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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 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)

(Registrant’s telephone number, including area code: (651) 227-7621)

Securities registered pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to Section 12(g) of the Act: Class A Commoon Stock, no par value.

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 if disclosure of delinquent filers pursuant to Item 405 of REgulation S-K is not contained herein, and will not be contained, to the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10_K.      X  

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2).    Yes      No   X  

Based upon the $36.68 per share price at which shares of class A common stock of the Company were last sold before June 30, 2003, the aggregate value of the Company’s shares of class A common stock held by non-affiliates as of such date was approximately $27.7 million. All of the Company’s class B common stock is owned by the Otto Bremer Foundation, an affiliate of the Company.

As of March 18, 2004, 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
Annual Report on Form 10-K
for the year ended December 31, 2003

INDEX

i

DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated by reference to the parts indicated of this Annual Report on Form 10-K:

ii

CROSS REFERENCE SHEET

Between Items in Part III
of Form 10-K and
Proxy Statement
Pursuant to Paragraph G-4 of General Instructions to Form 10-K

iii

PART I

Certain statements in this Annual Report on Form 10-K and in the documents incorporated by reference herein 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 this Annual Report on Form 10-K as Exhibit 99.1, that could cause actual results to differ materially from those expressed or implied by these forward-looking statements.

ITEM 1.   BUSINESS

General

Bremer Financial Corporation is a regional financial services company with $5.7 billion in assets as of December 31, 2003, operating 11 subsidiary banks and 104 offices in Minnesota, Wisconsin and North Dakota. We offer a wide range of banking and related products and services, including transaction and savings deposits, commercial, consumer, agricultural and real estate loans, mortgage origination services, insurance, trust, and retail brokerage services. From December 31, 1999 to December 31, 2003, we increased our asset base from $3.9 billion to $5.7 billion, resulting from a combination of internal growth and growth through bank and branch acquisitions within our three-state market area. During the same period, our loans and leases increased from $2.5 billion to $4.0 billion, and our deposits increased from $2.8 billion to $4.1 billion.

Business Developments

New Branches. As part of our ongoing Twin Cities expansion strategy, we opened a new office in White Bear Lake in October 2003 and two new offices located in Plymouth and in downtown Minneapolis in January 2003. Each of the offices provides a full range of banking services, with the downtown Minneapolis office focusing on Private Banking.

Sale of Branches. In May 2003, we sold two rural branches in Edgerton and Leota, Minnesota, to a local community bank headquartered in that area. The transaction included $15 million in deposits, $16 million in loans, and the bank facilities in those communities. We originally acquired these branches in 1999 as part of our larger purchase of a Twin Cities-based banking company.

History

Otto Bremer incorporated Bremer Financial Corporation in December 1943 to consolidate his majority stock holdings in community banks located throughout Minnesota, Wisconsin and North Dakota. Mr. Bremer formed the Otto Bremer Foundation in 1944 to own Bremer Financial Corporation’s stock. Today we are owned by the foundation and the employees and directors of the company. The foundation is organized as a non-profit trust for charitable, educational and religious purposes for the benefit of individuals and entities who are residents of or are located in Minnesota, Wisconsin, North Dakota and Montana. The foundation is a key part of our community-based philosophy. Earnings from its investment in us and other investments are returned to the bank communities in the form of grants and program-related investments. In 2003, the Otto Bremer Foundation made over $23.0 million in grants to over 700 community organizations and programs.

From our incorporation in 1943 and through the late 1980s, we relied on our existing community banks to generate loan and deposit growth in our market area. From 1990 through 2003, we augmented this growth through 11 bank and branch acquisitions totaling approximately $1 billion of assets and $1.4 billion of deposits. We use bank and branch acquisitions to fill in gaps in our geographic markets in order to provide better customer service and leverage existing operations.

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Beginning in 1999, our expansion focus has been primarily in higher growth metropolitan areas such as Minneapolis/St. Paul and Fargo/Moorhead.

