ITEM 1. BUSINESS.
GENERAL
Bremer Financial Corporation (the "Company") is a privately-held regional financial services company headquartered in St. Paul, Minnesota, and incorporated under Minnesota law on December 7, 1943. As of March 13, 2000, the Company owned at least 99.8% of the total outstanding capital stock of its 14 subsidiary banks (collectively, "Subsidiary Banks"). As a bank holding company, the Company is subject to the federal Bank Holding Company Act of 1956, as amended ("Holding Company Act"), and to regulation and supervision by the Federal Reserve System (including the Board of Governors of the Federal Reserve System). The Subsidiary Banks are located in Minnesota, Wisconsin and North Dakota and have a total of 100 offices throughout these states. The Subsidiary Banks draw most of their deposits from and make substantially all of their loans within the states of Minnesota, Wisconsin and North Dakota and have no foreign loans. At December 31, 1999, the Company and its subsidiaries (including the Subsidiary Banks) had consolidated assets of approximately $3.9 billion and consolidated deposits of approximately $2.9 billion. The Subsidiary Banks ranged in size from $65.2 million to $707.1 million in total assets and from $59.4 million to $483.7 million in total deposits as of December 31, 1999. See the portion of this Form 10-K, Item 1. entitled "Business Developments in 1999."
The Company also owns several financial services subsidiaries. It owns all of the outstanding capital stock of Bremer Trust, National Association ("Bremer Trust"), which provides trust and other fiduciary services to most of the Minnesota Subsidiary Banks' communities; Bremer Insurance Agencies, Inc. ("Bremer Insurance Agencies"), which provides insurance agency services to the Subsidiary Banks' communities; Bremer Financial Services, Inc. ("Bremer Financial"), which provides management and support services to the Company and its subsidiaries; Bremer Business Finance Corporation ("BBFC"), which provides asset-based lending and leasing services; and Bremer Services, Inc. ("Bremer Services"), which provides operations and support services to the Subsidiary Banks. The Company also owns a controlling portion of the capital stock of Bremer First American Life Insurance Company, which is engaged in the underwriting and reinsurance of credit life and health insurance sold in conjunction with the extension of credit by the Subsidiary Banks.
Consumer investment products and services are available at the Subsidiary Banks through INVEST Financial Corporation of Tampa, Florida ("INVEST"). The Company and its Subsidiary Banks have entered into a fully disclosed agreement with INVEST whereby the Company and its subsidiaries deliver investment services to its customers through a network of Subsidiary Banks' offices and receive a portion of the commissions earned by the investment representatives.
The operations of the financial services subsidiaries, while an integral part of the Company's ability to deliver a full range of financial services, taken as a whole, are not significant enough to meet the requirements of additional segment reporting.
The Otto Bremer Foundation (the "Foundation") owns 20% of the outstanding shares of the Company's class A common stock and 100% of the outstanding shares of its class B common stock, for a total of 92% of the outstanding shares of the Company's capital stock, consisting only of the class A and class B common stock. Accordingly, the Foundation is, and is subject to regulation as, a bank holding company within the meaning of the Holding Company Act.
COMPETITION
The banking business is highly competitive. As the financial service industry expands, the scope of potential competition for the Subsidiary Banks also expands. The Subsidiary Banks compete with other
commercial banks, savings and loan associations, and credit unions for loans and deposits, with money market funds for deposits, and with brokerage firms for investment products and services. Consumer and commercial finance companies, department stores, mortgage banks and insurance companies are also important competitors for various types of loans. Some of these entities and institutions are not subject to the same regulatory restrictions as the Company and the Subsidiary Banks. In addition, competition has intensified as local institutions become part of larger national associations as a result of amendments to interstate banking laws.
Management believes that each Subsidiary Bank will be able to continue to compete successfully in its community. Management further believes that the Company's emphasis on local management and the ability of the Subsidiary Banks to make decisions close to the marketplace, the Subsidiary Banks' community commitment and involvement, and the commitment to a strong sales culture and to providing quality banking services, are factors that should allow the Subsidiary Banks to continue to maintain and improve their competitive position.
TRADEMARKS
In 1998, in conjunction with the Company's legal name changes of its Subsidiary Banks and other subsidiaries, the Company modified its stylized "Bremer Eagle" symbol and registered it with the United States Patent and Trademark Office. As part of this modification, the Company also registered a stylized version of the word "Bremer" for use in identifying and advertising a common identity among the Company's affiliates. These trademarks are used by substantially all of the Company's affiliates, including the Subsidiary Banks. The Company has registered no other trademarks, patents or copyrights. While management believes that a trademark is useful in identifying and advertising a common identity among the Company's affiliates, it also believes that the "Bremer Eagle" symbol, the "Bremer" name, or any other trademark, patent or copyright, or the registration thereof, is not material to the business of the Company or its subsidiaries.
BUSINESS DEVELOPMENTS IN 1999
In February 1999, the Company expanded its operations in Fergus Falls, Minnesota, with the addition of a new branch facility to complement its existing supermarket location in that community.
On February 16, 1999, the Company signed a definitive agreement to purchase Northwest Equity Corp. of Amery, Wisconsin, and its subsidiary, Northwest Savings Bank. The closing of this acquisition, which had been held up by delays in the regulatory approval process, is expected in the first quarter of 2000. Northwest Savings Bank has assets of approximately $95 million with three locations in Amery, New Richmond, and Siren, Wisconsin.
In March 1999, the Company began operations in a Business Banking Center located on the 21st floor of the North Central Life tower in downtown St. Paul, Minnesota.
On July 8, 1999, the Company acquired Dean Financial Services, Inc. ("Dean"). Dean was a privately-held bank holding company with approximately $300 million in assets with four charter banks serving 11 locations in Minnesota. During the latter half of 1999, Dean was merged into the Company and the four separate charter banks of Dean were merged into previously existing charter banks of the Company.
On July 31, 1999, the Company sold substantially all of the assets of Premium Finance Corporation ("PFC") located in Eau Claire, Wisconsin. PFC was engaged in the business of financing customer insurance premiums and had assets of approximately $1 million.
In December 1999, the Company redeemed the remaining $1.6 million of redeemable preferred stock which had been issued by Dunn County Bankshares, Inc. ("DCBI") in connection with a September 1994 acquisition of operations in Menomonie, Wisconsin. Subsequent to this stock redemption, DCBI was merged into the Company.
EMPLOYEES
As of March 13, 2000, the Company and its subsidiaries (including the Subsidiary Banks) had a total of 1,520 full-time equivalent positions. The Company and each of its subsidiaries considers its relations with employees to be good. None of the Company's employees is a member of a collective bargaining unit.
ITEM 2.
ITEM 2. PROPERTIES.
The Company leases its principal offices at 445 Minnesota Street, Suite 2000, St. Paul, Minnesota 55101, which consist of approximately 25,000 square feet of space. Management believes that these facilities will be sufficient for the Company's needs in the foreseeable future.
Substantially all of the Subsidiary Bank offices and branches are owned, with the primary exception of those located in leased retail space in downtown St. Paul, Minnesota, and leased space in supermarkets. The facilities are all well maintained and range in size from 391 square feet to 52,280 square feet. Certain properties of the Subsidiary Banks may be subject to pledges or mortgages. However, the amount of long-term debt secured by mortgages on the Subsidiary Banks' properties is not material. See Notes F and H in the Notes to Consolidated Financial Statements of the Company set forth in Item 8 of Part II of this Form 10-K.
