FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ___________________
Commission file number 0-18342
Bremer Financial Corporation
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(Exact name of registrant as specified in its charter)
Minnesota 41-0715583
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
445 Minnesota St., Suite 2000, St. Paul, MN 55101-2107
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(Address of principal executive offices) (Zip Code)
(651) 227-7621
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(Registrant's telephone number, including area code)
Not applicable.
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
--------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of June 30, 2002, there were 1,200,000 shares of class A common
stock and 10,800,000 shares of class B common stock outstanding.
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(dollars in thousands, except per share amounts)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2002 2001 Change 2002 2001 Change
---- ---- ------ ---- ---- ------
Operating Results:
Total interest income $ 74,878 $ 83,349 (10.16) % $ 150,243 $ 162,395 (7.48) %
Total interest expense 26,081 41,968 (37.86) 53,654 83,956 (36.09)
------ ------ ------ ------ ------ ------
Net interest income 48,797 41,381 17.92 96,589 78,439 23.14
Provision for credit losses 2,927 2,023 44.69 6,864 4,952 38.61
----- ----- ----- ----- ----- -----
Net interest income after provision for
credit losses 45,870 39,358 16.55 89,725 73,487 22.10
Noninterest income 16,738 16,525 1.29 36,047 31,654 13.88
Noninterest expense 39,585 37,088 6.73 79,138 69,162 14.42
------ ------ ---- ------ ------ -----
Income before income tax expense 23,023 18,795 22.50 46,634 35,979 29.61
Income tax expense 7,659 6,329 21.01 15,569 12,339 26.18
----- ----- ----- ------ ------ -----
Net income $ 15,364 $ 12,466 23.25 % $ 31,065 $ 23,640 31.41 %
========== ========== ===== ========== ======== =====
Net income per share $ 1.28 $ 1.04 23.25 % $ 2.59 $ 1.97 31.41 %
Dividends paid per share 0.40 0.40 - 0.80 0.80 -
Tax equivalent net interest income $ 50,797 $ 43,379 17.10 % $ 100,686 $ 82,364 22.25 %
Net charge-offs 923 876 5.37 3,195 3,451 (7.42)
Selected Financial Ratios:
Return on average assets (1) 1.26 % 1.09 % 0.17 1.27 % 1.10 % 0.17
Return on average realized equity (2)(3) 15.36 13.79 1.57 15.83 13.26 2.57
Average realized equity to average
assets (2)(3) 8.17 7.92 0.25 8.05 8.26 (0.21)
Net interest margin (4) 4.45 4.07 0.38 4.43 4.08 0.35
Operating efficiency ratio (4)(5) 55.68 59.38 (3.70) 55.94 59.15 (3.21)
Net charge-offs to average loans and leases 0.11 0.11 0.00 0.19 0.23 (0.04)
June 30 June 30 December 31
2002 2001 2001 Change
---- ---- ---- ------
Balance Sheet Data:
Total assets $5,071,460 $4,930,500 2.86 % $5,094,064 (0.44)
Securities (6) 1,122,754 1,195,977 (6.12) 1,201,645 (6.57)
Loans and leases (7) 3,613,731 3,376,119 7.04 3,498,839 3.28
Total deposits 3,620,640 3,702,695 (2.22) 3,806,018 (4.87)
Short-term borrowings 531,978 488,842 8.82 448,912 18.50
Long-term debt 335,930 232,201 44.67 315,923 6.33
Mandatorily redeemable preferred securities 76,500 76,500 - 76,500 -
Total shareholders' equity and redeemable
Class A common stock 415,287 370,887 11.97 389,912 6.51
Per share book value of common stock 34.61 30.91 11.97 32.49 6.51
Asset Quality:
Reserve for credit losses $ 57,385 $ 51,396 11.65 % $ 53,716 6.83
Nonperforming assets 30,062 17,797 68.92 22,422 34.07
Nonperforming assets to total loans, leases
and OREO 0.83 % 0.53 % 0.30 0.64 0.19
Reserve to nonperforming loans and leases 204.05 300.70 (96.65) 258.17 (54.12)
Reserve to total loans and leases 1.59 1.52 0.07 1.54 0.05
(1) Calculation is based on income before minority interests.
(2) Calculation includes shareholders' equity and redeemable class A common stock.
(3) Excluding net unrealized gain (loss) on securities available-for-sale.
(4) Tax-equivalent basis.
(5) Calculation excludes minority interest, nonrecurring gains and losses, other nonrecurring noninterest
income and amortization of intangibles.
(6) Includes securities held-to-maturity and securities available-for-sale.
(7) Net of unearned discount and includes nonaccrual loans and leases.
SUMMARY BALANCE SHEET AND INCOME STATEMENT
(dollars in thousands)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Average Average Average Average
Average Rate/ Average Rate/ Average Rate/ Average Rate/
Balance Yield(1) Balance Yield(1) Balance Yield(1) Balance Yield(1)
------- -------- ------- -------- ------- -------- ------- --------
Summary Average Balance Sheet:
Total loans and leases (2) $3,506,043 7.07% $3,147,338 8.66% $3,461,812 7.18% $3,014,823 8.86 %
Total securities (3) 1,050,120 5.70 1,105,792 6.25 1,097,911 5.66 1,034,929 6.51
Total other earning assets 24,215 2.02 18,641 4.30 21,363 2.00 17,556 4.77
------ ------ ------ ------
Total interest earning assets (4) $4,580,378 6.73% $4,271,771 8.01% $4,581,086 6.79% 4,067,308 8.25%
Total noninterest earning assets 327,739 307,669 332,464 284,493
------- ------- ------- -------
Total assets $4,908,117 $4,579,440 $4,913,550 $4,351,801
========== ========== ========== ==========
Noninterest bearing deposits $ 554,166 $ 444,346 $ 549,336 $ 414,274
Interest bearing deposits 3,077,869 2.31% 2,931,778 4.31% 3,100,405 2.41% 2,782,148 4.60 %
Short-term borrowings 396,676 1.58 487,929 4.50 387,121 1.60 465,011 5.00
Long-term debt 337,356 5.92 232,417 6.55 338,653 5.94 232,077 6.60
Mandatorily redeemable preferred
securities 76,500 9.41 51,951 9.51 76,500 9.46 29,583 9.56
------ ------ ------ ------
Total interest bearing liabilities $3,888,401 2.69% $3,704,075 4.54% $3,902,679 2.77% $3,508,819 4.83 %
Other noninterest bearing liabilities 58,895 64,127 58,786 66,095
Minority interest 150 150 150 150
Total shareholders' equity and
redeemable Class A common stock 406,505 366,742 402,599 362,463
------- ------- ------- -------
Total liabilities and equity $4,908,117 $4,579,440 $4,913,550 $4,351,801
========== ========== ========== ==========
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2002 2001 $ Change % Change 2002 2001 $ Change % Change
---- ---- -------- -------- ---- ---- -------- --------
Summary Income Statement:
Total interest income $ 74,878 $83,349 $ (8,471) (10.16)% $ 150,243 $162,395 $ (12,152) (7.48)%
Total interest expense 26,081 41,968 (15,887) (37.86) 53,654 83,956 (30,302) (36.09)
------ ------ ------- ------ ------ -------
Net interest income 48,797 41,381 7,416 17.92 96,589 78,439 18,150 23.14
Provision for credit losses 2,927 2,023 904 44.69 6,864 4,952 1,912 38.61
----- ----- --- ----- ----- -----
Net interest income after provision
for credit losses 45,870 39,358 6,512 16.55 89,725 73,487 16,238 22.10
Service charges 7,117 6,816 301 4.42 13,758 12,709 1,049 8.25
Insurance 2,262 2,229 33 1.48 4,670 4,585 85 1.85
Trust 2,404 2,341 63 2.69 4,801 4,679 122 2.61
Brokerage 1,332 1,207 125 10.36 2,718 2,208 510 23.10
Gain on sale of loans 1,938 2,470 (532) (21.54) 4,301 3,625 676 18.65
Gain on sale of securities 326 26 300 NM 1,926 1,339 587 43.84
Other 1,359 1,436 (77) (5.36) 3,873 2,509 1,364 54.36
----- ----- --- ----- ----- -----
Total noninterest income 16,738 16,525 213 1.29 36,047 31,654 4,393 13.88
Salaries and wages 17,941 16,081 1,860 11.57 35,435 30,759 4,676 15.20
Employee benefits 4,559 3,810 749 19.66 9,422 7,560 1,862 24.63
Occupancy 2,573 2,329 244 10.48 5,146 4,526 620 13.70
Furniture and equipment 2,341 2,471 (130) (5.26) 4,747 4,818 (71) (1.47)
Data processing fees 2,341 2,196 145 6.60 4,520 4,121 399 9.68
FDIC premiums and examination fees 438 382 56 14.66 886 758 128 16.89
Amortization of goodwill and other
intangibles 2,095 1,518 577 38.01 4,192 2,453 1,739 70.89
Other 7,297 8,301 (1,004) (12.09) 14,790 14,167 623 4.40
----- ----- ------ ------ ------ ---
Total noninterest expense 39,585 37,088 2,497 6.73 79,138 69,162 9,976 14.42
------ ------ ----- ------ ------ -----
Income before income tax expense 23,023 18,795 4,228 22.50 46,634 35,979 10,655 29.61
Income tax expense 7,659 6,329 1,330 21.01 15,569 12,339 3,230 26.18
----- ----- ----- ------ ------ -----
Net income $ 15,364 $12,466 $ 2,898 23.25 % $ 31,065 $ 23,640 $ 7,425 31.41 %
========== ======= ========== ===== ========== ======== ========== =====
(1) Calculation is based on interest income including $2,000 and $1,998 for the three months ending June 2002 and June 2001
and $4,097 and $3,925 for the six months ending June 2002 and June 2001 to adjust to a fully taxable basis using the federal
statutory rate of 35%.
(2) Net of unearned discount and includes nonaccrual loans and leases.
(3) Excluding net unrealized gain (loss) on securities available-for-sale.
(4) Before deducting the reserve for credit losses.
BREMER FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED JUNE 30, 2002
INDEX
PART I -- FINANCIAL INFORMATION Page
----
Item 1. Financial Statements 2
Item 2. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About 22
Market Risk
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Exhibit 12.1 Statement Regarding Computation of Ratio of 25
Earnings to Fixed Charges
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 26
1350,as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 27
1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Forward-Looking Statements
Certain statements in this Form 10-Q constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21B of the Securities Exchange Act of 1934, as amended ("Exchange Act").
For this purpose, any statements contained herein or incorporated herein that
are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "intends," "expects" and similar expressions are intended to identify
forward-looking statements. Because these forward-looking statements involve
risk and uncertainties, there are important factors, including the factors
discussed in "Risk Factors" filed with the Annual Report on Form 10-K as Exhibit
99.1 on March 18, 2002 that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements.
1
Item 1. Financial Statements
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
June 30, December 31, June 30,
2002 2001 2001
---- ---- ----
(unaudited) (unaudited)
Assets
Cash and due from banks $ 161,780 $ 213,101 $ 168,447
Interest bearing deposits 4,175 4,250 4,310
Investment securities available-for-sale 112,747 240,036 206,819
Mortgage-backed securities available-for-sale 839,022 780,538 811,025
------- ------- -------
Total securities available-for-sale 951,769 1,020,574 1,017,844
Investment securities held-to-maturity
(fair value: 6/30/02 - $176,761, 12/31/01 - $183,570, 6/30/01 - $182,080 ) 170,985 181,071 178,133
Loans and leases 3,614,575 3,500,288 3,378,573
Reserve for credit losses (57,385) (53,716) (51,396)
Unearned discount (844) (1,449) (2,454)
---- ------ ------
Net loans and leases 3,556,346 3,445,123 3,324,723
Interest receivable 34,248 37,350 39,502
Premises and equipment, net 65,694 65,062 67,471
Goodwill and other intangibles 104,713 108,652 112,048
Other assets 21,750 18,881 18,022
------ ------ ------
Total assets $ 5,071,460 $ 5,094,064 $ 4,930,500
=========== =========== ===========
Liabilities and Shareholders' Equity
Noninterest bearing deposits $ 576,724 $ 656,651 $ 506,234
Interest bearing deposits 3,043,916 3,149,367 3,196,461
--------- --------- ---------
Total deposits 3,620,640 3,806,018 3,702,695
Federal funds purchased and repurchase agreements 423,978 377,762 344,208
Other short-term borrowings 108,000 71,150 144,634
Long-term debt 335,930 315,923 232,201
Company obligated mandatorily redeemable
preferred securities of subsidiary trusts
holding junior subordinated debentures 76,500 76,500 76,500
Accrued expenses and other liabilities 90,975 56,649 59,225
------ ------ ------
Total liabilities 4,656,023 4,704,002 4,559,463
Minority interests 150 150 150
Redeemable class A common stock, 960,000 shares
issued and outstanding 33,223 31,193 29,671
Shareholders' equity
Common stock
Class A, no par, 12,000,000 shares authorized;
240,000 shares issued and outstanding 57 57 57
Class B, no par, 10,800,000 shares authorized,
issued and outstanding 2,562 2,562 2,562
Retained earnings 371,245 351,497 334,582
Accumulated other comprehensive income 8,200 4,603 4,015
----- ----- -----
Total shareholders' equity 382,064 358,719 341,216
------- ------- -------
Total liabilities and shareholders' equity $ 5,071,460 $ 5,094,064 $ 4,930,500
=========== =========== ===========
See notes to consolidated financial statements.