Our Strategy

We seek to be the preeminent community bank in the markets we serve. Our strategy for achieving this objective includes:

      •    Providing distinctive, community banking to our customers by:

        »  providing personalized service through a relationship management approach

       »  offering a wide variety of innovative financial products to our customers

       »  local decision-making

       »  using our unique ownership structure to reinvest in the communities we serve

      •    Investing in technology

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      •    Increasing penetration in our existing markets

      •    Leveraging our holding company structure

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Our Banks

Our 11 subsidiary banks are located in Minnesota, Wisconsin and North Dakota. At December 31, 2003, they ranged in size from $73.8 million to $1.9 billion in total assets and from $60.6 million to $1.4 billion in total deposits. Each of our banks is a community bank that provides a full range of commercial and consumer banking services, primarily to customers within its market area. All of our banks are nationally chartered, operate under the name of Bremer Bank, National Association, and are regulated by the Office of the Comptroller of the Currency. The locations, total assets and total deposits of our banks are as follows:

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Communities Served By Our Banks

We operate in 84 communities across Minnesota, Wisconsin and North Dakota. Beginning in 1999, we have been expanding significantly in more urban metropolitan areas, including Minneapolis/St. Paul, Fargo/Moorhead, and St. Cloud. Before that time, we had our strongest market presence in communities outside major metropolitan areas. In Minnesota, these non-metropolitan communities

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are a blend of agricultural-based areas in the southwestern portion of the state and more recreational and resort-based communities in west central Minnesota. Our North Dakota communities are in primarily agricultural-based areas located along the Red River Valley and in western North Dakota surrounding the Minot trade area. In Wisconsin, our locations are concentrated on the western side of the state. In our markets located outside the major metropolitan areas, we generally are first or second in deposit market share.

Beginning in 1999, most of our expansion has been in higher-growth metropolitan areas. The primary areas targeted for future expansion are expected to continue to be in the corridor from Minneapolis/St. Paul to St. Cloud and in the Fargo/Moorhead area. Although we have maintained charter banks in St. Cloud and South St. Paul for many years, our metropolitan area market share has not been substantial. The acquisition of Dean Financial Services, Inc. in 1999 added eight additional branch offices in the metropolitan Minneapolis/St. Paul area, and the 2001 Branch Acquisition added another 11 offices in that area. In 2003, we opened three additional offices in the Minneapolis/St. Paul area. We have also opened a number of offices in the rapidly growing Fargo/Moorhead area during the last few years.

Lending Activities

We maintain a diversified loan portfolio consisting of commercial, commercial and residential real estate, agricultural, consumer and tax-exempt loans.

Commercial Loans.   Loans in this category include term loans and operating lines of credit primarily for manufacturing, wholesale, or retail businesses. While we rely on the borrower’s business operations as the principal source of repayment, we also generally obtain personal guarantees and security interests in inventory, receivables, and equipment as collateral support for the loans. We utilize standard advance rates in determining amounts that can be advanced for each collateral type. Approximately 70% of our commercial loan portfolio consists of short-term floating rate advances that are normally secured by inventory and receivables. The remaining 30% of the commercial loan portfolio consists of fixed rate loans typically amortizing over approximately five years and secured by equipment.

Commercial Real Estate Loans.   Our commercial real estate portfolio, which includes interim commercial real estate construction, consists primarily of loans to business customers who occupy the property or use the property for income production. Commercial real estate loans generally are made for up to 80% of appraised value or cost and typically have a term of five years with 15 to 20 year amortization. Approximately 47% of our commercial real estate loans are fixed rate loans and 53% are adjustable rate loans.

Agricultural Loans.    Our agricultural loans include term loans secured by farm property or equipment and operating loans used for commodity production. Our agricultural customers and agricultural-based communities are diversified across the three states we serve, and we extend credit to 12 different areas of commodity production, including crops, dairy, and livestock. Approximately 76% of our agricultural loans are short-term floating rate loans. The remainder of the agricultural loans are fixed rate loans with terms generally under five years.

Residential Real Estate Loans.   The residential real estate portfolio includes home equity loans, first mortgage residential real estate loans, and some construction loans. The construction loans are typically made to builders on homes under construction that have been pre-sold. Loan to value ratios for home equity loans typically range from 80% to 100%. Approximately 27% of our home equity loans are fixed rate loans with terms of five to 12 years. The remaining 73% of our home equity loans are floating rate lines of credit. First mortgage residential real estate lending is generally conducted in compliance with secondary market underwriting guidelines, and most newly originated fixed rate first mortgage loans are sold into the secondary market. The first mortgage residential real estate loans that we keep in our portfolio are generally adjustable rate loans and often involve vacation homes in our recreational and resort-based communities.

Consumer Loans.  Loans in this category include automobile loans, home improvement loans and personal lines of credit. In addition to our direct lending operations, our subsidiary banks also

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purchase indirect retail installment sales contracts primarily from automobile dealers, certain recreational vehicle dealers, and certain sport recreation dealers where the selling dealer is well known to us and located in our primary trade area. Approximately 80% of our consumer loans are fixed rate loans with terms of three to five years.

Tax-Exempt Loans.   Tax-exempt loans and leases are made to qualifying organizations located within our primary trade area.