ITEM 3.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the year ended December 31, 1999 to a vote of the Company's security holders, through the solicitation of proxies or otherwise.
PART II.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
There is no established trading market for the shares of the Company's class A common stock. To the best of the Company's knowledge, during the period from May 18, 1989 (the closing date of the registered initial public offering of the Company's class A common stock) through and including February 22, 2000, a majority of the purchases and sales of shares of the class A common stock have consisted of transfers effected upon the exercise of the options described in the portions of the Company's Prospectus dated April 20, 1989 ("Prospectus") entitled "Description of Capital Stock -- Description of Class A Common Stock -- Restrictions on Transfer" on page 62 of the Prospectus and "Description of Capital Stock -- Description of Class A Common Stock First Call Option to Company" on page 64 of the Prospectus (which portions are hereby incorporated by reference pursuant to Rule 12b-23 under the Securities Exchange Act of 1934). The Company is not obligated to purchase any shares of class A common stock from a holder upon the exercise of a put option if the purchase price paid for the shares subject to the put option, when added to the purchase price paid for all previous purchases of class A common stock during the preceding twelve-month period, would exceed 10% of the Company's net worth as of the date of such purchase. As of December 31, 1999, the Company's net worth, including redeemable class A common stock, was $312.9 million and 10% of the Company's net worth and redeemable class A common stock was $31.3 million.
During the period from January 1, 1999 and through and including February 22, 2000, the Company did not directly purchase any shares of class A common stock but assigned to its Employee Stock Ownership Plan ("ESOP") and the Bremer Banks Profit Sharing Plus Plan ("Profit Sharing Plan") its options to purchase a total of 87,553.7448 shares. The ESOP and the Profit Sharing Plan purchased these shares and then transferred them to employees of the Company and its subsidiaries through the ESOP and the Profit Sharing Plan. In addition, 2,645 shares of class A common stock were transferred directly between individuals at various times throughout the year. To the best of the Company's knowledge,
these were the only transfers of shares of class A common stock effected during the period from January 1, 1999 through and including February 22, 2000. The sales price of the shares of class A common stock in such transactions ranged from $25.21 to $36.85 per share. These prices were equal to either the per share book value of the class A common stock as shown in the Company's consolidated balance sheet dated as of the last day of the immediately preceding fiscal quarter or, and only with respect to shares transferred that had been held for employees in the ESOP, the per share fair market values of $36.85, $36.00, and $35.25 as of June 30, 1998, December 31, 1998, and June 30, 1999, respectively, as determined by an independent appraiser. At December 31, 1999, the most recent date for which a per share book value for the class A common stock is available, such value was $26.07.
To the best of the Company's knowledge, no brokers are used to sell the shares of class A common stock, and there are no market makers for the class A common stock.
HOLDERS
As of February 22, 2000, there were approximately 1,200 holders of record of the shares of class A common stock.
DIVIDENDS
The Subsidiary Banks' ability to pay dividends to the Company and the Company's ability to pay dividends to holders of the class A common stock are restricted and limited. The restrictions on payments of dividends are also described in Note O of the Company's Notes to Consolidated Financial Statements set forth in Item 8 of this Form 10-K. Each of the Subsidiary Banks is subject to extensive regulation regarding the payment of dividends and other matters. All Subsidiary Banks are nationally chartered and are regulated by the Office of the Comptroller of the Currency ("Comptroller"). In addition, because the deposits of the Company's Subsidiary Banks are insured up to the applicable limit (currently $100,000) by the Federal Deposit Insurance Corporation ("FDIC"), all of the Subsidiary Banks are subject to regulation by the FDIC. The Company and the Foundation, as bank holding companies, are regulated by the Board of Governors of the Federal Reserve System ("Federal Reserve Board").
DIVIDENDS FROM SUBSIDIARY BANKS. A substantial portion of the Company's cash flow and income is derived from dividends paid to it by the Subsidiary Banks, and restrictions on the payment of such dividends could affect the payment of dividends by the Company. With regard to the Subsidiary Banks, and in addition to the statutory prohibition against the withdrawal of any portion of a national bank's capital and certain statutory limitations on the payment of dividends, the approval of the Comptroller is required for the payment of any dividend by any national bank if the total of all dividends declared by the bank in any calendar year exceeds the total of its net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years, less any required transfer to surplus. The Comptroller also has issued a banking circular emphasizing that the level of cash dividends should bear a direct correlation to the level of a national bank's current and expected earnings stream, the bank's need to maintain an adequate capital base, and other factors.
In addition to the foregoing limitations, the appropriate federal banking agency could take the position that it has the power to prohibit a national bank from paying dividends if, in its view, such payments would constitute unsafe or unsound banking practices.
The payment of dividends by any national bank also is affected by the requirements to maintain adequate capital pursuant to the capital adequacy guidelines issued by the Comptroller. The Comptroller has issued capital adequacy regulations for national banks subject to the Comptroller's primary supervision. These regulations provide for a minimum tier 1 capital to total assets (leverage) ratio of 3.00% for the most highly-rated banks and a minimum total capital to risk-weighted assets (total capital) ratio of 8.00%. These guidelines and regulations further provide that capital adequacy is to be considered on a case-by-case basis in view of various qualitative factors that affect a bank's overall financial condition. Most banking organizations are expected to maintain a leverage ratio of 100 to 200 basis points above this minimum depending on their financial condition. The Subsidiary Banks are in compliance with the Comptroller's minimum capital guidelines. See the discussion of the capital
adequacy guidelines set forth in the portion of Part II of this Form 10-K entitled "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Capital Management."
The above regulations and restrictions on dividends paid by the Subsidiary Banks may limit the Company's ability to obtain funds from such dividends for its cash needs, including funds for payment of operating expenses and for the payment of dividends on the class A and class B common stock, as well as funds necessary to facilitate acquisitions. However, because of the capital positions of the Subsidiary Banks, the Company has been able to obtain dividends sufficient to meet its cash flow needs.
As of December 31, 1999, the Subsidiary Banks had retained earnings of $45.2 million which were available for distribution to the Company as dividends in 2000 subject to regulatory and administrative restrictions. Of this amount, approximately $34.8 million was available for distribution without obtaining the prior approval of the appropriate bank regulator. In 1998 and 1999, the Subsidiary Banks paid total dividends to the Company of $32.7 million and $29.0 million, respectively. Of the fourteen banks that were Subsidiary Banks in 1998 and 1999, thirteen paid dividends in 1998 and twelve paid dividends in 1999. Of the Subsidiary Banks that paid dividends in 1998 and/or 1999, the range of dividend payouts (dividends paid divided by net income) was 49.3% to 100.9% in 1998 and 22.7% to 114.0% in 1999.
Under the ESOP, and at the option of the ESOP's Administrator, cash dividends declared on the shares of class A common stock held by the ESOP will be allocated to the ESOP participants. To the extent that cash dividends declared on the class A common stock held by the ESOP are distributed to the participants (whether directly or indirectly), the dividends will be deductible to the Company. Any dividends paid in the form of class A common stock with respect to shares allocated to the individual participants' accounts will be allocated to such accounts.