2
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Interest income
Loans and leases, including fees $ 61,108 $ 67,257 $ 121,870 $ 131,167
Securities
Taxable 11,197 13,325 23,065 25,788
Tax-exempt 2,451 2,567 5,096 5,025
Federal funds sold 85 146 142 305
Other 37 54 70 110
-- -- -- ---
Total interest income 74,878 83,349 150,243 162,395
Interest expense
Deposits 17,744 31,469 37,028 63,426
Federal funds purchased and repurchase agreements 1,385 3,235 2,676 7,357
Other short-term borrowings 175 2,236 395 4,171
Long-term debt 4,983 3,796 9,968 7,599
Company obligated mandatorily redeemable
preferred securities of subsidiary trusts
holding junior subordinated debentures 1,794 1,232 3,587 1,403
----- ----- ----- -----
Total interest expense 26,081 41,968 53,654 83,956
------ ------ ------ ------
Net interest income 48,797 41,381 96,589 78,439
Provision for credit losses 2,927 2,023 6,864 4,952
Net interest income after provision for credit
losses 45,870 39,358 89,725 73,487
Noninterest income
Service charges 7,117 6,816 13,758 12,709
Insurance 2,262 2,229 4,670 4,585
Trust 2,404 2,341 4,801 4,679
Brokerage 1,332 1,207 2,718 2,208
Gain on sale of loans 1,938 2,470 4,301 3,625
Gain on sale of securities 326 26 1,926 1,339
Other 1,359 1,436 3,873 2,509
----- ----- ----- -----
Total noninterest income 16,738 16,525 36,047 31,654
Noninterest expense
Salaries and wages 17,941 16,081 35,435 30,759
Employee benefits 4,559 3,810 9,422 7,560
Occupancy 2,573 2,329 5,146 4,526
Furniture and equipment 2,341 2,471 4,747 4,818
Data processing fees 2,341 2,196 4,520 4,121
FDIC premiums and examination fees 438 382 886 758
Amortization of intangibles 2,095 1,518 4,192 2,453
Other 7,297 8,301 14,790 14,167
----- ----- ------ ------
Total noninterest expense 39,585 37,088 79,138 69,162
------ ------ ------ ------
Income before income tax expense 23,023 18,795 46,634 35,979
Income tax expense 7,659 6,329 15,569 12,339
----- ----- ------ ------
Net income $ 15,364 $ 12,466 $ 31,065 $ 23,640
======== ======== ======== ========
Per common share amounts:
Net income-basic and diluted $ 1.28 $ 1.04 $ 2.59 $ 1.97
Dividends paid 0.40 0.40 0.80 0.80
See notes to consolidated financial statements.
3
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
( in thousands, except per share amounts)
(unaudited)
Accumulated
Common Stock Other
------------ Comprehensive Comprehensive Retained
Class A Class B Income (Loss) Income Earnings Total
------- ------- ------------- ------ -------- -----
For the Six Months Ended June 30, 2001
Balance, December 31, 2000 $57 $2,562 $ 1,431 $321,665 $325,715
Comprehensive income
Net income $23,640 23,640 23,640
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during the period 3,612 3,612
Less: Reclassified adjustment for gains included in income (803) (803)
---- ----
Other comprehensive income 2,809 2,809 2,809
-----
Comprehensive income 26,449
======
Dividends, $.80 per share (9,600) (9,600)
Allocation of net income in excess of dividends and change
in net unrealized gain (loss) on securities available-
for-sale to redeemable class A common stock (225) (1,123) (1,348)
---- ---- ---- ------ ------
Balance, June 30, 2001 $57 $2,562 $ 4,015 $334,582 $341,216
=== ====== ======= ======== ========
For the Six Months Ended June 30, 2002
Balance, December 31, 2001 $57 $2,562 $ 4,603 $351,497 $358,719
Comprehensive income
Net income $31,065 31,065 31,065
Other comprehensive income, net of tax:
Unrealized losses on securities:
Unrealized holding gains arising during the period 5,066 5,066
Less: Reclassified adjustment for gains included in income (1,156) (1,156)
------ ------
Other comprehensive income 3,910 3,910 3,910
-----
Comprehensive income $34,975
=======
Dividends, $.80 per share (9,600) (9,600)
Allocation of net income in excess of dividends and change
in net unrealized gain (loss) on securities available-
for-sale to redeemable class A common stock (313) (1,717) (2,030)
---- ---- ---- ------ ------
Balance, June 30, 2002 $57 $2,562 $ 8,200 $371,245 $382,064
=== ====== ======= ======== ========
See notes to consolidated financial statements.
4
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the Six Months
Ended June 30,
--------------
2002 2001
---- ----
Cash flows from operating activities
Net income $ 31,065 $ 23,640
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 6,864 4,952
Depreciation and amortization 9,468 6,606
Gain on sale of securities (1,926) (1,339)
Gain on sale of other real estate owned, net (159) (57)
Other assets and liabilities, net 29,902 (11,283)
Proceeds from loans originated for sale 191,944 150,448
Loans originated for sale (173,148) (153,401)
-------- --------
Net cash provided by operating activities 94,010 19,566
Cash flows from investing activities
Interest bearing deposits, net 75 1,421
Purchases of mortgage-backed securities (209,453) (327,978)
Purchases of available-for-sale investment securities (74,411) (50,869)
Purchases of held-to-maturity securities (9,025) (25,880)
Proceeds from maturities of mortgage-backed securities 158,026 91,850
Proceeds from maturities of available-for-sale investment securities 77,919 6,184
Proceeds from maturities of held-to-maturity securities 19,111 15,860
Proceeds from sales of available-for-sale investment securities 125,167 52,480
Proceeds from sales of other real estate owned 573 3,618
Loans and leases, net (136,883) (137,016)
Acquisitions, net of cash acquired - 326,546
Purchase of premises and equipment (4,525) (3,521)
------ ------
Net cash used in investing activities (53,426) (47,305)
Cash flows from financing activities
Noninterest bearing deposits, net (79,927) (40,569)
Savings, NOW and money market accounts, net (62,641) 46,354
Certificates of deposits, net (42,810) (123,683)
Federal funds purchased and repurchase agreements,net 46,216 15,147
Other short-term borrowings, net 36,850 31,949
Repayments of long-term debt 20,007 (459)
Proceeds from issuance of trust preferred securities - 76,500
Common stock dividends paid (9,600) (9,600)
------ ------
Net cash used in financing activities (91,905) (4,361)
------- ------
Net decrease in cash and due from banks (51,321) (32,100)
Cash and due from banks at beginning of period 213,101 200,547
------- -------
Cash and due from banks at end of period $ 161,780 $ 168,447
========= =========
See notes to consolidated financial statements.