Deposits

We emphasize developing relationships with individuals and business customers in order to increase our deposit base. We offer a broad range of competitively priced deposit products designed to meet the individual needs of our customers, including checking accounts, money market accounts, savings accounts and certificates of deposit. Deposits in our banks are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to statutory limits (currently $100,000). Deposit product development is the primary responsibility of our holding company marketing and retail delivery departments, with input and feedback from the subsidiary banks’market managers. Pricing of products is generally consistent among all of our banks, with bank market managers having some local authority to modify pricing on certain products to meet the market and/or the local competition.

Other Products and Services

We operate various financial services subsidiaries, which provide insurance, trust and other fiduciary services. The subsidiaries allow us to offer a full range of products and services to our customers. On a consolidated basis, these other financial services subsidiaries historically have accounted for less than 10% of our annual earnings.

Bremer Trust, National Association.   Bremer Trust, National Association has trust powers and offers trust and other fiduciary services in the majority of our markets. Services that Bremer Trust provides to our customers include serving as trustee, investment agent, custodian, personal representative, and as a conservator for individuals, businesses, and public and tax-exempt organizations. Bremer Trust directly serves as an investment advisor for the proprietary stock and bond mutual funds we offer to our trust client accounts. It also operates on a limited basis as a registrar and transfer agent. As of December 31, 2003, Bremer Trust had 75 employees. Our total trust revenues for 2003 were $9.9 million.

Bremer Insurance Agencies, Inc.   Bremer Insurance Agencies, Inc. is an independent insurance agency with offices in Minnesota, Wisconsin and North Dakota, representing many different insurance companies. This gives agency personnel the ability to tailor coverage to meet the differing needs of our diverse customer base. The agency’s book of business is generated by selling personal, life, health, commercial and agricultural insurance products. In 2003, Bremer Insurance generated insurance commissions of $9.5 million and, as of December 31, 2003, it had 92 employees.

Brokerage Services.   In January 2004, we introduced our new name, Bremer Investments. Bremer Investments provides consumer investment products and services at our subsidiary bank offices through INVEST Financial Corporation of Tampa, Florida. We have an agreement with INVEST to deliver investment services to our customers through our branch network, and we receive a portion of the commissions earned by the investment representatives in those branches. We had $5.6 million in brokerage commissions in 2003.

Subsidiaries No Longer Conducting New Business Activities.   Bremer Life Insurance Company was formed as a reinsurer of credit life and credit accident and health insurance sold by the Bremer banks. In 2003, we discontinued selling credit life and disability insurance products through Bremer Life Insurance Company and replaced them with a bank product. Bremer Business Finance Corporation is a subsidiary originally formed in 1996 that was engaged in secured lending activities. Bremer Business Finance Corporation discontinued accepting new loan applications in 2003, and its loan portfolio has declined to $20.0 million at December 31, 2003 from $45.9 million at December 31, 2002.

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Operations and Administration

We provide a broad range of services to the individual subsidiaries in order to augment the capacities of the subsidiary banks’ management and to achieve many of the synergies of a larger company.

Operations Center.   Back-office operations for all banks are housed in an operations center in Lake Elmo, Minnesota, into which we moved in December 2002. We use a third-party provider for delivery of most data and item processing services for Bremer and its subsidiaries. We have entered into contracts for these services that extend through May 2008. Some of the operations of this third party provider are located in our operations center.

Credit.   We evaluate and approve credit at the individual subsidiary bank level through individual and senior lending officer credit authorities. In addition, each bank has a senior credit committee and a director’s credit committee that review and approve larger credits. The director’s credit committee can approve credit up to the individual bank limit.

We also support the credit process at the holding company level through the use of corporate credit committees and staff. Approval is required at the corporate level for loans that exceed the individual limits of the banks and for certain loans that have characteristics that warrant review at the corporate level as defined in our lending policy. We also provide centralized underwriting and internal syndication for credits that exceed the lending limits of individual banks.

Risk Management.   The risk management division is an independent unit that assists us in managing risk throughout the organization. This is done through consulting, monitoring, and performing independent audits and examinations of banks, other subsidiaries, and corporate support functions. The director of risk management has a direct reporting relationship to the holding company’s board of directors and the boards of the operating entities. Risk management consists of credit examination, internal audit, and compliance administration and counsel.

Asset Liability and Investment Portfolio Management.   We operate using a centralized treasury function. The asset liability committee of the holding company is responsible for developing appropriate risk management policies and for monitoring asset liability activities to assure that they are conducted within established risk parameters. The treasurer has day-to-day responsibility for our overall interest rate risk, liquidity, and investment portfolio management.