Under the Profit Sharing Plan, all cash dividends paid on the class A common stock are allocated to the accounts of the participants holding shares of the class A common stock in their profit sharing accounts. All such proceeds are available to the participants for investment under the Profit Sharing Plan in accordance with the terms and conditions of the Profit Sharing Plan. All dividends paid in the form of class A common stock will be allocated to the account of the participant in which the shares are held. In no event will dividends paid on the class A common stock held by the participants' accounts within the Profit Sharing Plan be forfeited or otherwise allocated and held by the trustees of the Profit Sharing Plan.
DIVIDENDS FROM COMPANY. The payment of dividends by the Company, as a bank holding company, is limited by, among other things, the requirement to maintain adequate capital pursuant to the capital adequacy guidelines issued by the Federal Reserve Board. These guidelines are substantially similar to those promulgated by the Comptroller with respect to national banks, which are discussed above. The payment of dividends by a bank holding company also is subject to the general limitation that the Federal Reserve Board could take the position that it has the power to prohibit the bank holding company from paying dividends if, in its view, such payments would constitute an unsafe or unsound practice.
The Company declared and paid dividends to the Foundation and all other holders of its class A common stock of $15.8 million in both 1998 and 1999. In 1998 and 1999, $3.96 million of dividends were paid in each of the four quarters. The dividend yield, which consists of dividends paid during the year divided by shareholder's equity as of the last day of the preceding year, was 5.7% and 5.2% for the years ended December 31, 1998 and 1999, respectively.
MARKET RISK
Market risk is the risk of loss due to adverse changes in market prices and rates. The management of this risk is an integral part of the Company's financial objectives. Interest rate risk is the risk that changing interest rates will adversely affect net interest income and balance sheet valuations due to differences in the repricing and maturity characteristics of assets and liabilities. Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities.
Responsibility for management of the Company's overall interest rate risk rests with the asset/liability committee ("ALCO"). ALCO is responsible for the development of appropriate risk management policies and for the monitoring of asset/liability activities to insure that they are conducted within established risk parameters. The tools used to measure interest rate risk include gap analysis, simulation of future net income, and a valuation model which measures the sensitivity of balance sheet valuations to changes in interest rates.
In the valuation model, the market value of each asset and liability as of the reporting date is calculated by computing the present value of all cash flows generated. In each case, the cash flows are discounted by a market interest rate chosen to reflect as closely as possible the characteristics of the given asset or liability as obtained from independent broker quotations and other public sources as of December 31, 1999. The impact on valuations is then calculated for a 200 basis point rate shock. The rate shock is an instantaneous change in market rates across the yield curve.
Significant assumptions required in the use of the valuation model include estimates regarding prepayment activity and the behavior of non-maturity deposits in various interest rate environments. The model does not reflect actions that ALCO could initiate in response to a change in interest rates.
The valuation model indicates that the value of assets would decline approximately 4% with a 200 basis point increase in interest rates. After considering the impact on liabilities and tax effects, the market value of equity impact from this 200 basis point increase in rates would be a decrease of approximately 13%. This is within the Company's maximum risk limit of 15% for this risk measure.
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES FINANCIAL HIGHLIGHTS
- ------------------
(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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HIGHLIGHTS
EARNINGS. The Company reported net income of $40.1 million for the year ended December 31, 1999, a $1.4 million or 3.4% decrease from the $41.5 million earned in 1998. Basic earnings per share were $3.34 in 1999 compared to $3.46 in 1998. Return on realized equity was 12.88% in 1999, as compared to the 14.55% return in 1998. Return on average assets was 1.12% in 1999, versus 1.30% in 1998. To facilitate comparisons, net interest income and net interest margin in the accompanying discussion and tables have been adjusted to show tax-exempt income, such as interest on municipal securities, loans, and leases on a tax-equivalent basis. Table I presents a comparative summary of operating data for 1995 through 1999. Table II presents the major components affecting the changes in return on assets for 1999.
TABLE I
SUMMARY INCOME STATEMENT (TAX-EQUIVALENT BASIS)
TABLE II
CHANGES IN RETURN ON ASSETS
EQUITY OF SHAREHOLDERS. Shareholder's equity and redeemable class A common stock totaled $312.9 million at December 31, 1999. Book value per share increased from $25.28 at December 31, 1998 to $26.07 at December 31, 1999, while dividends paid per share remained at $1.32. The 1999 dividends paid of $15.8 million represented 5.2% of the equity of shareholders at December 31, 1998 and 39.5% of 1999 net income. Realized book value per share, which excludes the impact of the net unrealized gain or loss on securities available for sale, increased from $24.94 at December 31, 1998 to $26.96 at December 31, 1999.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME. The most significant component of the Company's earnings is net interest income, which is the difference between interest earned on assets and interest paid on liabilities. Net interest margin measures the effectiveness of generating net interest income on earning assets and is calculated by dividing net interest income by earning assets. Table III sets forth certain information regarding changes in net interest income (tax-equivalent basis, "TEB"), by volume and rate, of the Company for the periods indicated.
TABLE III
CHANGES IN NET INTEREST INCOME (TEB)
- ------------------ *All changes in net interest income, other than those due to volume, have been allocated to yield/rate.
Tax-equivalent net interest income for 1999 was $146.4 million, an increase of $14.7 million or 11.2% from 1998. The increase in net interest income resulted primarily from a $319.4 million or 10.5% increase in average earning assets, driven by average loan growth of $230.6 million or 11.1%. A slight increase in the net interest margin, from 4.31% in 1998 to 4.34% in 1999, also contributed to the increase in net interest income.
The increase in net interest margin was primarily due to an increased spread between the yield on earning assets and the cost of interest bearing liabilities during 1999. While the yield on earning assets decreased 25 basis points from 1998 to 1999, the cost of interest bearing liabilities decreased by 34 basis points. An increased emphasis on money market savings accounts, which increased by 35% in 1999, and a reduced emphasis on more costly savings certificates, contributed to the margin improvement.
PROVISION FOR CREDIT LOSSES. The provision for credit losses was $8.3 million in 1999, compared to $5.6 million in 1998 and $4.7 million in 1997. Net charge-offs for 1999, 1998, and 1997 were $5.6 million, $2.8 million, and $1.7 million, respectively. The provision for credit losses reflects the costs associated with the risks inherent in the loan and lease portfolio, taking into consideration an evaluation of economic conditions, changes in the size, composition, and risk profile of the loan portfolio, net charge-offs, and the level of nonperforming and other problem loans and leases. From December 31, 1998 to December 31, 1999, nonperforming loans and leases increased $3.4 million to $16.7 million. The quality of the loan portfolio, as measured by the ratio of classified loans and leases to total loans and leases, reflected moderate improvement from 5.0% at December 31, 1998 to 4.5% at December 31, 1999, despite continued high levels of classified assets in the Company's agricultural portfolio. The improvement reflects a continuation of strong business conditions in the Company's other markets, resulting in lower levels of classified commercial and business credit. The Company's agricultural portfolio is influenced by industry factors such as commodity prices and market conditions in certain markets that caused below-normal production for several years. Crop production results for 1999 are in general more favorable and to some extent mitigate the effect of low commodity prices. The reserve to outstanding loans and leases decreased slightly in 1999 to 1.65% of loans, and the reserve to nonperforming loans and leases decreased from 279% to 252%. The reserve to outstanding loans and leases ratio remains above average when compared to similar institutions. A complete discussion of asset quality and credit management can be found in the Corporate Risk Profile section of Item 7 in this Form 10-K.