5
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A: Financial Statements
The condensed financial statements included herein have been prepared by Bremer
Financial Corporation (the "Company") pursuant to the rules and regulations of
the Securities and Exchange Commission and have not been audited by independent
auditors. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
Note B: General
The consolidated financial statements include the accounts of Bremer Financial
Corporation and subsidiaries. All material intercompany transactions and
balances are eliminated in consolidation. The Company has not changed its
accounting policies from those stated for the year ended December 31, 2001
included in its Annual Report on Form 10-K for the year ended December 31, 2001
filed on March 18, 2002.
Note C: Interim Period Adjustments
The consolidated financial statements contained herein reflect all adjustments
which are, in the opinion of management, of a normal recurring nature and are
necessary for a fair statement of the financial position, results of operations,
and cash flows for the unaudited interim periods. The results of operations for
the interim periods are not necessarily indicative of the results to be expected
for the entire year.
Note D: Earnings Per Share Calculations
Basic and diluted earnings per common share have been computed using 12,000,000
common shares outstanding for all periods. The Company does not have any
dilutive securities.
Note E: Securities
Investment securities classified as held-to-maturity are valued at amortized
historical cost. Investment securities and mortgage-backed securities classified
as available-for-sale are valued at current market value. Unrealized holding
gains and losses are excluded from earnings and reported, net of tax, as a
separate component of shareholders' equity until realized, except for the
portion allocated to redeemable class A stock. Gains or losses on these
securities are computed based on the amortized cost of the specific securities
when sold.
6
Note F: Redeemable Class A Common Stock
At June 30, 2002, 960,000 shares of redeemable class A stock were issued and
outstanding, subject to redemption at a price of $34.61 per share, which
approximated book value. These shares are owned by employees and directors of
the Company and its subsidiaries and the employee benefit plans of the Company.
These holders of class A common stock have the right to require the Company to
purchase their shares under certain circumstances. It is the Company's intent
that these 960,000 shares will continue to be held by employees, directors, and
employee benefit plans of the Company and its subsidiaries and not be directly
purchased by the Company or the Otto Bremer Foundation. Since January 1, 2002
and through June 30, 2002, options to call 80,703.8515 shares had been exercised
and the shares subsequently purchased by the Company's ESOP and profit sharing
plan from employees and non-employee directors of the Company and the Company's
subsidiaries. During the same period, a total of 5,269 shares changed hands
directly between individuals.
Note G: Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reported period. Actual
results may differ from those estimates.
Note H: Comprehensive Income
The Company reported comprehensive income for the first six months of 2002 of
$35.0 million, compared to the $26.4 million reported for the same period in
2001. Comprehensive income is defined as the change in equity of a business
enterprise during a period resulting from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. For the Company, comprehensive income consists of net income, as
reported in the financial statements, and other comprehensive income, which
consists of the change in unrealized gains and losses on available-for-sale
securities.
Note I: Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets," which addresses the accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB No. 17. The
Company adopted SFAS No. 142 on January 1, 2002. Under the provisions of SFAS
No. 142, intangible assets acquired in a business combination, which do not
possess finite useful lives, will no longer be amortized into net income over an
estimated useful life. However, these intangible assets will be tested for
impairment at least annually based on specific guidance provided in the new
standard. Management has performed a transitional impairment test on its
goodwill assets and no impairment loss will be recorded as a result of this
test. Had the Company been accounting for its goodwill under SFAS No. 142 for
all periods
7
presented, the Company's net income and income per share would have been as
follows:
Three Months Ended Six Months Ended
------------------ ----------------
06/30/02 06/30/01 06/30/02 06/30/01
-------- -------- -------- --------
(in thousands, except per share data)
Reported net income $ 15,364 $ 12,466 $ 31,065 $23,640
Add: Goodwill amortization, net of tax - 878 - 1,756
--- --- --- -----
Pro forma adjusted net income $ 15,364 $ 13,344 $ 31,065 $25,396
======== ======== ======== =======
Net income per share
As reported $ 1.28 $ 1.04 $ 2.59 $ 1.97
Add: Goodwill amortization, net of tax - 0.07 - 0.15
---- ---- ---- ----
Pro forma adjusted net income per share $ 1.28 $ 1.11 $ 2.59 $ 2.12
====== ====== ====== ======
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which is required to be adopted for fiscal years beginning after
June 15, 2002. SFAS No. 143 establishes accounting and reporting standards for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of the fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. The Company expects to adopt SFAS No. 143 on January 1,
2003. The Company has not yet determined the impact of SFAS No. 143 on its
financial position and results of operations.
Note J: Acquisitions
On May 11, 2001, the Company acquired from Firstar Corporation, Milwaukee,
Wisconsin (the "Seller"), 11 of its Minneapolis/St. Paul branch locations and a
portfolio of commercial loans and related deposits (the "Branch Acquisition").
This transaction was a result of the Seller's divestiture requirement related to
its merger with U.S. Bancorp, Minneapolis, Minnesota. The 11 branch offices and
the commercial loan portfolio that were acquired are now operated as part of the
Company's subsidiary bank charter in South St. Paul, Minnesota. The acquisition
was accounted for as an acquisition of assets and assumption of liabilities and
resulted in the recognition of a core deposit premium of approximately $20.0
million and approximately $45.0 million of other intangible assets.
The following pro forma financial information was prepared assuming the Branch
Acquisition
8
had been completed at January 1, 2001:
Three Months Ended Six Months Ended
------------------ ----------------
06/30/02 06/30/01 06/30/02 06/30/01
-------- -------- -------- --------
(in thousands, except per share data)
Net Interest Income $48,797 $43,006 $96,589 $83,631
Net Income 15,364 12,578 31,065 24,052
Net Income Per Share $ 1.28 $ 1.05 $ 2.59 $ 2.00
Note K: 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:
June 30 December 31
------- -----------
2002 2001
---- ----
(in thousands)
Standby letters of credit $ 27,624 $ 18,394
Loan commitments 878,797 848,391
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 to
a third party provider through March 2008. The costs under the item processing
contract are calculated in accordance with a volume-based fee schedule, which is
subject to change annually.
9
The Company has acquired land and begun constuction of a building which will
contain approximately 100,000 square feet for an expanded operations center. The
total cost of this project will be approximately $16 million, and it is expected
to be completed by year end.
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.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies
In preparing the financial statements, we follow accounting principles generally
accepted in the United States of America, which in many cases require us to make
assumptions, estimates and judgments that affect the amounts reported. Many of
these policies are relatively straightforward. There are, however, a few
policies that are critical because they are important in determining the
financial condition and results of operations and they can be difficult to
apply. We believe that the most critical accounting policies applied in the
preparation of our financial statements relate to:
>> accounting for the reserve for credit losses; and
>> accounting for investments.