Finance.   We have established policies for capital expenditures, accounting policy, capital adequacy and dividends. In addition, we monitor the performance of our individual subsidiaries and coordinate the reporting process, the strategic planning process and annual profit planning.

Human Resources.   Our human resources division has established standard salary administration procedures, and our subsidiary banks administer these standards at their level. Employee benefits are standardized and administered by the holding company.

Marketing.   Our marketing division manages our branding efforts to assure that consistent messages are communicated in all of our external communications.

Competition

We conduct business in the highly competitive financial services industry. The financial services industry in which we compete is comprised of commercial banks, thrifts, credit unions, investment banks, brokerage houses, money managers, mortgage banks, insurance companies and other providers

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of financial products and services. These firms compete with us for loans, deposits, trust services, investment products and a host of other financial products and services.

We believe that our success in competing effectively with these alternative providers of financial services will be partly based on our ability to monitor the local economies, make decisions close to the marketplace, commit to and be involved in the communities we serve, and fully develop our relationship management concepts. We must preserve our ability to focus on providing personalized quality banking services to maintain or improve our competitive position in our markets. We believe that our size, combined with our support services in specialized areas, adds to the strength of the individual banks, enabling them to compete more effectively. Some of our competitors are not subject to the same degree of regulation as that imposed on bank holding companies and national banks. In addition, the larger banking organizations, investment banks and brokerage houses have significantly greater resources than we do. As a result, some of our competitors have advantages over us in name recognition and market penetration.

Employees

As of February 29, 2004, we had 1,632 full-time equivalent employees. We provide our employees with a comprehensive program of benefits, some of which are on a contributory basis, including comprehensive medical and dental plans, life insurance plans, and 401(k) plans. In addition, all the employees have the opportunity to invest in our class A common stock. None of our employees is a member of a collective bargaining unit. We consider our relationship with our employees to be good.

ITEM 2.   PROPERTIES

We lease our principal offices at 445 Minnesota Street, Suite 2000, St. Paul, Minnesota 55101, which consist of approximately 25,000 square feet. In addition, the centralized service operations of the holding company occupy approximately 83,900 square feet of owned property in Lake Elmo, Minnesota, a suburb of St. Paul. An additional 17,000 square feet of that property is occupied by one of our third party providers of data and item processing services. We believe that the principal offices at 445 Minnesota Street in St. Paul and our service operations facility will be sufficient for our needs in the foreseeable future.

Substantially all of the current offices and branches of the subsidiary banks are owned, with the primary exception of those located in leased space in downtown St. Paul and Minneapolis, Minnesota, and small leased spaces in supermarkets. Our bank facilities range in size from 391 square feet to 52,280 square feet.

ITEM 3.   LEGAL PROCEEDINGS

There are no material legal proceedings pending other than ordinary routine litigation incidental to our business.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted during the fourth quarter of the year ended December 31, 2003 to a vote of our security holders, through the solicitation of proxies or otherwise.

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PART II

ITEM 5.   MARKET FOR REGISTRANT’'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

There is no established trading market for the shares of our class A common stock. To the best of our knowledge, during the period from May 18, 1989 (the closing date of the registered initial public offering of Bremer’s class A common stock) through February 29, 2004, a majority of the purchases and sales of shares of the class A common stock have consisted of transfers effected upon the exercise of the options described in the portions of Bremer’s Prospectus dated April 20, 1989 (“Prospectus”) entitled “Description of Capital Stock — Description of Class A Common Stock — Restrictions on Transfer” on page 62 of the Prospectus and “Description of Capital Stock — Description of Class A Common Stock First Call Option to Company” on page 64 of the Prospectus (which portions are hereby incorporated by reference pursuant to Rule 12b-23 under the Securities Exchange Act of 1934). We are not obligated to purchase any shares of class A common stock from a holder upon the exercise of a put option if the purchase price paid for the shares subject to the put option, when added to the purchase price paid for all previous purchases of class A common stock during the preceding twelve-month period, would exceed 10% of our net worth as of the date of such purchase. As of December 31, 2003, our net worth, including redeemable class A common stock, was $467.4 million, and 10% of our net worth and redeemable class A common stock was $46.7 million.

