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 September 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
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0715583
-------------------------- --------------------------
(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 September 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 September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2002 2001 Change 2002 2001 Change
---- ---- ------ ---- ---- ------
Operating Results:
Total interest income $ 75,733 $ 85,919 (11.86) % $ 225,976 $ 248,314 (9.00) %
Total interest expense 25,610 40,299 (36.45) 79,264 124,255 (36.21)
------ ------ ------ ------ ------- ------
Net interest income 50,123 45,620 9.87 146,712 124,059 18.26
Provision for credit losses 4,126 2,964 39.20 10,990 7,916 38.83
----- ----- ----- ------ ----- -----
Net interest income after provision
for credit losses 45,997 42,656 7.83 135,722 116,143 16.86
Noninterest income 18,005 16,821 7.04 54,052 48,475 11.50
Noninterest expense 40,985 37,882 8.19 120,123 107,044 12.22
------ ------ ---- ------- ------- -----
Income before income tax expense 23,017 21,595 6.58 69,651 57,574 20.98
Income tax expense 7,619 7,482 1.83 23,188 19,822 16.98
----- ----- ---- ------ ------ -----
Net income $ 15,398 $ 14,113 9.11 % $ 46,463 $ 37,752 23.07 %
========== ======== ==== ======== ======== =====
Net income per share $ 1.28 $ 1.18 9.11 % $ 3.87 $ 3.15 23.07 %
Dividends paid per share 0.40 0.40 1.20 1.20 -
Tax equivalent net interest income $ 52,234 $ 47,710 9.48 % $ 152,969 $ 130,079 17.60 %
Net charge-offs 3,548 1,827 94.20 6,743 5,278 27.76
Selected Financial Ratios:
Return on average assets (1) 1.22 % 1.14 % 0.08 1.26 % 1.11 % 0.15
Return on average realized equity (2)(3) 14.84 15.08 (0.24) 15.49 13.86 1.63
Average realized equity to average assets(2)(3) 8.20 7.55 0.65 8.11 8.02 0.09
Net interest margin (4) 4.43 4.14 0.29 4.43 4.10 0.33
Operating efficiency ratio (4)(5) 55.50 56.09 (0.59) 55.77 58.00 (2.23)
Net charge-offs to average loans and leases 0.39 0.22 0.17 0.26 0.22 0.04
September 30 September 30 December 31
2002 2001 2001 Change
---- ---- ---- ------
Balance Sheet Data:
Total assets $5,165,446 $4,986,524 3.59 % $5,094,064 1.40 %
Securities (6) 1,115,273 1,201,740 (7.20) 1,201,645 (7.19)
Loans and leases (7) 3,649,385 3,415,841 6.84 3,498,839 4.30
Total deposits 3,674,939 3,740,237 (1.75) 3,806,018 (3.44)
Short-term borrowings 513,540 436,760 17.58 448,912 14.40
Long-term debt 417,910 262,168 59.41 315,923 32.28
Mandatorily redeemable preferred securities 76,500 76,500 - 76,500 -
Total shareholders' equity and redeemable
Class A common stock 427,213 385,385 10.85 389,912 9.57
Per share book value of common stock 35.60 32.12 10.85 32.49 9.57
Asset Quality:
Reserve for credit losses $ 57,963 $ 52,533 10.34 % $ 53,716 7.91 %
Nonperforming assets 29,934 19,961 49.96 22,422 33.50
Nonperforming assets to total loans, leases
and OREO 0.82 % 0.58 % 0.24 0.64 0.18
Reserve to nonperforming loans and leases 206.24 274.95 (68.71) 258.17 (51.93)
Reserve to total loans and leases 1.59 1.54 0.05 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.
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY BALANCE SHEET AND INCOME STATEMENT
(dollars in thousands)
Three months ended September 30, Nine months ended September 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) $3,595,962 6.98% $3,380,521 8.22% $3,507,021 7.11% $3,138,061 8.63 %
Total securities (3) 1,062,822 5.42 1,164,530 6.02 1,086,086 5.58 1,078,605 6.33
Total other earning assets 18,030 2.31 27,489 3.69 20,239 2.09 20,904 4.29
------ ------ ------ ------
Total interest earning assets (4) $4,676,814 6.60% $4,572,540 7.64% $4,613,346 6.73% 4,237,570 8.02 %
Total noninterest earning assets 340,958 344,493 333,488 303,051
------- ------- ------- -------
Total assets $5,017,772 $4,917,033 $4,946,834 $4,540,621
========== ========== ========== ==========
Noninterest bearing deposits $ 599,128 $ 521,080 $ 566,116 $ 450,266
Interest bearing deposits 3,027,700 2.16% 3,193,297 3.80% 3,075,904 2.33% 2,920,682 4.30 %
Short-term borrowings 460,989 1.58 432,745 3.54 412,014 1.59 454,138 4.53
Long-term debt 380,133 5.72 255,201 6.37 352,632 5.86 239,963 6.52
Mandatorily redeemable preferred securities 76,500 9.30 76,500 9.28 76,500 9.40 45,300 9.42
------ ------ ------ ------
Total interest bearing liabilities $3,945,322 2.58% $3,957,743 4.04% $3,917,050 2.71% $3,660,083 4.54 %
Other noninterest bearing liabilities 51,896 59,922 54,929 60,409
Minority interest 150 150 150 150