The difficulty in applying these policies arises from the assumptions, estimates
and judgments that have to be made currently about matters that are inherently
uncertain, such as future economic conditions, operating results and valuations
as well as management intentions. As the difficulty increases, the level of
precision decreases, meaning that actual results can and probably will be
different from those currently estimated. We base our assumptions, estimates and
judgments on a combination of historical experiences and other reasonable
factors.
Reserves for credit losses include charges to reduce the recorded balances of
loans receivable and real estate to their estimated net realizable value or fair
value, as applicable. Further information is described in the later section
titled "- Financial Condition - Reserve for Credit Losses."
Investments in marketable equity and debt securities are classified into three
categories - held-to-maturity, available-for-sale, or trading - pursuant to
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." As of June 30, 2002, no investments
were classified as trading securities. Held-to-maturity securities represent
investments for which we have the ability and intent to hold to maturity and may
be sold only under very limited circumstances. We currently classify our
investments in certain municipal bond obligations and certain U.S. government
agency obligations as held-to-maturity securities.
Overview
Earnings. We reported net income of $15.4 million or $1.28 basic and diluted
earnings per share for the second quarter of 2002. This compares to $12.5
million or $1.04 basic and diluted earnings per share in the second quarter of
2001. On a year-to-date basis through June 30, net income was $31.1 million, a
31.4% increase over the $23.6 million earned in the first six months of 2001.
Return on average realized equity was 15.36% for the second quarter of 2002
compared to 13.79% for the same quarter of 2001. On a year-to-date basis, we
reported a return on average realized equity of 15.83%, compared to 13.26% in
the first six months of 2001. Realized equity excludes the impact of unrealized
gains and losses associated with available-for-sale securities. Return on
average assets increased to 1.26% in the second quarter of 2002 from 1.09% in
the
11
second quarter of 2001. On a year-to-date basis, we reported a return on
average assets of 1.27%, compared to 1.10% in the first six months of 2001.
Results of Operations
Net Interest Income. Net interest income for the second quarter of 2002 was
$48.8 million, an increase of 17.9% from the $41.4 million reported for the same
period a year ago, as our net interest margin increased to 4.45% in the second
quarter of 2002 from 4.07% in the second quarter of 2001. On a year-to-date
basis, net interest income was up $18.2 million, or 23.1% from the first six
months of 2001, as our net interest margin increased to 4.43% from 4.08% and our
average earning assets increased by $514 million when comparing the two periods.
Reductions in the general level of interest rates and a migration of customer
deposits to lower yielding products reduced the average cost of our interest
bearing liabilities by 185 basis points when comparing the second quarter of
2002 with the second quarter of 2001. Meanwhile, the average yield on our
earnings assets declined 128 basis points to 6.73% from 8.01% when comparing the
same two periods. On a year-to-date basis, the average cost of our interest
bearing liabilities was reduced by 206 basis points when comparing the first six
months of 2002 with the same period of 2001 while the average yield on our
earnings assets declined 146 basis points to 6.79% from 8.25% when comparing the
same two periods.
Net interest income for the quarter was also positively impacted by a $359
million or 11.4% increase in average loans and leases, to $3.5 billion in the
second quarter of 2002 from $3.1 billion in the second quarter of 2001.
Contributing significantly to the growth in average loans over the last year was
our May 2001 purchase of 11 bank branches in Minneapolis/St. Paul. This
acquisition added approximately $320 million in loans and $715 million in
deposits to our organization.
12
The following tables set forth, for the periods indicated, information regarding average balances of assets and liabilities and the
total dollar amounts of interest income from interest bearing assets and interest expense on interest bearing liabilities.
In addition, the tables show resultant yields or costs, net interest income, net interest spread, and net interest margin:
For the Three Months Ended June 30
----------------------------------
(unaudited)
2002 2001
---- ----
Average Average
Average Rate/ Average Rate/
Balance Interest (1) Yield Balance Interest (1) Yield
------- ------------ ----- ------- ------------ -----
(dollars in thousands)
Assets
Loans and Leases (2)
Commercial and other $ 879,483 $ 13,884 6.33 % $ 800,918 $ 16,668 8.35 %
Commercial real estate 1,046,464 19,040 7.30 902,651 19,571 8.70
Agricultural 406,981 6,879 6.78 399,768 8,585 8.61
Residential real estate 727,798 13,036 7.18 645,170 13,845 8.61
Consumer 334,490 6,729 8.07 315,896 7,295 9.26
Tax-exempt 110,827 2,268 8.21 82,935 1,962 9.49
------- ----- ------ -----
Total Loans and Leases 3,506,043 61,836 7.07 3,147,338 67,926 8.66
Reserve for Credit Losses (56,381) (47,453)
------- -------
Net Loans and Leases 3,449,662 3,099,885
Securities (3)
Mortgage-backed 765,418 10,379 5.44 728,963 11,216 6.17
Other taxable 89,119 818 3.68 175,724 2,109 4.81
Tax-exempt 195,583 3,723 7.64 201,105 3,896 7.77
------- ----- ------- -----
Total Securities 1,050,120 14,920 5.70 1,105,792 17,221 6.25
Federal funds sold 20,014 85 1.70 13,804 146 4.24
Other earning assets 4,201 37 3.53 4,837 54 4.48
----- -- ----- --
Total Earning Assets (4) $ 4,580,378 $ 76,878 6.73 % $ 4,271,771 $ 85,347 8.01 %
Cash and due from banks 131,205 135,869
Other non interest earning assets 252,915 219,253
------- -------
Total Assets $ 4,908,117 $ 4,579,440
=========== ===========
Liabilities and Shareholders' Equity
Noninterest bearing deposits $ 554,166 $ 444,346
Interest bearing deposits
Savings and NOW accounts 417,843 $ 528 0.51 % 325,491 $ 814 1.00 %
Money market checking 239,413 152 0.25 186,557 315 0.68
Money market savings 945,281 2,529 1.07 871,074 7,657 3.53
Savings certificates 1,200,216 11,843 3.96 1,270,417 18,541 5.85
Certificates over $100,000 275,116 2,692 3.92 278,239 4,142 5.97
------- ----- ------- -----
Total Interest Bearing Deposits 3,077,869 17,744 2.31 2,931,778 31,469 4.31
--------- ------ --------- ------
Total Deposits 3,632,035 3,376,124
Short-term borrowings 396,676 1,560 1.58 487,929 5,471 4.50
Long-term debt 337,356 4,983 5.92 232,417 3,796 6.55
Company obligated mandatorily redeemable
preferred securities 76,500 1,794 9.41 51,951 1,232 9.51
------ ----- ------ -----
Total Interest Bearing Liabilities $ 3,888,401 $ 26,081 2.69 % $ 3,704,075 $ 41,968 4.54 %
Other noninterest bearing liabilities 58,895 64,127
------ ------
Total Liabilities 4,501,462 4,212,548
Minority Interest 150 150
Redeemable Class A Common Stock 32,520 29,339
Shareholders' equity 373,985 337,403
------- -------
Total Liabilities and Equity $ 4,908,117 $ 4,579,440
=========== ===========
Net interest income $ 50,797 $ 43,379
======== ========
Net interest spread 4.04 % 3.47 %
Net interest margin 4.45 % 4.07 %
(1) Interest income includes $2,000 and $1,998 in 2002 and 2001 to adjust to a fully taxable basis using the federal statutory
rate of 35%.
