-----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, TLKbzHKNe9/9ZDbYkhFy4euTwA+c29PS/oMHFRMviwN11JFHQJD6PyXB8qP9tSqd NnTa2i6wyuMk2oHyjK56mg== 0000897101-97-000274.txt : 19970317 0000897101-97-000274.hdr.sgml : 19970317 ACCESSION NUMBER: 0000897101-97-000274 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970314 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: 97556799 BUSINESS ADDRESS: STREET 1: 445 MINNESOTA ST STE 2000 CITY: SAINT PAUL STATE: MN ZIP: 55418 BUSINESS PHONE: 6122277621 MAIL ADDRESS: STREET 1: 445 MINNESOTA STREET STREET 2: SUITE 2000 CITY: ST PAUL STATE: MN ZIP: 55418 10-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 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 (I.R.S. Employer of incorporation or organization) Identification No.) 445 MINNESOTA STREET 55101 SUITE 2000, ST. PAUL, MN (Zip Code) (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (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 $21.18 per share book value of the shares of class A common stock of the Company as of December 31, 1996, the aggregate value of the Company's shares of class A common stock held by employees and directors as of such date was approximately $20.3 million. As of March 14, 1997, 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, 1996 INDEX
PAGE ---- Documents Incorporated by Reference ii Cross Reference Sheet iii PART I Item 1. Business 1 Item 2. Properties 3 Item 3. Legal Proceedings 3 Item 4. Submission of Matters to a Vote of Security Holders 3 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 3 Item 6. Selected Financial Data 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 8. Financial Statements and Supplementary Data 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 44 PART III Item 10 through Item 13. See "Documents Incorporated by Reference" (Page ii) 44 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 44 Signatures 47
DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference to the parts indicated of this Annual Report on Form 10-K: DOCUMENTS INCORPORATED BY PARTS OF ANNUAL REPORT ON FORM 10-K REFERENCE - ----------------------------------- ------------------------- PART II Item 5. Market for Registrant's Common Reference is made to the Equity and Related Stockholder portions described herein of the Matters. final Prospectus of the Company dated April 20, 1989 filed with the Securities and Exchange Commission on April 20, 1989. PART III Item 10. Directors and Executive Officers Reference is made to the of the Registrant. Registrant's definitive proxy statement ("Proxy Statement"), which will be filed with the Securities and Exchange Commission ("Commission") within 120 days after December 31, 1996. Item 11. Executive Compensation. Reference is made to the Registrant's Proxy Statement. Item 12. Security Ownership of Certain Reference is made to the Beneficial Owners and Management. Registrant's Proxy Statement. Item 13. Certain Relationships and Related Reference is made to the 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 14, 1997, the Company owned at least 95.9% of the total outstanding capital stock of its 16 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 81 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, 1996, the Company and its subsidiaries (including the Subsidiary Banks) had consolidated assets of approximately $2.9 billion and consolidated deposits of approximately $2.3 billion. The Subsidiary Banks ranged in size from $3.0 million to $350.4 million in total assets and from less than $1.0 million to $280.0 million in total deposits as of December 31, 1996. See the portion of this Form 10-K, Item 1. entitled "Business Developments in 1996." The Company also owns several financial services 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; the two First American Insurance Agencies, Inc. (the "Insurance Agencies"), which provide insurance agency services to the Subsidiary Banks' communities; Bremer Financial Services, Inc. ("Bremer Financial"), which provides management and support services to the Company and its subsidiaries; Bremer 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, Minnesota, and North Dakota; Bremer Business Finance Corporation, ("BBFC"), which provides asset-based lending and leasing services; 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. Consumer investment products and services are available at the Subsidiary Banks through INVEST Financial Corporation of Tampa, Florida ("INVEST"). The Company and its Subsidiary Banks have entered into a fully disclosed agreement with INVEST, whereby the Company and its subsidiaries deliver investment services to its customers through a network of Subsidiary Banks' offices and receive a portion of the commissions earned by the investment representatives. The operations of the financial services subsidiaries, while an integral part of the Company's ability to deliver a full range of financial services, taken as a whole, are not significant enough to meet the requirements of additional segment reporting. The Otto Bremer Foundation (the "Foundation") owns 20% of the outstanding shares of the Company's class A common stock and 100% of the outstanding shares of its class B common stock, for a total of 92% of the outstanding shares of the Company's capital stock, consisting only of the class A and class B common stock. Accordingly, the Foundation is, and is subject to regulation as, a bank holding company within the meaning of the Holding Company Act. COMPETITION The banking business is highly competitive. As the financial service industry expands, the scope of potential competition for the Subsidiary Banks also expands. The Subsidiary Banks compete with other commercial banks, savings and loan associations, and credit unions for loans and deposits, with money market funds for deposits, and with brokerage firms for investment products and services. Consumer and commercial finance companies, department stores, mortgage banks and insurance companies are also important competitors for various types of loans. Some of these entities and institutions are not subject to the same regulatory restrictions as the Company and the Subsidiary Banks. In addition, competition has intensified as local institutions become part of larger national associations as a result of amendments to interstate banking laws. Management believes that each Subsidiary Bank will be able to continue to compete successfully in its community. Management further believes that the Company's emphasis on local management and the ability of the Subsidiary Banks to make decisions close to the marketplace, the Subsidiary Banks' community commitment and involvement, and the commitment to a strong sales culture and to providing quality banking services, are factors that should allow the Subsidiary Banks to continue to maintain and improve their competitive position. TRADEMARKS 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 1996 On January 1, 1996, First American Insurance Agencies, Inc. of Casselton, North Dakota (a wholly-owned subsidiary of the Company) acquired the United Insurance Agency in Minot, North Dakota ("United Agency"), with annual premiums of $7 million. During 1996 and January 1997, the Company expanded its operations into new markets via de novo charters and branches. The de novo charters opened were First American Bank, National Association, located in Wahpeton, North Dakota (formerly First American Bank Wahpeton) in June 1996, and First American Bank, National Association located in Moorhead, Minnesota in January 1997. The branch additions consisted of supermarket locations in Hutchinson, Minnesota and Fargo, North Dakota, both opened in December 1996. The Company merged corporate and bank resources within First American Bank, National Association of South Saint Paul, Minnesota (formerly First American Bank Metro) to enhance its business development, branching and acquisition activities in the greater Minneapolis and St. Paul, Minnesota market. In addition, the Company expanded trust services to the communities of Brainerd and South Saint Paul, Minnesota; Menomonie, Wisconsin; and Devil's Lake, North Dakota. In October 1996, the Company established a wholly-owned subsidiary, Bremer Business Finance Corporation, an asset-based lending subsidiary and developed leasing capabilities to expand the Company's business banking relationship offerings. In late 1996, the Company commenced the process of converting all of its state-chartered Subsidiary Banks to national charters. This will have the effect of standardizing the law and regulations applicable to the Subsidiary Banks, including reporting requirements. In addition, this conversion will result in the advantage of interacting with only one regulatory agency. The conversion was completed on March 1, 1997. On January 9, 1997, First American Bank, National Association of Detroit Lakes, Minnesota (formerly First American Bank of Detroit Lakes), completed the acquisition of approximately $12.4 million of deposits from the Perham Minnesota branch of Brainerd National Bank. On January 24, 1997, First American Trust Company of Minnesota introduced the Bremer Mutual Fund Family. Initially two no-load mutual funds, the Bremer Growth Stock Fund and the Bremer Bond Fund, will be offered through Bremer Investment Funds, Incorporated. The funds are managed by First American Trust Company of Minnesota. On March 1, 1997, First American Insurance Agencies, Inc. of St. Paul, Minnesota (a wholly-owned subsidiary of the Company) acquired the Paul E. Hedlund Insurance Agency in Boyceville, Wisconsin. The Paul E. Hedlund Insurance Agency has annual premiums of $900,000. EMPLOYEES As of March 14, 1997, the Company and its subsidiaries (including the Subsidiary Banks) had a total of 1,300 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, except for those located in leased space of supermarkets; the facilities are all well maintained and range in size from 391 square feet to 52,280 square feet. Certain properties of the Subsidiary Banks 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, 1996 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 7, 1997, 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, 1996, the Company's net worth, including redeemable class A common stock, was $254.2 million and 10% of the Company's net worth and redeemable class A common stock, was $25.4 million. During the period from January 1, 1996 and through and including March 7, 1997, 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 84,296.6201 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, 3,602.0 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, 1996 through and including March 7, 1997. The sales price of the shares of class A common stock in such transactions ranged from $19.83 to $26.35 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 $23.75, $25.50, and $26.35 as of June 30, 1995, December 31, 1995, and June 30, 1996, respectively, as determined by an independent appraiser. At December 31, 1996, the most recent date for which a per share book value for the class A common stock is available, such value was $21.18. 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 7, 1997, there were approximately 1,100 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, 1996, the Subsidiary Banks had retained earnings of $37.8 million which were available for distribution to the Company as dividends in 1997 subject to regulatory and administrative restrictions. Of this amount, approximately $19.6 million was available for distribution without obtaining the prior approval of the appropriate bank regulator. In 1995 and 1996, the Subsidiary Banks paid total dividends to the Company of $26.5 million and $22.8 million, respectively. Thirteen of the fourteen banks that were Subsidiary Banks in 1995 and 1996 paid dividends in both years. Of the Subsidiary Banks that paid dividends in 1995 and/or 1996, the range of dividend payouts (dividends paid divided by net income) was 47.0% to 336.1% in 1995 and 42.9% to 102.1% in 1996. 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 $9.6 million in 1995 and $12.6 million in 1996. In 1995, $2.4 million of dividends were paid in each of the four quarters. In 1996, $3.0 million of dividends were paid in each of the first, second, and third quarters and $3.6 million of dividends were paid in the fourth quarter. 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 4.7% and 5.3% for the years ended December 31, 1995 and 1996, respectively. (The remainder of this page was intentionally left blank.) ITEM 6. SELECTED FINANCIAL DATA. BREMER FINANCIAL CORPORATION AND SUBSIDIARIES FINANCIAL HIGHLIGHTS