NONINTEREST INCOME. Noninterest income was $52.9 million in 1999 compared to $51.3 million in 1998, representing a $1.6 million or 3.2% increase. Contributing to this increase in noninterest income were strong growth in service charge income of $2.4 million or 14.1% and insurance commissions of $2.3 million or 29.7%. Also contributing to the increase in noninterest income was an increase in trust revenue of $994 thousand or 14.2%. Excluding the state tax refund recorded in 1998, full year noninterest income increased $6.1 million or 13.0%. Table IV presents the components of noninterest income.
TABLE IV
NONINTEREST INCOME
NONINTEREST EXPENSE. Noninterest expense increased $15.4 million or 14.3% from 1998 to 1999. The following table summarizes the components of noninterest expense from 1995 to 1999.
TABLE V
NONINTEREST EXPENSE
Personnel costs, which accounted for 56.4% of noninterest expense, increased $7.2 million or 11.6%. Approximately $1.6 million of this increase in salaries and benefits was related to banks acquired during 1999. Excluding these costs, personnel costs would have increased $5.6 million or 9.1%.
Excluding personnel costs, noninterest expense increased $8.1 million or 18.0%. Approximately $2.8 million of this increase was due to banks acquired in 1999. Furniture and equipment expenses
increased by $1.5 million in 1999 as the Company completed a significant upgrade to its technology infrastructure and expanded into new markets. Also contributing to the increase in noninterest expense was a $1.4 million increase in data processing fees as the Company changed item processing vendors during the year and integrated the data processing of acquired offices. Professional fees increased by $1.2 million, primarily due to the outsourcing of the internal audit function. The expense associated with goodwill and other intangibles increased by $1.1 million.
A common industry statistic used to measure the productivity of banking organizations is the efficiency ratio. The efficiency ratio measures the cost required to generate each dollar of revenue and is calculated by dividing recurring noninterest expense by tax-equivalent net interest income and recurring noninterest income. The Company's efficiency ratio increased slightly from 59.1% in 1998 to 60.6% in 1999. This increase was due to growth in recurring noninterest expense of 14.3% which was only partially offset by increases of 12.0% in recurring noninterest income and 11.2% in tax-equivalent net interest income. The Company will continue its strategic focus to operate with an efficiency ratio below 60%. The efficiency ratio was under 60% during the third and fourth quarters of 1999.
INCOME TAXES. Income tax expense, which consists of provisions for federal and state income taxes, was $21.1 million for 1999, representing a decrease of $134 thousand from 1998. The Company's effective tax rate increased from 33.9% in 1998 to 34.5% in 1999 due to a decline in the level of tax-exempt income in 1999. For further discussion and detail on the Company's income taxes, refer to Notes A and M to the Consolidated Financial Statements found in the portion of Part II of this Form 10-K entitled "Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
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 privately-held regional financial services company headquartered in St. Paul, Minnesota. The Company is a majority owner of 14 subsidiary banks ("Subsidiary Banks") which draw most of their deposits from and make substantially all of their loans within the states of Minnesota, North Dakota, and Wisconsin and is operated as a single segment. Additionally, the Company provides asset-based lending and leasing, trust and insurance services to its customers through wholly-owned nonbanking subsidiaries and investment services through a third party relationship.
The accounting and reporting policies of the Company and its subsidiaries conform to generally accepted accounting principles and general practices within the financial services industry. The more significant accounting policies are summarized below:
CONSOLIDATION -- The consolidated financial statements include the accounts of the Company (a bank holding company majority owned by the Otto Bremer Foundation) and all Subsidiary Banks and financial service subsidiaries in which the Company has a majority interest. All significant intercompany accounts and transactions have been eliminated.
CASH FLOWS -- For purposes of this statement, the Company has defined cash equivalents as cash and due from banks. During the years ended December 31, 1999, 1998, and 1997, the Company received real estate valued at $725,000, $776,000, and $835,000, respectively, in satisfaction of outstanding loan balances.
INVESTMENT AND MORTGAGE-BACKED SECURITIES -- HELD TO MATURITY SECURITIES consist of debt securities which the Company has the intent and ability to hold to maturity and are valued at amortized historical cost. Under certain circumstances (including the deterioration of the issuer's creditworthiness or a change in tax law or statutory or regulatory requirements), securities held to maturity may be sold or transferred to another portfolio.
AVAILABLE FOR SALE SECURITIES consist of debt and equity securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity or changes in the availability or yield of alternative investments. These securities are valued at current market value with the resulting unrealized holding gains and losses excluded from earnings and reported, net of tax and minority interest effects and the resultant allocation to redeemable class A common stock, as a separate component of shareholder's equity until realized. Gains or losses on these securities are computed based on the adjusted cost of the specific securities sold.
The Company does not engage in trading activities.
LOANS AND LEASES -- Interest income is accrued on loan and lease balances based on the principal amount outstanding. Loans and leases are reviewed regularly by management and placed on nonaccrual status when the collection of interest or principal is unlikely. The accrual of interest on loans and leases is suspended when the credit becomes 90 days or more past due, unless the loan or lease is fully secured and in the process of collection. Thereafter, no interest is recognized as income unless received in cash or until such time the borrower demonstrates the ability to pay interest and principal. Certain net loan and commitment fees are deferred and amortized over the life of the related loan or commitment as an adjustment of yield.
RESERVE FOR CREDIT LOSSES -- Management determines the adequacy of the reserve based upon a number of factors, including credit loss experience and a continuous review of the loan and lease portfolio. Being an estimate, the reserve is subject to change through evaluation of the loan and lease composition, economic conditions, and the economic prospects of borrowers.
Under the Company's credit policies and practices, all nonaccrual and restructured commercial, agricultural, construction, and commercial real estate loans and leases, plus certain other loans and leases identified by the Company, meet the definition of impaired loans under Statements of Financial
Accounting Standard ("FAS") Nos. 114 and 118. Impaired loans as defined by FAS 114 and 118 exclude certain large groups of smaller balance homogeneous loans, such as consumer loans and residential real estate loans. Under these statements, loan impairment is required to be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent.
PREMISES AND EQUIPMENT -- Premises and equipment are stated at cost less accumulated depreciation and amortization computed principally on accelerated methods based on estimated useful lives.
OTHER REAL ESTATE -- Other real estate owned, which is included in other assets, represents properties acquired through foreclosure and other proceedings recorded at the lower of the amount of the loan satisfied or fair value. Any write-down to fair value at the time of foreclosure is charged to the reserve for credit losses. Property is appraised periodically to ensure that the recorded amount is supported by the current fair value. Market write-downs, operating expenses and losses on sales are charged to other expenses. Income, including gains on sales, is credited to other income.
INTANGIBLE ASSETS -- Intangible assets consist primarily of goodwill. The remaining unamortized balances at December 31, 1999 and 1998 were approximately $43,606,000 and $16,545,000, respectively, which are amortized over either a 15 year or 25 year period.
INCOME TAXES -- Bremer Financial Corporation and subsidiaries file a consolidated federal tax return. Deferred taxes are recorded to reflect the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end. Such differences are primarily related to the differences between providing for credit losses for financial reporting purposes while deducting charged-off loans and leases for tax purposes.
STATE INCOME TAX REFUND -- In 1998, the Company recorded a non-recurring state tax refund of nearly $4.5 million, including interest, as a component of noninterest income. The state tax refund reflects a refund of state income taxes paid to the state of Minnesota from 1980 through 1983.
