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.
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.
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, 1996 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 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.
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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 $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)
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)
- ---------------------- * 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
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
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.
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
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
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 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:
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:
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:
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:
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:
Net periodic pension cost includes the following components:
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:
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:
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.
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
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.
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.
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,
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)
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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.