1996 CHANGE 1995 1994 1993 1992 OPERATING RESULTS (in thousands) Total interest income $ 210,703 5.5% $ 199,781 162,267 149,192 163,309 Net interest income 108,193 7.5 100,645 94,083 87,094 87,427 Net interest income (1) 115,862 7.4 107,898 100,698 93,665 92,564 Provision for loan losses 2,756 54.8 1,780 (1,300) (1,000) 6,844 Noninterest income 33,842 21.3 27,892 26,768 30,816 26,637 Noninterest expense 92,325 5.8 87,296 85,636 79,762 74,421 Net income 31,817 17.3 27,136 25,797 26,885 22,647 Dividends 12,600 31.3 9,600 9,360 7,200 6,000 AVERAGE BALANCES (in thousands) Total assets 2,817,062 6.4 2,647,758 2,356,426 2,137,952 2,040,707 Loans 1,687,450 9.2 1,545,231 1,330,269 1,173,332 1,166,926 Securities 959,278 1.8 942,521 893,266 843,394 753,132 Deposits 2,211,280 4.6 2,113,070 1,903,284 1,776,395 1,718,844 Redeemable class A common stock 19,686 11.4 17,672 16,347 15,191 13,738 Shareholder's equity 226,388 11.4 203,222 187,986 174,702 157,989 PERIOD-END BALANCES (in thousands) Total assets 2,925,651 4.0 2,812,232 2,537,712 2,279,853 2,120,965 Loans 1,755,757 7.9 1,626,616 1,443,128 1,238,717 1,143,695 Securities 935,774 (5.0) 984,768 907,211 875,454 826,318 Deposits 2,283,446 1.8 2,242,307 2,024,464 1,894,453 1,776,954 Redeemable class A common stock 20,337 6.8 19,035 16,308 16,386 14,404 Shareholder's equity 233,870 6.8 218,906 187,538 188,434 165,646 FINANCIAL RATIOS Return on average total assets (2) 1.18% 10.3 1.07% 1.15 1.32 1.17 Return on average realized equity (3)(4) 13.08 8.5 12.06 12.41 14.16 13.19 Average equity to average total assets (3) 8.74 4.8 8.34 8.67 8.88 8.42 Tangible equity to total assets 8.62 2.6 8.40 8.03 9.14 8.98 Dividend payout 39.60 11.9 35.38 36.28 26.78 26.49 Net interest margin (1) 4.37 0.9 4.33 4.52 4.64 4.79 Net charge-offs to average total loans 0.03 (62.5) 0.08 0.02 0.03 0.46 Reserve for loan losses to total loans 1.74 -- 1.74 1.87 2.23 2.39 PER SHARE OF COMMON STOCK (3) Income before accounting changes $ 2.65 17.3 $ 2.26 2.15 2.24 1.93 Income after accounting changes 2.65 17.3 2.26 2.15 2.24 1.89 Dividends paid 1.05 31.3 0.80 0.78 0.60 0.50 Book value 21.18 6.8 19.83 16.99 17.07 15.00 Realized book value (4) 21.08 8.3 19.47 18.01 16.65 15.00
- -------------------------- (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. The Company reported net income of $31.8 million for the year ended December 31, 1996, a $4.7 million or 17.3% increase from the $27.1 million earned in 1995. Earnings per share were $2.65 in 1996 compared to $2.26 in 1995. Return on realized equity was 13.08% in 1996, as compared to the 12.06% return in 1995. Return on average assets was 1.18% in 1996, versus 1.07% in 1995. 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 1992 through 1996. Table II presents the major components affecting the changes in return on assets for 1996. TABLE I SUMMARY INCOME STATEMENT (TAX-EQUIVALENT BASIS)
1996 CHANGE 1995 1994 1993 1992 -------- ------ -------- ------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Interest income $218,372 5.5% $207,034 168,882 155,763 168,446 Interest expense 102,510 3.4 99,136 68,184 62,098 75,882 -------- -------- ------ ------ ------ Net interest income 115,862 7.4 107,898 100,698 93,665 92,564 Provision for loan losses 2,756 (54.8) 1,780 (1,300) (1,000) 6,844 -------- -------- ------ ------ ------ Net funds function 113,106 6.6 106,118 101,998 94,665 85,720 Noninterest income 33,842 21.3 27,892 26,768 30,816 26,637 -------- -------- ------ ------ ------ Adjusted gross income 146,948 9.7 134,010 128,766 125,481 112,357 Noninterest expense 92,325 5.8 87,296 85,636 79,762 74,421 -------- ---- -------- ------ ------ ------ Income before taxes and accounting changes 54,623 16.9 46,714 43,130 45,719 37,936 Income taxes 22,806 16.5 19,578 17,333 18,834 14,821 -------- ---- -------- ------ ------ ------ Income before accounting changes 31,817 17.3 27,136 25,797 26,885 23,115 Accounting changes -- -- -- -- -- (468) -------- ---- -------- ------ ------ ------ Net income $ 31,817 17.3% $ 27,136 25,797 26,885 22,647 ======== ==== ======== ====== ====== ====== Earnings per share $ 2.65 17.3% $ 2.26 2.15 2.24 1.89 Dividends paid per share $ 1.05 31.3% $ 0.80 0.78 0.60 0.50
TABLE II CHANGES IN RETURN ON ASSETS 1996 VS 1995 ------------ Return on assets, prior year 1.07% Increases Net interest income (TEB) 0.04 Service charges 0.04 Insurance 0.04 Trust fees 0.01 Brokerage 0.04 Gain on sale of loans 0.03 Employee benefits 0.03 FDIC premiums and examination fees 0.07 ---- Total increases 0.30 ==== Decreases Provision for loan loss 0.03 Gain on sale of other assets 0.02 Gain on sale of securities 0.01 Salaries and wages 0.03 Furniture and equipment 0.02 Provision for income taxes 0.07 Other noninterest expense, net 0.01 ---- Total decreases 0.19 ---- Return on assets, current year 1.18% ==== EQUITY OF SHAREHOLDERS. Shareholder's equity and redeemable class A common stock totaled $254.2 million at December 31, 1996. Book value per share increased from $19.83 at December 31, 1995 to $21.18 at December 31, 1996, while dividends paid per share increased from $.80 to $1.05. The 1996 dividends paid of $12.6 million represented 5.3% of the equity of shareholders at December 31, 1995 and 39.6% of 1996 net income. Realized book value per share, which excludes the impact of Financial Accounting Standards No. 115 (FAS 115), increased from $19.47 at December 31, 1995 to $21.08 at December 31, 1996. 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)
1996 VS 1995 1995 VS 1994 -------------------------------- ------------------------------- VOLUME YIELD/RATE* TOTAL VOLUME YIELD/RATE* TOTAL ------ ----------- ----- ------ ----------- ----- (IN THOUSANDS) Increase (decrease) in: Interest income Loans $ 9,136 1,272 10,408 13,641 14,895 28,536 Taxable securities 2,995 (2,704) 291 4,643 3,272 7,915 Tax-exempt securities 1,048 (380) 668 1,757 (105) 1,652 Federal funds sold -- -- -- 4 (41) (37) Other earning assets 12 (41) (29) 13 73 86 ------- ------ ------ ------ ------ ------ Total 13,191 (1,853) 11,338 20,058 18,094 38,152 ------- ------ ------ ------ ------ ------ Interest expense Savings deposits 1,056 (3,040) (1,984) 1,876 502 2,378 Other time deposits 4,214 (856) 3,358 5,712 17,595 23,307 Short-term borrowings 787 1,385 2,172 1,105 2,957 4,062 Long-term debt 98 (270) (172) 49 1,156 1,205 ------- ------ ------ ------ ------ ------ Total 6,155 (2,781) 3,374 8,742 22,210 30,952 ------- ------ ------ ------ ------ ------ Net interest income $ 7,036 928 7,964 11,316 (4,116) 7,200 ======= ====== ====== ====== ====== ======
- ---------------------- * All changes in net interest income, other than those due to volume, have been allocated to yield/rate. Tax-equivalent net interest income for 1996 was $115.9 million, an increase of $8.0 million or 7.4% from 1995. The increase in net interest income resulted primarily from a $159 million increase in average earning assets and an increase in the net interest margin, which improved 4 basis points from 4.33% in 1995 to 4.37% in 1996. The increase in net interest margin was primarily due to an increased spread in rates during 1996, as costs on interest bearing liabilities decreased more than yields on earning assets. The interest bearing liabilities cost and net interest margin were impacted by decreased rates paid on interest bearing savings deposits and certificates, offset partially by the increased use of other borrowings, with higher costs, to fund a portion of the earning asset growth experienced in 1996. Adversely impacting the net interest margin, but not enough to offset the decreased cost on interest bearing liabilities, was a decline in the earning asset yield of 7 basis points, resulting from a 17 basis point decline in loan yields, coupled with an unfavorable change in the mix of earning 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, 1995 to December 31, 1996, nonperforming loans increased $2.2 million to $11.2 million. However, the quality of the portfolio, as measured by the ratio of classified loans to total loans, reflected only modest deterioration during each quarter of 1996, despite strong loan growth. The modest deterioration in credit quality occurred primarily in the commercial real estate, agricultural, and consumer segments of the loan portfolio. Several commercial real estate 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 remained at 1.74% in 1996 while the reserve to nonperforming loan coverage decreased from 313.0% to 271.1% from 1995 to 1996. 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 $33.8 million in 1996 compared to $27.9 million in 1995, representing a $5.9 million or 21.3% increase. Contributing to this increase in noninterest income were strong growth in service charge income of $1.8 million or 16.2% and brokerage commissions of $1.3 million or 103.6%. Also contributing to the increase in noninterest income was an increase in insurance commissions of $1.5 million, due in large part to the acquisition of United Agency in January 1996. Gains on loans sold in the secondary market grew as the volume of real estate mortgage financing increased in 1996 driven by a more favorable interest rate environment. Decreasing $574 thousand from 1995 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
1996 CHANGE 1995 1994 1993 1992 ------- ------ ------- ------ ------ ------ (IN THOUSANDS) Service charges $12,837 16.2% $11,047 9,627 8,823 8,455 Insurance 7,082 28.7 5,503 4,716 4,671 4,576 Trust 5,332 11.5 4,784 4,502 4,462 4,087 Brokerage 2,531 103.6 1,243 1,865 1,950 1,361 Gain on sale of loans 2,138 64.2 1,302 1,649 3,949 2,891 Gain on sale of other assets 135 (81.0) 709 1,548 2,118 941 Other 3,640 21.3 3,000 3,131 3,058 3,176 ------- ------- ------ ------ ------ Operating noninterest income 33,695 22.1 27,588 27,038 29,031 25,487 Gain on sale of subsidiary -- -- -- -- -- 500 Gain (loss) on sale of securities 147 (51.6) 304 (270) 1,785 650 ------- ------- ------ ------ ------ Total $33,842 21.3% $27,892 26,768 30,816 26,637 ======= ======= ====== ====== ======
NONINTEREST EXPENSE. Noninterest expense increased $5.0 million or 5.8% from 1995 to 1996. The following table summarizes the components of noninterest expense from 1992 to 1996. TABLE V NONINTEREST EXPENSE
1996 CHANGE 1995 1994 1993 1992 ------- ------ ------- ------ ------ ------ (IN THOUSANDS) Salaries and wages $40,676 9.0% $37,325 36,556 33,633 31,297 Employee benefits 10,739 (1.3) 10,878 11,254 10,340 8,994 Occupancy 5,756 5.9 5,433 4,871 4,614 4,370 Furniture and equipment 6,020 19.9 5,020 4,320 3,994 4,028 Printing, postage and office supplies 4,824 4.9 4,599 3,918 3,723 3,557 Marketing 3,306 8.7 3,041 2,954 2,440 1,707 Data processing fees 7,680 4.7 7,334 7,031 6,595 5,399 Other real estate owned 56 (33.3) 84 (63) 791 1,948 Minority interest in earnings 1,400 9.6 1,277 1,271 1,408 1,166 FDIC premiums and examination fees 1,075 (62.9) 2,901 4,719 4,449 4,190 Other 10,793 14.8 9,404 8,805 7,775 7,765 ------- ------- ------ ------ ------ Total $92,325 5.8% $87,296 85,636 79,762 74,421 ======= ======= ====== ====== ======
Personnel costs, which accounted for 55.7% of noninterest expense, increased $3.2 million or 6.7%, as salaries and wages increased 9.0%. Affecting 1996 personnel costs were $1.3 million in salaries and benefits relating to entities acquired over the past two years. Excluding acquisitions, personnel costs would have increased $1.9 million or 4.1% over 1995. Employee benefits costs declined $139 thousand during the year as the Company's benefit plan expenses, which include pension, profit sharing and employee stock ownership, declined approximately $300 thousand. Also, contributing to the decline in benefit costs was a decline of approximately $307 thousand, during 1996, in costs associated with the relocation of personnel. Excluding personnel costs, noninterest expense increased $1.8 million or 4.6%. Contributing to this increase was a $1 million increase in furniture and equipment expense primarily due to the depreciation expense associated with the upgrading of technology throughout the Company. Also contributing to the increase in noninterest expense was a $1.4 million increase in other expenses driven by a $517 thousand increase in lending costs associated with the growth experienced in real estate mortgage lending; a $199 thousand increase in amortization of intangible assets; and increases in several other miscellaneous categories. Offsetting some of the increase in noninterest expense was a continued decline in FDIC insurance premiums in 1996. 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 63.0% in 1995 to 59.9% in 1996. Contributing to this improvement were significant increases in tax-equivalent net interest income of 7.4% and modest growth in recurring noninterest expense of 5.6%. The Company will continue its strategic focus to operate with an efficiency ratio below 60%. INCOME TAXES. Income tax expense, which consists of provisions for federal and state income taxes, was $15.1 million for 1996, representing an increase of $2.8 million from 1995. Comparing 1996 to 1995, the Company's effective tax rate also increased, from 31.2% to 32.2%, reflecting the impact of proportionately more taxable than tax-exempt income in 1996. For further discussion and detail on the Company's income taxes, refer to Notes A and M 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 administration and review department in cooperation with the Subsidiary Banks, has developed a credit philosophy aimed at minimizing credit risk by emphasizing the importance of a strong credit management process. This process is essentially aimed at managing credit risk from the initial request through the life of the loan on all business purpose credits. 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 high corn prices adversely affected certain livestock growers, other areas more involved in small grain production did very well. Similarly, the hospitality industry was stronger in some geographical areas than in other areas. 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