COMPREHENSIVE INCOME -- In 1998, the Company adopted FAS No. 130, "Reporting Comprehensive Income." Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. For the Company, comprehensive income consists of net income, as reported in the financial statements, and other comprehensive income, which consists of the change in unrealized gains and losses on securities available for sale.
ACCOUNTING FOR DERIVATIVES -- In June 1998, the Financial Accounting Standards Board issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for fiscal years beginning after June 15, 2000. The Company has not yet evaluated the full impact of adoption.
ESTIMATES -- The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans and leases.
EARNINGS PER SHARE CALCULATIONS -- Basic earnings per common share have been computed using 12,000,000 common shares for all periods. The Company does not have any dilutive securities. See Note O.
RECLASSIFICATIONS -- Certain amounts have been reclassified to provide consistent presentation among the various accounting periods shown. The reclassifications have no effect on previously reported net income or total shareholder's equity.
NOTE B: RESTRICTIONS ON CASH AND DUE FROM BANKS
The Subsidiary Banks are required to maintain average reserve balances in accordance with the Federal Reserve Bank requirements. The amount of those reserve balances was approximately $28,363,000 and $22,305,000 as of December 31, 1999 and 1998, respectively.
NOTE C: INVESTMENT AND MORTGAGE-BACKED SECURITIES
At December 31, 1999 and 1998, investment and mortgage-backed securities with an amortized cost of $818,305,000 and $703,857,000, respectively, were pledged as collateral to secure public deposits and for other purposes. The amortized cost and estimated fair value by maturity at December 31, 1999, are shown below (contractual maturity or, with mortgage-backed securities, projected principal payments are used):
The amortized cost and fair value of investment and mortgage-backed securities available for sale as of December 31 consisted of the following:
Proceeds from sales of investments and mortgage-backed securities were $83,444,000, $67,179,000, and $132,230,000 for 1999, 1998, and 1997, respectively. Gross gains of $1,866,000, $1,563,000, and $391,000 and gross losses of $21,000, $267,000, and $516,000 were realized on those sales for 1999, 1998, and 1997, respectively.
A summary of amortized cost and fair value of investment and mortgage-backed securities held to maturity at December 31 consisted of the following:
State and political subdivision investments largely involve governmental entities within the Company's market area.
NOTE D: LOANS AND LEASES
The Company is engaged in lending activities with borrowers in a wide variety of industries. Lending is concentrated in the areas in which its Subsidiary Banks are located. Loans and leases at December 31 consisted of the following:
Impaired loans and leases were $16,656,000 and $13,252,000 at December 31, 1999 and 1998, respectively. Impaired loans and leases include nonaccrual and restructured loans and leases. Restructured loans and leases are those for which the terms (principal and/or interest) have been modified as a result of the inability of the borrower to meet the original terms of the loan or lease. The reserve for credit losses included approximately $2,692,000 and $1,725,000 relating to impaired loans and leases at December 31, 1999 and 1998, respectively.
The effect of nonaccrual and restructured loans and leases on interest income for each of the three years ended December 31 was as follows:
Other nonperforming assets, consisting of other real estate owned, amounted to $527,000 and $620,000 at December 31, 1999 and 1998, respectively.
Loans totaling $283,140,000 and $244,851,000 had been pledged to secure Federal Home Loan Bank (FHLB) advances at December 31, 1999 and 1998, respectively. Acceptable collateral is defined by the FHLB and consists primarily of residential real estate mortgages.
The Company and its subsidiaries have granted loans to the officers and directors (the "Group") of significant subsidiaries. The aggregate dollar amount of loans to the Group was $17,605,000 and $19,431,000 at December 31, 1999 and 1998, respectively. During 1999, $65,997,000 of new loans were made, repayments totaled $68,144,000, and changes in the composition of the Group or their associations increased loans outstanding by $321,000. These loans were made at the prevailing market interest rates.
NOTE E: RESERVE FOR CREDIT LOSSES
Changes in the reserve for credit losses are as follows:
NOTE F: PREMISES AND EQUIPMENT
Premises and equipment at December 31 consisted of the following:
NOTE G: SHORT-TERM BORROWINGS
Short-term borrowings consist of federal funds and repurchase agreements (which generally mature within one to sixty days of the transaction date), treasury tax and loan notes (which generally mature within one to thirty days), FHLB advances (which mature within one year), and advances under an unsecured revolving credit facility. The size of the credit facility available at December 31, 1999, is $90 million, of which $74 million was unused. The facility contains covenants which require the Company to maintain certain levels of capitalization.
Information related to short-term borrowings for the two years ended December 31 is provided below:
NOTE H: LONG-TERM DEBT
Long-term debt (debt with original maturities of more than one year) at December 31 consisted of the following:
The $65 million of senior notes are unsecured and are made up of two tranches. The $46 million first tranche bears an interest rate of 8.27% and matures on November 1, 2004, while the remaining $19 million second tranche bears an interest rate of 8.47% and matures on November 1, 2006. These senior notes include covenants which require the Company to maintain certain levels of capitalization.
The FHLB borrowings bear interest at rates ranging from 4.97% to 7.83%, with maturity dates from 2000 through 2013, and are secured by certain loans and investment securities.
The installment promissory notes bear interest at rates ranging from 6.94% to 8.53%, paid predominantly in annual installments through 2007.
Maturities of long-term debt outstanding at December 31, 1999, were as follows:
At December 31, 1999, $71 million of the FHLB borrowings due in years beyond 2004 were subject to call prior to maturity at the option of the FHLB. Of this amount, $14 million is callable in 2001 and $57 million is callable in 2003.
NOTE I: DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Most of the Company's assets and liabilities are considered financial instruments as defined in FAS 107. Many of the Company's financial instruments, however, lack an available trading market which is characterized by an exchange transaction of the instrument by a willing buyer and seller. It is also the Company's general practice and intent to hold most of its financial instruments to maturity and not engage in trading activities. Therefore, significant estimations and present value calculations were utilized by the Company for purposes of this disclosure. The use of different market assumptions and/or estimation methodologies may have a material effect on these estimated fair value amounts.
The fair value estimates presented herein are based on pertinent information available to the Company as of December 31, 1999 and 1998. Although the Company is not aware of any factors that would significantly affect the estimated fair value amounts, these amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 1999 and, therefore, current estimates of fair value may differ from the amounts presented. As of December 31, carrying amounts and estimated fair values were:
CASH AND DUE FROM BANKS AND INTEREST BEARING DEPOSITS -- The carrying value for these financial instruments approximates fair value due to the relatively short period of time between the origination of the instruments and their expected realization.
SECURITIES -- Fair values of these financial instruments were estimated using quoted market prices, when available. If quoted market prices were not available, fair value was estimated using market prices for similar assets. As required by FAS 115, securities available for sale are carried at fair market value.
LOANS AND LEASES -- The fair value of loans (net of unearned discount) and leases is estimated by discounting the future cash flows using the current rates at which similar loans or leases would be made to qualified borrowers and for the same remaining maturities, adjusted by a related portion of the reserve for credit losses.
DEPOSITS -- The estimated fair value of deposits with no stated maturity, such as noninterest bearing savings and money-market checking accounts, is the amount payable on demand. The fair value of time deposits is estimated using the rates currently offered for deposits of similar remaining maturities.
SHORT-TERM BORROWINGS -- Due to the short term nature of repricing and maturities of these instruments, fair value is considered carrying value.