Total shareholders' equity and redeemable
Class A common stock 421,276 378,138 408,589 369,713
------- ------- ------- -------
Total liabilities and equity $5,017,772 $4,917,033 $4,946,834 $4,540,621
========== ========== ========== ==========
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2002 2001 $ Change %Change 2002 2001 $ Change % Change
---- ---- -------- -------- ---- ---- -------- --------
Summary Income Statement:
Total interest income $ 75,733 $85,919 $(10,186) (11.86)% $ 225,976 $248,314 $ (22,338) (9.00)%
Total interest expense 25,610 40,299 (14,689) (36.45) 79,264 124,255 (44,991) (36.21)
------ ------ ------- ------ ------ ------- ------- ------
Net interest income 50,123 45,620 4,503 9.87 146,712 124,059 22,653 18.26
Provision for credit losses 4,126 2,964 1,162 39.20 10,990 7,916 3,074 38.83
----- ----- ----- ----- ------ ----- ----- -----
Net interest income after provision
for credit losses 45,997 42,656 3,341 7.83 135,722 116,143 19,579 16.86
Service charges 7,619 6,962 657 9.44 21,377 19,671 1,706 8.67
Insurance 2,510 2,323 187 8.05 7,180 6,908 272 3.94
Trust 2,247 2,304 (57) (2.47) 7,048 6,983 65 0.93
Brokerage 1,214 1,051 163 15.51 3,932 3,258 674 20.69
Gain on sale of loans 2,891 2,309 582 25.21 7,192 5,934 1,258 21.20
Gain on sale of securities 318 776 (458) NM 2,244 2,115 129 6.10
Other 1,206 1,096 110 10.04 5,079 3,606 1,473 40.85
----- ----- --- ----- ----- ----- ----- -----
Total noninterest income 18,005 16,821 1,184 7.04 54,052 48,475 5,577 11.50
Salaries and wages 18,215 16,889 1,326 7.85 53,650 47,647 6,003 12.60
Employee benefits 5,241 4,075 1,166 28.61 14,663 11,636 3,027 26.01
Occupancy 2,593 2,549 44 1.73 7,739 7,075 664 9.39
Furniture and equipment 2,505 2,498 7 0.28 7,252 7,316 (64) (0.87)
Data processing fees 2,257 2,105 152 7.22 6,777 6,226 551 8.85
FDIC premiums and examination fees 431 435 (4) (0.92) 1,317 1,193 124 10.39
Amortization of goodwill and other intangibles 2,096 2,100 (4) (0.19) 6,288 4,553 1,735 38.11
Other 7,647 7,231 416 5.75 22,437 21,398 1,039 4.86
Total noninterest expense 40,985 37,882 3,103 8.19 120,123 107,044 13,079 12.22
------ ------ ----- ---- ------- ------- ------ -----
Income before income tax expense 23,017 21,595 1,422 6.58 69,651 57,574 12,077 20.98
Income tax expense 7,619 7,482 137 1.83 23,188 19,822 3,366 16.98
----- ----- --- ---- ------ ------ ----- -----
Net income $ 15,398 $14,113 $ 1,285 9.11% $ 46,463 $ 37,752 $ 8,711 23.07%
======== ======= ======= ==== ========== ======== ========== =====
- -------------------------------
(1) Calculation is based on interest income including $2,111 and $2,090 for the three months ending September 2002 and September
2001 and $6,257 and $6,020 for the nine months ending September 2002 and September 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.
BREMER FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2002
INDEX
PART I -- FINANCIAL INFORMATION Page
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Item 1. Financial Statements 2
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk 22
Item 4. Controls and Procedures 22
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 29
Earnings to Fixed Charges
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, 30
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, 31
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)
September 30, December 31, September 30,
2002 2001 2001
---- ---- ----
(unaudited) (unaudited)
Assets
Cash and due from banks $ 222,890 $ 213,101 $ 178,498
Interest bearing deposits 4,150 4,250 4,281
Investment securities available-for-sale 124,581 240,036 224,416
Mortgage-backed securities available-for-sale 822,835 780,538 790,298
------- ------- -------
Total securities available-for-sale 947,416 1,020,574 1,014,714
Investment securities held-to-maturity
(fair value: 9/30/02 - $175,566, 12/31/01 - $183,570, 9/30/01 - $192,474 ) 167,857 181,071 187,026
Loans and leases 3,650,000 3,500,288 3,417,771
Reserve for credit losses (57,963) (53,716) (52,533)
Unearned discount (615) (1,449) (1,930)
---- ------ ------
Net loans and leases 3,591,422 3,445,123 3,363,308
Interest receivable 36,636 37,350 44,546
Premises and equipment, net 70,052 65,062 66,799
Goodwill and other intangibles 102,720 108,652 110,217
Other assets 22,303 18,881 17,135
------ ------ ------
Total assets $ 5,165,446 $ 5,094,064 $ 4,986,524
=========== =========== ===========
Liabilities and Shareholders' Equity
Noninterest bearing deposits $ 668,522 $ 656,651 $ 541,535
Interest bearing deposits 3,006,417 3,149,367 3,198,702
--------- --------- ---------