DECEMBER 31 ---------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------------ ------------------ ------------------ ------------------- ------------------ AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % ---------- ----- ---------- ----- ---------- ----- ---------- ------ ---------- ------ (IN THOUSANDS) Commercial and other $ 346,472 19.69% $ 331,605 20.34% $ 292,643 20.23% $ 240,772 19.43% $ 200,600 17.53% Commercial real estate 340,621 19.36 313,287 19.22 282,203 19.51 273,204 22.04 286,395 25.03 Construction 30,039 1.71 31,952 1.96 26,421 1.83 12,704 1.03 6,093 0.53 Agricultural 378,399 21.50 350,786 21.52 299,127 20.68 250,163 20.19 233,132 20.37 Residential real estate 351,946 20.00 322,296 19.77 293,671 20.30 252,085 20.34 231,947 20.27 Construction 11,904 0.68 11,511 0.71 10,577 0.73 8,597 0.69 6,020 0.53 Consumer 247,511 14.06 221,727 13.60 192,865 13.33 157,169 12.68 128,084 11.19 Tax-exempt 52,819 3.00 46,936 2.88 49,135 3.39 44,612 3.60 52,052 4.55 ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total $1,759,711 100.0% $1,630,100 100.0% $1,446,642 100.0% $1,239,306 100.0% $1,144,323 100.0% ========== ===== ========== ===== ========== ===== ========== ===== ========== =====
In recent years the composition of the Company's loan portfolio has reflected a general stability in portfolio segments. The Company's Subsidiary Banks continued to actively seek credit opportunities of all loan types including commercial real estate. The Company believes that even if the economy were to suffer modest deterioration, its exposure to significant commercial real estate losses in the foreseeable future is limited. Of the Company's real estate lending, approximately 50% is in commercial real estate loans, as compared to 51% in 1995 and 50% in 1994. These commercial real estate loans consist primarily of loans to business customers who occupy the property or use it for income production. The remaining 50% of real estate lending is in the form of residential mortgages and home equity loans. The commercial real estate loan portfolio experienced growth of $25.4 million or 7.4% between 1995 and 1996, reflecting continued strong business loan demand and the effect of acquisitions. The residential real estate loan portfolio experienced growth of $30.0 million or 9.0% due to the effect of acquisitions and the more favorable interest rate environment. The Company is not involved in highly leveraged transaction lending or lending to foreign countries. While 1996 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 producers in the dairy and livestock industries who experienced low market prices and/or high input costs. Geographic dispersion of the Subsidiary Banks and diversity of agricultural products and activities were especially beneficial to the Company's agricultural portfolio and mitigated the negative effects of the segments of the portfolio experiencing these poor conditions. Of that loan portfolio, approximately two-thirds represented crop production lending, with the remainder primarily related to livestock and dairy lending. NET LOAN CHARGE-OFFS. Net loan charge-offs decreased to $527 thousand in 1996 from $1.2 million in 1995 and increased slightly from $251 thousand in 1994. Correspondingly, net charge-offs as a percentage of average loans decreased to .03% in 1996 from .08% in 1995 and increased slightly from .02% in 1994. Charge-offs during 1996 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
1996 CHANGE 1995 1994 1993 1992 ------- ------ ------- ------ ------ ------ (DOLLARS IN THOUSANDS) Nonaccrual loans $10,830 29.1% $ 8,392 10,401 13,356 20,983 Restructured loans 414 (34.7) 634 764 1,127 7,515 ------- ------- ------ ------ ------ Total nonperforming loans 11,244 24.6 9,026 11,165 14,483 28,498 Other real estate owned (OREO) 240 (36.8) 380 1,208 3,325 5,732 ------- ------- ------ ------ ------ Total nonperforming assets $11,484 22.1 $ 9,406 12,373 17,808 34,230 ======= ======= ====== ====== ====== Past due loans* $ 2,205 (11.9)% $ 2,504 1,563 1,985 902 ======= ======= ====== ====== ====== Nonperforming loans to total loans 0.64% -- 0.55% 0.77 1.17 2.49 Nonperforming assets to total loans and OREO 0.65 -- 0.58 0.86 1.43 2.98 Nonperforming assets and past due loans* to total loans and OREO 0.78 -- 0.73 0.96 1.59 3.06 Reserve to nonperforming loans 271.10 -- 313.02 241.34 190.73 95.95 Reserve to total loans 1.74 -- 1.74 1.87 2.23 2.39 Reserve for Loan Losses Beginning of year $28,253 4.9% $26,946 27,624 27,344 25,866 Charge-offs (2,230) (21.3) (2,834) (2,065) (3,022) (7,302) Recoveries 1,703 5.8 1,610 1,814 2,705 1,936 ------- ------- ------ ------ ------ Net charge-offs (527) (56.9) (1,224) (251) (317) (5,366) Provision for loan losses 2,756 54.8 1,780 (1,300) (1,000) 6,844 Reserve related to acquired assets -- (100.0) 751 873 1,597 -- ------- ------- ------ ------ ------ End of year $30,482 7.9% $28,253 26,946 27,624 27,344 ======= ======= ====== ====== ======
- ----------------------- * Past due loans include accruing loans 90 days or more past due. Nonperforming assets were $11.5 million at December 31, 1996, compared to $9.4 million at December 31, 1995, and $12.4 million at December 31, 1994. Correspondingly, as a percentage of total loans and other real estate owned, nonperforming assets increased to .65% in 1996 from .58% in 1995, and down from .86% in 1994. Nonperforming loans were $11.2 million and .64% of total loans at December 31, 1996, compared to $9.0 million and .55% of total loans at December 31, 1995 and $11.2 million and .77% at December 31, 1994. The increase in nonperforming loans reflects loan growth and continued penetration into markets with limited opportunities for high quality volumes. 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 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 1992 through 1996. TABLE VIII RESERVE FOR LOAN LOSSES
DECEMBER 31 ------------------------------------------------------------------ 1996 1995 1994 1993 1992 ---------- --------- --------- --------- --------- (IN THOUSANDS) Beginning of year $ 28,253 26,946 27,624 27,344 25,866 Charge-offs Commercial and other 480 532 680 1,004 4,416 Commercial real estate 117 381 67 868 1,256 Construction -- -- -- -- 110 Agricultural 489 375 675 247 570 Residential real estate 47 170 157 141 188 Construction -- 10 -- -- -- Consumer 1,097 835 486 526 759 Tax-exempt -- 531 -- 236 3 ---------- --------- --------- --------- --------- Total 2,230 2,834 2,065 3,022 7,302 ---------- --------- --------- --------- --------- Recoveries Commercial and other 911 352 688 1,478 522 Commercial real estate 194 389 466 565 604 Construction -- -- -- -- -- Agricultural 159 232 184 238 383 Residential real estate 58 313 81 115 58 Construction -- 10 13 -- -- Consumer 381 280 236 309 358 Tax-exempt -- 34 146 -- 11 ---------- --------- --------- --------- --------- Total 1,703 1,610 1,814 2,705 1,936 ---------- --------- --------- --------- --------- Net charge-offs 527 1,224 251 317 5,366 Provision for loan losses 2,756 1,780 (1,300) (1,000) 6,844 Reserve related to acquired assets -- 751 873 1,597 -- ---------- --------- --------- --------- --------- End of year $ 30,482 28,253 26,946 27,624 27,344 ========== ========= ========= ========= ========= Average loans $1,687,450 1,545,231 1,330,269 1,173,332 1,166,926 Net charge-offs/average loans 0.03% 0.08 0.02 0.03 0.46 ALLOCATION OF RESERVE FOR LOAN LOSSES Commercial and other $ 6,800 5,500 4,700 5,500 6,600 Commercial real estate 7,000 7,000 6,700 8,000 8,800 Construction 500 500 300 200 80 Agricultural 6,400 5,500 4,100 3,800 4,000 Residential real estate 2,100 2,000 1,800 1,700 1,500 Construction 100 100 100 50 30 Consumer 1,500 1,200 1,100 1,000 1,100 Tax-exempt 300 400 500 1,000 1,100 ---------- --------- --------- --------- --------- Total allocated 24,700 22,200 19,300 21,250 23,210 Unallocated 5,782 6,053 7,646 6,374 4,134 ---------- --------- --------- --------- --------- Total $ 30,482 28,253 26,946 27,624 27,344 ========== ========= ========= ========= ========= Reserve to total loans 1.74% 1.74 1.87 2.23 2.39
The reserve for loan losses was $30.5 million or 1.74% of total loans at December 31, 1996, compared to $28.3 million or 1.74% at December 31, 1995. In establishing the reserve, management has considered its current credit process, continued strong loan growth in 1996, 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. 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. TABLE IX INTEREST RATE SENSITIVITY AT DECEMBER 31, 1996
REPRICING OR MATURING ---------------------------------------------------------------- WITHIN 3 - 12 1 - 5 OVER 5 3 MONTHS MONTHS YEARS YEARS TOTAL ---------- -------- --------- ------- ------- (DOLLARS IN THOUSANDS) INTEREST SENSITIVE ASSETS Loans $ 734,124 288,928 609,967 122,737 1,755,756 Tax-exempt securities 9,230 18,458 125,840 57,328 210,856 Taxable securities 260,014 101,453 312,393 48,827 722,687 Interest bearing deposits 660 -- -- -- 660 Other earning assets 55 1,224 229 -- 1,508 ---------- -------- --------- ------- --------- Total 1,004,083 410,063 1,048,429 228,892 2,691,467 ---------- -------- --------- ------- --------- INTEREST SENSITIVE LIABILITIES Savings deposits 687,574 -- -- -- 687,574 Other time deposits 341,704 509,329 410,844 1,852 1,263,729 Short-term borrowings 243,647 29,274 2,100 -- 275,021 Long-term debt 53,712 473 5,890 2,314 62,389 ---------- -------- --------- ------- --------- Total 1,326,637 539,076 418,834 4,166 2,288,713 ---------- -------- --------- ------- --------- REPRICING GAP $ (322,554) (129,013) 629,595 224,726 402,754 ========== ======== ========= ======= ========= CUMULATIVE REPRICING GAP $ (322,554) (451,567) 178,028 402,754 ========== ======== ========= ======= CUMULATIVE GAP TO TOTAL ASSETS (11.47)% (16.06) 6.33 14.32