During the period from January 1, 2003 through February 29, 2004, we did not directly purchase any shares of class A common stock but assigned to various parties our options to purchase a total of 109,236.9984 shares. These options were assigned to the Bremer Financial Corporation Employee Stock Ownership Plan (“ESOP”) (8,971.3837 shares), the Bremer Banks Profit Sharing Plus Plan (66,896.6147 shares), executives and directors under the Executive Stock Purchase Plan (33,269.0000 shares), and certain directors of subsidiary banks (100.0000 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 February 29, 2004. The sales price of the shares of class A common stock in such transactions occurring during that period ranged from $36.17 to $46.50 per share. These prices were equal to either the per share book value of the class A common stock as shown in our consolidated balance sheet dated as of the last day of the immediately preceding fiscal quarter or, and only with respect to shares transferred that had been held for employees in the ESOP, the per share fair market value as determined by an independent appraiser. At December 31, 2003, the most recent date for which a per share book value for the class A common stock is available, such value was $38.95.

To the best of our knowledge, no brokers are used to sell the shares of class A common stock, and there are no market makers for the class A common stock. The Company has sold none of its equity securities during the three years ended December 31, 2003.

Holders

As of February 29, 2004, there were 1,321 holders of record of the shares of class A common stock.

Dividends

The subsidiary banks’ ability to pay dividends to the parent and the parent’s ability to pay dividends to holders of the class A common stock are restricted and limited. The restrictions on payments of dividends are described in Note R of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K. Each of the subsidiary banks is subject to extensive regulation regarding the payment of dividends and other matters. All subsidiary banks are nationally chartered and are regulated by the Office of the Comptroller of the Currency. In addition, because the deposits of our subsidiary banks are insured up to the applicable limit (currently $100,000) by the

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FDIC, all of the subsidiary banks are subject to regulation by the FDIC. The parent and the foundation, as bank holding companies, are regulated by the Board of Governors of the Federal Reserve System.

Dividends from Subsidiary Banks.   A substantial portion of our cash flow and income is derived from dividends paid to us by the subsidiary banks, and restrictions on the payment of such dividends could affect the payment of dividends by the parent. With regard to the subsidiary banks, and in addition to the statutory prohibition against the withdrawal of any portion of a national bank’s capital and certain statutory limitations on the payment of dividends, the approval of the Comptroller is required for the payment of any dividend by any national bank if the total of all dividends declared by the bank in any calendar year exceeds the total of its net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years, less any required transfer to surplus. The Comptroller also has issued a banking circular emphasizing that the level of cash dividends should bear a direct correlation to the level of a national bank’s current and expected earnings stream, the bank’s need to maintain an adequate capital base, and other factors.

In addition to the foregoing limitations, the appropriate federal banking agency could take the position that it has the power to prohibit a national bank from paying dividends if, in its view, such payments would constitute unsafe or unsound banking practices.

The payment of dividends by any national bank also is affected by the requirements to maintain adequate capital pursuant to the capital adequacy guidelines issued by the Comptroller. The Comptroller has issued capital adequacy regulations for national banks subject to the Comptroller’s primary supervision. These regulations provide for a minimum Tier 1 capital to total assets (leverage) ratio of 4.00% for the most highly-rated banks and a minimum total capital to risk-weighted assets (total capital) ratio of 8.00%. These guidelines and regulations further provide that capital adequacy is to be considered on a case-by-case basis in view of various qualitative factors that affect a bank’s overall financial condition. Most banking organizations are expected to maintain a leverage ratio of 100 to 200 basis points above this minimum, depending on their financial condition. The subsidiary banks are in compliance with the Comptroller’s minimum capital guidelines. See the discussion of the capital adequacy guidelines set forth in the portion of Part II of this Form 10-K entitled “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Management.”

The above regulations and restrictions on dividends paid by the subsidiary banks may limit our ability to obtain funds from such dividends for our cash needs, including funds for payment of operating expenses and for the payment of dividends on the class A and class B common stock, as well as funds necessary to facilitate acquisitions. However, because of the capital positions of the subsidiary banks, we have been able to obtain dividends sufficient to meet our cash flow needs.

As of December 31, 2003, the subsidiary banks had retained earnings of $31.7 million which were available for distribution to the parent as dividends in 2004 subject to regulatory and administrative restrictions. Of this amount, approximately $24.4 million was available for distribution without obtaining the prior approval of the appropriate bank regulator. In 2003 and 2002, the subsidiary banks paid total dividends to the parent of $32.2 million and $59.8 million. The range of dividend payouts (dividends paid divided by net income) was 0.0% to 137.5% in 2003 and 24.3% to 116.5% in 2002.

Under the ESOP, and at the option of the ESOP’s Administrator, cash dividends declared on the shares of class A common stock held by the ESOP will be allocated to the ESOP participants. To the extent that cash dividends declared on the class A common stock held by the ESOP are distributed to the participants (whether directly or indirectly), the dividends will be deductible to us for income tax purposes. Any dividends paid in the form of class A common stock with respect to shares allocated to the individual participants’ accounts will be allocated to such accounts.