LONG-TERM DEBT -- For fixed rate debt, the fair value is determined by discounting future cash flows at current rates for debt with similar remaining maturities and call features. For variable rate debt, fair value approximates carrying value.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS -- The estimated fair value of these instruments, such as loan commitments and standby letters of credit, approximates their off-balance sheet carrying value due to repricing ability and other terms of the contracts.
NOTE J: EMPLOYEE BENEFIT PLANS
PENSION PLAN -- The Company has a defined benefit pension plan covering substantially all of its employees. The benefits are based on age, years of service, and the employee's highest average compensation during 60 consecutive months of the last 120 months of employment. In recent years, the Company's funding policy is to contribute annually an amount approaching the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide for benefits attributed to service to date and for those expected to be earned in the future.
OTHER POSTRETIREMENT BENEFITS -- The Company provides certain retiree health care benefits relating primarily to medical insurance co-payments to retired employees between the ages of 55 and 65. In accordance with FAS No. 106 as amended by FAS No. 132, "Employers' Accounting for Postretirement Benefits Other than Pensions," the Company accrues the cost of these benefits during the employees' active service.
The cost of these programs are as follows:
Contributions to the pension plan are intended to provide for benefits attributed to service to date and for those expected to be earned in the future. Benefits under FAS No. 106 are funded on a pay-as-you-go-basis.
The following tables set forth the plans' funded status (based on a valuation date of September 30), along with a description of how the status changed during the past two years and the amount recognized on the Company's balance sheet at December 31. The funded status of the plans is equal to the fair value of plan assets less the benefit obligation at end of year.
The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation and the expected long-term rates of return on assets are as follows:
For purposes of the 1999 postretirement benefits measurements, the Company has assumed a health-care cost trend rate of between 5.30% and 5.80%. The health-care trend rate assumption has a significant effect on the amounts reported. A one (1) percentage point change in the health-care trend rate would have the following effects on 1999 service and interest cost on the accumulated postretirement benefit obligation at December 31, 1999:
OTHER POSTEMPLOYMENT BENEFITS -- The Company accounts for postemployment benefits in accordance with FAS No. 112, "Employer's Accounting for Postemployment Benefits," adopted in 1994.
PROFIT SHARING PLAN -- The profit sharing plan is a defined contribution plan with contributions made by the Company. The profit sharing plan is noncontributory at the employee level, except for the employees' option to contribute under a 401(k) savings plan available as part of the profit sharing plan.
Contributions are calculated using a formula based primarily upon the Company's earnings. The expense for 1999, 1998, and 1997 was approximately $2,795,000, $2,465,000 and $2,264,000, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN -- The ESOP is a defined contribution plan covering substantially all employees, with contributions made exclusively by the Company on a discretionary year-by-year basis. The expense for 1999, 1998, and 1997 was approximately $100,000, $250,000 and $350,000, respectively.
NOTE K: OTHER NONINTEREST INCOME
Other noninterest income at December 31 consisted of the following:
1999 1998 1997 ------- ------- ------- (IN THOUSANDS)
Fees on loans ................................. $2,841 2,944 2,452 Other ......................................... 2,737 1,994 1,314 ------ ------ ------ Total ....................................... $5,578 4,938 3,766 ====== ====== ======
NOTE L: OTHER NONINTEREST EXPENSE
Other noninterest expense at December 31 consisted of the following:
1999 1998 1997 ------- ------- ------- (IN THOUSANDS)
Printing, postage and office supplies ......... $ 5,916 5,487 5,189 Marketing ..................................... 4,760 4,756 3,609 Other real estate owned ....................... 104 91 149 Other ......................................... 14,836 12,157 11,315 ------- ------- ------- Total ....................................... $25,616 22,491 20,262 ======= ======= =======
NOTE M: INCOME TAXES
The components of the provision for income taxes at December 31 were as follows:
1999 1998 1997 ------- ------- ------- (IN THOUSANDS)
Current Federal ...................................... $12,306 14,713 12,941 State ........................................ 3,746 4,281 3,981 Deferred ...................................... 5,091 2,283 279 ------- ------- ------- Total ....................................... $21,143 21,277 17,201 ======= ======= =======
A reconciliation between income tax expense and the amount computed by applying the statutory federal income tax rate at December 31 was as follows:
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:
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:
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. The type of collateral held varies, but includes accounts receivable, inventory, and productive assets.
Under substantially noncancelable contracts, the Company is obligated to pay approximately $4.5 million in annual data processing and item processing fees through February 2004 and March 2006, respectively. The costs under the item processing contract are calculated in accordance with a volume-based fee schedule, which is subject to change annually.
The Company is routinely involved in legal actions which are incidental to the business of the Company. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with counsel, that any ultimate liability will not materially affect the consolidated financial position or operations.
The Company issued redeemable preferred stock of Dunn County Bankshares, Inc. ("DCBI") in connection with the acquisition of DCBI's operations in Menomonie, Wisconsin on September 1, 1994. On December 31, 1998 there were 80,000 shares authorized, 71,594 shares issued, and 20,787 shares outstanding of the $100 par redeemable preferred stock. All of the outstanding stock was redeemed in late 1999.
NOTE O: COMMON STOCK
The Company has authorized 12,000,000 shares of class A common stock and 10,800,000 shares of class B common stock. The shares of class A common stock have full rights to vote on all matters properly before the Company's shareholders, including the election of the Company's directors. The class B common stock, all of which is held by the Otto Bremer Foundation, is non-voting except with respect to certain extraordinary corporate transactions, upon which the holders would have the right to vote on an equivalent per share basis with the holders of class A common stock.
Each share of class B common stock is convertible into one share of class A common stock upon the occurrence of the following events: (i) at the affirmative election of a third party or entity, upon the transfer of class B common stock from the Otto Bremer Foundation to any third party or entity, or (ii) at the affirmative election of the holder of class B common stock, if cash dividends have not been paid on class A and class B common stock with respect to any year in an amount equal to at least 5% of the Company's net book value as of the last day of the immediately preceding year. The Company has reserved 10,800,000 shares of class A common stock in the event of conversion of the class B common stock.
At December 31, 1999 and 1998, 960,000 shares of redeemable class A common stock were issued and outstanding. With the exception of shares held in the Company's ESOP, these shares were subject to redemption at a price of $26.07 and $25.28 per share, respectively, which approximated book value. Shares held in the Company's ESOP were redeemed at a price of $35.25 and $36.85 per share, respectively, as determined by an independent appraiser. These shares are owned by employees and Directors of the Company and its subsidiaries and the employee benefit plans of the Company. These holders of class A common stock have the right to require the Company to purchase their shares under certain circumstances. The shares have been classified as redeemable class A common stock subject to redemption at a price, which approximates book value. It is the Company's intent that these 960,000 shares will continue to be held by employees, directors, and employee benefit plans of the Company or its subsidiaries and not be directly repurchased by the Company or the Otto Bremer Foundation.
Certain restrictions exist regarding the extent to which banks may transfer funds to the Company in the form of dividends. Federal law prevents the Company and its non-bank subsidiaries from borrowing from the Subsidiary Banks unless the loans are secured by specified U.S. obligations. Further, the secured loans that may be made by Subsidiary Banks are generally limited in amount to 10% of the Subsidiary Bank's equity if made to the Company or any individual affiliate and 20% of the Subsidiary
Bank's equity if made to all affiliates and the Company in the aggregate. At December 31, 1999, 1998 and 1997, no Subsidiary Banks had extended credit to the Company.