Total deposits 3,674,939 3,806,018 3,740,237
Federal funds purchased and repurchase agreements 415,760 377,762 381,153
Other short-term borrowings 97,780 71,150 55,607
Long-term debt 417,910 315,923 262,168
Company obligated mandatorily redeemable
preferred securities of subsidiary trusts
holding junior subordinated debentures 76,500 76,500 76,500
Accrued expenses and other liabilities 55,194 56,649 85,324
------ ------ ------
Total liabilities 4,738,083 4,704,002 4,600,989
Minority interests 150 150 150
Redeemable class A common stock, 960,000 shares
issued and outstanding 34,177 31,193 30,831
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 380,995 351,497 343,149
Accumulated other comprehensive income 9,422 4,603 8,786
----- ----- -----
Total shareholders' equity 393,036 358,719 354,554
------- ------- -------
Total liabilities and shareholders' equity $ 5,165,446 $ 5,094,064 $ 4,986,524
=========== =========== ===========
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 Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Interest income
Loans and leases, including fees $ 62,353 $ 69,393 $ 184,223 $ 200,560
Securities
Taxable 10,886 13,548 33,951 39,336
Tax-exempt 2,389 2,722 7,485 7,747
Federal funds sold 58 200 200 505
Other 47 56 117 166
-- -- --- ---
Total interest income 75,733 85,919 225,976 248,314
Interest expense
Deposits 16,498 30,554 53,526 93,980
Federal funds purchased and repurchase agreements 1,472 2,772 4,148 10,129
Other short-term borrowings 363 1,085 758 5,255
Long-term debt 5,484 4,099 15,452 11,699
Company obligated mandatorily redeemable
preferred securities of subsidiary trusts
holding junior subordinated debentures 1,793 1,789 5,380 3,192
----- ----- ----- -----
Total interest expense 25,610 40,299 79,264 124,255
------ ------ ------ -------
Net interest income 50,123 45,620 146,712 124,059
Provision for credit losses 4,126 2,964 10,990 7,916
----- ----- ------ -----
Net interest income after provision for credit losses 45,997 42,656 135,722 116,143
Noninterest income
Service charges 7,619 6,962 21,377 19,671
Insurance 2,510 2,323 7,180 6,908
Trust 2,247 2,304 7,048 6,983
Brokerage 1,214 1,051 3,932 3,258
Gain on sale of loans 2,891 2,309 7,192 5,934
Gain on sale of securities 318 776 2,244 2,115
Other 1,206 1,096 5,079 3,606
----- ----- ----- -----
Total noninterest income 18,005 16,821 54,052 48,475
Noninterest expense
Salaries and wages 18,215 16,889 53,650 47,647
Employee benefits 5,241 4,075 14,663 11,636
Occupancy 2,593 2,549 7,739 7,075
Furniture and equipment 2,505 2,498 7,252 7,316
Data processing fees 2,257 2,105 6,777 6,226
FDIC premiums and examination fees 431 435 1,317 1,193
Amortization of intangibles 2,096 2,100 6,288 4,553
Other 7,647 7,231 22,437 21,398
----- ----- ------ ------
Total noninterest expense 40,985 37,882 120,123 107,044
Income before income tax expense 23,017 21,595 69,651 57,574
Income tax expense 7,619 7,482 23,188 19,822
----- ----- ------ ------
Net income $ 15,398 $ 14,113 $ 46,463 $ 37,752
======== ======== ======== ========
Per common share amounts:
Net income-basic and diluted $ 1.28 $ 1.18 $ 3.87 $ 3.15
Dividends paid 0.40 0.40 1.20 1.20
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 Nine Months Ended September 30, 2001
Balance, December 31, 2000 $57 $2,562 $ 1,431 $321,665 $325,715
Comprehensive income
Net income $37,752 37,752 37,752
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during the period 9,264 9,264
Less: Reclassified adjustment for gains included in income (1,269) (1,269)
------ ------
Other comprehensive income 7,995 7,995 7,995
-----
Comprehensive income 45,747
======
Dividends, $1.20 per share (14,400) (14,400)
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 (640) (1,868) (2,508)
--- ----- ---- ------ ------
Balance, September 30, 2001 $57 $2,562 $ 8,786 $343,149 $354,554
=== ====== ======= ======== ========
For the Nine Months Ended September 30, 2002
Balance, December 31, 2001 $57 $2,562 $ 4,603 $351,497 $358,719
Comprehensive income
Net income $46,463 46,463 46,463
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during the period 6,585 6,585
Less: Reclassified adjustment for gains included in income (1,347) (1,347)
------ ------
Other comprehensive income 5,238 5,238 5,238
-----
Comprehensive income $51,701
=======
Dividends, $1.20 per share (14,400) (14,400)
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 (419) (2,565) (2,984)
--- ----- ---- ------ ------
Balance, September 30, 2002 $57 $2,562 $ 9,422 $380,995 $393,036
=== ====== ======= ======== ========
See notes to consolidated financial statements.
