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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2003.
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
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(651) 227-7621
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable.
- --------------------------------------------------------------------------------
(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 _____
--------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes ______ No__X__
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 March 31, 2003, 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 March 31,
----------------------------
2003 2002 Change
---- ---- ------
Operating Results:
Total interest income $ 68,845 $ 75,365 (8.65) %
Total interest expense 22,768 27,573 (17.43)
------ ------
Net interest income 46,077 47,792 (3.59)
Provision for credit losses 3,478 3,937 (11.66)
----- -----
Net interest income after provision for credit losses 42,599 43,855 (2.86)
Noninterest income 22,805 19,309 18.11
Noninterest expense 40,886 38,204 7.02
------ ------
Income before income tax expense 24,518 24,960 (1.77)
Income tax expense 8,330 8,449 (1.41)
----- -----
Net income $ 16,188 $ 16,511 (1.95) %
========== ==========
Net income per share $ 1.35 $ 1.38 (1.95) %
Dividends paid per share 0.45 0.40 12.50
Tax equivalent net interest income $ 48,071 $ 49,890 (3.65) %
Net charge-offs 1,007 2,272 (55.70)
Selected Financial Ratios:
Return on average assets 1.28 % 1.36 % (0.08)
Return on average equity (1) 15.02 16.99 (1.97)
Average equity to average assets (1) 8.54 8.02 0.52
Net interest margin (2) 4.10 4.42 (0.32)
Operating efficiency ratio (2)(3) 60.19 56.20 3.99
Net charge-offs to average loans and leases 0.11 0.27 (0.16)
March 31 March 31 December 31
2003 2002 2002 Change
---- ---- ---- ------
Balance Sheet Data:
Total assets $5,234,910 $4,925,947 6.27 % $5,259,543 (0.47) %
Securities (4) 1,131,415 1,142,680 (0.99) 1,126,501 0.44
Loans and leases (5) 3,720,464 3,461,905 7.47 3,679,669 1.11
Total deposits 3,720,139 3,658,352 1.69 3,750,329 (0.80)
Short-term borrowings 457,854 397,608 15.15 511,476 (10.48)
Long-term debt 415,657 340,789 21.97 417,678 (0.48)
Mandatorily redeemable preferred securities 76,500 76,500 - 76,500 -
Total shareholders' equity and redeemable Class A
common stock 440,190 398,534 10.45 434,096 1.40
Per share book value of common stock 36.68 33.21 10.45 36.17 1.40
Asset Quality:
Reserve for credit losses $ 61,270 $ 55,381 10.63 % $ 58,799 4.20 %
Nonperforming assets 35,234 29,831 18.11 31,910 10.42
Nonperforming assets to total loans, leases
and OREO 0.95 % 0.86 % 0.09 0.87 % 0.08
Reserve to nonperforming loans and leases 185.65 194.94 (9.29) 202.02 (16.37)
Reserve to total loans and leases 1.65 1.60 0.05 1.60 0.05
- ------------------------
(1) Calculation includes shareholders' equity and redeemable class A common stock.
(2) Tax-equivalent basis.
(3) Calculation excludes nonrecurring gains and losses, other nonrecurring noninterest income and amortization of intangibles.
(4) Includes securities held-to-maturity and securities available-for-sale.
(5) 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 March 31,
----------------------------
2003 2002
---- ----
Average Average
Average Rate/ Average Rate/
Balance Yield (1) Balance Yield (1)
------- --------- ------- ---------
Summary Average Balance Sheet:
Total loans and leases (2) $3,655,398 6.43 % $3,417,091 7.30 %
Total securities (3) 1,079,739 4.82 1,146,233 5.62
Total other earning assets 16,716 1.29 18,478 1.98
------ ------
Total interest earning assets (4) $4,751,853 6.05 % $4,581,802 6.86 %
Total noninterest earning assets 369,763 335,120
------- -------
Total assets $5,121,616 $4,916,922
========== ==========
Noninterest bearing deposits $ 621,303 $ 544,453
Interest bearing deposits 3,053,604 1.82 % 3,123,192 2.50 %
Short-term borrowings 449,882 1.31 377,460 1.62
Long-term debt 417,181 5.63 339,964 5.95
Mandatorily redeemable preferred securities 76,500 9.51 76,500 9.51
------ ------
Total interest bearing liabilities $3,997,167 2.31 % $3,917,116 2.85 %
Other noninterest bearing liabilities 65,854 60,981
Minority interest 150 150
Total shareholders' equity and redeemable
Class A common stock 437,142 394,222
------- -------
Total liabilities and equity $5,121,616 $4,916,922
========== ==========
Three months ended March 31,
----------------------------
2003 2002 $ Change % Change
---- ---- -------- --------
Summary Income Statement:
Total interest income $ 68,845 $ 75,365 $ (6,520) (8.65) %
Total interest expense 22,768 27,573 (4,805) (17.43)
------ ------ ------
Net interest income 46,077 47,792 (1,715) (3.59)
Provision for credit losses 3,478 3,937 (459) (11.66)
----- ----- ----
Net interest income after provision for credit losses 42,599 43,855 (1,256) (2.86)
Service charges 7,098 6,641 457 6.88
Insurance 2,238 2,408 (170) (7.06)
Trust 2,340 2,397 (57) (2.38)
Brokerage 1,237 1,386 (149) (10.75)
Gain on sale of loans 4,312 2,363 1,949 82.48
Gain on sale of securities 4,202 1,600 2,602 NM
Other 1,378 2,514 (1,136) (45.19)
----- ----- ------
Total noninterest income 22,805 19,309 3,496 18.11
Salaries and wages 18,288 17,494 794 4.54
Employee benefits 6,171 4,862 1,309 26.92
Occupancy 2,789 2,573 216 8.39
Furniture and equipment 2,612 2,406 206 8.56
Data processing fees 2,485 2,179 306 14.04
FDIC premiums and examination fees 437 448 (11) (2.46)
Amortization of intangibles 717 747 (30) (4.02)
Other 7,387 7,495 (108) (1.44)
----- ----- ----
Total noninterest expense 40,886 38,204 2,682 7.02
------ ------ -----
Income before income tax expense 24,518 24,960 (442) (1.77)
Income tax expense 8,330 8,449 (119) (1.41)
----- ----- ----
Net income $ 16,188 $ 16,511 $ (323) (1.95) %
========== ======== ==========
- ----------------------------
(1) Calculation is based on interest income including $1,994 and $2,098 for the three months ending March 2003
and March 2002 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 MARCH 31, 2003
INDEX
PART I -- FINANCIAL INFORMATION Page
----
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk 24
Item 4. Controls and Procedures 24
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders. 24
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Exhibit 12.1 Statement Regarding Computation of Ratio of
Earnings to Fixed Charges
Exhibit 99.1 Certification Pursuant to 18 U.S.C.