(2) Net of unearned discount and includes nonaccrual loans and leases.
(3) Excluding net unrealized gain (loss) on available-for-sale securities.
(4) Before deducting the reserve for credit losses.
13
For the Six Months Ended June 30,
---------------------------------
(unaudited)
2002 2001
---- ----
Average Average
Average Rate/ Average Rate/
Balance Interest (1) Yield Balance Interest (1) Yield
------- ------------ ----- ------- ------------ -----
(dollars in thousands)
Assets
Loans and Leases (2)
Commercial and other $ 862,820 $ 27,574 6.44 % $ 754,728 $ 32,632 8.72 %
Commercial real estate 1,040,679 38,031 7.37 855,000 37,324 8.80
Agricultural 398,560 13,767 6.97 395,933 17,526 8.93
Residential real estate 721,120 26,013 7.27 618,451 26,751 8.72
Consumer 334,741 13,546 8.16 308,348 14,379 9.40
Tax-exempt 103,892 4,393 8.53 82,363 3,877 9.49
------- ----- ------ -----
Total Loans and Leases 3,461,812 123,324 7.18 3,014,823 132,489 8.86
Reserve for Credit Losses (55,670) (47,100)
------- -------
Net Loans and Leases 3,406,142 2,967,723
Securities (3)
Mortgage-backed 765,450 20,958 5.52 666,541 21,245 6.43
Other taxable 127,920 2,107 3.32 169,760 4,543 5.40
Tax-exempt 204,541 7,739 7.63 198,628 7,628 7.74
------- ----- ------- -----
Total Securities 1,097,911 30,804 5.66 1,034,929 33,416 6.51
Federal funds sold 17,144 142 1.67 12,593 305 4.88
Other earning assets 4,219 70 3.35 4,963 110 4.47
----- -- ----- ---
Total Earning Assets (4) $ 4,581,086 $ 154,340 6.79 % $ 4,067,308 $ 166,320 8.25 %
Cash and due from banks 134,714 131,070
Other non interest earning assets 253,420 200,523
------- -------
Total Assets $ 4,913,550 $ 4,351,801
=========== ===========
Liabilities and Shareholders' Equity
Noninterest bearing deposits $ 549,336 $ 414,274
Interest bearing deposits
Savings and NOW accounts 414,299 $ 1,053 0.51 % 314,286 $ 1,775 1.14 %
Money market checking 237,482 301 0.26 173,446 654 0.76
Money market savings 965,851 5,198 1.09 781,492 15,881 4.10
Savings certificates 1,210,747 24,948 4.16 1,221,215 36,180 5.97
Certificates over $100,000 272,026 5,528 4.10 291,709 8,936 6.18
------- ----- ------- -----
Total Interest Bearing Deposits 3,100,405 37,028 2.41 2,782,148 63,426 4.60
--------- ------ --------- ------
Total Deposits 3,649,741 3,196,422
Short-term borrowings 387,121 3,071 1.60 465,011 11,528 5.00
Long-term debt 338,653 9,968 5.94 232,077 7,599 6.60
Company obligated mandatorily redeemable
preferred securities 76,500 3,587 9.46 29,583 1,403 9.56
------ ----- ------ -----
Total Interest Bearing Liabilities $ 3,902,679 $ 53,654 2.77 % $ 3,508,819 $ 83,956 4.83 %
Other noninterest bearing liabilities 58,786 66,095
------ ------
Total Liabilities 4,510,801 3,989,188
Minority Interest 150 150
Redeemable Class A Common Stock 32,208 28,997
Shareholders' equity 370,391 333,466
------- -------
Total Liabilities and Equity $ 4,913,550 $ 4,351,801
=========== ===========
Net interest income $ 100,686 $ 82,364
========= ========
Net interest spread 4.02 % 3.42 %
Net interest margin 4.43 % 4.08 %
(1) Interest income includes $4,097 and $3,925 in 2002 and 2001 to adjust to a fully taxable basis using the federal statutory
rate of 35%.
(2) Net of unearned discount and includes nonaccrual loans and leases.
(3) Excluding net unrealized gain (loss) on available-for-sale securities.
(4) Before deducting the reserve for credit losses.
14
The following table illustrates, on a tax-equivalent basis, for the periods
indicated, the changes in our net interest income due to changes in volume and
changes in interest rates. Changes in net interest income other than those due
to volume have been included in changes due to rate:
Six Months Ended June 30,
-------------------------
2002 vs. 2001
-------------
Increase (Decrease)
Due to Change in
----------------
Volume Rate Total
------ ---- -----
(in thousands)
Interest earning assets:
Loans and leases (1) $19,643 $(28,808) $ (9,165)
Taxable securities 1,760 (4,483) (2,723)
Tax-exempt securities (1) 227 (116) 111
Federal funds sold 110 (273) (163)
Other interest earning assets (16) (24) (40)
--- --- ---
Total interest earning assets $21,724 $(33,704) $(11,980)
======= ======== ========
Interest bearing liabilities:
Savings and NOW accounts $ 487 $ (1,209) $ (722)
Money market accounts 4,539 (15,575) (11,036)
Savings certificates (899) (13,741) (14,640)
Short-term borrowings (1,931) (6,526) (8,457)
Long-term debt 3,490 (1,121) 2,369
Mandatorily redeemable preferred securities 2,225 (41) 2,184
----- --- -----
Total interest bearing liabilities 7,911 (38,213) (30,302)
----- ------- -------
Change in net interest income $13,813 $ 4,509 $ 18,322
======= ======= ========
(1) Interest income includes $4,097 and $3,925 in 2002 and 2001 to adjust to a fully
taxable basis using the federal statutory rate of 35%.