4
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the Nine Months
Ended September 30,
-------------------
2002 2001
---- ----
Cash flows from operating activities
Net income $ 46,463 $ 37,752
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 10,990 7,916
Depreciation and amortization 14,232 11,140
Gain on sale of securities (2,244) (2,115)
Gain on sale of other real estate owned, net (159) (60)
Other assets and liabilities, net (10,987) 6,712
Proceeds from loans originated for sale 312,326 217,893
Loans originated for sale (296,421) (223,775)
-------- --------
Net cash provided by operating activities 74,200 55,463
Cash flows from investing activities
Interest bearing deposits, net 100 1,450
Purchases of mortgage-backed securities (290,476) (440,216)
Purchases of available-for-sale investment securities (105,088) (80,609)
Purchases of held-to-maturity securities (9,338) (42,371)
Proceeds from maturities of mortgage-backed securities 241,062 160,488
Proceeds from maturities of available-for-sale investment securities 26,757 8,377
Proceeds from maturities of held-to-maturity securities 22,552 23,493
Proceeds from sales of mortage-backed securities 15,951 80,473
Proceeds from sales of available-for-sale investment securities 195,926 55,694
Proceeds from sales of other real estate owned 938 3,657
Loans and leases, net (173,194) (175,636)
Acquisition of minority interests - (143)
Acquisitions, net of cash acquired - 326,546
Purchase of premises and equipment (10,737) (4,981)
------- ------
Net cash used in investing activities (85,547) (83,778)
Cash flows from financing activities
Noninterest bearing deposits, net 11,871 (5,268)
Savings, NOW and money market accounts, net (46,630) 91,892
Certificates of deposits, net (96,320) (166,980)
Federal funds purchased and repurchase agreements,net 37,998 52,092
Other short-term borrowings, net 26,630 (57,078)
Proceeds from issuance of long-term debt 116,013 30,000
Repayments of long-term debt (14,026) (492)
Proceeds from issuance of trust preferred securities - 76,500
Common stock dividends paid (14,400) (14,400)
------- -------
Net cash used in financing activities 21,136 6,266
Net increase (decrease) in cash and due from banks 9,789 (22,049)
Cash and due from banks at beginning of period 213,101 200,547
------- -------
Cash and due from banks at end of period $ 222,890 $ 178,498
========= =========
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 September 30, 2002, 960,000 shares of redeemable class A stock were issued
and outstanding, subject to redemption at a price of $35.60 per share, which
approximated book value as of such date. 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 September 30, 2002, options to
call 86,142.0345 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 5,769 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 nine months of 2002 of
$51.7 million, compared to the $45.7 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 Accounting
Principles Board Opinion ("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
7
accounting for its goodwill under SFAS No. 142 for all periods presented, the
Company's net income and income per share would have been as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
09/30/02 09/30/01 09/30/02 09/30/01
-------- -------- -------- --------
(in thousands, except per share data)
Reported net income $ 15,398 $ 14,113 $ 46,463 $ 37,752
Add: Goodwill amortization, net of tax - 878 - 2,635
------ ------ ------ ------
Pro forma adjusted net income $ 15,398 $ 14,991 $ 46,463 $ 40,387
======== ======== ======== ========
Net income per share
As reported $ 1.28 $ 1.18 $ 3.87 $ 3.15
Add: Goodwill amortization, net of tax - 0.07 - 0.22
---- ---- ---- ----
Pro forma adjusted net income per share $ 1.28 $ 1.25 $ 3.87 $ 3.37
====== ====== ====== ======
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." This Statement removes acquisitions of financial
institutions from the scope of both SFAS 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions," and FASB Interpretation No. 9,
"Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a
Similar Institution Is Acquired in a Business Combination Accounted for by the
Purchase Method." SFAS No. 72 included a requirement to recognize and
subsequently amortize any excess of the fair value of the liabilities assumed in
certain acquisitions over the fair value of tangible and identifiable intangible
assets acquired as an unidentifiable intangible asset. Under the requirements of
SFAS No. 147, for a transaction that is a business combination, the
unidentifiable intangible asset that is required to be recognized under SFAS No.
72 represents goodwill that should be accounted for under SFAS No. 142. When
SFAS No. 142 was adopted on January 1, 2002, the Company had $42.1 million of
unidentifiable intangible assets which had been acquired in a business
combination. When the Company adopts SFAS No. 147 on October 1, 2002, these
unidentifiable intangible assets will be classified as goodwill, and the
financial statements will be restated to remove $1.3 million of amortization
expense for the three months ending September 30, 2002, and $4.0 million of
amortization expense for the first nine months of 2002, that has been recorded
since the adoption of SFAS No. 142.
Amortization expense for the nine months ended September 30, 2002 was $6.3
million, including the $4.0 million discussed above, based on the Company's
present intangible assets. The estimated amortization expense for each of the
next five years is approximately $2.6 million.
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
8
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. $42.1
million of the other intangible assets will be classified as goodwill when SFAS
No. 147 is adopted on October 1, 2002.
The following pro forma financial information was prepared assuming the Branch
Acquisition had been completed at January 1, 2001:
Three Months Ended Nine Months Ended
------------------ -----------------
09/30/02 09/30/01 09/30/02 09/30/01
-------- -------- -------- --------
(in thousands, except per share data)
Proforma
Net Interest Income $ 50,123 $ 45,620 $146,712 $129,574
Net Income 15,398 14,113 46,463 38,073
Net Income Per Share $ 1.28 $ 1.18 $ 3.87 $ 3.17
9
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:
September 30 December 31
------------ -----------
2002 2001
---- ----
(in thousands)
Standby letters of credit $ 35,413 $ 18,394
Loan commitments 937,391 848,391
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.
The Company is nearing the completion of construction 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 Company's
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 September 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 third quarter of 2002. This compares to $14.1 million
or $1.18 basic and diluted earnings per share in the third quarter of 2001. On a
year-to-date basis through September 30, 2002, net income was $46.5 million, a
23.1% increase over the $37.8 million earned in the first nine months of 2001.