Payment of dividends to the Company by its Subsidiary Banks is subject to various limitations by bank regulators, which includes maintenance of certain minimum capital ratios. As of December 31, 1999, $45,160,000 of retained earnings of the Subsidiary Banks was available for distribution to the Company as dividends subject to these limitations. Approximately $34,769,000 was available for distribution without obtaining the prior approval of the appropriate bank regulator.
NOTE P: REGULATORY MATTERS
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors.
Qualitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below and as defined in the regulations) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. Management believes, as of December 31, 1999, that the Company meets all capital adequacy requirements to which it is subject.
The Company's actual capital amounts and ratios as of December 31 are also presented below.
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") required the establishment of a capital-based supervisory system of prompt corrective action for all depository institutions. The Federal Reserve Board's implementation of FDICIA defines "well-capitalized" institutions as those whose Tier I Capital ratio equals or exceeds 6%, total risk-based capital ratio equals or exceeds 10%, and leverage ratio equals or exceeds 5%. The Company's Subsidiary Banks ratios in each of these categories met or exceeded the "well-capitalized" ratios as of December 31, 1999.
NOTE Q: BREMER FINANCIAL CORPORATION (PARENT COMPANY ONLY) CONDENSED STATEMENTS:
BALANCE SHEETS
STATEMENTS OF INCOME
NOTE Q: BREMER FINANCIAL CORPORATION (PARENT COMPANY ONLY) CONDENSED STATEMENTS (CONTINUED):
STATEMENTS OF CASH FLOWS
(The remainder of this page was intentionally left blank.)
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF BREMER FINANCIAL CORPORATION
We have audited the accompanying consolidated balance sheets of Bremer Financial Corporation and subsidiaries (the Company), a subsidiary of the Otto Bremer Foundation, as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholder's equity and cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Bremer Financial Corporation and subsidiaries as of December 31, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
January 25, 2000 Minneapolis, Minnesota
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
No event requiring disclosure pursuant to this Item 9 has occurred during the two years ended December 31, 1999.
PART III.
Items 10 through 13 of the Form 10-K are omitted because the Company will file before April 30, 2000 a definitive Proxy Statement (the "Proxy Statement") conforming to Schedule 14A involving the election of directors. The information required by Items 10, 11, 12 and 13 of Part III of the Form 10-K are hereby incorporated by reference to such Proxy Statement.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) The following financial statements of Bremer Financial Corporation are part of this document under Item 8. Financial Statements and Supplementary Data:
Consolidated Balance Sheets -- December 31, 1999 and December 31, 1998
Consolidated Statements of Income -- Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholder's Equity -- Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows -- Years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
(2) Financial statement schedules are omitted as they are not applicable, not required, or the required information is included in the financial statements or notes thereto.
(3) The following exhibits are filed as a part of this report:
10.1 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Chairman of the Board of Bremer Financial Corporation.
10.2 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for President and CEO of Bremer Financial Corporation.
10.3 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Community Banking Director.
10.4 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Financial Services Director.
10.5 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Chief Credit Officer, Chief Financial Officer, and Chief Information Officer.
10.6 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for other Senior Management Positions.
21 Subsidiaries of the Company.
27 Financial Data Schedule.
The following exhibits are incorporated by reference to Exhibits 10.1, 10.2, 10.3, and 10.4, respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 1998:
10.7 Bremer Financial Corporation 1998 Executive Annual Incentive Compensation Plan for Chief Credit Officer, Chief Financial Officer, Chief Information Officer, Human Resources Director, and Operations Director.
10.8 Bremer Financial Corporation 1998 Executive Annual Incentive Compensation Plan for Group Presidents.
10.9 Bremer Financial Corporation 1998 Executive Annual Incentive Compensation Plan for Chairman of the Board of Bremer Financial Corporation.
10.10 Bremer Financial Corporation 1998 Executive Annual Incentive Compensation Plan for President and CEO of Bremer Financial Corporation.
The following exhibits are incorporated by reference to Exhibits 10.1, 10.2, 10.3, and 10.4, respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 1997:
10.11 Bremer Financial Corporation 1997 Executive Annual Incentive Compensation Plan for Director, Operations & Technology; Retail Banking Services Director; Chief Information Officer; Chief Financial Officer, Chief Credit Officer, and Human Resources Director.
10.12 Bremer Financial Corporation 1997 Executive Annual Incentive Compensation Plan for Group Presidents.
10.13 Bremer Financial Corporation 1997 Executive Annual Incentive Compensation Plan for Chief Operating Officer.
10.14 Bremer Financial Corporation 1997 Executive Annual Incentive Compensation Plan for President and CEO.
The following exhibits are incorporated by reference to Exhibits 3.1, 28.7, and 28.8, respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 1989:
3.1 Bylaws of the Company in effect on the date hereof.
99.1 The portion of the final Prospectus of the Company dated April 20, 1989 ("Prospectus"), which was filed with the SEC on April 20, 1989, entitled "Description of Capital Stock Description of Class A Common Stock -- Restrictions on Transfer."
99.2 The portion of the Prospectus entitled "Description of Capital Stock -- Description of Class A Common Stock -- First Call Option to Company" on page 64 of the Prospectus.
The following exhibits are incorporated by reference to Exhibits 3.1, 10.12, 10.13, 10.14, 10.15, and 10.16, respectively, to the Company's Registration Statement on Form S-1 filed with the SEC on February 10, 1989:
3.2 Restated Articles of Incorporation of the Company in effect on the date hereof.
10.15 Bremer Financial Corporation Employee Stock Ownership Plan and Trust Agreement.
10.16 Bremer Banks Profit Sharing Plus Plan, as amended and restated effective January 1, 1986, and Amendment No. 1 thereto.
10.17 Bremer Banks Profit Sharing Plus Trust Agreement dated October 1, 1986 and Amendment No. 1 thereto.
10.18 Bremer Banks Retirement Plan as effective April 1, 1985.
10.19 Bremer Banks Retirement Plan Trust Agreement (as revised and restated effective January 1, 1976).
The following exhibits are incorporated by reference to Exhibits 4.1, 4.2, and 28.1, respectively, to the Company's Amendment No. 1 to Registration Statement on Form S-1 filed with the SEC on March 29, 1989:
4.1 Specimen of Stock Certificate evidencing Class A Common Stock.
4.2 Specimen of Stock Certificate evidencing Class B Common Stock.
99.3 Otto Bremer Foundation Trust Instrument dated May 22, 1944.
(b) The Company filed no Current Reports on Form 8-K during the fourth quarter of 1999, which ended December 31, 1999.
A copy of this Form 10-K and exhibits herein can be obtained by writing Robert B. Buck, Senior Vice President and Chief Financial Officer, Bremer Financial Corporation, 445 Minnesota Street, Suite 2000, St. Paul, MN 55101.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 13, 2000. Bremer Financial Corporation
By /S/ STAN K. DARDIS -------------------------------------------- Stan K. Dardis ITS PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the registrant on March 13, 2000 in the capacities indicated.