Provision for Credit Losses. The provision for credit losses is charged against
earnings to cover both current period net charge-offs and to maintain the
allowance for credit losses at an acceptable level to cover losses inherent in
the portfolio as of the reporting date. The provision for credit losses
increased to $2.9 million for the second quarter of 2002 from $2.0 million for
the same quarter in 2001. On a year-to-date basis, the provision for credit
losses increased to $6.9 million in 2002 from $5.0 million for the first six
months of 2001. The provision for credit losses has been increased in 2002
primarily to increase the reserve for loans losses allocated to
15
the loan portfolio of our finance company subsidiary. These loans generally
carry more risk than our bank loans and recent economic weakness has increased
the stress on certain of the finance company customers. Net charge-offs were
$923 thousand during the second quarter of 2002 compared to $876 thousand for
the same period in 2001 and $3.2 million during the first six months of 2002
compared to $3.5 million for the same period in 2001. For further discussion
related to the allowance for credit losses, see the later section titled "-
Financial Condition - Reserve for Credit Losses."
Noninterest Income. Noninterest income increased $213 thousand, or 1.29%, to
$16.7 million for the second quarter of 2002 compared to $16.5 million for the
second quarter of 2001. On a year-to-date basis, noninterest income was $36.0
million, a $4.4 million, or 13.9% increase over the $31.7 million recorded in
the first six months of 2001. Service charges increased by $1.0 million or
8.25%, to $13.8 million in the first six months of 2002 from $12.7 million in
the first six months of 2001. Also contributing to the $4.4 million year-to-date
increase in noninterest income were increases of $676 thousand in gain on sale
of loans, as residential mortgage loan activity remained strong, securities
gains, and more than $1.0 million of miscellaneous nonrecurring revenue recorded
in the first quarter of 2002. The following table summarizes the components of
noninterest income:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Service charges $ 7,117 $ 6,816 $ 13,758 $ 12,709
Insurance 2,262 2,229 4,670 4,585
Trust 2,404 2,341 4,801 4,679
Brokerage 1,332 1,207 2,718 2,208
Gain on sale of loans 1,938 2,470 4,301 3,625
Other recurring noninterest income 1,329 1,384 2,814 2,423
----- ----- ----- -----
Recurring noninterest income 16,382 16,447 33,062 30,229
Gain on sale of other assets 30 52 1,059 86
Gain on sale of securities 326 26 1,926 1,339
--- -- ----- -----
Total noninterest income $ 16,738 $ 16,525 $ 36,047 $ 31,654
======== ======== ======== ========
Noninterest Expense. Noninterest expense increased $2.5 million, or 6.73%, to
$39.6 million in the second quarter of 2002 from $37.1 million in the second
quarter of 2001. Noninterest expense in the second quarter of 2001 included
approximately $1.5 million of one-time transition costs related to the branch
acquisition. On a year-to-date basis, total noninterest expense increased $10.0
million or 14.4%, to $79.1 in 2002 from $69.2 million in 2001. Ongoing operating
costs and the amortization of intangibles related to the branch acquisition
contributed to the higher noninterest expense when comparing both the quarterly
and year-to-date 2002 results to the same periods in 2001. While goodwill is no
longer required to be amortized under current accounting rules, these rules
still require the amortization of other acquired intangibles.
16
The following table summarizes the components of noninterest expense:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Salaries and wages $ 17,941 $ 16,081 $ 35,435 $ 30,759
Employee benefits 4,559 3,810 9,422 7,560
Occupancy 2,573 2,329 5,146 4,526
Furniture and equipment 2,341 2,471 4,747 4,818
Printing, postage and telephone 1,582 1,853 3,151 3,175
Marketing 1,357 2,350 3,123 3,491
Data processing fees 2,341 2,196 4,520 4,121
Professional fees 1,056 876 2,087 1,668
Other real estate owned 25 29 37 75
FDIC premiums and examination fees 438 382 886 758
Amortization of goodwill and other intangibles 2,095 1,518 4,192 2,453
Other noninterest expense 3,277 3,193 6,392 5,758
----- ----- ----- -----
Total noninterest expense $ 39,585 $ 37,088 $ 79,138 $ 69,162
======== ======== ======== ========
A common industry statistic used to measure the productivity of banking
organizations is the operating efficiency ratio. The operating efficiency ratio
measures the cost required to generate each dollar of revenue and is calculated
by dividing recurring noninterest expense by tax-equivalent net interest income
and recurring noninterest income. Our operating efficiency ratio was 55.7% for
the second quarter of 2002 compared to 59.4% for the second quarter of 2001. On
a year-to-date basis, the ratio was 55.9% for the six months ending June 30,
2002 compared to 59.2% for the same period in 2001.
Income Taxes. The provision for income taxes was $7.7 million for the quarter
ended June 30, 2002 compared to $6.3 million for the same period in 2001. On a
year-to-date basis, the provision for income taxes increased to $15.6 million in
2002 from $12.3 million in 2001. Comparing the second quarter of 2002 to the
same period in 2001, our effective tax rate decreased to 33.3% from 33.7%,
primarily as a result of lower taxable income calculated at the state level. Our
effective tax rate decreased to 33.4% for the first six months of 2002 from
34.3% for the same period in 2001.
17
Financial Condition
Loan and Lease Portfolio. The following table presents the components of our
gross loans and lease portfolio:
At June 30, 2002 At December 31, 2001
---------------- --------------------
Percent of Percent of
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(in thousands)
Commercial and other $ 929,698 25.7 % $ 883,099 25.2 %
Commercial real estate 980,908 27.2 957,318 27.3
- Construction 76,320 2.1 83,388 2.4
Agricultural 427,489 11.8 417,069 11.9
Residential real estate 731,158 20.2 708,334 20.2
- Construction 17,703 0.5 19,300 0.6
Consumer 336,660 9.3 334,472 9.6
Tax-exempt 114,639 3.2 97,308 2.8
------- --- ------ ---
Total $ 3,614,575 100.0 % $3,500,288 100.0 %
=========== ===== ========== =====
Our total loan and lease portfolio was $3.6 billion at June 30, 2002 compared to
$3.5 billion at December 31, 2001. The commercial component of the loan and
lease portfolio showed an increase of $46.6 million, or 5.3%, during the first
half of 2002 and commercial real estate loans increased by $23.6 miilion, or
2.5%, during the same period. Residential real estate loans increased by $22.8
million, or 3.2%, with all of the increase in the home equity portion of the
real estate portfolio. Tax-exempt loans increased by $17.3 million, or 17.8%,
with most of the increase due to a single new loan to finance a medical facility
expansion.
Nonperforming Assets. Nonperforming assets include nonaccrual loans,
restructured loans and other real estate owned. Nonperforming assets were $30.1
million at June 30, 2002, an increase of $7.6 million or 34.1% from the $22.4
million level at December 31, 2001. Nonperforming assets as a percentage of
total loans, leases and OREO increased to .83% as of June 30, 2002 from .64% as
of December 31, 2001. While these increases are largely the result of a weaker
economic environment, most of the $7.6 million increase in nonperforming assets
since year end 2001 can be attributed to a single commercial credit, for which
loan loss reserves had previously been provided. Accruing loans and leases 90
days or more past due totaled $2.1 million at June 30, 2002 compared to $3.0
million at December 31, 2001.