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, 1996, the cumulative gap to total assets ratio within one year was a negative 16.06%, with the Company's interest rate sensitivity gap within one year a negative $451.6 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 83% for 1996 and 84% for 1995. 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 18% of the portfolio matures within 1997. 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 CAPITAL RATIOS (1) REGULATORY 1996 1995 REQUIREMENT ---- ---- ----------- Equity to assets (2) 8.69% 8.46 -- Equity to tangible assets (2) 8.62 8.40 -- Tier I capital (3) 12.89 12.75 4.00 Tier I and tier II capital (3) 14.15 14.01 8.00 Leverage ratio (3) 8.79 8.41 3.00 - -------------------------- (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, 1996 was 12.89%, its total risk-adjusted capital ratio (Tier I plus Tier II) was 14.15%, and its Tier I leverage ratio was 8.79%. The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") required the establishment of a capital-based supervisory system of prompt corrective action for all depository institutions. The Federal Reserve Board's implementation of FDICIA defines "well-capitalized" institutions as those whose Tier I Capital ratio equals or exceeds 6%, total risk-based capital ratio equals or exceeds 10%, and leverage ratio equals or exceeds 5%. The Company's Subsidiary Banks ratios in each of these categories met or exceeded the "well-capitalized" ratios as of December 31, 1996. IMPACT OF INFLATION. The assets and liabilities of a financial institution are primarily monetary in nature. Because banks generally have an excess of monetary assets over monetary liabilities, inflation, in theory, will cause a loss of purchasing power in the value of shareholder's equity. Other sections of this financial review provide the information necessary for an understanding of the Company's ability to react to changing interest rates. BALANCE SHEET ANALYSIS Table XII on pages 20 and 21 sets forth for the periods indicated the average balance sheets and related yields and rates on earning assets and interest bearing liabilities. Acquisitions completed in the first half of 1995 had an impact on the 1996 average balance sheet growth. Specifically, these acquisitions increased the Company's full-year 1996 total averages in assets by $24.1 million, gross loans by $9.6 million, securities by $11.7 million, and core deposits by $21.1 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 $97.8 million or 4.8% in 1996. Average total deposits increased $98.2 million or 4.6% from 1995 to $2.2 billion in 1996. Excluding the effects of acquisitions, average total deposits increased $76.3 million or 3.8% during 1996. Within core deposits, savings certificates had the strongest growth, increasing $67.5 million or 6.5%, while demand deposits, a non-interest bearing source of funds, increased $19.1 million or 7.4%, money market checking accounts increased $3.1 million or 1.8%, savings and NOW accounts increased $2.1 million or .8%, and money market savings accounts increased $1.8 million or .7%. The table below sets forth the amount and maturity of time deposits that had balances of more than $100,000 at December 31, 1996. TABLE XI MATURITY OF TIME DEPOSITS OVER $100,000 DECEMBER 31 ------------------- 1996 1995 -------- ------- (IN THOUSANDS) Within 3 months $ 56,645 44,650 3 - 6 months 29,451 38,901 6 - 12 months 36,286 32,259 After 12 months 41,823 37,640 -------- ------- Total $164,205 153,450 ======== ======= 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 23.0% from $229.9 million in 1995 to $282.8 million in 1996. 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, decreased $1.1 million. This decline can be attributed to normal installment payments on the promissory notes and FHLB advances being reclassified to short-term within one year of maturity. USES OF FUNDS Between 1995 and 1996, average total assets increased $169.3 million or 6.4%. Acquisitions accounted for $24.1 million or 14.3% of this growth. Average earning assets increased $158.7 million or 6.4%. Strong loan growth, which started in 1994 and continued throughout 1995 and 1996, increased loans as a percent of average earning assets from 62.0% in 1995 to 63.7% in 1996, while securities decreased from 37.8% to 36.2%. LOAN PORTFOLIO. The increase in average loans from 1995 to 1996 was $142.2 million with all categories of loans experiencing increases as loan demand remained strong in the Company's markets. Agricultural loans led the loan growth in 1996, increasing $31.0 million or 9.4%. Of the remaining loan categories, residential real estate loans increased $28.4 million, commercial loans increased $26.7 million, commercial real estate loans increased $26.5 million, consumer loans increased $26.4 million and tax-exempt loans increased $3.2 million. TABLE XII CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES
1996 1995 ---------------------------------- ---------------------------------- AVERAGE RATE/ AVERAGE RATE/ (DOLLARS IN THOUSANDS) BALANCE INTEREST YIELD BALANCE INTEREST YIELD - ---------------------- ---------- -------- ------ ---------- -------- ------ ASSETS Loans (net of unearned discount)* Commercial and other $ 341,649 $ 31,251 9.15% $ 314,903 $ 30,092 9.56% Commercial real estate 354,614 32,262 9.10 328,163 30,542 9.31 Agricultural 361,401 33,461 9.26 330,422 31,615 9.57 Residential real estate 346,875 30,211 8.71 318,447 27,638 8.68 Consumer 232,168 21,244 9.15 205,766 18,706 9.09 Tax-exempt 50,743 5,371 10.58 47,530 4,799 10.10 ---------- -------- ---------- -------- ---- TOTAL LOANS 1,687,450 153,800 9.11 1,545,231 143,392 9.28 Reserve for loan losses (29,689) (27,858) ---------- ---------- NET LOANS 1,657,761 1,517,373 Securities Mortgage-backed 230,624 16,203 7.03 245,227 17,195 7.01 Other taxable 520,218 31,094 5.98 499,632 29,811 5.97 Tax-exempt 208,436 17,112 8.21 197,662 16,444 8.32 ---------- -------- ---------- -------- ---- TOTAL SECURITIES 959,278 64,409 6.71 942,521 63,450 6.73 Federal funds sold -- -- -- -- -- -- Other earning assets 2,806 163 5.81 3,083 192 6.23 ---------- -------- ---------- -------- ---- TOTAL EARNING ASSETS** 2,649,534 218,372 8.24 2,490,835 207,034 8.31 Cash and due from banks 94,912 69,625 Nonearning assets 102,305 115,156 ---------- ---------- TOTAL ASSETS $2,817,062 $2,647,758 ========== ========== LIABILITIES AND SHAREHOLDER'S EQUITY Noninterest bearing deposits $ 276,948 $ 257,888 Interest bearing deposits Savings and NOW accounts 257,166 4,331 1.68 255,104 5,160 2.02 Money market checking 176,078 2,964 1.68 172,994 3,507 2.03 Money market savings 243,208 7,731 3.18 241,417 8,343 3.46 Savings certificates 1,102,819 62,671 5.68 1,035,354 59,461 5.74 Certificates over $100,000 155,061 8,549 5.51 150,313 8,401 5.59 ---------- -------- ---------- -------- ---- TOTAL TIME DEPOSITS 1,934,332 86,246 4.46 1,855,182 84,872 4.57 TOTAL DEPOSITS 2,211,280 2,113,070 CORE DEPOSITS*** 2,132,674 2,034,837 Short-term borrowings 282,813 14,850 5.25 229,935 12,678 5.51 Long-term debt 22,178 1,414 6.38 23,306 1,586 6.81 ---------- -------- ---------- -------- ---- TOTAL INTEREST BEARING LIABILITIES 2,239,323 102,510 4.58 2,108,423 99,136 4.70 Other liabilities 43,357 47,179 ---------- ---------- TOTAL LIABILITIES 2,559,628 2,413,490 Minority interest 9,216 8,676 Redeemable preferred stock 2,144 4,698 Redeemable class A common stock 19,686 17,672 Shareholder's equity 226,388 203,222 ---------- ---------- TOTAL LIABILITIES AND EQUITY $2,817,062 $2,647,758 ========== ========== Net interest income $115,862 $107,898 ======== ======== Gross spread 3.66% 3.61% Percent of earning assets Interest income 8.24 8.31 Interest cost 3.87 3.98 ----- ----- NET INTEREST MARGIN 4.37% 4.33% Interest bearing liabilities to earning assets 84.52% 84.65% Profitability Net income $ 31,817 $ 27,136 Return on average assets 1.18% 1.07% Leverage 11.35X 11.74X Return on average realized equity 13.08% 12.06%
- --------------------------- INTEREST AND RATES ARE REALIZED ON A FULLY TAXABLE EQUIVALENT BASIS USING A 35% TAX RATE IN 1996, 1995, 1994 AND 1993, AND A 34% TAX RATE IN 1992. * 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.
1994 1993 1992 AVERAGE BALANCE --------------------------------- --------------------------------- --------------------------------- -------------------- AVERAGE RATE/ AVERAGE RATE/ AVERAGE RATE/ 1996 VS FIVE-YEAR BALANCE INTEREST YIELD BALANCE INTEREST YIELD BALANCE INTEREST YIELD 1995 GROWTH RATE ---------- -------- ------ ---------- -------- ------ ---------- -------- ------ ------- ----------- $ 270,415 $ 22,305 8.25% $ 221,719 $ 17,328 7.82% $ 212,115 $ 17,524 8.26% 8.49% 7.54 295,579 25,955 8.78 286,986 24,189 8.43 301,973 28,068 9.29 8.06 1.11 269,266 23,696 8.80 233,632 20,852 8.93 233,379 23,167 9.93 9.38 8.87 276,860 23,268 8.40 244,719 22,016 9.00 235,080 23,516 10.00 8.93 6.86 173,193 15,044 8.69 138,377 12,949 9.36 129,361 13,763 10.64 12.83 10.52 44,956 4,588 10.21 47,899 5,301 11.07 55,018 6,306 11.46 6.76 (2.90) ---------- -------- ---------- -------- ---------- -------- 1,330,269 114,856 8.63 1,173,332 102,635 8.75 1,166,926 112,344 9.63 9.20 6.05 (28,632) (28,893) (27,902) 6.57 4.29 ---------- ----- ---------- ---------- 1,301,637 1,144,439 1,139,024 9.25 6.08 227,915 13,933 6.11 330,208 21,156 6.41 357,127 26,678 7.47 (5.95) (1.07) 483,384 25,158 5.20 350,708 17,935 5.11 297,279 19,125 6.43 4.12 11.74 181,967 14,792 8.13 162,478 13,927 8.57 98,726 9,789 9.92 5.45 17.46 ---------- -------- ---------- -------- ---------- -------- 893,266 53,883 6.03 843,394 53,018 6.29 753,132 55,592 7.38 1.78 8.59 789 37 4.69 1,690 44 2.60 5,923 228 3.85 N/M N/M 2,094 106 5.06 1,898 66 3.48 4,645 282 6.07 (8.98) (12.05) ---------- -------- ---------- -------- ---------- -------- 2,226,418 168,882 7.59 2,020,314 155,763 7.71 1,930,626 168,446 8.72 6.37 6.81 64,141 73,867 65,540 36.32 9.06 94,499 72,664 72,443 (11.16) 7.18 ---------- ---------- ---------- $2,356,426 $2,137,952 $2,040,707 6.39 6.93 ========== ========== ========== $ 242,439 $ 210,386 $ 185,188 7.39 10.57 259,947 4,424 1.70 231,702 4,576 1.97 191,508 5,547 2.90 0.81 7.21 156,658 2,827 1.80 156,572 3,133 2.00 161,672 4,506 2.79 1.78 6.57 270,850 7,381 2.73 255,498 6,829 2.67 238,528 8,257 3.46 0.74 4.38 886,245 40,719 4.59 852,055 39,992 4.69 870,088 48,908 5.62 6.52 3.95 87,145 3,836 4.40 70,182 3,006 4.28 71,860 3,898 5.42 3.16 12.13 ---------- -------- ---------- -------- ---------- -------- 1,660,845 59,187 3.56 1,566,009 57,536 3.67 1,533,656 71,116 4.64 4.27 5.19 1,903,284 1,776,395 1,718,844 4.65 5.78 1,867,688 1,747,904 1,691,067 4.81 5.48 199,186 8,616 4.33 139,119 4,539 3.26 114,664 4,695 4.09 23.00 13.33 8,813 381 4.32 357 23 6.44 883 71 8.04 (4.84) 74.80 ---------- -------- ---------- -------- ---------- -------- 1,868,844 68,184 3.65 1,705,485 62,098 3.64 1,649,203 75,882 4.60 6.21 6.24 29,850 23,447 25,918 (8.10) 9.20 ---------- ---------- ---------- 2,141,133 1,939,318 1,860,309 6.06 6.71 8,536 8,741 8,671 6.22 2.09 2,424 -- -- N/M N/M 16,347 15,191 13,738 11.40 9.41 187,986 174,702 157,989 11.40 9.41 ---------- ---------- ---------- $2,356,426 $2,137,952 $2,040,707 6.39 6.93 ========== ========== ========== $100,698 $ 93,665 $ 92,564 ======== ======== ======== 3.94% 4.07% 4.12% 7.59 7.71 8.72 3.07 3.07 3.93 ----- ----- ----- 4.52% 4.64% 4.79% 83.94% 84.42% 85.42% $ 25,797 $ 26,885 $ 22,647 1.15% 1.32% 1.17% 11.40X 11.26X 11.88X 12.41% 14.16% 13.19%
The following table summarizes the amount and maturity of the loan portfolio as of December 31, 1996. TABLE XIII MATURITY OF LOANS
WITHIN 1 - 5 AFTER 5 1 YEAR YEARS YEARS TOTAL -------- -------- ------- --------- (IN THOUSANDS) Commercial and other $213,622 119,664 13,186 346,472 Commercial real estate 79,304 207,258 54,059 340,621 Construction 8,409 13,473 8,157 30,039 Agricultural 204,704 124,696 48,999 378,399 Residential real estate 54,104 189,855 107,987 351,946 Construction 10,318 1,138 448 11,904 Consumer 100,255 135,057 12,199 247,511 Tax-exempt 11,430 19,669 21,720 52,819 -------- -------- ------- --------- Total $682,146 810,810 266,755 1,759,711 ======== ======== ======= ========= Loans maturing after one year Fixed interest rate $461,504 100,574 562,078 Variable interest rate 349,306 166,181 515,487 -------- ------- --------- Total $810,810 266,755 1,077,565 ======== ======= =========
SECURITIES. Average total securities rose $16.8 million or 1.8% from 1995 to 1996, with mortgage-backed and other taxable securities increasing $6.0 million or .8%. The increase in tax-exempt securities of $10.8 million or 5.5% was due to the Company's continued ability to utilize tax-exempt income. Mortgage-backed securities represented 61.1% of total securities at December 31, 1996 compared to 58.2% at December 31, 1995. 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, 1996 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 TOTAL ----------------- ----------------- ----------------- ----------------- --------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (IN THOUSANDS) Governments and agencies $ 52,837 6.29% $ 34,568 6.24% $ -- -- % $ -- -- % $ 87,405 6.27% State and political subdivisions 31,712 8.20 87,659 7.99 65,882 7.97 2,337 8.01 187,590 8.02 Corporate bonds 1,916 6.43 34,193 5.99 -- -- -- -- 36,109 6.02 Mortgage-backed securities 96,591 6.20 309,101 6.44 71,460 6.42 92,842 6.31 569,994 6.37 Equity securities 2,896 9.47 18,369 9.17 -- -- 24,072 7.16 45,337 8.12 Other securities 6,553 6.76 355 6.58 86 7.90 113 7.90 7,107 6.79 -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- Total $192,505 6.63% $484,245 6.77% $137,428 7.17% $119,364 6.51% $933,542 6.77% ======== ==== ======== ==== ======== ==== ======== ==== ======== ====