/S/ STAN K. DARDIS -------------------------------------------- Stan K. Dardis ITS PRESIDENT AND CHIEF EXECUTIVE OFFICER AND DIRECTOR
/S/ TERRY M. CUMMINGS -------------------------------------------- Terry M. Cummings CHAIRMAN OF THE BOARD AND DIRECTOR
/S/ WILLIAM H. LIPSCHULTZ -------------------------------------------- William H. Lipschultz VICE PRESIDENT AND DIRECTOR
/S/ CHARLOTTE S. JOHNSON -------------------------------------------- Charlotte S. Johnson VICE PRESIDENT AND DIRECTOR
/S/ SHERMAN WINTHROP -------------------------------------------- Sherman Winthrop DIRECTOR
/S/ DANIEL C. REARDON -------------------------------------------- Daniel C. Reardon VICE PRESIDENT AND DIRECTOR
/S/ ROBERT B. BUCK -------------------------------------------- Robert B. Buck SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER)
/S/ STUART F. BRADT -------------------------------------------- Stuart F. Bradt CONTROLLER (PRINCIPAL ACCOUNTING OFFICER)
INDEX TO EXHIBITS
Description of Exhibits Page
10.1 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Chairman of the Board of Bremer Financial Corporation.
10.2 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for President and CEO of Bremer Financial Corporation.
10.3 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Community Banking Director.
10.4 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Financial Services Director.
10.5 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Chief Credit Officer, Chief Financial Officer, and Chief Information Officer.
10.6 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for other Senior Management Positions.
21 Subsidiaries of the Company.
27 Financial Data Schedule.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) The following financial statements of Bremer Financial Corporation are part of this document under Item 8. Financial Statements and Supplementary Data:
Consolidated Balance Sheets -- December 31, 1999 and December 31, 1998
Consolidated Statements of Income -- Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholder's Equity -- Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows -- Years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
(2) Financial statement schedules are omitted as they are not applicable, not required, or the required information is included in the financial statements or notes thereto.
(3) The following exhibits are filed as a part of this report:
10.1 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Chairman of the Board of Bremer Financial Corporation.
10.2 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for President and CEO of Bremer Financial Corporation.
10.3 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Community Banking Director.
10.4 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Financial Services Director.
10.5 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Chief Credit Officer, Chief Financial Officer, and Chief Information Officer.
10.6 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for other Senior Management Positions.
21 Subsidiaries of the Company.
27 Financial Data Schedule.
The following exhibits are incorporated by reference to Exhibits 10.1, 10.2, 10.3, and 10.4, respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 1998:
10.7 Bremer Financial Corporation 1998 Executive Annual Incentive Compensation Plan for Chief Credit Officer, Chief Financial Officer, Chief Information Officer, Human Resources Director, and Operations Director.
10.8 Bremer Financial Corporation 1998 Executive Annual Incentive Compensation Plan for Group Presidents.
10.9 Bremer Financial Corporation 1998 Executive Annual Incentive Compensation Plan for Chairman of the Board of Bremer Financial Corporation.
10.10 Bremer Financial Corporation 1998 Executive Annual Incentive Compensation Plan for President and CEO of Bremer Financial Corporation.
The following exhibits are incorporated by reference to Exhibits 10.1, 10.2, 10.3, and 10.4, respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 1997:
10.11 Bremer Financial Corporation 1997 Executive Annual Incentive Compensation Plan for Director, Operations & Technology; Retail Banking Services Director; Chief Information Officer; Chief Financial Officer, Chief Credit Officer, and Human Resources Director.
10.12 Bremer Financial Corporation 1997 Executive Annual Incentive Compensation Plan for Group Presidents.
10.13 Bremer Financial Corporation 1997 Executive Annual Incentive Compensation Plan for Chief Operating Officer.
10.14 Bremer Financial Corporation 1997 Executive Annual Incentive Compensation Plan for President and CEO.
The following exhibits are incorporated by reference to Exhibits 3.1, 28.7, and 28.8, respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 1989:
3.1 Bylaws of the Company in effect on the date hereof.
99.1 The portion of the final Prospectus of the Company dated April 20, 1989 ("Prospectus"), which was filed with the SEC on April 20, 1989, entitled "Description of Capital Stock Description of Class A Common Stock -- Restrictions on Transfer."
99.2 The portion of the Prospectus entitled "Description of Capital Stock -- Description of Class A Common Stock -- First Call Option to Company" on page 64 of the Prospectus.
The following exhibits are incorporated by reference to Exhibits 3.1, 10.12, 10.13, 10.14, 10.15, and 10.16, respectively, to the Company's Registration Statement on Form S-1 filed with the SEC on February 10, 1989:
3.2 Restated Articles of Incorporation of the Company in effect on the date hereof.
10.15 Bremer Financial Corporation Employee Stock Ownership Plan and Trust Agreement.
10.16 Bremer Banks Profit Sharing Plus Plan, as amended and restated effective January 1, 1986, and Amendment No. 1 thereto.
10.17 Bremer Banks Profit Sharing Plus Trust Agreement dated October 1, 1986 and Amendment No. 1 thereto.
10.18 Bremer Banks Retirement Plan as effective April 1, 1985.
10.19 Bremer Banks Retirement Plan Trust Agreement (as revised and restated effective January 1, 1976).
The following exhibits are incorporated by reference to Exhibits 4.1, 4.2, and 28.1, respectively, to the Company's Amendment No. 1 to Registration Statement on Form S-1 filed with the SEC on March 29, 1989:
4.1 Specimen of Stock Certificate evidencing Class A Common Stock.
4.2 Specimen of Stock Certificate evidencing Class B Common Stock.
99.3 Otto Bremer Foundation Trust Instrument dated May 22, 1944.
(b) The Company filed no Current Reports on Form 8-K during the fourth quarter of 1999, which ended December 31, 1999.
A copy of this Form 10-K and exhibits herein can be obtained by writing Robert B. Buck, Senior Vice President and Chief Financial Officer, Bremer Financial Corporation, 445 Minnesota Street, Suite 2000, St. Paul, MN 55101.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 13, 2000. Bremer Financial Corporation
By /S/ STAN K. DARDIS -------------------------------------------- Stan K. Dardis ITS PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the registrant on March 13, 2000 in the capacities indicated.
/S/ STAN K. DARDIS -------------------------------------------- Stan K. Dardis ITS PRESIDENT AND CHIEF EXECUTIVE OFFICER AND DIRECTOR
/S/ TERRY M. CUMMINGS -------------------------------------------- Terry M. Cummings CHAIRMAN OF THE BOARD AND DIRECTOR
/S/ WILLIAM H. LIPSCHULTZ -------------------------------------------- William H. Lipschultz VICE PRESIDENT AND DIRECTOR
/S/ CHARLOTTE S. JOHNSON -------------------------------------------- Charlotte S. Johnson VICE PRESIDENT AND DIRECTOR
/S/ SHERMAN WINTHROP -------------------------------------------- Sherman Winthrop DIRECTOR
/S/ DANIEL C. REARDON -------------------------------------------- Daniel C. Reardon VICE PRESIDENT AND DIRECTOR
/S/ ROBERT B. BUCK -------------------------------------------- Robert B. Buck SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER)
/S/ STUART F. BRADT -------------------------------------------- Stuart F. Bradt CONTROLLER (PRINCIPAL ACCOUNTING OFFICER)
INDEX TO EXHIBITS
Description of Exhibits Page
10.1 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Chairman of the Board of Bremer Financial Corporation.
10.2 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for President and CEO of Bremer Financial Corporation.
10.3 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Community Banking Director.
10.4 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Financial Services Director.
10.5 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Chief Credit Officer, Chief Financial Officer, and Chief Information Officer.
10.6 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for other Senior Management Positions.
21 Subsidiaries of the Company.
27 Financial Data Schedule.