Under the Profit Sharing Plan, all cash dividends paid on the class A common stock are allocated to the accounts of the participants holding shares of the class A common stock in their profit sharing accounts. All such proceeds are available to the participants for investment under the Profit Sharing

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Plan in accordance with the terms and conditions of the Profit Sharing Plan. All dividends paid in the form of class A common stock will be allocated to the account of the participant in which the shares are held. In no event will dividends paid on the class A common stock held by the participants’ accounts within the Profit Sharing Plan be forfeited or otherwise allocated and held by the trustees of the Profit Sharing Plan.

Dividends from the Company.   Our payment of dividends is limited by, among other things, the requirement to maintain adequate capital pursuant to the capital adequacy guidelines issued by the Federal Reserve Board. These guidelines are substantially similar to those promulgated by the Comptroller with respect to national banks, which are discussed above. The payment of dividends by a bank holding company also is subject to the general limitation that the Federal Reserve Board could take the position that it has the power to prohibit the bank holding company from paying dividends if, in its view, such payments would constitute an unsafe or unsound practice.

We declared and paid dividends to the foundation and all other holders of our class A common stock of $21.6 million in 2003 and $19.8 million in 2002. We paid $5.4 million of dividends in each of the four quarters of 2003 and in the final quarter of 2002 and $4.8 million of dividends in each of the first three quarters of 2002. The dividend yield, which consists of dividends paid during the year divided by shareholders’ equity as of the last day of the preceding year, was 5.0% and 5.1% for the years ended December 31, 2003 and 2002.

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ITEM 6.    SELECTED FINANCIAL DATA

BREMER FINANCIAL CORPORATION AND SUBSIDIARIES

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ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Application of 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 Note A 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 are critical to an understanding of our consolidated financial statements and management’s discussion and analysis due to the judgments, estimates and assumptions inherent in those policies.

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 the use of significant judgment and 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. The policy for accounting for the reserves for credit losses is described in the later section entitled “- Financial Condition – Reserve for Credit Losses” and in Note A to the consolidated financial statements.

Investment and Mortgage-Backed Securities.   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 December 31, 2003, no investments were classified as trading securities. Held-to-maturity securities, which are valued at amortized historical cost, 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 current market value, with the resulting unrealized holding gains and losses excluded from earnings and 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 and mortgage-backed securities for other than temporary declines in fair value. Declines in fair value of individual investment and mortgage-backed securities below their amortized cost that are deemed to be other than temporary are written down to current market value and included in earnings as realized losses in the period the securities are deemed to be impaired. The assessment of whether such impairment has occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in fair value. Management considers a wide range of factors in making this assessment. Those factors include but are not limited to the length and severity of the decline in value and changes in the credit quality of the issuer or underlying assets. There were no investment and mortgage-backed securities which management identified to be other-than-temporarily impaired for the year ended December 31, 2003. If the financial markets experience deterioration and investments decline in fair value, charges to income could occur in future periods.

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Interest Income Recognition.   We recognize interest income by methods that conform to generally accepted 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 December 31, 2003, we had $84.2 million of goodwill, which is not subject to periodic amortization, and $18.3 million in other intangible assets, which is subject to periodic amortization. The largest components of our other intangible assets at December 31, 2003 were core deposit premiums at $14.1 million, $13.5 million of which is the result of the Branch Acquisition in 2001, and mortgage servicing rights at $1.9 million. Other intangibles are being amortized on the basis of estimated remaining life. The core deposit premium related to the Branch Acquisition is being amortized over an estimated remaining deposit life of 10 years from the date of acquisition.

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 have performed the annual impairment tests on our goodwill assets and have concluded that the recorded value of goodwill was not impaired as of December 31, 2003. There are many assumptions and estimates underlying the determination of impairment. Impairment testing is based on a determination of value of each reporting unit, using readily available market and earnings data for comparable publicly-traded organizations within the same time period, and comparing that calculation of value to the current book value of the unit. 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.

Retirement Plan Accounting.   As discussed in Note M of the Notes to the Consolidated Financial Statements, we provide pension benefits to substantially all employees. As of year end 2003, the fair value of the qualified pension plan assets was $55.2 million, compared to an accumulated benefit obligation at that date of $47.0 million. We account for these plans in accordance with SFAS No. 87 “Employers’ Accounting for Pensions,” which requires us to make a number of economic and other assumptions that can have a significant impact on amounts recorded in our income statement and statement of financial position. Assumptions regarding long-term discount rates and the expected return on pension plan assets can have the most material impact on our financial results and funding requirements.