The average maturity of the portfolio was 50 months at December 31, 1996, with an average tax-equivalent yield to maturity on the $934 million portfolio of 6.71%, unrealized gains of $9.3 million and unrealized losses of $4.0 million. At December 31, 1996, the market value of the Company's securities was $938.8 million or $5.3 million over its amortized cost. This compares to a market value of $988.2 million or $10.8 million over amortized cost at December 31, 1995. 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 1995 COMPARED WITH 1994 The following analysis compares 1995 consolidated financial results with 1994 results. NET INCOME. Net income was $27.1 million or $2.26 per share in 1995 compared to $25.8 million or $2.15 per share in 1994. 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. NET INTEREST INCOME. 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 in 1995 resulted primarily from a $264 million increase in average earning assets. Approximately 34.3% of that growth was due to assets acquired in late 1994 and in the first half of 1995. 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 the 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. From December 31, 1994 to December 31, 1995, nonperforming loans decreased $2.1 million to $9.0 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. The reserve to outstanding loan ratio decreased from 1.87% in 1994 to 1.74% in 1995, and the reserve to nonperforming loan coverage increased from 241.3% to 313.0% during this time. 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 acquisitions completed in early 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. Decreasing $839 thousand from 1994 were gains on the sale of other assets, primarily other real estate owned (OREO). NONINTEREST EXPENSE. Noninterest expense increased $1.7 million or 1.9% from 1994 to 1995. 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, driven primarily from a decline in FDIC insurance premiums in 1995 and operational efficiency initiatives implemented in mid-1995. 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 increased from 29.4% to 31.2%, reflecting the impact of proportionately more taxable than tax-exempt income in 1995. (The remainder of this page was intentionally left blank.) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. BREMER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ------------------------ 1996 1995 ---------- --------- (IN THOUSANDS) ASSETS Cash and due from banks $ 159,832 127,786 Interest bearing deposits 1,778 3,008 Investment securities held to maturity (fair value of $187,045 and $203,607, respectively) 183,095 198,515 Mortgage-backed securities held to maturity (fair value of $108,111 and $116,772, respectively) 109,036 118,390 ---------- ------- TOTAL SECURITIES HELD TO MATURITY 292,131 316,905 Investment securities available for sale (amortized cost of $180,453 and $209,978, respectively) 180,679 213,520 Mortgage-backed securities available for sale (amortized cost of $460,958 and $450,551, respectively) 462,964 454,343 ---------- ------- TOTAL SECURITIES AVAILABLE FOR SALE 643,643 667,863 Loans 1,759,711 1,630,100 Reserve for loan losses (30,482) (28,253) Unearned discount (3,954) (3,484) ---------- ------- NET LOANS 1,725,275 1,598,363 Premises and equipment, net 45,980 44,252 Interest receivable and other assets 57,012 54,055 ---------- ------- TOTAL ASSETS $2,925,651 2,812,232 ========== ======= LIABILITIES AND SHAREHOLDER'S EQUITY Noninterest bearing deposits $ 332,143 326,531 Interest bearing deposits 1,951,303 1,915,776 ---------- ------- TOTAL DEPOSITS 2,283,446 2,242,307 Federal funds purchased and repurchase agreements 188,129 187,100 Other short-term borrowings 86,892 69,427 Long-term debt 62,389 25,568 Accrued expenses and other liabilities 39,125 38,633 ---------- ------- TOTAL LIABILITIES 2,659,981 2,563,035 Minority interests 9,319 9,112 Redeemable preferred stock, $100 par, 80,000 shares authorized; 71,594 shares issued; 21,437 shares outstanding 2,144 2,144 Redeemable class A common stock, 960,000 shares issued and outstanding 20,337 19,035 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 230,071 212,392 Net unrealized gain on securities available for sale 1,180 3,895 ---------- ------- TOTAL SHAREHOLDER'S EQUITY 233,870 218,906 ---------- ------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $2,925,651 2,812,232 ========== =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. BREMER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31 -------------------------------- 1996 1995 1994 -------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INTEREST INCOME Loans, including fees $151,964 141,754 113,295 Securities Taxable 47,297 47,006 39,091 Tax-exempt 11,285 10,839 9,748 Federal funds sold -- -- 37 Other 157 182 96 -------- ------- ------- Total interest income 210,703 199,781 162,267 -------- ------- ------- INTEREST EXPENSE Deposits 86,246 84,872 59,187 Federal funds purchased and repurchase agreements 8,823 8,175 6,771 Other short term borrowings 6,027 4,503 1,844 Long term debt 1,414 1,586 382 -------- ------- ------- Total interest expense 102,510 99,136 68,184 -------- ------- ------- Net interest income 108,193 100,645 94,083 Provision for loan losses 2,756 1,780 (1,300) -------- ------- ------- Net interest income after provision for loan losses 105,437 98,865 95,383 -------- ------- ------- NONINTEREST INCOME Service charges 12,837 11,047 9,627 Insurance 7,082 5,503 4,716 Trust 5,332 4,784 4,502 Gain on sale of loans 2,138 1,302 1,649 Gain (loss) on sale of securities 147 304 (270) Other 6,306 4,952 6,544 -------- ------- ------- Total noninterest income 33,842 27,892 26,768 -------- ------- ------- NONINTEREST EXPENSE Salaries and wages 40,676 37,325 36,556 Employee benefits 10,739 10,878 11,254 Occupancy 5,756 5,433 4,871 Furniture and equipment 6,020 5,020 4,320 Data processing fees 7,680 7,334 7,031 FDIC premiums and examination fees 1,075 2,901 4,719 Other 20,379 18,405 16,885 -------- ------- ------- Total noninterest expense 92,325 87,296 85,636 -------- ------- ------- INCOME BEFORE INCOME TAX EXPENSE 46,954 39,461 36,515 Income tax expense 15,137 12,325 10,718 -------- ------- ------- NET INCOME $ 31,817 27,136 25,797 ======== ======= ======= Per common share amounts Net income $ 2.65 2.26 2.15 Dividends paid $ 1.05 0.80 0.78 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 CLASS A CLASS B FOR SALE EARNINGS TOTAL ------- ------- -------------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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) 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 Net income 31,817 31,817 Dividends, $1.05 per share (12,600) (12,600) 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 236 (1,538) (1,302) Change in net unrealized gain (loss) on securities available for sale (2,951) (2,951) --- ----- ------- ------- ------- BALANCE, DECEMBER 31, 1996 $57 2,562 1,180 230,071 233,870 === ===== ===== ======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. BREMER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 ------------------------------------ 1996 1995 1994 --------- -------- -------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 31,817 27,136 25,797 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 2,756 1,780 (1,300) Depreciation and amortization 7,135 6,525 9,531 Deferred income taxes (1,204) 1,074 (459) Minority interests in earnings of subsidiaries 1,400 1,277 1,271 (Gain) loss on sale of securities (147) (304) 270 Valuation writedown on other real estate owned -- 13 6 Gains on sale of other real estate owned, net (33) (517) (1,471) Other assets and liabilities, net (915) 2,758 (793) Proceeds from sales of other real estate owned 269 2,192 4,466 Cash receipts related to loans originated specifically for resale 123,549 74,672 81,401 Cash payments related to loans originated specifically for resale (123,397) (73,370) (79,752) --------- -------- -------- Net cash provided by operating activities 41,230 43,236 38,967 --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Deposits in other banks, net 1,230 (1,396) 11 Federal funds sold, net -- -- 21,547 Purchases of securities available for sale (208,159) (273,311) (294,536) Purchases of securities held to maturity (33,762) (20,738) (54,868) Proceeds from maturities of securities available for sale 128,539 92,292 95,976 Proceeds from maturities of securities held to maturity 59,942 55,081 60,900 Proceeds from sales of securities available for sale 97,713 112,886 143,593 Loans, net (129,819) (149,885) (163,484) Business acquisitions, net of cash acquired -- (1,469) 1,621 Acquisition of premises and equipment (7,637) (11,540) (5,913) --------- -------- -------- Net cash used by investing activities (91,953) (198,080) (195,153) --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Noninterest bearing deposits, net 5,612 36,160 5,781 Interest bearing deposits (excluding certificates of deposit), net (7,416) 16,692 (32,545) Certificates of deposits, net 42,943 119,120 97,316 Federal funds and repurchase agreements, net 1,029 (16,961) 68,016 Other short-term borrowings, net 17,465 25,611 29,889 Long-term debt, net 36,821 1,780 13,924 Minority interests acquired and dividends paid (1,085) (1,105) (1,098) Redeemable preferred stock -- (5,108) -- Dividends paid (12,600) (9,600) (9,360) --------- -------- -------- Net cash provided by financing activities 82,769 166,589 171,923 --------- -------- -------- Net increase in cash and due from banks 32,046 11,745 15,737 Cash and due from banks Beginning of year 127,786 116,041 100,304 --------- -------- -------- End of year $ 159,832 127,786 116,041 ========= ======== ======== Supplemental disclosures of cash flow information Cash paid during the year for interest $ 103,494 89,977 64,366 Cash paid during the year for income taxes 16,229 8,640 13,270
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 sixteen 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 and insurance services to its customers through wholly-owned nonbanking subsidiaries, and investment services through a third party relationship. The accounting and reporting policies of the Company and its subsidiaries conform to generally accepted accounting principles and general practices within the financial services industry. The more significant accounting policies are summarized below: CONSOLIDATION -- The consolidated financial statements include the accounts of the Company (a bank holding company majority owned by the Otto Bremer Foundation) and all 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, 1996, 1995, and 1994, the Company received real estate valued at $481,000, $1,312,000, and $506,000, respectively, in satisfaction of outstanding loan balances. During the years ended December 31, 1996, 1995 and 1994, the Company issued installment notes totaling $250,000, $5,577,000 and $3,801,000, respectively, and redeemable preferred stock during 1994 of $7,160,000, in connection with acquisitions. Of the preferred stock issued in 1994, $5,108,000 was redeemed during 1995. INVESTMENT AND MORTGAGE-BACKED SECURITIES -- HELD TO MATURITY SECURITIES consist of debt securities which the Company has the intent and ability to hold to maturity, and are valued at amortized historical cost, 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. The Company does not engage in trading activities. 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 loans 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. The remaining unamortized balances at December 31, 1996 and 1995 were approximately $10,635,000 and $10,200,000, respectively, which are 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 O. RECLASSIFICATIONS -- Certain amounts have been reclassified to provide consistent presentation among the various accounting periods shown. The reclassifications have no effect on previously reported net income or total shareholder's equity. NOTE B: RESTRICTIONS ON CASH AND DUE FROM BANKS Subsidiary Banks are required to maintain average reserve balances in accordance with the Federal Reserve Bank requirements. The amount of those reserve balances was approximately $15,883,000 and $15,388,000 as of December 31, 1996 and 1995, respectively. NOTE C: INVESTMENT AND MORTGAGE-BACKED SECURITIES At December 31, 1996 and 1995, investment and mortgage-backed securities with amortized cost of $655,439,000 and $606,895,000, respectively, were pledged as collateral to secure public deposits and for other purposes. The amortized cost and estimated fair value by maturity at December 31, 1996, are shown below (contractual maturity or, if earlier, call dates are used): HELD TO MATURITY AVAILABLE FOR SALE --------------------- --------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE --------- ------- -------- ------- (IN THOUSANDS) Within 1 year $ 74,676 74,634 117,829 118,237 1 -- 5 years 130,204 131,627 354,041 356,237 5 -- 10 years 71,893 73,643 65,535 65,504 After 10 years 15,358 15,252 104,006 103,665 -------- ------- ------- ------- Total $292,131 295,156 641,411 643,643 ======== ======= ======= ======= The amortized cost and fair value of investment and mortgage-backed securities available for sale as of December 31 consist of the following:
1996 1995 --------------------------------------------------- -------------------------------------------------- GROSS GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE -------- ---------- ---------- ------- --------- ---------- ---------- ------- (IN THOUSANDS) Governments $ 54,966 317 25 55,258 76,335 851 63 77,123 State and political subdivisions 36,934 271 7 37,198 41,500 431 8 41,923 Corporate bonds 36,109 88 80 36,117 48,236 130 319 48,047 Mortgage-backed securities 460,958 3,886 1,880 462,964 450,551 5,257 1,465 454,343 Equity securities 45,337 145 136 45,346 33,436 2,718 15 36,139 Other 7,107 42 389 6,760 10,471 27 210 10,288 -------- ----- ----- ------- ------- ----- ----- ------- Total $641,411 4,749 2,517 643,643 660,529 9,414 2,080 667,863 ======== ===== ===== ======= ======= ===== ===== =======
Proceeds from sales of investments and mortgage-backed securities were $97,713,000, $112,886,000, and $143,593,000, for 1996, 1995, and 1994, respectively. Gross gains of $727,000, $938,000, and $1,583,000 and gross losses of $580,000, $634,000, and $1,853,000 were realized on those sales for 1996, 1995, and 1994, respectively. A summary of amortized cost and fair value of investment and mortgage-backed securities held to maturity at December 31 consist of the following:
1996 1995 --------------------------------------------------- -------------------------------------------------- GROSS GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE -------- ---------- ---------- ------- --------- ---------- ---------- ------- (IN THOUSANDS) Government agencies $ 32,439 93 79 32,453 51,222 240 54 51,408 State and political subdivisions 150,656 4,123 187 154,592 147,293 5,160 254 152,199 Mortgage-backed securities 109,036 308 1,233 108,111 118,390 3 1,621 116,772 -------- ----- ----- ------- ------- ----- ----- ------- Total $292,131 4,524 1,499 295,156 316,905 5,403 1,929 320,379 ======== ===== ===== ======= ======= ===== ===== =======
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: 1996 1995 ---------- --------- (IN THOUSANDS) Commercial and other $ 346,472 331,605 Commercial real estate 340,621 313,287 Construction 30,039 31,952 Agricultural 378,399 350,786 Residential real estate 351,946 322,296 Construction 11,904 11,511 Consumer 247,511 221,727 Tax-exempt 52,819 46,936 ---------- --------- Total $1,759,711 1,630,100 ========== ========= Impaired loans were $11,244,000 and $10,248,000 at December 31, 1996 and 1995, respectively. Impaired loans include nonaccrual, restructured loans and certain other loans identified by the Company. 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 reserve for loan losses includes approximately $1,519,000 and $1,623,000 relating to impaired loans at December 31, 1996 and 1995, respectively. The effect of nonaccrual and restructured loans on interest income for each of the three years ended December 31 was as follows: 1996 1995 1994 ------ ----- ----- (IN THOUSANDS) Interest income As originally contracted $1,227 1,575 1,662 As recognized (291) (429) (346) ------ ----- ----- Reduction of interest income $ 936 1,146 1,316 ====== ===== ===== Other nonperforming assets, consisting of other real estate owned, amounted to $240,000 and $380,000 at December 31, 1996 and 1995, respectively. Loans totaling $62,300,000 and $45,300,000 were pledged to secure Federal Home Loan Bank (FHLB) advances at December 31, 1996 and 1995, 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 $16,483,000 and $14,115,000 at December 31, 1996 and 1995, respectively. During 1996, $15,417,000 of new loans were made, repayments totaled $13,512,000, and changes in the composition of the Group or their associations increased loans outstanding by $463,000. 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: 1996 1995 1994 ------- ------- ------- (IN THOUSANDS) Beginning of year $28,253 26,946 27,624 Charge-offs (2,230) (2,834) (2,065) Recoveries 1,703 1,610 1,814 ------- ------- ------- Net charge-offs (527) (1,224) (251) Provision for loan loss 2,756 1,780 (1,300) Reserve related to acquired assets -- 751 873 ------- ------- ------- End of year $30,482 28,253 26,946 ======= ======= ======= NOTE F: PREMISES AND EQUIPMENT Premises and equipment at December 31 consist of the following: 1996 1995 ------- ------ (IN THOUSANDS) Land $ 6,521 6,582 Buildings and improvements 49,836 47,057 Furniture and equipment 38,538 35,331 ------- ------ Total premises and equipment 94,895 88,970 Less: accumulated depreciation and amortization 48,915 44,718 ------- ------ Premises and equipment, net $45,980 44,252 ======= ====== 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 two years ended December 31 is provided below:
FEDERAL FUNDS FEDERAL HOME TREASURY AND REPURCHASE LOAN BANK TAX AND LOAN AGREEMENTS BORROWINGS NOTES -------------- ------------ ------------ (DOLLARS IN THOUSANDS) Balance at December 31 1995 $187,100 64,500 4,927 1996 188,129 78,200 8,692 Weighted average interest rate at December 31 1995 5.12% 5.84 5.24 1996 5.58 5.85 5.16 Maximum amount outstanding at any month end 1995 $193,777 95,990 21,083 1996 204,332 130,500 13,466 Average amount outstanding during the year 1995 $154,453 67,203 8,279 1996 175,196 101,081 6,536 Weighted average interest rate during the year 1995 5.30% 6.01 5.57 1996 5.04 5.62 5.16
NOTE H: LONG-TERM DEBT Long-term debt (debt with original maturities of more than one year) at December 31 consists of the following: 1996 1995 ------- ------ (IN THOUSANDS) Federal Home Loan Bank borrowings $54,514 16,200 Installment promissory notes and other 7,875 9,368 ------- ------ Total $62,389 25,568 ======= ====== The FHLB borrowings bear interest at rates ranging from 5.46% to 7.35%, with maturity dates from 1998 through 2011. The promissory notes and other bear interest at rates ranging from 5.68% to 8.53%, paid predominantly in annual installments through 2007. Maturities of long-term debt outstanding at December 31, 1996, were as follows: (IN THOUSANDS) 1997 $ 1,748 1998 52,197 1999 1,703 2000 673 2001 1,423 Thereafter 4,645 ------- Total $62,389 ======= The Company had an unused line of credit of $10 million with a bank at December 31, 1996. 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 September 11, 1997. NOTE I: DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS 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, 1996 and 1995. 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, 1996 and, therefore, current estimates of fair value may differ from the amounts presented. As of December 31, carrying amounts and estimated fair values are:
1996 1995 ------------------------- ----------------------- ESTIMATED ESTIMATED CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ---------- ---------- --------- --------- (IN THOUSANDS) ASSETS Cash and due from banks $ 159,832 159,832 127,786 127,786 Interest bearing deposits 1,778 1,778 3,008 3,008 Securities held to maturity 292,131 295,156 316,905 320,379 Securities available for sale 643,643 643,643 667,863 667,863 Loans 1,725,275 1,749,205 1,626,616 1,678,937 LIABILITIES Demand deposits 1,019,717 1,019,717 1,013,415 1,013,415 Time deposits 1,263,729 1,266,944 1,228,892 1,261,969 Short-term borrowings 275,021 275,021 256,527 256,527 Long-term debt 62,389 62,826 25,568 26,169
CASH AND DUE FROM BANKS AND INTEREST BEARING DEPOSITS -- 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 generally 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:
1996 1995 -------- ------- (IN THOUSANDS) Accumulated benefit obligation, including vested benefits of $12,986 in 1996, and $11,302 in 1995 $ 14,836 14,089 Increase due to salary projections 5,067 6,159 -------- ------- Projected benefit obligation for service rendered to date 19,903 20,248 Plan assets (marketable securities) at fair value (21,124) (18,667) -------- ------- Projected benefit obligation (less than)/in excess of plan assets (1,221) 1,581 Unrecognized actuarial gain (loss) 2,019 (162) Prior service cost not yet recognized in net periodic expense (612) (734) -------- ------- Accrued pension expense $ 186 685 ======== =======
Net periodic pension cost includes the following components:
1996 1995 1994 ------- ------ ------ (IN THOUSANDS) Service cost -- benefits earned during the period $ 1,145 973 1,143 Interest cost on projected benefit obligation 1,597 1,434 1,279 Actual return on plan assets (1,240) (3,645) 202 Net amortization and deferral (297) 2,526 (1,258) ------- ------ ------ Net pension cost $ 1,205 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 8.0% and 4.5%, respectively, at December 31, 1996, and 7.5% and 5.0%, respectively, at December 31, 1995. The expected long-term rate of return on assets in 1996, 1995, and 1994 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: 1996 1995 ------ ----- (IN THOUSANDS) Retirees $ 517 240 Fully eligible active plan participants 280 377 Other active plan participants 1,133 1,158 ------ ----- Total $1,930 1,775 ====== ===== Net periodic postretirement benefit cost includes the following components:
1996 1995 1994 ------ ---- ---- (IN THOUSANDS) Service cost -- benefits earned during the period $ 122 106 118 Interest cost on accumulated postretirement benefit obligation 148 130 138 Net amortization and deferral (82) (106) (87) ------ ---- --- Net postretirement benefit cost $ 188 130 169 ====== ==== ===
For the 1996 measurements, the assumed annual rate of increase in the per capita cost of covered health care benefits was 9.6% for 1996 and 8.6% for 1997; 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, 1996 by $210,000 and the aggregate of the service cost and interest cost components of net periodic post-retirement benefit cost for the year then ended by $36,000. The weighted average discount rates used in determining the accumulated postretirement benefit obligation at December 31, 1996 and 1995 were 8.0% and 7.5%, 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. The expense for 1996 was approximately $1,757,000. Contributions to the plan were $1,560,000 and $1,893,000 in 1995 and 1994, respectively. EMPLOYEE STOCK OWNERSHIP PLAN -- The ESOP is a defined contribution plan covering substantially all employees, with contributions made exclusively by the Company on a discretionary year-by-year basis. The expense for 1996 was approximately $350,000. Contributions for the plan were $350,000 and $140,000 in 1995, and 1994, respectively. NOTE K: OTHER NONINTEREST INCOME Other noninterest income consists of the following: 1996 1995 1994 ------ ----- ----- (IN THOUSANDS) Brokerage commissions $2,531 1,243 1,856 Fees on loans 2,484 1,726 1,538 Other 1,291 1,983 3,150 ------ ----- ----- Total $6,306 4,952 6,544 ====== ===== ===== NOTE L: OTHER NONINTEREST EXPENSE Other noninterest expense consists of the following: 1996 1995 1994 ------- ------ ------ (IN THOUSANDS) Printing, postage and office supplies $ 4,824 4,599 3,918 Marketing 3,306 3,041 2,954 Other real estate owned 56 84 (63) Other 12,193 10,681 10,076 ------- ------ ------ Total $20,379 18,405 16,885 ======= ====== ====== NOTE M: INCOME TAXES The components of the provision for income taxes are as follows: 1996 1995 1994 ------- ------ ------ (IN THOUSANDS) Current Federal $12,290 8,295 8,236 State 4,051 2,956 2,941 Deferred (1,204) 1,074 (459) ------- ------ ------ Total $15,137 12,325 10,718 ======= ====== ====== A reconciliation between income tax expense and the amount computed by applying the statutory federal income tax rate is as follows:
1996 1995 1994 ------- ------ ------ (IN THOUSANDS) Tax at statutory rate $16,434 13,811 12,780 Plus state income tax, net of federal tax benefits 2,634 1,922 1,912 ------- ------ ------ 19,068 15,733 14,692 Less tax effect of: Interest on state and political subdivision securities 3,003 2,980 2,855 Other tax-exempt interest 1,499 1,553 1,196 Amortization (249) (93) 105 Minority interest in earnings (560) (511) (508) Other 238 (521) 326 ------- ------ ------ 3,931 3,408 3,974 ------- ------ ------ Income tax expense $15,137 12,325 10,718 ======= ====== ======