Return on average realized equity was 14.84% for the third quarter of 2002
compared to 15.08% for the same quarter of 2001. On a year-to-date basis, we
reported a return on average realized equity of 15.49%, compared to 13.86% in
the first nine 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 1.22% in the third quarter of 2002 from 1.14% in the
11
third quarter of 2001. On a year-to-date basis in 2002, we reported a return on
average assets of 1.26%, compared to 1.11% in the first nine months of 2001.
Results of Operations
Net Interest Income. Net interest income for the third quarter of 2002 was $50.1
million, an increase of 9.9% from the $45.6 million reported for the same period
a year ago, as our net interest margin increased to 4.43% in the third quarter
of 2002 from 4.14% in the third quarter of 2001. On a year-to-date basis, net
interest income was up $22.7 million, or 18.3% from the first nine months of
2001, as our net interest margin increased to 4.43% from 4.10% and our average
earning assets increased by $375.8 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 146 basis points when comparing the third quarter of 2002
with the third quarter of 2001. Meanwhile, the average yield on our earnings
assets declined 104 basis points to 6.60% from 7.64% when comparing the same two
periods. On a year-to-date basis, the average cost of our interest bearing
liabilities was reduced by 183 basis points when comparing the first nine months
of 2002 with the same period of 2001, while the average yield on our earnings
assets declined 129 basis points to 6.73% from 8.02% when comparing the same two
periods.
Net interest income for the quarter was also positively impacted by a $215.4
million or 6.4% increase in average loans and leases, to $3.6 billion in the
third quarter of 2002 from $3.4 billion in the third quarter of 2001. On a
year-to-date basis, average loans and leases increased $369.0 million or 11.8%
to $3.5 billion for the first nine months of 2002 from $3.1 billion for the same
period in 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 $320.0 million in loans and $715.0
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 September 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 $ 854,311 $ 13,428 6.24 % $ 851,113 $ 16,807 7.83 %
Commercial real estate 1,076,656 19,811 7.30 976,922 20,163 8.19
Agricultural 445,202 7,329 6.53 430,555 8,967 8.26
Residential real estate 765,622 13,437 6.96 711,443 14,787 8.25
Consumer 338,453 6,712 7.87 325,503 7,362 8.97
Tax-exempt 115,718 2,507 8.60 84,985 1,986 9.27
------- ----- ------ -----
Total Loans and Leases 3,595,962 63,224 6.98 3,380,521 70,072 8.22
Reserve for Credit Losses (58,333) (52,098)
------- -------
Net Loans and Leases 3,537,629 3,328,423
Securities (3)
Mortgage-backed 784,274 10,063 5.09 770,358 11,562 5.95
Other taxable 89,329 823 3.66 179,469 1,986 4.39
Tax-exempt 189,219 3,629 7.61 214,703 4,133 7.64
------- ----- ------- -----
Total Securities 1,062,822 14,515 5.42 1,164,530 17,681 6.02
Federal funds sold 13,860 58 1.66 23,185 200 3.42
Other earning assets 4,170 47 4.47 4,304 56 5.16
----- -- ----- --
Total Earning Assets (4) $4,676,814 $ 77,844 6.60 % $ 4,572,540 $ 88,009 7.64 %
Cash and due from banks 147,163 144,620
Other non interest earning assets 252,128 251,971
------- -------
Total Assets $5,017,772 $ 4,917,033
Liabilities and Shareholders' Equity
Noninterest bearing deposits $ 599,128 $ 521,080
Interest bearing deposits
Savings and NOW accounts 423,139 $ 573 0.54 % 362,061 $ 833 0.91 %
Money market checking 232,610 147 0.25 210,369 284 0.54
Money market savings 928,949 2,600 1.11 1,004,656 6,959 2.75
Savings certificates 1,170,337 10,728 3.64 1,338,173 18,572 5.51
Certificates over $100,000 272,665 2,450 3.56 278,038 3,906 5.57
-------- ------- ----- ------- -----
Total Interest Bearing Deposits 3,027,700 16,498 2.16 3,193,297 30,554 3.80
--------- ------ --------- ------
Total Deposits 3,626,828 3,714,377
Short-term borrowings 460,989 1,835 1.58 432,745 3,857 3.54
Long-term debt 380,133 5,484 5.72 255,201 4,099 6.37
Company obligated mandatorily redeemable
preferred securities 76,500 1,793 9.30 76,500 1,789 9.28
------ ----- ------ -----
Total Interest Bearing Liabilities $3,945,322 $ 25,610 2.58 % $ 3,957,743 $ 40,299 4.04 %
Other noninterest bearing liabilities 51,896 59,922
------ ------
Total Liabilities 4,596,346 4,538,745
Minority Interest 150 150
Redeemable Class A Common Stock 33,702 30,251
Shareholders' equity 387,574 347,887
------- -------
Total Liabilities and Equity $5,017,772 $ 4,917,033