Section 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 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
1
with the Annual Report on Form 10-K as Exhibit 99.1 on March 21, 2003, that
could cause actual results to differ materially from those expressed or implied
by these forward-looking statements.
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
March 31, December 31,
2003 2002
---- ----
(unaudited)
Assets
Cash and due from banks $ 188,876 $ 256,900
Interest bearing deposits 4,202 4,185
Investment securities available-for-sale 227,901 196,773
Mortgage-backed securities available-for-sale 744,879 766,315
------- -------
Total securities available-for-sale 972,780 963,088
Investment securities held-to-maturity
(fair value: 03/31/03 - $166,239, 12/31/02 - $171,233,
03/31/02 - $176,035 ) 158,635 163,413
Loans and leases 3,720,806 3,680,122
Reserve for credit losses (61,270) (58,799)
Unearned discount (342) (453)
---- ----
Net loans and leases 3,659,194 3,620,870
Interest receivable 32,957 33,854
Premises and equipment, net 83,024 82,152
Goodwill 85,148 85,148
Other intangibles 20,124 21,025
Other assets 29,970 28,908
------ ------
Total assets $5,234,910 $5,259,543
========== ==========
Liabilities and Shareholders' Equity
Noninterest bearing deposits $ 664,921 $ 724,102
Interest bearing deposits 3,055,218 3,026,227
--------- ---------
Total deposits 3,720,139 3,750,329
Federal funds purchased and repurchase agreements 446,801 449,970
Other short-term borrowings 11,053 61,506
Long-term debt 415,657 417,678
Company obligated mandatorily redeemable
preferred securities of subsidiary trusts
holding junior subordinated debentures 76,500 76,500
Accrued expenses and other liabilities 124,420 69,314
------- ------
Total liabilities 4,794,570 4,825,297
Minority interests 150 150
Redeemable class A common stock, 960,000 shares
issued and outstanding 35,215 34,728
Shareholders' equity
Common stock
Class A, no par, 12,000,000 shares authorized;
240,000 shares issued and outstanding 57 57
Class B, no par, 10,800,000 shares authorized,
issued and outstanding 2,562 2,562
Retained earnings 399,923 389,998
Accumulated other comprehensive income 2,433 6,751
----- -----
Total shareholders' equity 404,975 399,368
------- -------
Total liabilities and shareholders' equity $5,234,910 $5,259,543
========== ==========
See notes to consolidated financial statements.
3
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
For the Three Months Ended
March 31
2003 2002
---- ----
Interest income
Loans and leases, including fees $ 57,132 $ 60,762
Securities
Taxable 9,412 11,868
Tax-exempt 2,248 2,645
Federal funds sold 36 57
Other 17 33
-- --
Total interest income 68,845 75,365
------ ------
Interest expense
Deposits 13,737 19,284
Federal funds purchased and repurchase agreements 1,275 1,291
Other short term borrowings 173 220
Long term debt 5,790 4,985
Company-obligated manditorily redeemable
preferred securities of subsidiary trusts
holding junior subordinated debentures 1,793 1,793
----- -----
Total interest expense 22,768 27,573
------ ------
Net interest income 46,077 47,792
Provision for credit losses 3,478 3,937
----- -----
Net interest income after provision for credit losses 42,599 43,855
------ ------
Noninterest income
Service charges 7,098 6,641
Insurance 2,238 2,408
Trust 2,340 2,397
Brokerage 1,237 1,386
Gain on sale of loans 4,312 2,363
Gain on sale of securities 4,202 1,600
Other 1,378 2,514
----- -----
Total noninterest income 22,805 19,309
------ ------
Noninterest expense
Salaries and wages 18,288 17,494
Employee benefits 6,171 4,862
Occupancy 2,789 2,573
Furniture and equipment 2,612 2,406
Data processing fees 2,485 2,179
FDIC premiums and examination fees 437 448
Amortization of intangibles 717 747
Other 7,387 7,495
----- -----
Total noninterest expense 40,886 38,204
------ ------
Income before income tax expense 24,518 24,960
Income tax expense 8,330 8,449
----- -----
Net income $ 16,188 $ 16,511
======== ========
Per common share amounts:
Net income-basic and diluted $ 1.35 $ 1.38
Dividends paid 0.45 0.40
See notes to consolidated financial statements.