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: 1996 1995 -------- ------ (IN THOUSANDS) Deferred tax assets Provision for loan losses $ 12,113 11,135 Employee compensation and benefits accruals 1,757 1,425 Deferred income 270 208 Other 378 -- -------- ------ Total 14,518 12,768 -------- ------ Deferred tax liabilities Deferred expense 1,196 1,334 Depreciation 1,630 1,402 Unrealized gains on securities available for sale 888 2,933 Other 396 665 -------- ------ Total 4,110 6,334 -------- ------ Net deferred tax assets $ 10,408 6,434 ======== ====== NOTE N: COMMITMENTS AND CONTINGENCIES The Company utilizes various off-balance sheet instruments to satisfy the financing needs of customers. These instruments represent contractual obligations of the Company to provide funding, within a specified time period, to a customer. The following represents the outstanding obligations at December 31: 1996 1995 -------- ------ (IN THOUSANDS) Standby letters of credit $ 35,863 39,889 Loan commitments 341,822 325,692 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 $2 million in annual fees, through February 2004, to its data processing provider. In addition, the Company has a separate contract, with its item processing provider, which covers item processing services to the Company's subsidiary banks through March 1999. 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 O: COMMON STOCK The Company has authorized 12,000,000 shares of class A common stock and 10,800,000 shares of class B common stock. The shares of class A common stock have full rights to vote on all matters properly before the Company's shareholders, including the election of the Company's directors. The class B common stock, all of which is held by the Otto Bremer Foundation, is non-voting except with respect to certain extraordinary corporate transactions, upon which the holders would have the right to vote on an equivalent per share basis with the holders of class A common stock. Each share of class B common stock is convertible into one share of class A common stock upon the occurrence of the following events: (i) at the affirmative election of a third party or entity, upon the transfer of class B common stock from the Otto Bremer Foundation to any third party or entity, or (ii) at the affirmative election of the holder of class B common stock, if cash dividends have not been paid on class A and class B common stock with respect to any year in an amount equal to at least 5% of the Company's net book value as of the last day of the immediately preceding year. The Company has reserved 10,800,000 shares of class A common stock in the event of conversion of the class B common stock. At December 31, 1996 and 1995, 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 $21.18 and $19.83 per share, respectively, which approximated book value. Shares held in the Company's ESOP were redeemed at a price of $26.35 and $23.75 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, 1996, 1995 and 1994, 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, 1996, $37,833,000 of retained earnings of the Subsidiary Banks was available for distribution to the Company as dividends subject to these limitations. Approximately $19,551,000 was available for distribution without obtaining the prior approval of the appropriate bank regulator. NOTE P: REGULATORY MATTERS The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. Qualitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below and as defined in the regulations) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. Management believes, as of December 31, 1996, that the Company meets all capital adequacy requirements to which it is subject. The Company's actual capital amounts and ratios are also presented below.
FOR CAPITAL ACTUAL ADEQUACY PURPOSES ------------------ ------------------ AMOUNT RATIO AMOUNT RATIO ------- ------ -------- ----- AS OF DECEMBER 31, 1996: TOTAL CAPITAL (TO RISK WEIGHTED ASSETS) $274,447 14.15% $155,213 8.00% TIER I CAPITAL (TO RISK WEIGHTED ASSETS) 250,118 12.89 77,607 4.00 TIER I CAPITAL (TO AVERAGE ASSETS) 250,118 8.79 85,410 3.00 As of December 31, 1995: Total Capital (to Risk Weighted Assets) 253,522 14.01 143,813 8.00 Tier I Capital (to Risk Weighted Assets) 230,825 12.75 72,407 4.00 Tier I Capital (to Average Assets) 230,825 8.41 82,322 3.00
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") required the establishment of a capital-based supervisory system of prompt corrective action for all depository institutions. The Federal Reserve Board's implementation of FDICIA defines "well-capitalized" institutions as those whose Tier I capital ratio equals or exceeds 6%, total risk-based capital ratio equals or exceeds 10%, and leverage ratio equals or exceeds 5%. The Company's Subsidiary Banks ratios in each of these categories met or exceeded the "well-capitalized" ratios as of December 31, 1996. NOTE Q: BREMER FINANCIAL CORPORATION (PARENT COMPANY ONLY) CONDENSED STATEMENTS: BALANCE SHEETS DECEMBER 31 1996 1995 -------- ------- (IN THOUSANDS) ASSETS Cash and cash equivalents $ 2,048 5,399 Marketable securities 22,391 21,091 Investment in and advances to: Bank subsidiaries 220,929 206,636 Non-bank subsidiaries 11,432 8,227 Other assets 3,482 3,814 -------- ------- Total assets $260,282 245,167 ======== ======= LIABILITIES AND SHAREHOLDER'S EQUITY Accrued expenses and other liabilities $ 1,629 2,356 Long-term debt 4,446 4,870 Redeemable class A common stock 20,337 19,035 Shareholder's equity 233,870 218,906 -------- ------- Total liabilities and shareholder's equity $260,282 245,167 ======== ======= STATEMENTS OF INCOME YEAR ENDED DECEMBER 31 ----------------------------- 1996 1995 1994 ------- ------ ------ (IN THOUSANDS) INCOME Dividends from: Bank subsidiaries $19,281 23,357 20,349 Non-bank subsidiaries 603 200 190 Interest from subsidiaries 313 248 185 Other interest income 1,363 942 484 Gain on sale of securities 200 (13) -- Other income 14 14 -- ------- ------ ------ Total income 21,774 24,748 21,208 ------- ------ ------ EXPENSES Salaries and benefits 702 621 640 Operating expense paid to subsidiaries 1,190 1,165 1,402 Interest expense 373 266 -- Other operating expenses 1,105 546 215 ------- ------ ------ Total expenses 3,370 2,598 2,257 ------- ------ ------ Income before income tax benefit 18,404 22,150 18,951 Income tax benefit 788 747 773 ------- ------ ------ Income of parent company only 19,192 22,897 19,724 Equity in undistributed earnings of subsidiaries 12,625 4,239 6,073 ------- ------ ------ NET INCOME $31,817 27,136 25,797 ======= ====== ====== STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 --------------------------------- 1996 1995 1994 -------- ------- ------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTITIVIES Net income $ 31,817 27,136 25,797 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed earnings of subsidiaries (12,625) (4,239) (6,073) (Gain) loss on sale of securities (200) 13 -- Securities amortization 470 185 279 Other, net (262) (1,080) (271) -------- ------- ------- Net cash provided by operating activities 19,200 22,015 19,732 -------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in and advances to subsidiaries, net (7,624) (10,332) (5,729) Purchases of securities, net (22,746) (28,127) (14,428) Proceeds from maturities of securities 5,303 13,968 -- Proceeds from sales of securities 15,540 9,409 -- Long term debt, net (424) 4,870 -- -------- ------- ------- Net cash used by investing activities (9,951) (10,212) (20,157) -------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (12,600) (9,600) (9,360) -------- ------- ------- Net cash used by financing activities (12,600) (9,600) (9,360) -------- ------- ------- Increase (decrease) in cash and cash equivalents (3,351) 2,203 (9,785) Cash and cash equivalents Beginning of year 5,399 3,196 12,981 -------- ------- ------- End of year $ 2,048 5,399 3,196 ======== ======= =======
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. January 24, 1997 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, 1996. PART III. Items 10 through 13 of the Form 10-K are omitted because the Company will file before April 30, 1997 a definitive Proxy Statement (the "Proxy Statement") conforming to Schedule 14A involving the election of directors. The information required by Items 10, 11, 12 and 13 of Part III of the Form 10-K are hereby incorporated by reference to such Proxy Statement. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: (1) The following financial statements of Bremer Financial Corporation are part of this document under Item 8. Financial Statements and Supplementary Data: Consolidated Balance Sheets -- December 31, 1996 and December 31, 1995 Consolidated Statements of Income -- Years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Shareholder's Equity -- Years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows -- Years ended December 31, 1996, 1995 and 1994 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 1996 Executive Incentive Compensation Plan for Chief Financial Officer, Chief Credit Officer, and Human Resources Director. 10.2 Bremer Financial Corporation 1996 Executive Incentive Compensation Plan for Group Presidents. 10.3 Bremer Financial Corporation 1996 Executive Incentive Compensation Plan for Chief Operating Officer. 10.4 Bremer Financial Corporation 1996 Executive Incentive Compensation Plan for President and CEO. 10.5 Bremer Financial Corporation 1996 Long-Term Incentive Compensation Plan for Group Presidents and Chief Operating Officer. 10.6 Bremer Financial Corporation 1996 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 10.1, 10.2, 10.3, 10.4, and 10.5, respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 1995: 10.7 Bremer Financial Corporation 1995 Executive Incentive Compensation Plan for Group Presidents. 10.8 Bremer Financial Corporation 1995 Executive Incentive Compensation Plan for Retail Banking Services Director (Chief Operating Officer). 10.9 Bremer Financial Corporation 1995 Executive Incentive Compensation Plan for President and CEO. 10.10 Bremer Financial Corporation 1995 Long-Term Compensation Plan for Group Presidents and Retail Banking Services Director (Chief Operating Officer). 10.11 Bremer Financial Corporation 1995 Long-Term Incentive Compensation Plan for President and CEO. 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: 10.12 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). 10.13 Bremer Financial Corporation 1994 Executive Incentive Compensation Plan for Gene H. Sipe and Duaine C. Espegard. 10.14 Bremer Financial Corporation 1994 Executive Incentive Compensation Plan for Kenneth P. Nelson. 10.15 Bremer Financial Corporation 1994 Executive Incentive Compensation Plan for Stan K. Dardis. 10.16 Bremer Financial Corporation 1994 Executive Incentive Compensation Plan for President and CEO. 10.17 Bremer Financial Corporation 1994 Long-Term Incentive Compensation Plan for Group Presidents and Retail Banking Services Director. 10.18 Bremer Financial Corporation 1994 Long-Term Incentive Compensation Plan for President and CEO. 10.19 Deferred Compensation Plan for Directors of Bremer Financial Services, Inc. 10.20 Bremer Financial Corporation Supplemental Executive Retirement Plan (Effective January 1, 1994). The following exhibit is incorporated by reference to Exhibit 10.5, to the Company's Annual Report on Form 10-K for the year ended December 31, 1992: 10.21 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 10.22 through 10.25 (inclusive). 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. 10.22 Employment Agreement by and between Bremer Financial Services, Inc. ("BFS") and Terry Cummings dated January 9, 1985 and Amendment thereto dated March 23, 1988. 10.23 Employment Agreement by and between BFS and Duaine Espegard dated January 2, 1986 and Amendments thereto dated October 28, 1987 and March 23, 1988. 10.24 Employment Agreement by and between BFS and Kenneth Nelson dated January 2, 1986 and Amendments thereto dated October 28, 1987 and March 23, 1988. 10.25 Employment Agreement by and between BFS and Gene Sipe dated January 2, 1986 and Amendments thereto dated October 28, 1987 and March 23, 1988. 10.26 Bremer Financial Corporation Employee Stock Ownership Plan and Trust Agreement. 10.27 Bremer Banks Profit Sharing Plus Plan, as amended and restated effective January 1, 1986, and Amendment No. 1 thereto. 10.28 Bremer Banks Profit Sharing Plus Trust Agreement dated October 1, 1986 and Amendment No. 1 thereto. 10.29 Bremer Banks Retirement Plan as effective April 1, 1985. 10.30 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 1996, which ended December 31, 1996. A copy of this Form 10-K and exhibits herein can be obtained by writing Brent J. Gray, Senior Vice President and Chief Financial Officer, Bremer Financial Corporation, 445 Minnesota Street, Suite 2000, St. Paul, MN 55101. 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 14, 1997. 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 14, 1997 in the capacities indicated. /S/ TERRY M. CUMMINGS ------------------------------------------------------ Terry M. Cummings ITS PRESIDENT AND 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/ DANIEL C. REARDON ------------------------------------------------------ Daniel C. Reardon VICE PRESIDENT AND 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) (This page was intentionally left blank) INDEX TO EXHIBITS Description of Exhibits Page 10.1 Bremer Financial Corporation 1996 Executive Incentive Compensation Plan for Chief Financial Officer, Chief Credit Officer, and Human Resources Director. 