18
Our nonperforming assets are summarized in the following table:
June 30 December 31
------- -----------
2002 2001
---- ----
(dollars in thousands)
Nonaccrual loans and leases $27,531 $20,307
Restructured loans and leases 592 499
--- ---
Total nonperforming loans and leases 28,123 20,806
Other real estate owned (OREO) 1,939 1,616
----- -----
Total nonperforming assets $30,062 $22,422
======= =======
Accruing loans and leases 90 days or more past due $ 2,089 $ 2,995
======= =======
Nonperforming loans and leases to total loans and leases 0.78 % 0.60 %
Nonperforming assets to total loans, leases and OREO 0.83 0.64
Nonperforming assets and accruing loans and leases 90
days or more past due to total loans, leases and OREO 0.89 0.73
Reserve for Credit Losses. At June 30, 2002, the reserve for credit losses was
$57.4 million, an increase of $3.7 million or 6.8% from the balance of $53.7
million at December 31, 2001. At June 30, 2002, the reserve for credit losses as
a percentage of total loans and leases was 1.59% compared to 1.54% at December
31, 2001.
19
Activity in the reserve for the following periods is shown in the following
table:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
(dollars in thousands)
Balance at beginning of period $ 55,381 $ 46,249 $ 53,716 $ 45,895
Charge-offs:
Commercial and other 572 416 2,919 2,558
Commercial real estate 35 44 42 104
Agricultural 76 170 104 248
Residential real estate 28 70 63 192
Consumer 593 468 1,186 1,019
--- --- ----- -----
Total charge-offs 1,304 1,168 4,314 4,121
Recoveries:
Commercial and other 96 47 584 211
Commercial real estate 41 7 87 45
Construction 4 - 4 -
Agricultural 45 130 67 187
Residential real estate 9 6 30 17
Consumer 186 102 347 210
--- --- --- ---
Total recoveries 381 292 1,119 670
--- --- ----- ---
Net charge-offs 923 876 3,195 3,451
Provision for credit losses 2,927 2,023 6,864 4,952
Reserve related to acquired assets - 4,000 - 8,000
--- ----- --- -----
Balance at end of period $ 57,385 $ 51,396 $ 57,385 $ 55,396
Average loans and leases $ 3,506,042 $ 3,147,338 $ 3,461,812 $ 3,014,823
Annualized net charge-offs to average loans
and leases 0.11 % 0.11 % 0.19 % 0.23 %
----------------------------
Reserve as a percentage of:
Period-end loans and leases 1.59 % 1.64 %
Nonperforming loans and leases 204.05 324.11
Nonperforming assets 190.89 311.27
20
Securities. Our investment portfolio, including available-for-sale securities
and held-to-maturity securities, decreased by $78.9 million to $1.1 billion at
June 30, 2002 from $1.2 billion at December 31, 2001. We sold $125.2 million in
securities during the first half of 2002, resulting in a $1.9 million gain on
sale of securities. An additional $255.1 million in securities matured during
the first half of 2002. We reinvested $292.9 million of the total proceeds from
sales and maturities in other securities during the first half of the year and
utilized the rest of the funds received to fund loan growth during the second
quarter of 2002.
Deposits. Total deposits were $3.6 billion at June 30, 2002 compared to $3.8
billion at December 31, 2001. Noninterest bearing deposits decreased $79.9
million, or 12.2%, to $576.7 million at June 30, 2002 from $656.7 million at
December 31, 2001. Interest bearing deposits decreased $105.5 million, or 3.3%,
to $3.0 billion at June 30, 2002 compared to $3.1 billion at December 31, 2001.
Borrowings. Short-term borrowings, which include federal funds purchased,
securities sold under agreements to repurchase, treasury tax and loan notes,
Federal Home Loan Bank ("FHLB") advances, and an unsecured revolving credit
facility, increased $83.1 million or 18.5% to $532.0 million at June 30, 2002
from $448.9 million at December 31, 2001. The increased use of short-term
borrowings as a funding source was due to the decline in total deposits since
December 31, 2001.
Long-term debt. Long-term debt consists primarily of FHLB advances and $65.0
million of privately-placed senior debt. FHLB advances increased $20.2 million
to $268.8 million at June 30, 2002 from $248.6 million at December 31, 2001. The
increase is part of our asset/liability management strategy to match fund longer
term loans with longer term liabilities.
Company Obligated Mandatorily Redeemable Preferred Securities. The $76.5 million
in outstanding Company Obligated Mandatorily Redeemable Preferred Securities at
June 30, 2002 qualifies as Tier I capital under guidelines of the Federal
Reserve.
Capital Management. The following table compares our consolidated capital ratios
with the minimum requirements for well capitalized and adequately capitalized
banks as of June 30, 2002:
Minimum Requirements
--------------------
June 30 December 31 Well Adequately
2002 2001 Capitalized Capitalized
---- ---- ----------- -----------
Tier I capital to risk-weighted assets 10.47 % 9.94 % 6.00 % 4.00 %
Total capital to risk-weighted assets 11.73 11.19 10.00 8.00
Tier I capital to average tangible assets 7.91 7.27 5.00 4.00
21
We have maintained our capital at the well-capitalized level in each of these
categories in the past and expect to do so in the future. The capital ratios of
the subsidiary banks in each of these categories met or exceeded the
well-capitalized ratios as of June 30, 2002.
Commitments and Contingencies. We have acquired land and begun constuction of a
building which will contain approximately 100,000 square feet for an expanded
operations center. The total cost of this project will be approximately $16
million, and it is expected to be completed by year end. The Company's contracts
with a third party provider of data processing and item processing services have
been extended through May 2008 under terms similar to those in place prior to
the extension. There have been no other material changes in our outstanding
commitments and contingencies since those reported at December 31, 2001 in the
Form 10-K for 2001.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
There have been no material changes in market risk exposures that affect the
quantitative and qualitative disclosures presented as of December 31, 2001 in
the 2001 Form 10-K.
22
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
12.1 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) No Current Reports on Form 8-K were filed during the quarter ended June
30, 2002 or during the period from June 30, 2002 to the date of this
Quarterly Report on Form 10-Q.
23
SIGNATURES
Pursuant to the requirements 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.
Dated: August 13, 2002 BREMER FINANCIAL CORPORATION
By: /s/ Stan K. Dardis
----------------------------------
Stan K. Dardis
President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Stuart F. Bradt
----------------------------------
Stuart F. Bradt
Controller
(Chief Accounting Officer)
24