========== ===========
Net interest income $ 52,234 $ 47,710
======== ========
Net interest spread 4.03 % 3.60 %
Net interest margin 4.43 % 4.14 %
- --------------------------------
(1) Interest income includes $2,111 and $2,090 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 Nine Months Ended September 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 $ 859,953 $ 41,002 6.37 % $ 787,209 $ 49,439 8.40 %
Commercial real estate 1,052,803 57,843 7.35 896,087 57,487 8.58
Agricultural 414,278 21,096 6.81 407,600 26,493 8.69
Residential real estate 736,117 39,450 7.17 649,789 41,539 8.55
Consumer 335,992 20,258 8.06 314,129 21,741 9.25
Tax-exempt 107,878 6,948 8.61 83,247 5,867 9.42
------- ----- ------ -----
Total Loans and Leases 3,507,021 186,597 7.11 3,138,061 202,566 8.63
Reserve for Credit Losses (56,568) (48,784)
------- -------
Net Loans and Leases 3,450,453 3,089,277
Securities (3)
Mortgage-backed 771,794 31,021 5.37 701,527 32,807 6.25
Other taxable 114,915 2,930 3.41 173,033 6,529 5.04
Tax-exempt 199,377 11,368 7.62 204,045 11,761 7.71
------- ------ ------- ------
Total Securities 1,086,086 45,319 5.58 1,078,605 51,097 6.33
Federal funds sold 16,037 200 1.67 16,163 505 4.18
Other earning assets 4,202 117 3.72 4,741 166 4.68
----- --- ----- ---
Total Earning Assets (4) $4,613,346 $232,233 6.73 % $4,237,570 $ 254,334 8.02 %
Cash and due from banks 138,909 135,636
Other non interest earning assets 251,147 216,199
------- -------
Total Assets $4,946,834 $4,540,621
========== ==========
Liabilities and Shareholders' Equity
Noninterest bearing deposits $ 566,116 $ 450,266
Interest bearing deposits
Savings and NOW accounts 417,278 $ 1,625 0.52 % 330,386 $ 2,608 1.06 %
Money market checking 235,840 448 0.25 185,889 938 0.67
Money market savings 953,415 7,798 1.09 856,676 22,840 3.56
Savings certificates 1,197,130 35,678 3.98 1,260,629 54,751 5.81
Certificates over $100,000 272,241 7,977 3.92 287,102 12,843 5.98
-------- ------- ----- ------- ------
Total Interest Bearing Deposits 3,075,904 53,526 2.33 2,920,682 93,980 4.30
--------- ------ --------- ------
Total Deposits 3,642,020 3,370,948
Short-term borrowings 412,014 4,906 1.59 454,138 15,384 4.53
Long-term debt 352,632 15,452 5.86 239,963 11,699 6.52
Company obligated mandatorily redeemable
preferred securities 76,500 5,380 9.40 45,300 3,192 9.42
------ ----- ------ -----
Total Interest Bearing Liabilities $3,917,050 $79,264 2.71 % $3,660,083 $ 124,255 4.54 %
Other noninterest bearing liabilities 54,929 60,409
------ ------
Total Liabilities 4,538,095 4,170,758
Minority Interest 150 150
Redeemable Class A Common Stock 32,687 29,577
Shareholders' equity 375,902 340,136
------- -------
Total Liabilities and Equity $4,946,834 $4,540,621
========== ==========
Net interest income $152,969 $ 130,079
======== =========
Net interest spread 4.02 % 3.49 %
Net interest margin 4.43 % 4.10 %
(1) Interest income includes $6,257 and $6,020 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:
Nine Months Ended September 30,
-------------------------------
2002 vs. 2001
-------------
Increase (Decrease)
Due to Change in
----------------
Volume Rate Total
------ ---- -----
(in thousands)
Interest earning assets:
Loans and leases (1) $ 23,817 $ (39,786) $ (15,969)
Taxable securities 547 (5,932) (5,385)
Tax-exempt securities (1) (269) (124) (393)
Federal funds sold (4) (301) (305)
Other interest earning assets (19) (30) (49)
--- --- ---
Total interest earning assets $ 24,072 $ (46,173) $ (22,101)
======== ========= =========
Interest bearing liabilities:
Savings and NOW accounts $ 444 $ (1,427) $ (983)
Money market accounts 4,045 (19,577) (15,532)
Savings certificates (3,422) (20,517) (23,939)
Short-term borrowings (1,427) (9,051) (10,478)
Long-term debt 5,493 (1,740) 3,753
Mandatorily redeemable preferred securities 2,198 (10) 2,188
----- --- -----
Total interest bearing liabilities 7,331 (52,322) (44,991)
----- ------- -------
Change in net interest income $ 16,741 $ 6,149 $ 22,890
======== ======= ========
(1) Interest income includes $6,257 and $6,020 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 $4.1 million for the third quarter of 2002 from $3.0 million for
the same quarter in 2001. On a year-to-date basis, the provision for credit
losses increased to $11.0 million in 2002 from $7.9 million for the first nine
months of 2001. The provision for credit losses has been increased in 2002
primarily to increase the reserve for loans losses allocated to 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. These customers include major U.S.
airlines which have obligations to the Company under airline leases in the
15
amount of $22.0 million as of September 30, 2002. Net charge-offs were $3.5
million during the third quarter of 2002 compared to $1.8 million for the same
period in 2001 and $6.7 million during the first nine months of 2002 compared to
$5.3 million for the same period in 2001. Of the $3.5 million of net charge offs
for the third quarter, $2.0 million was related to a single commercial real
estate credit. 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 $1.2 million, or 7.04%, to
$18.0 million for the third quarter of 2002 compared to $16.8 million for the
third quarter of 2001. On a year-to-date basis, noninterest income was $54.1
million, a $5.6 million, or 11.5% increase over the $48.5 million recorded in
the first nine months of 2001. Service charges increased by $1.7 million or
8.7%, to $21.4 million in the first nine months of 2002 from $19.7 million in
the first nine months of 2001. Gain on sale of loans increased by $1.3 million,
or 21.2%, to $7.2 million in the first nine months of 2002 from $5.9 million in
the first nine months of 2001 as residential mortgage loan activity remained
strong. Also contributing to the $5.6 million year-to-date increase in
noninterest income were increases of $ 674 thousand, or 20.7%, in brokerage fees
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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Service charges $ 7,619 $ 6,962 $ 21,377 $ 19,671
Insurance 2,510 2,323 7,180 6,908
Trust 2,247 2,304 7,048 6,983
Brokerage 1,214 1,051 3,932 3,258
Gain on sale of loans 2,891 2,309 7,192 5,934
Other recurring noninterest income 1,205 1,032 4,019 3,455
----- ----- ----- -----
Recurring noninterest income 17,686 15,981 50,748 46,209
Gain on sale of other assets 1 64 1,060 151
Gain on sale of securities 318 776 2,244 2,115
--- --- ----- -----
Total noninterest income $ 18,005 $ 16,821 $ 54,052 $ 48,475
======== ======== ======== ========
Noninterest Expense. Noninterest expense increased $3.1 million, or 8.2%, to
$41.0 million in the third quarter of 2002 from $37.9 million in the third
quarter of 2001. On a year-to-date basis, total noninterest expense increased
$13.1 million or 12.2%, to $120.1 million in 2002 from $107.0 million in 2001.
Ongoing operating costs and the amortization of intangibles related to the
branch acquisition contributed to the higher noninterest expense when comparing
the year-to-date 2002 results to the same periods in 2001. Employee benefit
expenses increased $3.1 million, or 26.0%, to $14.7 million in the first nine
months of 2002 from $11.6 million for the first nine months of 2001, primarily
as a result of increased employee medical insurance and pension costs.
16
The following table summarizes the components of noninterest expense:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Salaries and wages $18,215 $ 16,889 $ 53,650 $ 47,647
Employee benefits 5,241 4,075 14,663 11,636
Occupancy 2,593 2,549 7,739 7,075
Furniture and equipment 2,505 2,498 7,252 7,316
Printing, postage and telephone 1,551 1,638 4,702 4,813
Marketing 1,421 1,539 4,543 5,030
Data processing fees 2,257 2,105 6,777 6,226
Professional fees 1,271 871 3,358 2,539
Other real estate owned 23 14 61 88
FDIC premiums and examination fees 431 435 1,317 1,193
Amortization of goodwill and other intangibles 2,096 2,100 6,288 4,553
Other noninterest expense 3,381 3,169 9,773 8,928
----- ----- ----- -----
Total noninterest expense $40,985 $37,882 $120,123 $107,044
======= ======= ======== ========
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 55.5% for
the third quarter of 2002 compared to 56.1% for the third quarter of 2001. On a
year-to-date basis, the ratio was 55.8% for the nine months ending September 30,
2002 compared to 58.0% for the same period in 2001.
Income Taxes. The provision for income taxes was $7.6 million for the quarter
ended September 30, 2002 compared to $7.5 million for the same period in 2001.
On a year-to-date basis, the provision for income taxes increased to $23.2
million in 2002 from $19.8 million in 2001. Comparing the third quarter of 2002
to the same period in 2001, our effective tax rate decreased to 33.1% from
34.6%, primarily as a result of lower taxable income calculated at the state
level. Our effective tax rate decreased to 33.3% for the first nine months of
2002 from 34.4% 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 September 30, 2002 At December 31, 2001
--------------------- --------------------
Percent of Percent of
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(in thousands)
Commercial and other $ 866,594 23.7 % $ 883,099 25.2 %
Commercial real estate 1,016,225 27.7 957,318 27.3
- Construction 74,787 2.1 83,388 2.4
Agricultural 454,617 12.5 417,069 11.9
Residential real estate 757,614 20.8 708,334 20.2
- Construction 23,087 0.6 19,300 0.6
Consumer 341,684 9.4 334,472 9.6
Tax-exempt 115,392 3.2 97,308 2.8
------- --- ------ ---
Total $ 3,650,000 100.0 % $ 3,500,288 100.0 %
=========== ===== =========== =====
Our total loan and lease portfolio was $3.7 billion at September 30, 2002
compared to $3.5 billion at December 31, 2001. Commercial real estate loans
increased by $58.9 million, or 6.2%, during the first nine months of 2002, with
about two-thirds of the increase taking place in the Twin Cities market.
Residential real estate loans increased by $49.3 million, or 7.0%, with all of
the increase in the home equity portion of the real estate portfolio.
Agricultural loans increased by $37.5 million, or 9.0%, during the first nine
months of 2002, with the increase being primarily seasonal in nature. Tax-exempt
loans increased by $18.1 million, or 18.6%, with most of the increase due to a
single new loan to finance a medical facility expansion. Commercial loans
declined by $16.5 million, or 1.9%, during the first nine months of 2002 due to
a combination of competitive conditions in this market and a generally weak
economic environment that slowed the level of new loan advances to current
customers.
Nonperforming Assets. Nonperforming assets include nonaccrual loans,
restructured loans and other real estate owned. Nonperforming assets were $29.9
million at September 30, 2002, an increase of $7.5 million or 33.5% from the
$22.4 million level at December 31, 2001. Nonperforming assets as a percentage
of total loans, leases and OREO increased to .82% as of September 30, 2002 from
..64% as of December 31, 2001. These increases are primarily in the commercial
component of the portfolio and are largely the result of a weaker economic
environment. Accruing loans and leases 90 days or more past due totaled $2.5
million at September 30, 2002 compared to $3.0 million at December 31, 2001.
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Our nonperforming assets are summarized in the following table:
September 30 December 31
------------ -----------
2002 2001
---- ----
(dollars in thousands)
Nonaccrual loans and leases $ 27,518 $ 20,257
Restructured loans and leases 587 499
--- ---
Total nonperforming loans and leases 28,105 20,756
Other real estate owned (OREO) 1,829 1,616
----- -----
Total nonperforming assets $ 29,934 $ 22,372
======== ========
Accruing loans and leases 90 days or more past due $ 2,507 $ 2,995
======= =======
Nonperforming loans and leases to total loans and leases 0.77 % 0.60 %
Nonperforming assets to total loans, leases and OREO 0.82 0.64
Nonperforming assets and accruing loans and leases 90
days or more past due to total loans, leases and OREO 0.89 0.72
Reserve for Credit Losses. At September 30, 2002, the reserve for credit losses
was $58.0 million, an increase of $4.2 million or 7.9% from the balance of $53.7
million at December 31, 2001. At September 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Balance at beginning of period $ 57,385 $ 51,396 $ 53,716 $ 45,895
Charge-offs:
Commercial and other 508 1,432 3,427 3,990
Commercial real estate 2,468 24 2,510 128
Agricultural 198 110 302 358
Residential real estate 147 35 210 227
Consumer 617 721 1,803 1,740
--- --- ----- -----
Total charge-offs 3,938 2,322 8,252 6,443
Recoveries:
Commercial and other 169 216 753 427
Commercial real estate 5 46 92 91
Construction - - 4 -
Agricultural 46 52 113 239
Residential real estate 36 3 66 20
Consumer 134 178 481 388
--- --- --- ---
Total recoveries 390 495 1,509 1,165
--- --- ----- -----
Net charge-offs 3,548 1,827 6,743 5,278
Provision for credit losses 4,126 2,964 10,990 7,916
Reserve related to acquired assets - - - 4,000
----- ----- ----- -----
Balance at end of period $ 57,963 $ 52,533 $ 57,963 $ 52,533
========== ========== ========== ==========
Average loans and leases $3,595,962 $3,380,521 $3,507,021 $3,138,061
Annualized net charge-offs to average loans and leases 0.39 % 0.22 % 0.26 % 0.22 %
--------------------------------
Reserve as a percentage of:
Period-end loans and leases 1.59 % 1.54 %
Nonperforming loans and leases 206.24 274.95
Nonperforming assets 193.64 263.18
20
Securities. Our investment portfolio, including available-for-sale securities
and held-to-maturity securities, decreased by $86.4 million to $1.1 billion at
September 30, 2002 from $1.2 billion at December 31, 2001. We sold $211.9
million in securities during the first nine months of 2002, resulting in a $2.2
million gain on sale of securities. An additional $290.4 million in securities
matured during the first nine months of 2002. We reinvested $404.9 million of
the total proceeds from sales and maturities in other securities during the
first nine months of the year and utilized the rest of the funds received to
fund loan growth during the year.
Deposits. Total deposits were $3.7 billion at September 30, 2002 compared to
$3.8 billion at December 31, 2001. Noninterest bearing deposits increased $11.9
million, or 1.8%, to $668.5 million at September 30, 2002 from $656.7 million at
December 31, 2001. Interest bearing deposits decreased $143.0 million, or 4.5%,
to $3.0 billion at September 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 $64.6 million or 14.4% to $513.5 million at September 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 $102.2 million
to $350.8 million at September 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
September 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 September 30, 2002:
Minimum Requirements
--------------------
September 30 December 31 Well Adequately
2002 2001 Capitalized Capitalized
---- ---- ----------- -----------
Tier I capital to risk-weighted assets 10.70 % 9.94 % 6.00 % 4.00 %
Total capital to risk-weighted assets 11.96 11.19 10.00 8.00
Tier I capital to average tangible assets 8.01 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 September 30, 2002.
Commitments and Contingencies. We are nearing the completion of construction 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 2002. Our 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.
Item 4. Controls and Procedures
Our management, including the Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the design and operation of our
disclosure controls and procedures within 90 days of the filing of this
quarterly report, and, based on their evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that these disclosure controls and
procedures are effective. There were no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
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
September 30, 2002 or during the period from September 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: November 12, 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
I, Stan K. Dardis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bremer Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
25
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
----------------------
/s/ Stan K. Dardis
-----------------------------
Stan K. Dardis
President and
Chief Executive Officer
Bremer Financial Corporation
26
I, Robert B. Buck, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bremer Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
27
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
--------------------------------------
/s/ Robert B. Buck
----------------------
Robert B. Buck
Chief Financial Officer
Bremer Financial Corporation
28