10.2 Bremer Financial Corporation 1996 Executive Incentive Compensation Plan for Group Presidents. 10.3 Bremer Financial Corporation 1996 Executive Incentive Compensation Plan for Chief Operating Officer. 10.4 Bremer Financial Corporation 1996 Executive Incentive Compensation Plan for President and CEO. 10.5 Bremer Financial Corporation 1996 Long-Term Incentive Compensation Plan for Group Presidents and Chief Operating Officer. 10.6 Bremer Financial Corporation 1996 Long-Term Incentive Compensation Plan for President and CEO. 21 Subsidiaries of the Company. 27 Financial Data Schedule. EX-10.1 2 EXECUTIVE COMPENSATION PLAN EX-10.1 EXHIBIT 10.1 BREMER FINANCIAL CORPORATION 1996 EXECUTIVE INCENTIVE COMPENSATION PLAN Chief Financial Officer Chief Credit Officer Human Resources Director Contained herein is a detailed outline of the Executive Incentive Compensation Plan which has been designed for the Chief Financial Officer, Chief Credit Officer, and Human Resources Director of Bremer Financial Services, Inc. A. Purpose 1) To provide an annual incentive award to the Chief Financial Officer, Chief Credit Officer, and Human Resources Director of Bremer Financial Services, Inc. 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 Chief Financial Officer, Chief Credit Officer, and Human Resources Director of Bremer Financial Services, Inc. are the participants 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 appropriate designated management to determine and measure performance. Upon completion of the measurement of the participant's goals and objectives, an award will be approved. 3) 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 ------ ------- 10% 20% 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 -------------- ---------------- 11.00 -0- 12.00 5.0% 13.00 TARGET 10.0% 14.00 12.5% 15.00 15.0% 16.00 17.5% 17.00 and over 20.0% * Restructuring costs will be amortized over the years 1996 and 1997 when calculating incentive. 2) Other Measures Will be included in Corporate RORE performance measure. 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 not be deferred. H. Administrative Procedures 1) Additions to Plan -- Eligible individuals will be added to the plan at any time upon the approval of the Board 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 -- If the eligible participant terminates during the plan year, the incentive award will be handled as follows: - Voluntary resignations -- no incentive award. - Involuntary terminations for cause -- no incentive award. - Involuntary termination without cause -- incentive award prorated by number of months service during current incentive plan year, based on approval by President of BFC. - Retirement/disability -- incentive award prorated by number of months of service during current incentive plan year. 3) Change in Position -- If the eligible participant has a change in position during a plan year, their incentive award will be calculated under both plan award levels and prorated by the months of service at each level. 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 and/or certain performance goals are not met, 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. I. 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 1996 Percentage of Salary To Be Awarded F-1 - Corporate RORE -------------------- - -------------------- Corporate RORE __________% __________% Total Award Earned as % of Salary __________% - --------------------------------- X 1996 Salary $___________ = 1996 INCENTIVE AWARD $___________ Approved: _______________________________ ___________________________________ Date _______________________________ ___________________________________ Date EX-10.2 3 EXECUTIVE INCENTIVE COMPENSATION PLAN EX-10.2 EXHIBIT 10.2 BREMER FINANCIAL CORPORATION 1996 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 appropriate designated management to determine and measure performance. Upon completion of the measurement of the participant's goals and objectives, award payments will be recommended and approved. 2) Award payments will be made in the first quarter, following the end of defined incentive plan year. E. Potential Awards 1) The 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 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 -------------- ---------------- 11.00 0% 12.00 10.0% 13.00 TARGET 20.0% 14.00 25.0% 15.00 30.0% 16.00 35.0% 17.00 and over 40.0% * Restructuring costs will be amortized over the years 1996 and 1997 when calculating incentive. 2) Other Measures Will be included in Corporate RORE performance measure. 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) 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 and/or certain performance goals are not met, 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. I. 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 1996 Percentage of Salary To Be Awarded F-1 - Corporate RORE -------------------- - -------------------- Corporate RORE __________% __________% Total Award Earned as % of Salary __________% - --------------------------------- X 1996 Salary $___________ = 1996 INCENTIVE AWARD $___________ Approved: ____________________________ _____________________________________________ Date ____________________________ _____________________________________________ Date EX-10.3 4 1996 EXECUTIVE INCENTIVE COMPENSATION PLAN EX-10.3 EXHIBIT 10.3 BREMER FINANCIAL CORPORATION 1996 EXECUTIVE INCENTIVE COMPENSATION PLAN Chief Operating Officer Contained herein is a detailed outline of the Executive Incentive Compensation Plan which has been designed for the Chief Operating Officer. 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 Chief Operating Officer for Bremer Financial Corporation. 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 ------ ------- Chief Operating Officer 20% 40% 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 -------------- ---------------- 11.00 0% 12.00 10.0% 13.00 TARGET 20.0% 14.00 25.0% 15.00 30.0% 16.00 35.0% 17.00 and over 40.0% * Restructuring costs will be amortized over the years 1996 and 1997 when calculating incentive. 2) Other Measures Will be included in Corporate RORE performance measure. 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) 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 and/or certain performance goals are not met, 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. I. 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 GROUP PRESIDENT INCENTIVE AWARD ---------------------------------------------- Plan Year 1996 Percentage of Salary To Be Awarded F-1 - Corporate RORE -------------------- - -------------------- Corporate RORE __________% __________% Total Award Earned as % of Salary __________% - --------------------------------- X 1996 Salary $___________ = 1996 INCENTIVE AWARD $___________ Approved: ____________________________ _____________________________________________ Date President, Bremer Financial Corporation EX-10.4 5 EXECUTIVE INCENTIVE COMPENSATION PLAN EX-10.4 EXHIBIT 10.4 BREMER FINANCIAL CORPORATION 1996 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 11.00 0.0% 12.00 15.0% 13.00 TARGET 30.0% 14.00 37.5% 15.00 45.0% 16.00 52.5% 17.00 and over 60.0% * Restructuring costs will be amortized over the years 1996 and 1997 when calculating incentive. 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 1996 Percentage of Salary To Be Awarded F-1 - Corporate RORE -------------------- - -------------------- Corporate RORE __________% __________% Total Award Earned as % of Salary __________% - --------------------------------- X 1996 Salary $___________ = 1996 INCENTIVE AWARD $___________ Approved: ____________________________ _____________________________________________ Date Board of Directors of BFC EX-10.5 6 LONG TERM INCENTIVE COMPENSATION PLAN EX-10.5 EXHIBIT 10.5 BREMER FINANCIAL CORPORATION 1996 LONG-TERM INCENTIVE COMPENSATION PLAN Group President Chief Operating Officer Contained herein is a detailed outline of the Long-Term Executive Incentive Compensation Plan which has been designed for the Group Presidents and Chief Operating Officer. 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 well-being. Those activities include long term profitability, growth through acquisitions, and maximization of efficiencies resulting in high productivity. B. Eligibility 1) The Group Presidents and Chief Operating Officer are the participants in this plan. C. Plan Years 1) The Executive Incentive Compensation program will begin on January 1, 1996 and will end on December 31, 1998. 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 1999, 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 1996, 1997, and 1998. 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, 1998 will be utilized. RORE Percentage Award 13.00 25.0% 14.50 TARGET 45.0% 16.50 and over 105.0% (1) RORE excludes from equity the FAS 115 net unrealized gain or loss on securities available for sale. 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. 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 1996 - 1998 Percentage of Salary To Be Awarded F-1 - Return on Realized Equity -------------------- - ------------------------------- a. 1996______________________% b. 1997 _____________________% c. 1998 _____________________% Simple average equals a + b + c ________________% --------- 3 X 12/31/98 Salary $__________________ = 1996-1998 INCENTIVE AWARD $__________________ Approved: ____________________________ ______________________________________ Date President and CEO, BFC EX-10.6 7 LONG TERM INCENTIVE COMPENSATION PLAN EX-10.6 EXHIBIT 10.6 BREMER FINANCIAL CORPORATION 1996 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 well-being. 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, 1996 and will end on December 31, 1998. D. Payment of Award 1) At the end of 1998, 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 1999, 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 1996, 1997, and 1998. 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, 1998 will be utilized. RORE Percentage Award ---- ---------------- 13.00 33.0% 14.50 TARGET 60.0% 16.50 and over 120.0% (1) RORE excludes from equity the FAS 115 net unrealized gain or loss on securities available for sale. 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. 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 1996 - 1998 Percentage of Salary To Be Awarded F-1 - Return on Realized Equity -------------------- - ------------------------------- a. 1996______________________% b. 1997 _____________________% c. 1998 _____________________% Simple average equals a + b + c ________________% --------- 3 X 12/31/98 Salary $__________________ = 1996-1998 INCENTIVE AWARD $__________________ Approved: ____________________________ ______________________________________ Date Board of Directors of BFC EX-21 8 SUBSIDIARIES OF BREMER FINANCIAL CORPORATION EX-21 EXHIBIT 21 Subsidiaries of Bremer Financial Corporation Name of Subsidiaries and State or Other Jurisdiction of Incorporation as of March 14, 1997: State of Minnesota: Bremer Business Finance Corporation 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 Insurance Agencies, Inc. State of Wisconsin: Dunn County Bankshares, Inc., parent of First American Bank, National Association (Menomonie, WI) and Premium Finance Corporation State of Arizona: Bremer First American Life Insurance Company United States (National Bank Act): First American Bank, National Association (Alexandria, MN) First American Bank, National Association (Brainerd, MN) First American Bank, National Association (Breckenridge, MN) First American Bank, National Association (Crookston, MN) First American Bank, National Association (Detroit Lakes, MN) First American Bank, National Association (Grand Forks, ND) First American Bank, National Association (International Falls, MN) First American Bank, National Association (Lisbon, ND) First American Bank, National Association (Marshall, MN) First American Bank, National Association (Menomonie, WI) First American Bank, National Association (Minot, ND) First American Bank, National Association (Moorhead, MN) First American Bank, National Association (St. Cloud, MN) First American Bank, National Association (South Saint Paul, MN) First American Bank, National Association (Wahpeton, ND) First American Bank, National Association (Willmar, MN) EX-27 9 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 159,832 1,778 0 0 643,643 292,131 295,156 1,755,757 30,482 2,925,651 2,283,446 275,021 39,125 62,389 2,144 0 22,956 240,570 2,925,651 151,964 58,582 157 210,703 86,246 102,510 108,193 2,756 147 92,325 46,954 31,817 0 0 31,817 2.65 2.65 4.08 10,830 2,205 414 90,818 28,253 2,230 1,703 30,482 24,700 0 5,782
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