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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 September 30, 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
(State or other jurisdiction of
 incorporation or organization) 		              41-0715583
(I.R.S. Employer Identification No.)

445 Minnesota St., Suite 2000, St. Paul, MN
 (Address of principal executive offices) 		    55101-2107
    (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 September 30, 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 September 30,
 Nine months ended September 30,
2003
 2002
 Change
 2003
 2002
 Change
Operating Results:                            
     Total interest income   $ 67,967   $ 75,733    (10.2 5)% $ 205,871   $ 225,976    (8.90 )%
     Total interest expense    21,488    25,610    (16.1 0)  66,898    79,264    (15.6 0)
     Net interest income    46,479    50,123    (7.27 )  138,973    146,712    (5.27 )
     Provision for credit losses    4,220    4,126    2.28    10,376    10,990    (5.59 )
     Net interest income after provision for credit losses    42,259    45,997    (8.13 )  128,597    135,722    (5.25 )
     Noninterest income    22,480    18,005    24.85    67,745    54,052    25.33  
     Noninterest expense    41,651    39,635    5.09    124,830    116,075    7.54  
     Income before income tax expense    23,088    24,367    (5.25 )  71,512    73,699    (2.97 )
     Income tax expense    7,777    8,159    (4.68 )  24,626    24,807    (0.73 )
     Net income   $ 15,311   $ 16,208    (5.54 )% $ 46,886   $ 48,892    (4.10 )%
     Net income per share   $ 1.28   $ 1.35    (5.54 )% $ 3.91   $ 4.07    (4.10 )%
     Dividends paid per share    0.45    0.40    12.50    1.35    1.20    12.50  
     Tax equivalent net interest income   $ 48,540   $ 52,234    (7.07 )% $ 145,026   $ 152,969    (5.19 )%
     Net charge-offs    4,810    3,548    35.52    7,450    6,743    10.47  


Selected Financial Ratios:		  
     Return on average assets    1.12 %  1.28 %  (0.16 )  1.19 %  1.32 %  (0.13 )
     Return on average equity (1)    13.40    15.19    (1.79 )  14.12    15.95    (1.83 )
     Average equity to average assets (1)    8.36    8.24    0.12    8.40    8.28    0.12  
     Net interest margin (2)    3.81    4.43    (0.62 )  3.94    4.43    (0.49 )
     Operating efficiency ratio (2)(3)    57.21    55.50    1.71    58.98    55.77    3.21  
     Net charge-offs to average loans and leases    0.49    0.39    0.10    0.26    0.26    --  

September 30
2003
 September 30
2002
 December 31
2002
 Change
Balance Sheet Data:                            
     Total assets   $ 5,532,203   $ 5,169,494    7.02 % $ 5,259,543    5.18 %      
     Securities (4)    1,203,495    1,115,273    7.91    1,126,501    6.83        
     Loans and leases (5)    3,939,102    3,649,385    7.94    3,679,669    7.05        
     Total deposits    3,908,985    3,674,939    6.37    3,750,329    4.23        
     Short-term borrowings    654,595    513,540    27.47    511,476    27.98        
     Long-term debt    381,510    417,910    (8.71 )  417,678    (8.66 )      
     Mandatorily redeemable preferred securities    76,500    76,500    --    76,500    --        
     Total shareholders' equity and redeemable Class A  
         common stock    454,015    429,642    5.67    434,096    4.59        
     Per share book value of common stock    37.83    35.80    5.67    36.17    4.59        
Asset Quality:  
     Reserve for credit losses   $ 61,725   $ 57,963    6.49 % $ 58,799    4.98 %      
     Nonperforming assets    27,716    29,934    (7.41 )  31,910    (13.1 4)      
     Nonperforming assets to total loans, leases       
         and OREO    0.70 %  0.82 %  (0.12 )  0.87 %  (0.17 )      
     Reserve to nonperforming loans and leases    269.22    206.24    62.98    202.02    67.20        
     Reserve to total loans and leases    1.57    1.59    (0.02 )  1.60    (0.03 )      

(1)
(2)
(3)
(4)
(5) 		Calculation includes shareholders' equity and redeemable class A common stock.
Tax-equivalent basis.
Calculation excludes nonrecurring gains and losses, other nonrecurring noninterest income and amortization of intangibles.
Includes securities held-to-maturity and securities available-for-sale.
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,
2003
 2002
 2003
 2002
Average
Balance
 Average
Rate/
Yield (1)
 Average
Balance
 Average
Rate/
Yield (1)
 Average
Balance
 Average
Rate/
Yield (1)
 Average
Balance
 Average
Rate/
Yield (1)
Summary Average Balance Sheet:                                    
     Total loans and leases (2)   $ 3,862,828    6.02 % $ 3,595,962    6.98 % $ 3,765,172    6.23 % $ 3,507,021    7 .11%
     Total securities (3)    1,169,453    3.85    1,062,822    5.42    1,134,157    4.27    1,086,086    5 .58
     Total other earning assets    20,756    1.20    18,030    2.31    16,447    1.56    20,239    2 .09
     Total interest earning assets (4)   $ 5,053,037    5.50 % $ 4,676,814    6.60 % $ 4,915,776    5.76 %  4,613,346    6 .73%
     Total noninterest earning assets    365,940          343,048          371,358          334,823        
     Total assets   $ 5,418,977         $ 5,019,862         $ 5,287,134         $ 4,948,169        
     Noninterest bearing deposits   $ 691,714       $599,128         $ 651,875         $ 566,116        
     Interest bearing deposits    3,112,816    1.55 %  3,027,700    2.16 %  3,078,765    1.70 %  3,075,904    2 .33%
     Short-term borrowings    626,764    1.21    460,989    1.58    556,297    1.27    412,014    1 .59
     Long-term debt    399,374    5.55    380,133    5.72    410,623    5.59    352,632    5 .86
     Mandatorily redeemable preferred securities    76,500    9.30    76,500    9.30    76,500    9.40    76,500    9 .40
     Total interest bearing liabilities   $ 4,215,454    2.02 % $ 3,945,322    2.58 % $ 4,122,185    2.17 % $ 3,917,050    2 .71%
     Other noninterest bearing liabilities    58,394          51,988          68,869          55,076        
     Minority interest    150          150          150          150        
     Total shareholders' equity and redeemable                 
        Class A common stock    453,265          423,274          444,055          409,777        
     Total liabilities and equity   $ 5,418,977         $ 5,019,862         $ 5,287,134         $ 4,948,169        

Three months ended September 30,
 Nine months ended September 30,
2003
 2002
 $ Change
 % Change
 2003
 2002
 $ Change
 % Change
Summary Income Statement:                                    
     Total interest income   $ 67,967   $ 75,733   $ (7,766 )  (10.25 )% $ 205,871   $ 225,976   $ (20,105 )  (8.90 )%
     Total interest expense    21,488    25,610    (4,122 )  (16.10 )  66,898    79,264    (12,366 )  (15.60 )
     Net interest income    46,479    50,123    (3,644 )  (7.27 )  138,973    146,712    (7,739 )  (5.27 )
     Provision for credit losses    4,220    4,126    94    2.28    10,376    10,990    (614 )  (5.59 )
     Net interest income after provision for  
      credit losses    42,259    45,997    (3,738 )  (8.13 )  128,597    135,722    (7,125 )  (5.25 )
     Service charges    7,605    7,619    (14 )  (0.18 )  22,337    21,377    960    4.49  
     Insurance    2,366    2,510    (144 )  (5.74 )  6,390    7,180    (790 )  (11.00 )
     Trust    2,515    2,247    268    11.93    7,299    7,048    251    3.56  
     Brokerage    1,303    1,214    89    7.33    3,885    3,932    (47 )  (1.20 )
     Gain on sale of loans    6,259    2,891    3,368    116.50    16,779    7,192    9,587    133.30  
     Gain on sale of securities    16    318    (302 )  NM    5,855    2,244    3,611    160.92  
     Other    2,416    1,206    1,210    NM    5,200    5,079    121    2.38  
        Total noninterest income    22,480    18,005    4,475    24.85    67,745    54,052    13,693    25.33  
     Salaries and wages    19,757    18,215    1,542    8.47    57,644    53,650    3,994    7.44  
     Employee benefits    5,236    5,241    (5 )  (0.10 )  17,507    14,663    2,844    19.40  
     Occupancy    2,820    2,593    227    8.75    8,410    7,739    671    8.67  
     Furniture and equipment    2,764    2,505    259    10.34    7,836    7,252    584    8.05  
     Data processing fees    2,668    2,257    411    18.21    7,651    6,777    874    12.90  
     FDIC premiums and examination fees    443    431    12    2.78    1,319    1,317    2    0.15  
     Amortization of intangibles    717    746    (29 )  (3.89 )  2,150    2,240    (90 )  (4.02 )
     Other    7,246    7,647    (401 )  (5.24 )  22,313    22,437    (124 )  (0.55 )
        Total noninterest expense    41,651    39,635    2,016    5.09    124,830    116,075    8,755    7.54  
     Income before income tax expense    23,088    24,367    (1,279 )  (5.25 )  71,512    73,699    (2,187 )  (2.97 )
        Income tax expense    7,777    8,159    (382 )  (4.68 )  24,626    24,807    (181 )  (0.73 )
     Net income   $ 15,311   $ 16,208   $ (897 )  (5.54 )% $ 46,886   $ 48,892   $ (2,006 )  (4.10 )%

(1)


(2)
(3)
(4) 		Calculation is based on interest income including $2,061 and $2,111 for the three months ending September 2003 and September 2002 and $6,053 and $6,257 for the nine months ending September 2003 and September 2002 to adjust to a fully taxable basis using the federal statutory rate of 35%.
Net of unearned discount and includes nonaccrual loans and leases.
Excluding net unrealized gain (loss) on securities available-for-sale.
Before deducting the reserve for credit losses.

BREMER FINANCIAL CORPORATION

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2003

INDEX

Page

PART I

 FINANCIAL INFORMATION

Item 1.
       
Item 2.
       
       
Item 3.
       
Item 4. 		Financial Statements

Management's Discussion and Analysis of Financial
Condition and Results of Operations

Quantitative and Qualitative Disclosure About Market Risk

Controls and Procedures 		 3

13


25

26

PART II

 OTHER INFORMATION
Item 6.
            
Signatures
            
Exhibit 31.1
            
            

Exhibit 31.2
            
            
            
Exhibit 32.1
            
            
            
Exhibit 32.2
            
            
            
 Exhibits and Reports on Form 8-K



Certification of Chief Executive Officer Pursuant to Rules
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934
and Section 302 of the Sarbanes-Oxley Act of 2002.

Certification of Chief Financial Officer Pursuant to Rules
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934
and Section 302 of the Sarbanes-Oxley Act of 2002.

Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.

Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. 		26

27



1

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 21, 2003, and as amended on Form 10K/A filed on May 13, 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)

September 30,
2003
 December 31,
2002
(unaudited)
Assets            
    Cash and due from banks   $ 187,114   $ 256,900  
    Interest bearing deposits    4,280    4,185  
    Investment securities available-for-sale    225,589    196,773  
    Mortgage-backed securities available-for-sale    808,710    766,315  
         Total securities available-for-sale    1,034,299    963,088  
    Investment securities held-to-maturity  
      (fair value: 09/30/03 - $178,413, 12/31/02 - $171,233)    169,196    163,413  
    Loans and leases    3,939,282    3,680,122  
      Reserve for credit losses    (61,725 )  (58,799 )
      Unearned discount    (180 )  (453 )
         Net loans and leases    3,877,377    3,620,870  
    Interest receivable    34,637    33,854  
    Premises and equipment, net    86,146    82,152  
    Goodwill    84,226    85,148  
    Other intangibles    19,406    21,025  
    Other assets    35,522    28,908  
Total assets   $ 5,532,203   $ 5,259,543  
Liabilities and Shareholders' Equity  
    Noninterest bearing deposits   $ 717,665   $ 724,102  
    Interest bearing deposits    3,191,320    3,026,227  
         Total deposits    3,908,985    3,750,329  
    Federal funds purchased and repurchase agreements    463,790    449,970  
    Other short-term borrowings    190,805    61,506  
    Long-term debt    381,510    417,678  
    Company obligated mandatorily redeemable  
      preferred securities of subsidiary trusts  
      holding junior subordinated debentures    76,500    76,500  
    Accrued expenses and other liabilities    56,448    69,314  
Total liabilities    5,078,038    4,825,297  
    Minority interests    150    150  
    Redeemable class A common stock, 960,000 shares  
      issued and outstanding    36,321    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    418,229    389,998  
      Accumulated other comprehensive income    (3,154 )  6,751  
          Total shareholders' equity    417,694    399,368  
Total liabilities and shareholders' equity   $ 5,532,203   $ 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
September 30,
 For the Nine Months Ended
September 30,
 2003
 2002
 2003
 2002
Interest income                    
    Loans and leases, including fees   $ 57,725   $ 62,353   $ 172,922   $ 184,223  
    Securities  
       Taxable    7,921    10,886    26,012    33,951  
       Tax-exempt    2,258    2,389    6,746    7,485  
    Federal funds sold    39    58    97    200  
    Other    24    47    94    117  
         Total interest income    67,967    75,733    205,871    225,976  
Interest expense  
    Deposits    12,196    16,498    39,056    53,526  
    Federal funds purchased and repurchase agreements    1,365    1,472    4,022    4,148  
    Other short-term borrowings    548    363    1,262    758  
    Long-term debt    5,586    5,484    17,178    15,452  
    Company obligated mandatorily redeemable  
       preferred securities of subsidiary trusts  
       holding junior subordinated debentures    1,793    1,793    5,380    5,380  
         Total interest expense    21,488    25,610    66,898    79,264  
       Net interest income    46,479    50,123    138,973    146,712  
    Provision for credit losses    4,220    4,126    10,376    10,990  
       Net interest income after provision for credit losses    42,259    45,997    128,597    135,722  
Noninterest income  
    Service charges    7,605    7,619    22,337    21,377  
    Insurance    2,366    2,510    6,390    7,180  
    Trust    2,515    2,247    7,299    7,048  
    Brokerage    1,303    1,214    3,885    3,932  
    Gain on sale of loans    6,259    2,891    16,779    7,192  
    Gain on sale of securities    16    318    5,855    2,244  
    Other    2,416    1,206    5,200    5,079  
       Total noninterest income    22,480    18,005    67,745    54,052  
Noninterest expense  
    Salaries and wages    19,757    18,215    57,644    53,650  
    Employee benefits    5,236    5,241    17,507    14,663  
    Occupancy    2,820    2,593    8,410    7,739  
    Furniture and equipment    2,764    2,505    7,836    7,252  
    Data processing fees    2,668    2,257    7,651    6,777  
    FDIC premiums and examination fees    443    431    1,319    1,317  
    Amortization of intangibles    717    746    2,150    2,240  
    Other    7,246    7,647    22,313    22,437  
       Total noninterest expense    41,651    39,635    124,830    116,075  
Income before income tax expense    23,088    24,367    71,512    73,699  
    Income tax expense    7,777    8,159    24,626    24,807  
Net income   $ 15,311   $ 16,208   $ 46,886   $ 48,892  
    Per common share amounts:  
       Net income-basic and diluted   $ 1.28   $ 1.35   $ 3.91   $ 4.07  
       Dividends paid    0.45    0.40    1.35    1.20  

See notes to consolidated financial statements.


4

BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share amounts)


Class A
Common Stock
 Class B
Common Stock
 Accumulated
Other
Comprehensive
Income (Loss)
 Comprehensive
Income
 Retained
Earnings
 Total
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                     $ 48,892    48,892    48,892  
      Other comprehensive income, net of tax:  
      Unrealized gains on securities:  
      Unrealized holding gains arising during the   
            period, net of tax                6,585    6,585              
      Less: Reclassified adjustment for gains   
            included in income, net of tax                 (1,347 )  (1,347 )            
      Other comprehensive income                5,238    5,238          5,238  
      Comprehensive income                     $ 54,130              
    Dividends, $1.20 per share                            (14,400 )  (14,400 )
    Allocation of net income in excess of dividends  
      and other comprehensive income to       redeemable class A common stock                (419 )        (2,759 )  (3,178 )
Balance, September 30, 2002   $ 57   $ 2,562   $ 9,422         $ 383,230   $ 395,271  
For the Nine Months Ended September 30, 2003

  
Balance, December 31, 2002   $ 57   $ 2,562   $ 6,751         $ 389,998   $ 399,368  
    Comprehensive income  
      Net income                     $ 46,886    46,886    46,886  
      Other comprehensive income, net of tax:  
      Unrealized gains on securities:  
      Unrealized holding losses arising during the  
         period, net of tax                (7,253 )  (7,253 )            
      Less: Reclassified adjustment for gains  
            included in income, net of tax                (3,513 )  (3,513 )            
      Other comprehensive income                (10,766 )  (10,766 )        (10,766 )
      Comprehensive income                     $ 36,120              
    Dividends, $1.35 per share                            (16,200 )  (16,200 )
    Allocation of net income in excess of dividends   
      and other comprehensive income to       redeemable class A common stock                861          (2,455 )  (1,594 )
Balance, September 30, 2003   $ 57   $ 2,562   $ (3,154 )       $ 418,229   $ 417,694  

See notes to consolidated financial statements.


5

BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS
(in thousands)
(unaudited)


For the Nine Months
Ended September 30,
2003
 2002
Cash flows from operating activities            
     Net income   $ 46,886   $ 48,892  
     Adjustments to reconcile net income to net cash  
       provided by operating activities:  
         Provision for credit losses    10,376    10,990  
         Depreciation and amortization    13,462    10,185  
         Gain on sale of securities    (5,855 )  (2,244 )
         Loss (gain) on sale of other real estate owned, net    51    (159 )
         Other assets and liabilities, net    (19,651 )  (9,369 )
         Gain on sale of loans    16,779    7,192  
         Proceeds from loans originated for sale    656,033    305,134  
         Loans originated for sale    (650,395 )  (296,421 )
Net cash provided by operating activities    67,686    74,200  
Cash flows from investing activities  
     Interest bearing deposits, net    (95 )  100  
     Purchases of mortgage-backed securities    (477,579 )  (290,476 )
     Purchases of available-for-sale investment securities    (139,183 )  (105,088 )
     Purchases of held-to-maturity securities    (18,847 )  (9,338 )
     Proceeds from maturities of mortgage-backed securities    300,912    241,062  
     Proceeds from maturities of available-for-sale investment securities    24,821    26,757  
     Proceeds from maturities of held-to-maturity securities    13,064    22,552  
     Proceeds from sales of mortage-backed securities    115,170    15,951  
     Proceeds from sales of available-for-sale investment securities    92,561    195,926  
     Proceeds from sales of other real estate owned    2,039    938  
     Loans and leases, net    (289,300 )  (173,194 )
     Purchase of premises and equipment    (10,441 )  (10,737 )
Net cash used in investing activities    (386,879 )  (85,547 )
Cash flows from financing activities  
     Noninterest bearing deposits, net    (6,437 )  11,871  
     Savings, NOW and money market accounts, net    384,007    (46,630 )
     Certificates of deposits, net    (218,914 )  (96,320 )
     Federal funds purchased and repurchase agreements,net    13,820    37,998  
     Other short-term borrowings, net    129,299    26,630  
     Proceeds from issuance of long-term debt    14,820    116,013  
     Repayments of long-term debt    (50,988 )  (14,026 )
     Common stock dividends paid    (16,200 )  (14,400 )
Net cash provided by (used in) financing activities    249,407    21,136  
Net decrease in cash and due from banks    (69,786 )  9,789  
     Cash and due from banks at beginning of period    256,900    213,101  
     Cash and due from banks at end of period   $ 187,114   $ 222,890  
Supplemental disclosures of cash flow information  
     Cash paid during the year for interest   $ 68,740   $ 87,069  
     Cash paid during the year for income taxes    21,359    21,868  

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, as amended by the Form 10K/A filed on May 13, 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.

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Note F: Redeemable Class A Common Stock

At September 30, 2003, 960,000 shares of redeemable class A stock were issued and outstanding. At September 30, 2003, these shares were subject to redemption at a price of $37.83 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 September 30, 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 81,421.4028 shares. These options were assigned to the Bremer Financial Corporation Employee Stock Ownership Plan (“ESOP”) (5,679.1228 shares), the Bremer Banks Profit Sharing Plus Plan (45,893.2800 shares), and executives and directors under the Executive Stock Purchase Plan (29,849.0000 shares). To 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 September 30, 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 nine months of 2003 of $36.1 million, compared to the $54.1 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.

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Note I: Goodwill and Intangible Assets

Intangible assets consist of goodwill, core deposit intangibles, and other intangibles. The remaining unamortized balances at September 30, 2003 and 2002 were $103.6 million and $106.8 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, 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, or more frequently if events or changes in circumstances indicate that assets might be impaired. Management performed its annual impairment assessment on its goodwill assets in December 2002, no impairment loss was recorded as a result of that test, and no events or changes in circumstances have occurred since that test that would indicate that assets might be impaired.

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. The financial statements for the three and nine month periods ended September 30, 2002 have been restated to reflect the adoption of SFAS No. 147.

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The following table presents relevant information about the Company’s amortized and unamortized intangible assets:

As of September 30, 2003
Gross Carrying
Amount
 Accumulated
Amortization
Amortized intangible assets            
       Core deposit premium   $ 21,313   $ 6,605  
       Mortgage servicing rights (1)    4,524    2,373  
       Other    4,525    1,978  
            Total   $ 30,362   $ 10,956  
Unamortized intangible assets  
       Goodwill   $ 84,226        
           Total   $ 84,226        
As of September 30, 2002
Gross Carrying
Amount
 Accumulated
Amortization
 Amortized intangible assets            
       Core deposit premium   $ 21,313   $ 4,095  
       Mortgage servicing rights    2,379    785  
       Other    4,400    1,592  
            Total   $ 28,092   $ 6,472  
Unamortized intangible assets  
       Goodwill   $ 85,148        
           Total   $ 85,148        

(1) Accumulated amortization of mortgage servicing rights includes the relatedvaluation allowance of $1.1 million.

The Company recorded aggregate intangible amortization expense of $2.2 million for the nine month periods ended September 30, 2003 and September 30, 2002. The Company sold two branches that were part of its Marshall, Minnesota bank subsidiary in June 2003. The sale reduced goodwill by approximately $922 thousand, which was the amount of unamortized goodwill assigned to these two branches which were originally acquired by the Company in 1999. The estimated amortization expense for each of the next five years is approximately $2.6 million.

Note J: Recent Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation (“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 FIN requires existing

10

unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. In October 2003, the FASB deferred the effective date of FIN No. 46 to financial statements issued after December 15, 2003. We do not expect the adoption of FIN No. 46 to have a material effect on the Company’s financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging activities,” to provide additional clarification of certain terms and investment characteristics. This statement will be applied prospectively and is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect on the Company’s financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer clarifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). The adoption of the standard did not have a material effect on the Company’s financial statements.

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 table represents the outstanding obligations:

September 30,
2003
 December 31,
2002
(in thousands)
Standby letters of credit     $ 55,764   $ 37,245  
Loan commitments    1,083,313    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.

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.

11

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.

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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 September 30, 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 amounts allocable to redeemable class A common stock, 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 fair 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 September 30, 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 September 30, 2003, we had $84.2 million of goodwill, which is not subject to periodic amortization, and $19.4 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.

Management performed its annual impairment assessment on its goodwill assets in December 2002 and no impairment loss was recorded as a result of that test. No events or changes in circumstances have occurred since that test that would indicate that assets might be impaired,

14

and we have concluded that the recorded value of goodwill was not impaired as of September 30, 2003. There are many assumptions and estimates underlying the determination of impairment. Another estimate using different, but 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.

Mortage Servicing Rights Valuation. The Company recognizes the rights to service loans for others as assets, known as mortgage servicing rights (“MSRs”). The Company’s MSRs are retained upon the sale of originated loans. Originated MSRs are capitalized based on the relative fair value of the servicing right and the mortage loan. MSRs are carried at the lower of the capitalized amount, net of accumulated amortization, or fair value. MSRs are amortized in proportion to, and over the period of, estimated net servicing income.

The amortization of the MSRs is analyzed periodically and is adjusted to reflect changes in prepayment speeds and discount rates. Each quarter, the Company evaluates the possible impairment of MRSs based on the difference between the carrying amount and current fair value of the MSRs in accordance with FASB No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” See Note I to the Consolidated Financial Statements in this Form 10-Q.

Overview

Earnings.     We reported net income of $15.3 million or $1.28 basic and diluted earnings per share for the third quarter of 2003. This compares to $16.2 million or $1.35 basic and diluted earnings per share in the third quarter of 2002. On a year-to-date basis through September 30, 2003, net income was $46.9 million, a 4.1% decrease from the $48.9 million earned in the first nine months of 2002. Return on average equity was 13.40% for the third quarter of 2003 compared to 15.19% for the same quarter of 2002. On a year-to-date basis, we reported a return on average equity of 14.12%, compared to 15.95% in the first nine months of 2002. Return on average assets decreased to 1.12% in the third quarter of 2003 from 1.28% in the third quarter of 2002. On a year-to-date basis, we reported a return on average assets of 1.19%, compared to 1.32% in the first nine months of 2002.

Results of Operations

Net Interest Income. Net interest income for the third quarter of 2003 was $46.5 million, a decrease of 7.3% from the $50.1 million reported for the same period a year ago, as our net interest margin decreased to 3.81% in the third quarter of 2003 from 4.43% in the third quarter of 2002. On a year-to-date basis, net interest income decreased $7.7 million, or 5.3% from the first nine months of 2002, as our net interest margin decreased to 3.94% from 4.43%. Offsetting some of the decline in net interest margin when comparing the two nine-month periods was an increase in our average loans and leases of $258 million, or 7.4%.

Net interest margin, which has declined for five consecutive quarters due primarily to the effects of historically low interest rates, is expected

15

to begin stabilizing during the fourth quarter of 2003. The average yield on our earning assets declined by 97 basis points when comparing the first nine months of 2003 with the first nine months of 2002. Meanwhile, and largely as a result of competitive pressure in deposit markets and already historically low deposit rates, we were able to reduce the average cost of our interest bearing liabilities by only 54 basis points when comparing the same two periods.

16

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)
2003
 2002
Average
Balance
 Interest (1)
 Average
Rate/
Yield
 Average
Balance
 Interest (1)
 Average
Rate/
Yield
(dollars in thousands)
Assets                            
Loans and Leases (2)  
     Commercial and other   $ 900,172   $ 12,573    5.54 % $ 854,311   $ 13,428    6.24 %
     Commercial real estate    1,249,046    19,375    6.15    1,076,656    19,811    7.30  
     Agricultural    470,728    6,733    5.67    445,202    7,329    6.53  
     Residential real estate    776,089    11,459    5.86    765,622    13,437    6.96  
     Consumer    338,048    5,881    6.90    338,453    6,712    7.87  
     Tax-exempt    128,745    2,590    7.98    115,718    2,507    8.60  
        Total Loans and Leases    3,862,828    58,611    6.02    3,595,962    63,224    6.98  
     Reserve for Credit Losses    (63,618 )              (58,333 )            
        Net Loans and Leases    3,799,210                3,537,629              
Securities (3)  
     Mortgage-backed    779,014    6,561    3.34    784,274    10,063    5.09  
     Other taxable    206,735    1,360    2.61    89,329    823    3.66  
     Tax-exempt    183,704    3,433    7.41    189,219    3,629    7.61  
        Total Securities    1,169,453    11,354    3.85    1,062,822    14,515    5.42  
Federal funds sold    16,487    38    0.91    13,860    58    1.66  
Other earning assets    4,269    25    2.32    4,170    47    4.47  
        Total Earning Assets (4)   $ 5,053,037   $ 70,028    5.50 % $ 4,676,814   $ 77,844    6.60 %
Cash and due from banks    158,925                147,163              
Other non interest earning assets    270,633                254,218              
        Total Assets   $ 5,418,977               $ 5,019,862              
Liabilities and Shareholders' Equity  
Noninterest bearing deposits     $ 691,714               $ 599,128
Interest bearing deposits    
     Savings and NOW accounts    471,210   $ 310    0.26 %  423,139   $ 573    0.54 %
     Money market checking    245,334    64    0.10    232,610    147    0.25  
     Money market savings    1,248,249    4,025    1.28    928,949    2,600    1.11  
     Savings certificates    940,916    6,432    2.71    1,170,337    10,728    3.64  
     Certificates over $100,000    207,107    1,365    2.61    272,665    2,450    3.56  
        Total Interest Bearing Deposits    3,112,816    12,196    1.55    3,027,700    16,498    2.16  
        Total Deposits    3,804,530                3,626,828              
     Short-term borrowings    626,764    1,913    1.21    460,989    1,835    1.58  
     Long-term debt    399,374    5,586    5.55    380,133    5,484    5.72  
     Company obligated mandatorily redeemable  
        preferred securities    76,500    1,793    9.30    76,500    1,793    9.30  
        Total Interest Bearing Liabilities   $ 4,215,454   $ 21,488    2.02 % $ 3,945,322   $ 25,610    2.58 %
Other noninterest bearing liabilities    58,394                51,988              
        Total Liabilities    4,965,562                4,596,438              
Minority Interest    150                150              
Redeemable Class A Common Stock    36,261                33,862              
Shareholders' equity    417,004                389,412              
        Total Liabilities and Equity   $ 5,418,977               $ 5,019,862              
Net interest income         $ 48,540               $ 52,234        
Net interest spread                3.48 %              4.03 %
Net interest margin                3.81 %              4.43 %

(1)     Interest income includes $2,061 and $2,111 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.

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For the Nine Months Ended September 30,
(unaudited)
2003
 2002
Average
Balance
 Interest (1)
 Average
Rate/
Yield
 Average
Balance
 Interest (1)
 Average
Rate/
Yield
(dollars in thousands)
Assets                            
Loans and Leases (2)  
     Commercial and other   $ 895,587   $ 37,833    5.65 % $ 859,953   $ 41,002    6.37 %
     Commercial real estate    1,196,298    57,390    6.41    1,052,803    57,843    7.35  
     Agricultural    440,936    19,576    5.94    414,278    21,096    6.81  
     Residential real estate    774,341    35,352    6.10    736,117    39,450    7.17  
     Consumer    335,158    17,870    7.13    335,992    20,258    8.06  
     Tax-exempt    122,852    7,449    8.11    107,878    6,948    8.61  
        Total Loans and Leases    3,765,172    175,470    6.23    3,507,021    186,597    7.11  
     Reserve for Credit Losses    (61,859 )              (56,568 )            
        Net Loans and Leases    3,703,313                3,450,453              
Securities (3)  
     Mortgage-backed    755,539    22,021    3.90    771,794    31,021    5.37  
     Other taxable    196,759    3,991    2.71    114,915    2,930    3.41  
     Tax-exempt    181,859    10,250    7.54    199,377    11,368    7.62  
        Total Securities    1,134,157    36,262    4.27    1,086,086    45,319    5.58  
Federal funds sold    12,213    97    1.06    16,037    200    1.67  
Other earning assets    4,234    95    3.00    4,202    117    3.72  
        Total Earning Assets (4)   $ 4,915,776   $ 211,924    5.76 % $ 4,613,346   $ 232,233    6.73 %
Cash and due from banks    151,647                138,909              
Other non interest earning assets    281,570                252,482              
        Total Assets   $ 5,287,134               $ 4,948,169              
Liabilities and Shareholders' Equity  
Noninterest bearing deposits     $ 651,875               $ 566,116
Interest bearing deposits    
     Savings and NOW accounts    464,736   $ 1,095    0.32 %  417,278   $ 1,625    0.52 %
     Money market checking    247,976    261    0.14    235,840    448    0.25  
     Money market savings    1,138,716    11,155    1.31    953,415    7,798    1.09  
     Savings certificates    1,004,322    21,864    2.91    1,197,130    35,678    3.98  
     Certificates over $100,000    223,015    4,681    2.81    272,241    7,977    3.92  
        Total Interest Bearing Deposits    3,078,765    39,056    1.70    3,075,904    53,526    2.33  
        Total Deposits    3,730,640                3,642,020              
     Short-term borrowings    556,297    5,284    1.27    412,014    4,906    1.59  
     Long-term debt    410,623    17,178    5.59    352,632    15,452    5.86  
     Company obligated mandatorily redeemable  
        preferred securities    76,500    5,380    9.40    76,500    5,380    9.40  
        Total Interest Bearing Liabilities   $ 4,122,185   $ 66,898    2.17 % $ 3,917,050   $ 79,264    2.71 %
Other noninterest bearing liabilities    68,869                55,076              
        Total Liabilities    4,842,929                4,538,242              
Minority Interest    150                150              
Redeemable Class A Common Stock    35,524                32,782              
Shareholders' equity    408,531                376,995              
        Total Liabilities and Equity   $ 5,287,134               $ 4,948,169              
Net interest income         $ 145,026               $ 152,969        
Net interest spread                3.59 %              4.02 %
Net interest margin                3.94 %              4.43 %

(1)     Interest income includes $6,053 and $6,257 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.

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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,
2003 vs. 2002
Increase (Decrease)
Due to Change in
Volume
 Rate
 Total
(in thousands)
Interest earning assets:                
      Loans and leases (1)   $ 13,735   $ (24,862 ) $ (11,127 )
      Taxable securities    2,512    (10,451 )  (7,939 )
      Tax-exempt securities (1)    (999 )  (119 )  (1,118 )
      Federal funds sold    (48 )  (55 )  (103 )
      Other interest earning assets    1    (23 )  (22 )
          Total interest earning assets   $ 15,201   $ (35,510 ) $ (20,309 )
Interest bearing liabilities:  
      Savings and NOW accounts   $ 248   $ (778 ) $ (530 )
      Money market accounts    1,257    1,913    3,170  
      Savings certificates    (7,191 )  (9,919 )  (17,110 )
      Short-term borrowings    1,718    (1,340 )  378  
      Long-term debt    2,541    (815 )  1,726  
          Total interest bearing liabilities    (1,427 )  (10,939 )  (12,366 )
Change in net interest income   $ 16,628   $ (24,571 ) $ (7,943 )
(1) Interest income includes $6,053 in 2003 and $6,257 in 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 increased to $4.2 million for the third quarter of 2003 from $4.1 million for the same quarter in 2002. On a year-to-date basis, the provision for credit losses decreased to $10.4 million in 2003 from $11.0 million for the first nine months of 2002. Net charge-offs were $4.8 million during the third quarter of 2003 compared to $3.5 million for the same period in 2002 and $7.5 million during the first nine months of 2003 compared to $6.7 million for the same period in 2002. A single commercial real estate credit originated in our finance company subsidiary accounted for $4.3 million of the net charge-off total in the third quarter of 2003. Our ratio of reserve to total loans and leases decreased slightly to 1.57% at September 30, 2003 from 1.60% at September 30, 2002. Our reserve coverage on nonperforming loans and leases was 269% at

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September 30, 2003 and 206% at September 30, 2002. For further discussion related to the allowance for credit losses, see the later section entitled “– Financial Condition – Reserve for Credit Losses.”

Noninterest Income. Noninterest income reflected a $4.5 million, or 24.9%, increase to $22.5 million for the third quarter of 2003 from the $18.0 million recorded in the third quarter of 2002. On a year-to-date basis, noninterest income was $67.7 million, a $13.7 million, or 25.3%, increase over the $54.1 million recorded in the first nine months of 2002. The major contributors to the significant increases in noninterest income were gains on sale of loans and securities. Gains on sale of loans increased by $9.6 million to $16.8 million in the first nine months of 2003, an increase of 133% from the $7.2 million recorded in the first nine months of 2002, as residential mortgage loan activity remained strong due largely to the refinancing of mortgages. With recent increases in longer-term interest rates, the pipeline of new residential mortgage loans has slowed, and a lower level of loan sales activity is expected in the fourth quarter of 2003 and into 2004.

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, which took place during March and April 2003, resulted in securities gains of $5.9 million in the first nine months of 2003, compared to securities gains of $2.2 million in the first nine months of 2002.

The following table summarizes the components of noninterest income:

Three Months Ended September 30,
 Nine Months Ended September 30,
2003
 2002
 2003
 2002
(in thousands)
Service charges     $ 7,605   $ 7,619   $ 22,337   $ 21,377  
Insurance    2,366    2,510    6,390    7,180  
Trust    2,515    2,247    7,299    7,048  
Brokerage    1,303    1,214    3,885    3,932  
Gain on sale of loans    6,259    2,891    16,779    7,192  
Other recurring noninterest income    2,385    1,205    5,045    4,019  
    Recurring noninterest income    22,433    17,686    61,735    50,748  
Gain on sale of other assets    31    1    155    1,060  
Gain on sale of securities    16    318    5,855    2,244  
    Total noninterest income   $ 22,480   $ 18,005   $ 67,745   $ 54,052  

Noninterest Expense. Noninterest expense increased $2.0 million, or 5.1%, to $41.7 million in the third quarter of 2003 from $39.6 million in the third quarter of 2002. On a year-to-date basis, total noninterest expense increased $8.8 million, or 7.5%, to $124.8 million in 2003 from $116.1 million in 2002. Personnel costs, impacted by higher retirement expenses, contributed most significantly to the increase in noninterest expenses when comparing the first nine months of 2003 to the first nine months of 2002. All other noninterest expenses, exclusive of personnel costs,

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increased a total of $1.9 million, or 4.0%, when comparing those same nine-month periods.

The following table summarizes the components of noninterest expense:

Three Months Ended September 30,
 Nine Months Ended September 30,
2003
 2002
 2003
 2002
(in thousands)
Salaries and wages     $ 19,757   $ 18,215   $ 57,644   $ 53,650  
Employee benefits    5,236    5,241    17,507    14,663  
Occupancy    2,820    2,593    8,410    7,739  
Furniture and equipment    2,764    2,505    7,836    7,252  
Printing, postage and telephone    1,641    1,551    5,060    4,702  
Marketing    1,553    1,421    4,672    4,543  
Data processing fees    2,668    2,257    7,651    6,777  
Professional fees    1,040    1,271    2,490    3,358  
Other real estate owned    66    23    226    61  
FDIC premiums and examination fees    443    431    1,319    1,317  
Amortization of intangibles    717    746    2,150    2,240  
Other noninterest expense    2,946    3,381    9,865    9,773  
     Total noninterest expense   $ 41,651   $ 39,635   $ 124,830   $ 116,075  

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. Gain on sale of securities and gains on sales of other assets are not components of recurring noninterest income and are not included in the calculation. Recurring noninterest expense does not include amortization of intangibles, certain losses, and other expenses that are not part of normal operations. Our operating efficiency ratio was 57.2% for the third quarter of 2003 compared to 55.5% for the third quarter of 2002. On a year-to-date basis, the ratio was 59.0% for the nine months ending September 30, 2003 compared to 55.8% for the same period in 2002.

Income Taxes. The provision for income taxes was $7.8 million for the quarter ended September 30, 2003 compared to $8.2 million for the same period in 2002. On a year-to-date basis, the provision for income taxes decreased to $24.6 million in 2003 from $24.8 million in 2002. Comparing the third quarter of 2003 to the same period in 2002, our effective tax rate increased to 33.7% from 33.5%. Our effective tax rate increased to 34.4% for the first nine months of 2003 from 33.7% for the same period in 2002. Our effective tax rate increased primarily as a result of the branch sale that occurred during the second quarter of 2003.

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Financial Condition

Loan and Lease Portfolio. The following table presents the components of our gross loans and lease portfolio:

At September 30, 2003
 At December 31, 2002
Amount
 Percent of
Total Loans
 Amount
 Percent of
Total Loans
(in thousands)

Commercial and other     $ 915,874    23.3 % $ 872,597    23.7 %
Commercial real estate    1,202,424    30.5    1,052,194    28.6  
       - Construction    90,288    2.3    76,460    2.1  
Agricultural    471,264    12.0    436,364    11.9  
Residential real estate    757,530    19.2    768,068    20.9  
       - Construction    22,091    0.6    23,546    0.6  
Consumer    344,406    8.7    332,428    9.0  
Tax-exempt    135,405    3.4    118,465    3.2  
       Total   $ 3,939,282    100.0 % $ 3,680,122    100.0 %

Our total loan and lease portfolio increased to $3.9 billion at September 30, 2003 from $3.7 billion at December 31, 2002. Commercial loans increased by $43.3 million, or 5.0%, during the first nine months of 2003. Commercial real estate loans increased by $164.1 million, or 14.5%, during the first nine months of 2003, with over half of the increase taking place in the Twin Cities market. Agricultural loans increased by $34.9 million, or 8.0%, during the first nine months of 2003, with the increase being primarily seasonal in nature. Residential real estate loans decreased by $12.0 million, or 1.5%, as most of our new first mortgages are being sold in the secondary market. These sales resulted in gains on sale of loans of $16.8 million in the first nine months of 2003 as residential mortgage loan activity remained strong due largely to the refinancing of mortgages. Consumer loans increased $12.0 million, or 3.6%, and tax-exempt loans increased by $16.9 million, or 14.3%, during the first nine months of 2003.

Nonperforming Assets. Nonperforming assets include nonaccrual loans, restructured loans and other real estate owned. Nonperforming assets were $27.7 million at September 30, 2003, a decrease of $4.2 million, or 13.1%, from the $31.9 million level at December 31, 2002. Nonperforming assets as a percentage of total loans, leases and other real estate owned (“OREO”) decreased to .70% as of September 30, 2003 from .87% as of December 31, 2002. Approximately $7.6 million, or 27.3% of our nonperforming assets, are commercial and commercial real estate credits originated in our finance company subsidiary. This finance company subsidiary, which had a total loan and lease portfolio of $28.4 million at September 30, 2003 compared to $45.9 million at December 31, 2002, is in the process of winding down operations and is no longer accepting new loan applications. Accruing loans and leases 90 days or more past due totaled $6.2 million at September 30, 2003, compared to $3.4 million at December 31, 2002.

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Our nonperforming assets are summarized in the following table:

September 30
 December 31
2003
 2002
(dollars in thousands)

Nonaccrual loans and leases     $ 22,638   $ 28,782  
Restructured loans and leases    290    323  
       Total nonperforming loans and leases    22,928    29,105  
Other real estate owned (OREO)    4,788    2,805  
       Total nonperforming assets   $ 27,716   $ 31,910  
Accruing loans and leases 90 days or more past due   $ 6,249   $ 3,407  
Nonperforming loans and leases to total loans and leases    0.58 %  0.79 %
Nonperforming assets to total loans, leases and OREO    0.70    0.87  
Nonperforming assets and accruing loans and leases 90  
       days or more past due to total loans, leases and OREO    0.86    0.96  

Reserve for Credit Losses. At September 30, 2003, the reserve for credit losses was $61.7 million, an increase of $2.9 million or 5.0% from the balance of $58.8 million at December 31, 2002. At September 30, 2003, the reserve for credit losses as a percentage of total loans and leases was 1.57%, compared to 1.60% at December 31, 2002.






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Activity in the reserve for credit losses for the following periods is shown in the following table:


Three Months Ended September 30,
 Nine Months Ended September 30,
2003
 2002
 2003
 2002
Balance at beginning of period     $ 62,315   $ 57,385   $ 58,799   $ 53,716  
Charge-offs:  
      Commercial and other    207    508    1,672    3,427  
      Commercial real estate    4,406    2,468    4,584    2,510  
      Agricultural    --    198    103    302  
      Residential real estate    23    147    171    210  
      Consumer    479    617    1,662    1,803  
          Total charge-offs    5,115    3,938    8,192    8,252  
Recoveries:  
      Commercial and other    72    169    169    753  
      Commercial real estate    --    5    16    92  
          Construction    --    --    --    4  
      Agricultural    48    46    63    113  
      Residential real estate    39    36    54    66  
      Consumer    146    134    440    481  
          Total recoveries    305    390    742    1,509  
Net charge-offs    4,810    3,548    7,450    6,743  
Provision for credit losses    4,220    4,126    10,376    10,990  
Balance at end of period   $ 61,725   $ 57,963   $ 61,725   $ 57,963  
Average loans and leases   $ 3,862,828   $ 3,595,962   $ 3,765,172   $ 3,507,021  
Annualized net charge-offs to average loans   and leases    0.49 %  0.39 %  0.26 %  0.26 %
          _____________________________________________


Reserve as a percentage of:                    
      Period-end loans and leases    1.57 %  1.59 %          
      Nonperforming loans and leases    269.22    206.24            
      Nonperforming assets    222.71    193.64            



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Securities.     Our investment portfolio, including available-for-sale securities and held-to-maturity securities, increased by $77.0 million to $1.2 billion at September 30, 2003 from $1.1 billion at December 31, 2002. We increased the size of the investment portfolio during the first nine months of 2003, with the majority of the increase due to purchases of hybrid adjustable rate mortgage-backed securities that have a fixed coupon for three years and a variable coupon that resets annually thereafter. We also 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 in the first nine months of 2003. These actions reduced the level of asset sensitivity in our balance sheet and provided us with a more balanced interest rate risk position. These securities sales resulted in securities gains of $5.9 million in the first nine months of 2003, compared to securities gains of $2.2 million in the first nine months of 2002.

Deposits.     Total deposits were $3.9 billion at September 30, 2003, compared to $3.8 billion at December 31, 2002. Noninterest bearing deposits decreased $6.4 million, or less than 1.0%, to $717.7 million at September 30, 2003 from $724.1 million at December 31, 2002. Interest bearing deposits increased $165.1 million, or 5.5%, to $3.2 billion at September 30, 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, increased $143.1 million or 28.0% to $654.6 million at September 30, 2003 from $511.5 million at December 31, 2002. The increased use of short-term borrowings as a funding source was the result of our loan growth outpacing our deposit growth in the first nine months of 2003 and the use of short-term borrowings to fund growth in the investment portfolio during this same period.

Long-term debt. Long-term debt consists primarily of FHLB advances and $65.0 million of privately-placed senior debt. FHLB advances decreased $36.0 million to $314.8 million at September 30, 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 September 30, 2003 qualifies as Tier I capital under guidelines of the Federal Reserve.

Capital Management. The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) required the establishment of a capital-based supervisory system of prompt corrective action for all depository institutions. The Federal Reserve Board’s implementation of FDICIA defines “well-capitalized” institutions as those whose Tier I capital ratio equals or exceeds 6%, total risk-based capital ratio equals or exceeds 10%, and leverage ratio equals or exceeds 5%. 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, 2003.

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The following table compares our consolidated capital ratios with the minimum requirements for well-capitalized and adequately capitalized banks as of September 30, 2003:

Minimum Requirements
September 30
2003
 December 31
2002
 Well
Capitalized
 Adequately
Capitalized
Tier I capital to risk-weighted assets      10 .31%  10 .44%  6 .00%  4 .00%
Total capital to risk-weighted assets    11 .56  11 .70  10 .00  8 .00
Tier I capital to average tangible assets    8 .03  7 .86  5 .00  4 .00

Payment of dividends to us by the subsidiary banks is subject to various limitations by bank regulators, which includes maintenance of certain minimum capital ratios.

Liquidity Management. The objective of liquidity management is to assure the continuous availability of funds to meet our financial commitments. We use an asset liability management committee (“ALCO”) as part of our risk management process. ALCO is responsible for managing balance sheet and off-balance sheet commitments to meet the needs of customers while achieving our financial objectives. ALCO meets regularly to review funding capacity, current and forecasted loan demand, investment opportunities, and liquidity positions as outlined in our asset liability policy. With this information, ALCO guides changes in the balance sheet structure to provide for adequate ongoing liquidity.

Several factors provide for a favorable liquidity position. The first is the ability to acquire and retain funds in the local markets we serve. This in-market funding provides a historically stable source of funding and represented approximately 85% of total liabilities at September 30, 2003. Our available-for-sale securities portfolio is a secondary source of liquidity because of its readily marketable nature and predictable stream of maturities. While we prefer to fund the balance sheet with in-market funding sources, another source of liquidity is our ready access to regional and national wholesale funding markets, including federal funds purchased, Federal Home Loan Bank advances, and brokered deposits. As of September 30, 2003, we also had available $30.0 million of borrowing capacity under an unsecured credit facility. As of September 30, 2003, there were no advances outstanding under this facility. This credit facility is used primarily for contingency purposes.

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.

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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 at the end of the period covered by this quarterly report. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of September 30, 2003. There were no changes in our internal controls over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II — OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a)       The Company is filing the following exhibits with this Quarterly Report on Form 10-Q:

  31.1 Certification of Chief Executive Officer Pursuant to Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.

  31.2 Certification of Chief Financial Officer Pursuant to Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.

  32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

  32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) During the quarter ended September 30, 2003, and during the period from September 30, 2003 until the date of this Quarterly Report, the Company filed or furnished the following Current Reports on Form 8-K:

  A Current Report on Form 8-K dated October 08, 2003, which disclosed the issuance of a press release under Item 5,was filed by the Company with the Securities and Exchange Commission on October 09, 2003. The press release announced that the Company had named Pat Donovan as Executive Vice President and Chief Operating Officer of Bremer Financial Corporation.

  A Current Report on Form 8-K dated October 28, 2003, which disclosed the issuance of a press release under Item 12, was furnished by the Company to the Securities and Exchange Commission on October 28, 2003. The press release described the Company’s financial results for the quarter ended September 30, 2003.

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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, 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)

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