The SFAS No. 87 discount rate is used to calculate the present value of pension obligations and the service cost and interest components of net periodic pension cost. It is intended to represent the rate

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at which pension benefit obligations could be settled by purchase of an annuity contract. Lower discount rate assumptions have the effect of increasing the service cost and interest cost components of pension expense, while higher discount rates have the opposite effect. The SFAS No. 87 discount rate used in calculating the 2003 pension expense was 6.75%, compared to 7.25% for 2002. The SFAS No. 87 discount rate which will be used in calculating 2004 pension expense is 6.00%. Each 25 basis point reduction in the 2004 discount rate assumption of 6.0% would increase our 2004 pension expense by approximately $350 thousand.

The SFAS No. 87 expected return on pension plan assets is our long-term expectation of the annual earnings rate on the pension fund and is determined by looking at historical trends, current expectations for certain asset categories based on broad equity and bond indices and the Company’s actual and targeted asset allocation. Higher expected return assumptions have the effect of decreasing pension costs while lower assumptions have the opposite effect. As of December 31, 2003, 70% of the Company’s pension plan assets were invested in a diversified mix of domestic and foreign equity securities and 30% in debt and other investments. Our expected return on pension assets used to determine 2003 pension expense was 9.0% compared to 10.0% for 2002. Our expected return as of January 1, 2004 used to determine 2004 pension expense was 8.50%. Each 25 basis point reduction in the 2004 expected rate of return would increase our 2004 pension expense by approximately $140 thousand.

Recent Accounting Pronouncements and Developments

Note A to the consolidated financial statements discusses new accounting policies adopted by us during 2003 and the expected impact of accounting policies recently issued or proposed but not yet required to be adopted. To the extent the adoption of new accounting standards materially affects our financial condition, results of operations, or liquidity, the impacts are discussed in the applicable section(s) of the financial review and the Notes to the consolidated financial statements.

Overview

Earnings.   We reported net income of $61.1 million or $5.09 basic and diluted earnings per share for the year ended December 31, 2003. This compares to net income of $61.6 million or $5.14 basic and diluted earnings per share in 2002 and $51.6 million or $4.30 basic and diluted earnings per share in 2001. Return on average equity was 13.55% in 2003, as compared to 14.96% in 2002 and 13.88% in 2001. Return on average assets was 1.14% in 2003, 1.23% in 2002 and 1.11% in 2001.

Assets.   Total assets at December 31, 2003 increased $411.7 million, or 7.8%, to $5.7 billion from $5.3 billion at December 31, 2002. During 2002, assets increased $165.5 million, or 3.2%, from $5.1 billion at December 31, 2001. Loans and leases net of unearned discount as a percentage of total assets were 69.9% at December 31, 2003, compared to 70.0% at December 31, 2002 and 68.7% at December 31, 2001.

Acquisitions.   One acquisition impacted our operating results during the three year period ended December 31, 2003. In May 2001, we completed the Branch Acquisition. This added approximately $715 million in deposits and $320 million in loans to our subsidiary bank operating in Minneapolis/St. Paul. Of the $320 million of loans acquired, approximately $150 million were loans originated in the branch locations, primarily home equity and other consumer credit. The remaining loans were primarily middle-market commercial loans originated in the commercial banking group.

The following pro forma financial information was prepared assuming the Branch Acquisition had been completed at January 1, 2001:

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Results of Operations

Net Interest Income.   We derive our net income primarily from net interest income. Net interest income is the difference between interest income, principally from loans and investment securities, and interest expense, principally on borrowings and customer deposits. Changes in net interest income result from changes in volume, net interest spread, and net interest margin. Volume refers to the average dollar levels of interest earning assets and interest bearing liabilities. Net interest spread refers to the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities. Net interest margin refers to the net interest income divided by average interest earning assets and is influenced by the level and relative mix of interest earning assets and interest bearing liabilities.

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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:

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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:

Tax-equivalent net interest income for 2003 was $194.0 million, a decrease of 4.6% from the 2002 total of $203.4 million. Tax-equivalent net interest income in 2002 increased 13.1% from $179.8 million in 2001. The decrease in net interest income in 2003, as our net interest margin declined to 3.89% in 2003 from 4.38% in 2002, was primarily due to the effects of historically low interest rates. Net interest margin has declined for six consecutive quarters through the fourth quarter of 2003. The average yield on our earning assets declined 95 basis points when comparing 2003 with 2002. Meanwhile, 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 51 basis points when comparing the same two periods. Offsetting some of the decline in net interest margin when comparing 2003 to 2002 was an increase in average earning assets which increased by $337.1 million or 7.3% in 2003 from 2002. Most of the increase in average earning assets was due to growth in loans. Average loans and leases increased by $262.3 million, or 7.4%, in 2003 from 2002.