4
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)
( in thousands, except per share amounts)
Accumulated
Common Stock Other
------------ Comprehensive Comprehensive Retained
Class A Class B Income (Loss) Income Earnings Total
------- ------- ------------- ------ -------- -----
For the Three Months Ended March 31, 2002
Balance, December 31, 2001 $ 57 $ 2,562 $ 4,603 $351,497 $358,719
Comprehensive income
Net income $ 16,511 16,511 16,511
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding losses arising during the period,
net of tax (2,129) (2,129)
Less: Reclassified adjustment for gains included in income,
net of tax (960) (960)
---- ----
Other comprehensive income (3,089) (3,089) (3,089)
------
Comprehensive income $ 13,422
========
Dividends, $.40 per share (4,800) (4,800)
Allocation of net income in excess of dividends and other
comprehensive income to redeemable class A common stock 247 (937) (690)
--- ------- ----- ------- -------
Balance, March 31, 2002 $ 57 $ 2,5627 $ 1,761 $362,271 $366,651
==== ======== ======= ======== ========
For the Three Months Ended March 31, 2003
Balance, December 31, 2002 $ 57 $ 2,562 $ 6,751 $389,998 $399,368
Comprehensive income
Net income $ 16,188 16,188 16,188
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding losses arising during the period,
net of tax (2,173) (2,173)
Less: Reclassified adjustment for gains included in income,
net of tax (2,521) (2,521)
------ ------
Other comprehensive income (4,694) (4,694) (4,694)
------
Comprehensive income $ 11,494
========
Dividends, $.45 per share (5,400) (5,400)
Allocation of net income in excess of dividends and other
comprehensive income to redeemable class A common stock 376 (863) (487)
--- ----- ----- ------- -------
Balance, March 31, 2003 $ 57 $ 2,562 $ 2,433 $399,923 $404,975
==== ======= ======= ======== ========
See notes to consolidated financial statements.
5
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the Three Months
Ended March 31,
---------------
2003 2002
---- ----
Cash flows from operating activities
Net income $ 16,188 $16,511
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 3,478 3,937
Depreciation and amortization 3,988 3,450
Gain on sale of securities (4,202) (1,600)
Gain on sale of other real estate owned, net (41) (138)
Other assets and liabilities, net 56,834 (6,995)
Gain on sale of loans 4,312 2,363
Proceeds from loans originated for sale 176,662 60,636
Loans originated for sale (162,095) (46,795)
-------- -------
Net cash provided by operating activities 95,124 31,369
Cash flows from investing activities
Interest bearing deposits, net (17) 39
Purchases of mortgage-backed securities (160,364) (90,888)
Purchases of available-for-sale investment securities (57,977) (75,275)
Purchases of held-to-maturity securities (2,522) (2,543)
Proceeds from maturities of mortgage-backed securities 95,486 84,636
Proceeds from maturities of available-for-sale investment securities 7,668 18,537
Proceeds from maturities of held-to-maturity securities 7,300 10,054
Proceeds from sales of mortage-backed securities 78,474 -
Proceeds from sales of available-for-sale investment securities 23,401 110,899
Proceeds from sales of other real estate owned 272 406
Loans and leases, net (60,681) 18,458
Purchase of premises and equipment (2,955) (3,171)
------ ------
Net cash (used in) provided by investing activities (71,915) 71,152
Cash flows from financing activities
Noninterest bearing deposits, net (59,181) (94,099)
Savings, NOW and money market accounts, net 114,144 (25,873)
Certificates of deposits, net (85,153) (27,694)
Federal funds purchased and repurchase agreements,net (3,169) (770)
Other short-term borrowings, net (50,453) (50,534)
Proceeds from issuance of long-term debt - 25,000
Repayments of long-term debt (2,021) (134)
Common stock dividends paid (5,400) (4,800)
------ ------
Net cash used in financing activities (91,233) (178,904)
------- --------
Net decrease in cash and due from banks (68,024) (76,383)
Cash and due from banks at beginning of period 256,900 213,101
------- -------
Cash and due from banks at end of period $ 188,876 $136,718
========= ========
See notes to consolidated financial statements.
6
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, 2002
included in its Annual Report on Form 10-K for that year filed on March 21,
2003.
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 fair 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.
7
Note F: Redeemable Class A Common Stock
At March 31, 2003, 960,000 shares of redeemable class A stock were issued and
outstanding. At March 31, 2003, these shares were subject to redemption at a
price of $36.68 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. During the period from January 1, 2003 through March 31,
2003, we did not directly purchase any shares of class A common stock but
assigned to various parties our options that arose during that period to
purchase a total of 33,767.8806 shares. These options were assigned to the
Bremer Financial Corporation Employee Stock Ownership Plan ("ESOP") (2,008.7076
shares), the Bremer Banks Profit Sharing Plus Plan (6,160.1730 shares), and
executives and directors under the Executive Stock Purchase Plan (25,599.0000
shares). To the best of our knowledge, shares purchased by these parties upon
exercise of these assigned options were the only transfers of shares of class A
common stock effected during the period from January 1, 2003 through March 31,
2003.
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 three months of 2003 of
$11.5 million, compared to the $13.4 million reported for the same period in
2002. 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 and the change in the minimum pension liability.
Note I: Goodwill and Intangible Assets
Intangible assets consist of goodwill, core deposit intangibles, and other
intangibles. The remaining unamortized balances at March 31, 2003 and 2002 were
approximately $105.3 million and $108.1 million. The core deposit and other
intangibles have remaining amortization lives of 5 to 10 years. Goodwill is not
amortized but is tested regularly for impairment. On January 1,
8
2002, the Company adopted 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. 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 performed its annual
impairment assessment on its goodwill assets and no impairment loss was recorded
as a result of this test.
In October 2002, the Financial Accounting Standards Board ("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 Accounting Principles Board Opinion ("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.
9
The following table presents relevant information about the Company's amortized
and unamortized intangible assets:
As of March 31, 2003
--------------------
Gross Carrying Accumulated
Amount Amortization
------ ------------
Amortized intangible assets
Core deposit premium $ 21,313 $ 5,363
Other 7,862 3,688
----- -----
Total $ 29,175 $ 9,051
======== =======
Unamortized intangible assets
Goodwill $ 85,148
--------
Total $ 85,148
========
As of March 31, 2002
--------------------
Gross Carrying Accumulated
Amount Amortization
------ ------------
Amortized intangible assets
Core deposit premium $ 21,313 $ 2,799
Other 6,457 1,984
----- -----
Total $ 27,770 $ 4,783
======== =======
Unamortized intangible assets
Goodwill $ 85,148
--------
Total $ 85,148
========
The Company recorded aggregate intangible amortization expense of $716.6
thousand for the three months ended March 31, 2003 and $746.8 thousand for the
three months ended March 31, 2002. The estimated amortization expense for each
of the next five years is approximately $2.6 million.
Note J: Accounting for Asset Retirement Obligations
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 adopted SFAS No. 143 on January 1, 2003,
and the adoption did not have a material impact on its financial position or
results of operations.
10
Note K: Recent Accounting Pronouncements
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies the
requirements for a guarantor's accounting for and disclosure of certain
guarantees issued and outstanding. The initial recognition and initial
measurement provisions of FIN No. 45 are applicable to guarantees issued or
modified after December 31, 2002. The disclosure requirements of FIN No. 45 are
effective for financial statements of interim or annual periods after December
15, 2002. The adoption of FIN No. 45 did not have a significant impact on the
Company's financial statement disclosures, consolidated balance sheet, or
results of operations.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an interpretation of Account Research Bulletin No. 51, Consolidated
Financial Statements." FIN No. 46 explains how to identify variable interest
entities and how an enterprise assesses its interests in a variable interest
entity to decide whether to consolidate that entity. This Interpretation
requires existing unconsolidated variable interest entities to be consolidated
by their primary beneficiaries if the entities do not effectively disperse risks
among parties involved. FIN No. 46 is effective immediately for variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. The
Interpretation applies in the first fiscal quarter beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company does not
anticipate that the adoption of FIN No. 46 will have a material effect on its
financial position or results of operations.
Note L: 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 table represents the outstanding obligations:
March 31 December 31
-------- -----------
2003 2002
---- ----
(in thousands)
Standby letters of credit $ 49,930 $ 37,245
Loan commitments 1,109,471 1,040,027
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.
11
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 $4.8 million in annual data processing and item processing fees to
a third party provider through May 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 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.
12
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. A summary
of our significant accounting policies can be found in the footnotes to the
consolidated financial statements, and many of these policies are relatively
straightforward. However, management has identified the accounting policies
described below as those that, due to the judgments, estimates and assumptions
inherent in these policies, are critical to an understanding of our consolidated
financial statements and management's discussion and analysis.
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. In general, determining the amount of the reserve
for credit losses requires significant judgment and the use of estimates by
management. We maintain an allowance for credit losses to absorb probable losses
in the loan and lease portfolio based on a quarterly analysis of the portfolio
and expected future losses. 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.
Investment Securities. Purchased investment securities are recorded at cost,
which includes premiums and discounts if purchased at other than par or face
value. We amortize premiums and discounts as an adjustment to interest income
using the effective interest method over the estimated life of the security. The
cost of investment securities sold, and any resulting gain or loss, is based on
the specific identification method.
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 ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." As of March 31, 2003, 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. Available-for-sale
securities consist of debt and equity securities that will be held for
indefinite periods of time, including securities that may be sold in response to
changes in market interest or prepayment rates, needs for liquidity, or changes
in the availability or yield of alternative investments. These securities are
valued at fair value with the resulting unrealized holding gains and
losses excluded from earnings and
13
reported, net of tax, and the resultant allocation to redeemable class A common
stock reflected as a separate component of shareholders' equity until realized.
Gains or losses on these securities are computed based on the amortized cost of
the specific securities when sold.
Management periodically evaluates investment securities for other than temporary
declines in fair value. Declines in fair value of individual investment
securities below their amortized cost that are deemed to be other than temporary
will be written down to current market value and included in earnings as
realized losses. There were no investment securities which management identified
to be other-than-temporarily impaired for the period ended March 31, 2003. If
the financial markets experience deterioration and investments decline in fair
value, charges to income could occur in future periods.
Interest Income Recognition. We recognize interest income by methods that
conform to general accounting practices within the banking industry. Interest
income is accrued on loan and lease balances based on the principal amount
outstanding. Loans and leases are reviewed regularly by management and placed on
nonaccrual status when the collection of interest or principal is unlikely. The
accrual of interest on loans and leases is suspended when the credit becomes 90
days or more past due, unless the loan or lease is fully secured and in the
process of collection. Thereafter, no interest is recognized as income unless
received in cash or until such time the borrower demonstrates the ability to pay
interest and principal.
Goodwill and Other Intangible Assets. SFAS No. 142, "Accounting for Goodwill and
Other Intangible Assets," establishes standards for the amortization of acquired
intangible assets and the non-amortization and impairment assessment of
goodwill. In addition, SFAS No. 147, "Acquisitions of Certain Financial
Institutions," establishes standards for unidentifiable intangible assets
acquired specifically in branch purchases that qualify as business combinations.
At March 31, 2003, we had $85.1 million of goodwill, which is not subject to
periodic amortization, and $20.1 million in other intangible assets, which is
subject to periodic amortization.
Goodwill arising from business combinations represents the value attributable to
unidentifiable intangible elements in the business acquired. Our recorded
goodwill relates to value inherent in the banking business, and the value is
dependent upon our ability to provide quality, cost effective services in a
competitive market place. As such, goodwill value is supported ultimately by
revenue that is driven by the volume of business transacted. A decline in
revenue as a result of a lack of growth or the inability to deliver cost
effective services over sustained periods can lead to impairment of goodwill
that could adversely impact earnings in future periods.
Under accounting principles generally accepted in the United States of America
in effect through December 31, 2001, we amortized goodwill on a straight-line
basis over periods ranging from 15 to 25 years. Effective January 1, 2002, we no
longer were required to amortize previously recorded goodwill as a result of
adopting SFAS No. 142 and SFAS No. 147.
We performed the annual impairment test on our goodwill assets and have
concluded that the recorded value of goodwill was not impaired as of March 31,
2003. There are many assumptions and estimates underlying the determination of
impairment. Another estimate using different, but
14
still reasonable, assumptions could produce a significantly different result.
Additionally, future events could cause management to conclude impairment
indicators exist and our goodwill is impaired, which would result in us
recording an impairment loss. Any resulting impairment loss could have a
material adverse impact on our financial condition and results of operations.
Overview
Earnings. We reported net income of $16.2 million or $1.35 basic and diluted
earnings per share for the first quarter of 2003. This compares to $16.5 million
or $1.38 basic and diluted earnings per share in the first quarter of 2002.
Return on average equity was 15.02% for the first quarter of 2003 compared to
16.99% for the same quarter of 2002. Return on average assets decreased to 1.28%
in the first quarter of 2003 from 1.36% in the first quarter of 2002.
Results of Operations
Net Interest Income. Net interest income for the first quarter of 2003 was $46.1
million, a decrease of 3.6% from the $47.8 million reported for the same period
a year ago, as our net interest margin decreased to 4.10% in the first quarter
of 2003 from 4.42% in the first quarter of 2002. The decline in net interest
margin, which was primarily due to the effects of historically low interest
rates, is expected to continue during the second and third quarters of 2003. The
average yield on our earning assets declined by 81 basis points when comparing
the first quarter of 2003 with the first quarter of 2002. Largely as a result of
competitive pressure in deposit markets, we were able to reduce the average cost
of our interest bearing liabilities by only 54 basis points when comparing the
same two periods. Net interest income for the quarter was positively impacted by
a $238 million or 7.0% increase in average loans and leases, to $3.7 billion in
the first quarter of 2003 from $3.4 billion in the first quarter of 2002.
15
The following table sets 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 table shows resultant yields or costs, net
interest income, net interest spread, and net interest margin:
For the Three Months Ended March 31,
------------------------------------
(unaudited)
2003 2002
---- ----
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 $ 869,436 $ 12,358 5.76% $ 845,973 $ 13,690 6.56%
Commercial real estate 1,146,744 18,802 6.65 1,034,829 18,992 7.44
Agricultural 411,723 6,312 6.22 390,046 6,888 7.16
Residential real estate 773,516 11,978 6.28 714,368 12,977 7.37
Consumer 335,148 6,092 7.37 334,994 6,817 8.25
Tax-exempt 118,831 2,416 8.25 96,881 2,125 8.90
------- ----- ------ -----
Total Loans and Leases 3,655,398 57,958 6.43 3,417,091 61,489 7.30
Reserve for Credit Losses (60,062) (54,952)
------- -------
Net Loans and Leases 3,595,336 3,362,139
Securities (3)
Mortgage-backed 719,097 8,168 4.61 765,482 10,579 5.60
Other taxable 178,870 1,244 2.82 167,153 1,289 3.13
Tax-exempt 181,772 3,416 7.62 213,598 4,016 7.63
------- ----- ------- -----
Total Securities 1,079,739 12,828 4.82 1,146,233 15,884 5.62
Federal funds sold 12,523 36 1.17 14,242 57 1.62
Other earning assets 4,193 17 1.64 4,236 33 3.16
----- -- ----- --
16,716 53 1.29 18,478 90 1.98
Total Earning Assets (4) $ 4,751,853 $ 70,839 6.05% $ 4,581,802 $ 77,463 6.86%
Cash and due from banks 148,553 138,262
Other non interest earning assets 281,272 251,810
------- -------
Total Assets $ 5,121,616 $ 4,916,922
=========== ===========
Liabilities and Shareholders' Equity
Noninterest bearing deposits $ 621,303 $ 544,453
Interest bearing deposits
Savings and NOW accounts 466,125 $ 410 0.36% 410,716 $ 524 0.52%
Money market checking 248,961 97 0.16 235,529 149 0.26
Money market savings 1,029,832 3,264 1.29 986,650 2,669 1.10
Savings certificates 1,067,008 8,162 3.10 1,221,395 13,106 4.35
Certificates over $100,000 241,678 1,804 3.03 268,902 2,836 4.28
------- ----- ------- -----
Total Interest Bearing Deposits 3,053,604 13,737 1.82 3,123,192 19,284 2.50
--------- ------ --------- ------
Total Deposits 3,674,907 3,667,645
Short-term borrowings 449,882 1,448 1.31 377,460 1,511 1.62
Long-term debt 417,181 5,790 5.63 339,964 4,985 5.95
Company obligated mandatorily redeemable
preferred securities 76,500 1,793 9.51 76,500 1,793 9.51
------ ----- ------ -----
Total Interest Bearing Liabilities $ 3,997,167 $ 22,768 2.31% $ 3,917,116 $ 27,573 2.85%
Other noninterest bearing liabilities 65,854 60,981
------ ------
Total Liabilities 4,684,324 4,522,550
Minority Interest 150 150
Redeemable Class A Common Stock 34,971 31,538
Shareholders' equity 402,171 362,684
------- -------
Total Liabilities and Equity $ 5,121,616 $ 4,916,922
=========== ===========
Net interest income $ 48,071 $ 49,890
======== ========
Net interest spread 3.74% 4.00%
Net interest margin 4.10% 4.42%
- --------------------------------
(1) Interest income includes $1,994 and $2,098 in 2003 and 2002 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.
16
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:
Three Months Ended March 31,
----------------------------
2003 vs. 2002
-------------
Increase (Decrease)
Due to Change in
----------------
Volume Rate Total
------ ---- -----
(in thousands)
Interest earning assets:
Loans and leases (1) $ 4,287 $ (7,818) $ (3,531)
Taxable securities (441) (2,015) (2,456)
Tax-exempt securities (1) (598) (2) (600)
Federal funds sold (7) (14) (21)
Other interest earning assets - (16) (16)
----- ----- -----
Total interest earning assets $ 3,241 $ (9,865) $ (6,624)
======= ======== ========
Interest bearing liabilities:
Savings and NOW accounts $ 36 $ (150) $ (114)
Money market accounts 193 350 543
Savings certificates (1,943) (4,033) (5,976)
Short-term borrowings 290 (353) (63)
Long-term debt 1,132 (327) 805
----- ---- ---
Total interest bearing liabilities (292) (4,513) (4,805)
---- ------ ------
Change in net interest income $ 3,533 $ (5,352) $ (1,819)
======= ======== ========
- --------------------
(1) Interest income includes $1,994 and $2,098 in 2003 and 2002 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
decreased to $3.5 million for the first quarter of 2003 from $3.9 million for
the same quarter in 2002. Net charge-offs were $1.0 million during the first
quarter of 2003 compared to $2.3 million for the same period in 2002. Our ratio
of reserve to total loans and leases increased slightly to 1.65% at March 31,
2003 from 1.60% at March 31, 2002. Our reserve coverage on nonperforming loans
and leases was 186% at March 31, 2003 and 195% at March 31, 2002. For further
discussion related to the allowance for credit losses, see the later
17
section entitled "- Financial Condition - Reserve for Credit Losses."
Noninterest Income. Noninterest income increased $3.5 million, or 18.1%, to
$22.8 million for the first quarter of 2003 compared to $19.3 million for the
first quarter of 2002. The most significant contributors to the increase in
noninterest income were gains on sale of loans and securities. Gain on sale of
loans increased by $1.9 million, or 82.5%, to $4.3 million for the first quarter
of 2003 from $2.4 million for the first quarter of 2002, as residential mortgage
loan activity remained strong due largely to the refinancing of mortgages by
customers. In order to better balance our interest rate risk position, we sold
shorter duration mortgage backed securities with high prepayment rates and
reinvested the proceeds in longer duration securities that better matched the
duration of our liabilities. These securities sales resulted in securities gains
of $4.2 million in the first quarter of 2003, compared to securities gains of
$1.6 million in the first quarter of 2002. Other noninterest income declined to
$1.4 million in the first quarter of 2003 from $2.5 million recorded in the
first quarter of 2002, as the first quarter of 2002 included more than $1.0
million of miscellaneous nonrecurring revenue.
The following table summarizes the components of noninterest income:
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Service charges $ 7,098 $ 6,641
Insurance 2,238 2,408
Trust 2,340 2,397
Brokerage 1,237 1,386
Gain on sale of loans 4,312 2,363
Other recurring noninterest income 1,319 1,485
----- -----
Recurring noninterest income 18,544 16,680
Gain on sale of other assets 59 1,029
Gain on sale of securities 4,202 1,600
----- -----
Total noninterest income $ 22,805 $ 19,309
======== ========
Noninterest Expense. Noninterest expense increased $2.7 million, or 7.0%, to
$40.9 million in the first quarter of 2003 from $38.2 million in the first
quarter of 2002. Employee benefit costs, primarily in the form of higher pension
expense and health care premiums, contributed most significantly to the increase
in noninterest expenses when comparing the first quarter of 2003 to the first
quarter of 2002.
18
The following table summarizes the components of noninterest expense:
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Salaries and wages $ 18,288 $ 17,494
Employee benefits 6,171 4,862
Occupancy 2,789 2,573
Furniture and equipment 2,612 2,406
Printing, postage and telephone 1,780 1,569
Marketing 1,919 1,766
Data processing fees 2,485 2,179
Professional fees 621 1,031
Other real estate owned 20 12
FDIC premiums and examination fees 437 448
Amortization of intangibles 717 747
Other noninterest expense 3,047 3,117
----- -----
Total noninterest expense $ 40,886 $ 38,204
======== ========
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 60.2% for
the first quarter of 2003 compared to 56.2% for the first quarter of 2002.
Income Taxes. The provision for income taxes was $8.3 million for the quarter
ended March 31, 2003 compared to $8.4 million for the same period in 2002.
Comparing the first quarter of 2003 to the same period in 2002, our effective
tax rate increased slightly to 34.0% from 33.9%.
Financial Condition
19
Loan and Lease Portfolio. The following table presents the components of our
gross loans and lease portfolio:
At March 31, 2003 At December 31, 2002
----------------- --------------------
Percent of Percent of
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(in thousands)
Commercial and other $ 917,904 24.7% $ 872,597 23.7%
Commercial real estate 1,101,349 29.6 1,052,194 28.6
- Construction 66,331 1.8 76,460 2.1
Agricultural 421,409 11.3 436,364 11.9
Residential real estate 740,669 19.9 768,068 20.9
- Construction 19,368 0.5 23,546 0.6
Consumer 333,107 9.0 332,428 9.0
Tax-exempt 120,669 3.2 118,465 3.2
------- --- ------- ---
Total $3,720,806 100.0% $3,680,122 100.0%
========== ===== ========== =====
Our total loan and lease portfolio was $3.7 billion at March 31, 2003 and at
December 31, 2002. Commercial loans increased by $45.3 million, or 5.2%, during
the first three months of 2003. Commercial real estate loans increased by $39.0
million, or 3.5%, during the first three months of 2003, with over one-third of
the increase taking place in the Twin Cities market and almost one-third of the
increase occurring in the Brainerd, Minnesota market. Residential real estate
loans decreased by $31.6 million, or 4.0%, with most of the decrease from the
sale of loans in the secondary market. These sales resulted in gains on sale of
loans of $4.3 million in the first quarter of 2003 as residential mortgage loan
activity remained strong due largely to the refinancing of mortgages by
customers. Agricultural loans decreased by $15.0 million, or 3.4%, during the
first three months of 2003, with the decrease being primarily seasonal in
nature. Tax-exempt loans increased by $2.2 million, or 1.9%.
Nonperforming Assets. Nonperforming assets include nonaccrual loans,
restructured loans and other real estate owned. Nonperforming assets were $35.2
million at March 31, 2003, an increase of $3.3 million, or 10.4%, from the $31.9
million level at December 31, 2002. Nonperforming assets as a percentage of
total loans, leases and OREO increased to .95% as of March 31, 2003 from .87% as
of December 31, 2002. The increase in nonperforming assets is primarily due to
commercial credits originated in our finance company subsidiary and is a result
of a weaker economic environment. Accruing loans and leases 90 days or more past
due totaled $12.2 million at March 31, 2003, compared to $3.4 million at
December 31, 2002. One commercial credit accounts for the majority of this
increase.
20
Our nonperforming assets are summarized in the following table:
March 31 December 31
-------- -----------
2003 2002
---- ----
(dollars in thousands)
Nonaccrual loans and leases $32,689 $28,782
Restructured loans and leases 314 323
--- ---
Total nonperforming loans and leases 33,003 29,105
Other real estate owned (OREO) 2,231 2,805
----- -----
Total nonperforming assets $35,234 $31,910
======= =======
Accruing loans and leases 90 days or more past due $12,212 $ 3,407
======= =======
Nonperforming loans and leases to total loans and leases 0.89% 0.79%
Nonperforming assets to total loans, leases and OREO 0.95 0.87
Nonperforming assets and accruing loans and leases 90
days or more past due to total loans, leases and OREO 1.28 0.96
Reserve for Credit Losses. At March 31, 2003, the reserve for credit losses was
$61.3 million, an increase of $2.5 million or 4.2% from the balance of $58.8
million at December 31, 2002. At March 31, 2003, the reserve for credit losses
as a percentage of total loans and leases was 1.65%, compared to 1.60% at
December 31, 2002.
21
Activity in the reserve for credit losses for the following periods is shown
in the following table:
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
(dollars in thousands)
Balance at beginning of period $ 58,799 $ 53,716
Charge-offs:
Commercial and other 594 2,347
Commercial real estate 35 7
Agricultural 1 28
Residential real estate 117 35
Consumer 476 593
--- ---
Total charge-offs 1,223 3,010
Recoveries:
Commercial and other 21 488
Commercial real estate 6 46
Agricultural 6 22
Residential real estate 13 21
Consumer 170 161
--- ---
Total recoveries 216 738
--- ---
Net charge-offs 1,007 2,272
Provision for credit losses 3,478 3,937
----- -----
Balance at end of period $ 61,270 $ 55,381
========== ==========
Average loans and leases $3,655,398 $3,417,091
Annualized net charge-offs to average
loans and leases 0.11 % 0.27 %
--------------------------
Reserve as a percentage of:
Period-end loans and leases 1.65 % 1.60 %
Nonperforming loans and leases 185.65 194.94
Nonperforming assets 173.89 185.65
22
Securities. Our investment portfolio, including available-for-sale securities
and held-to-maturity securities, increased by $4.9 million, remaining at $1.1
billion at March 31, 2003 and at December 31, 2002. In order to better balance
our interest rate risk position, we sold shorter duration mortgage backed
securities with high prepayment rates during the first quarter of 2003 and
reinvested the proceeds in longer duration securities that better matched the
duration of our liabilities. These securities sales resulted in securities gains
of $4.2 million in the first quarter of 2003, compared to securities gains of
$1.6 million in the first quarter of 2002.
Deposits. Total deposits were $3.7 billion at March 31, 2003 compared to $3.8
billion at December 31, 2002. Noninterest bearing deposits decreased $59.2
million, or 8.2%, to $664.9 million at March 31, 2003 from $724.1 million at
December 31, 2002. Interest bearing deposits increased $29.0 million, or 1.0%,
to $3.1 billion at March 31, 2003, compared to $3.0 billion at December 31,
2002.
Borrowings. Short-term borrowings, which include federal funds purchased,
securities sold under agreements to repurchase, treasury tax and loan notes, and
Federal Home Loan Bank ("FHLB") advances, decreased $53.6 million or 10.5% to
$457.9 million at March 31, 2003 from $511.5 million at December 31, 2002.
Long-term debt. Long-term debt consists primarily of FHLB advances and $65.0
million of privately-placed senior debt. FHLB advances decreased $2.0 million to
$348.8 million at March 31, 2003 from $350.8 million at December 31, 2002.
Company Obligated Mandatorily Redeemable Preferred Securities. The $76.5 million
in outstanding Company Obligated Mandatorily Redeemable Preferred Securities at
March 31, 2003 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 March 31, 2003:
Minimum Requirements
--------------------
March 31 December 31 Well Adequately
2003 2002 Capitalized Capitalized
---- ---- ----------- -----------
Tier I capital to risk-weighted assets 10.41 % 10.44 % 6.00 % 4.00 %
Total capital to risk-weighted assets 11.66 11.70 10.00 8.00
Tier I capital to average tangible assets 8.09 7.86 5.00 4.00
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 March 31, 2003.
23
Commitments and Contingencies. There have been no material changes in our
outstanding commitments and contingencies since those reported at December 31,
2002 in the Form 10-K for 2002.
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, 2002 in
the 2002 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.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Company held its annual meeting of shareholders on April 22,
2003. At the meeting, 64.7% of the outstanding shares of the
Company's class A common stock was represented in person or by proxy.
(b) The Company solicited proxies for the annual meeting pursuant to
Regulation 14 under the Securities Exchange Act of 1934. There was no
solicitation in opposition to management's solicitation.
The nominees for the Board of Directors consisted of all directors
serving as such at the time of the annual meeting, and all such
nominees were re-elected as directors. The directors elected were
Terry M. Cummings, Stan K. Dardis, William H. Lipschultz, Charlotte
S. Johnson, Daniel C.Reardon, Sherman Winthrop and Patrick J.
Donovan.
(c) The first matter to be voted upon was a proposal to fix the number of
directors at not less than four (4) nor more than ten (10). This
proposal was passed as follows: 772,964.0129 votes for, 1421.5022
votes against and 1,840.1288 votes abstained.
The second matter voted upon was the election of directors. The votes
cast were as follows: 774,283.1010 votes for all nominees, 1,358.8060
votes to withhold authority for all nominees, 24.4752 votes to
withhold authority for Patrick J. Donovan, 99.7188 votes to withhold
authority for William H. Lipschultz, 181.7199 votes to withhold
authority for Daniel C. Reardon, 266.0000 votes to withhold authority
for each of William H. Lipschultz and Sherman Winthrop, 10.8692 votes
to withhold authority for each of William H. Lipschultz, Charlotte S.
Johnson, and Daniel C. Reardon, and .9538 votes to withhold authority
for each of Terry M. Cummings, Stan K. Dardis, William H. Lipschultz,
and Sherman Winthrop.
24
The final matter voted upon was the ratification of the appointment
of Deloitte & Touche LLP as the Company's independent accountant to
audit the consolidated financial statements of the Company for the
year ended December 31, 2003. The appointment was ratified as
follows: 763,531.0393 votes for, 11,489.0388 votes against, and
1,205.5658 votes abstained.
As to each matter, there were no broker non-votes.
There were no other matters submitted for a vote or voted upon at the
annual meeting.
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) A Current Report on Form 8-K dated April 22, 2003, which disclosed
the issuance of a press release under Item 9 in satisfaction of Item
12, was filed by the Company with the Securities and Exchange
Commission April 22, 2003. The press release described the Company's
financial results for the quarter ended March 31, 2003.
25
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: May 13, 2003 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)
26
CERTIFICATIONS
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
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
27
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: May 13, 2003
------------
/s/ Stan K. Dardis
-------------------------------
Stan K. Dardis
President and
Chief Executive Officer
28
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
29
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: May 13, 2003
------------
/s/ Robert B. Buck
-----------------------------
Robert B. Buck
Chief Financial Officer
30