The increase in net interest income in 2002 resulted primarily from our average earning assets, which increased by $313.1 million or 7.2% in 2002 from 2001. Most of this increase in average earning assets was also due to growth in loans, which increased by $329.8 million, or 10.3%, in 2002 from 2001. Also contributing to the increase in net interest income for 2002 was an increase in the net interest margin to 4.38% from 4.15% in 2001. As interest rates were declining in 2002, customer deposits were still migrating into lower yielding products which reduced the average annual cost of our interest bearing liabilities by 158 basis points when comparing 2002 with 2001. Offsetting some of this positive impact to the net interest margin was a 117 basis point decline in the average yield of earning assets between the same two periods.

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Provision for Credit Losses.   We establish the provision for credit losses based on a quarterly assessment of the adequacy of the reserve for credit losses. The provision for credit losses was $14.8 million in 2003, $18.2 million in 2002 and $12.1 million in 2001. Net charge-offs were $14.7 million in 2003, $13.1 million in 2002 and $8.2 million in 2001. For further information regarding the provision for credit losses, see the section entitled “- Financial Condition — Reserve for Credit Losses.”

Noninterest Income.   Noninterest income was $86.8 million in 2003 compared to $74.6 million in 2002 and $67.7 million in 2001. The following table summarizes the components of noninterest income:

Service charge income increased by 3.7% in 2003 from 2002 and 7.7% in 2002 from 2001. The Branch Acquisition in 2001 contributed significantly to the growth in service charge income during 2002. Brokerage revenue increased by 7.9% in 2003 and 13.2% in 2002. Trust revenue increased by 5.5% in 2003 after a decrease of 0.3% in 2002, while insurance revenue decreased by 8.3% in 2003 and by 0.8% in 2002. The Company stopped selling most single premium credit life and disability insurance during 2002 and discontinued the product completely in 2003, which caused the declines in insurance revenue. Gains on sales of loans resulted primarily from the sale of fixed rate residential real estate first mortgages into the secondary market. The higher volume of loan sales and resulting income has been due in large part to customer refinancing activity caused by historically low interest rates. Income from loan sales increased by 52.7% in 2003 and 34.8% in 2002. Securities sales in early 2003 resulted in securities gains of $5.9 million in 2003, compared to $2.2 million in 2002.

Noninterest Expense.   Noninterest expense increased $5.4 million, or 3.4%, in 2003 and $10.5 million, or 7.0%, in 2002. The following table summarizes the components of noninterest expense:

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Personnel costs, which include salaries, wages and employee benefits, accounted for 59.5% of noninterest expense in 2003 and increased by $4.3 million, or 4.6%, from 2002 and $11.8 million, or 14.5%, from 2001 to 2002. Personnel expenses in 2003 increased due in part to the opening of three new branches during the year. During 2002, the ongoing operating costs related to our Branch Acquisition in May 2001 contributed significantly to our growth in personnel costs. In addition, employee benefit costs increased by $4.8 million, or 30.0%, from 2001 to 2002, primarily as a result of increased employee medical insurance and pension cost.

Excluding personnel costs, noninterest expense increased $1.1 million, or 1.7%, from 2002 to 2003. Other noninterest expense declined by $1.2 million when comparing these two periods. The higher level of other noninterest expense in 2002 was primarily related to transition costs associated with our move to a new operations center in 2002. Excluding personnel costs, noninterest expense decreased $1.4 million, or 2.1%, in 2002 from 2001. The adoption of new accounting rules in 2002, which eliminated the requirement to amortize goodwill arising from business combinations, reduced the amortization of intangibles by $3.7 million in 2002 compared to 2001.

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 noninterest expense by tax-equivalent net interest income and noninterest income. Our operating efficiency ratio was 58.6% in 2003, 57.2% in 2002 and 60.1% in 2001. Our strategic goal is to move the operating efficiency ratio to 55.0% or below.

Income Taxes.   Income tax expense, which consists of provisions for federal and state income taxes, was $32.1 million for 2003 compared to $30.8 million in 2002 and $27.1 million in 2001. Our effective tax rate was 34.5% in 2003, 33.3% in 2002 and 34.4% in 2001. Our effective tax rate increased in 2003 primarily as a result of the branch sale that occurred during the second quarter of 2003.

Financial Condition

Loan and Lease Portfolio.   We maintain a diversified loan and lease portfolio consisting of commercial, commercial real estate, agricultural, residential real estate, consumer and tax-exempt loans and leases. The following table summarizes the components of our gross loan and lease portfolio: