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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004.

or

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________________ to _________________________

Commission file number       0-18342

Bremer Financial Corporation

(Exact name of registrant as specified in its charter)

            Minnesota                    

              41-0715583                 

(State or other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

445 Minnesota St., Suite 2000, St. Paul, MN  55101-2107

(Address of principal executive offices)  (Zip Code)

(651) 227-7621

(Registrant’s telephone number, including area code)

Not applicable.

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days

Yes __X__  No _____

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date

As of March 31, 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 AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(dollars in thousands, except per share amounts)

BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY BALANCE SHEET AND INCOME STATEMENT
(dollars in thousands)

BREMER FINANCIAL CORPORATION

FORM 10-Q

QUARTER ENDED MARCH 31, 2004

INDEX

Page

PART I  —  FINANCIAL INFORMATION

Item 1.

Financial Statements

3

Item 2.

Management's Discussion and Analysis of Financial

13

Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

24

Item 4.

Controls and Procedures

24

PART II  —  OTHER INFORMATION

Item 6.

Exhibits and Reports on Form 8-K

25

Signatures

26

Exhibit 31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1

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

Exhibit 32.2

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

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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” included as Exhibit 99.1 to the Annual Report on Form 10-K for the year ended December 31, 2003 filed on March 23, 2004 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)

See notes to consolidated financial statements.

3

BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)

See notes to consolidated financial statements.

4

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

See notes to consolidated financial statements.

5

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

See notes to consolidated financial statements.

6

BREMER FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months ended March 31, 2004 and 2003 (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, 2003 included in its Annual Report on Form 10-K for that year filed on March 23, 2004.

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 which 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 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. Management periodically evaluates investment securities for other than temporary declines in fair value. There were no investment securities which management identified to be other-than-temporarily impaired for the three months ended March 31, 2004.

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Note F:   Redeemable Class A Common Stock

At March 31, 2004, 960,000 shares of redeemable class A stock were issued and outstanding. At March 31, 2004, these shares were subject to redemption at a price of $39.97 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. The employee holders of class A common stock have the right to require the Company to purchase their shares under certain circumstances, including death, permanent disability or retirement, while the Company has the option to purchase the shares from holders upon the occurrence of certain events, which also include death, retirement or termination of the employee. 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, 2004 through March 31, 2004, the Company 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 10,869.7358 shares. These options were assigned to the Bremer Financial Corporation Employee Stock Ownership Plan (“ESOP”) (1,606.8381 shares), the Bremer Banks Profit Sharing Plus Plan (7,292.8977 shares), and executives and directors under the Executive Stock Purchase Plan (1,970.0000 shares). To the Company's 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, 2004 through March 31, 2004.

Note G:   Goodwill and Intangible Assets

Intangible assets consist of goodwill, core deposit intangibles, and other intangibles. The remaining unamortized balances at March 31, 2004 and 2003 were $101.8 million and $105.3 million. The core deposit and other intangibles amortization lives are 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 are tested for impairment at least annually and more frequently if events or changes in circumstances indicate that assets might be impaired. Management performed its annual impairment test on its goodwill assets in December 2003, 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.

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The following table presents relevant information about the Company's amortized intangible assets:

_______________________
(1)  Accumulated amortization of mortgage servicing rights includes the related valuation allowance of $984 thousand in 2004 and $892 thousand in 2003.

The Company recorded aggregate intangible amortization expense of $685 thousand for the three month period ended March 31, 2004 and $717 thousand for the three months ended March 31, 2003. The estimated amortization expense for each of the next five years is approximately $2.4 million.

Goodwill was $84.2 million at March 31, 2004 and $85.1 million at March 31, 2003. 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. There were no other changes in the carrying amount of the Company's goodwill during the periods presented.

Note H:   Employee Benefit Plans

Pension benefit plans – The Company maintains the Bremer Retirement Plan (“Pension Plan”), which is a qualified defined benefit pension plan designed to provide retirement benefits to substantially all of the employees of the Company and its subsidiaries. In addition, the Company has a Supplemental Executive Retirement Plan (“SERP”). Collectively, these two plans constitute the Company's “Pension Benefit Plans.”

Other postretirement benefits – The Company provides certain retiree health care benefits relating primarily to medical insurance co-payments to retired employees between the ages of 55 and 65. The Company accrues the cost of these benefits during the employees’ active service.

9

Net benefit plan expense for the above plans as actuarially determined, for the three months ended March 31, 2004 and 2003, included the following components:

The Company expects to contribute approximately $3.0 million to the retirement and postretirement plans in 2004. No contributions were made to these plans during the quarter ended March 31, 2004.

Note I:   Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN No. 46”), an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements.”  FIN No. 46 prescribes how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. This interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. On December 24, 2003, the FASB published a revision to FIN No. 46 (“FIN No. 46( R )”). FIN No. 46(R) clarifies certain provisions of FIN No. 46 and exempts certain entities from its requirements. For interests in variable interest entities acquired prior to January 31, 2003, the provisions of FIN No. 46(R) were applied on March 31, 2004. The Company applied the provisions by de-consolidating its subsidiary trusts, which issued Company obligated mandatorily redeemable preferred securities (“Trust Preferred Securities”). The junior subordinated debentures of the Company owned by the trusts are reflected in the Statements of Financial Condition as long-term debt. As provided by FIN No. 46(R), the Company has restated its financial statements to reflect the adoption for all periods presented. The Trust Preferred Securities currently qualify as Tier I capital of the Company for regulatory capital purposes. The banking regulatory agencies have not issued any guidance that would change the capital treatment for Trust Preferred Securities based on the impact of the adoption of FIN No. 46(R).

On March 9, 2004, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments”, which provides guidance regarding loan commitments that are accounted for as derivative instruments. The Company, which makes such interest rate lock commitments primarily in connection with

10

residential real estate lending activities, currently accounts for such commitments in a manner consistent with the provisions of Staff Accounting Bulletin No. 105, and the application of this accounting guidance will not have a material impact on the financial statements of the Company.

Note J:   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:

Standby letters of credit represent a conditional commitment to satisfy an obligation to a third party, generally to support public and private borrowing arrangements, on behalf of the customer. Loan commitments represent contractual agreements to provide funding to customers over a specified time period as long as there is no violation of any condition of the contract. These loans generally will take the form of operating lines.

The Company’s potential exposure to credit loss in the event of nonperformance by the other party is represented by the contractual amount of those instruments. The credit risk associated with letters of credit and loan commitments is substantially the same as extending credit in the form of a loan; therefore, the same credit policies apply in evaluating potential letters of credit or loan commitments. The amount of collateral obtained, if deemed necessary upon the extension of credit, is based on management’s credit evaluation. The type of collateral held varies, but includes accounts receivable, inventory, and productive assets.

Under substantially noncancelable contracts, the Company is obligated to pay approximately $4.8 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 Wisconsin Department of Revenue is currently conducting an income tax audit of our Wisconsin bank subsidiary, and another subsidiary company located in Nevada that holds and manages investments for the Wisconsin subsidiary bank. The audit has been initiated under an audit program targeted at Wisconsin financial institutions with non-Wisconsin subsidiaries, the income of which has not been subject to Wisconsin tax. The Wisconsin Department of Revenue may take the position that the income of the out-of-state investment subsidiary is taxable in Wisconsin. If such a claim is made, the Company intends to challenge such a claim, and management does not believe the resolution of any such claim will have a material impact on the financial statements.

11

The Company is routinely involved in legal actions which are incidental to the business of the Company. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with counsel, that any ultimate liability will not materially affect the Company's consolidated financial position or operations.

12

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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. 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.

Investment 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 March 31, 2004, 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 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 are written down to current market value and

13

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 securities which management identified to be other-than-temporarily impaired for the three months ended March 31, 2004. If the financial markets experience deterioration and investments decline in fair value, charges to income could occur in future periods.

Goodwill and Other Intangible Assets. SFAS No. 142, ”Accounting for Goodwill and Other Intangible Assets,” establishes standards for the amortization of acquired intangible assets and the non-amortization and impairment assessment of goodwill. In addition, SFAS No. 147, ”Acquisitions of Certain Financial Institutions,” establishes standards for unidentifiable intangible assets acquired specifically in branch purchases that qualify as business combinations. At March 31, 2004, we had  $84.2 million of goodwill, which is not subject to periodic amortization, and $17.6 million in other intangible assets, which is subject to periodic amortization.

We performed the annual impairment tests on our goodwill assets in December 2003. No events or changes in circumstances have occurred since that test that would indicate that such assets might be impaired, and we have concluded that the recorded value of goodwill was not impaired as of March 31, 2004. There are many assumptions and estimates underlying the determination of impairment. Impairment testing is based on a determination of the 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. We provide pension benefits to substantially all employees. 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.

Our accounting policies for the reserve for credit losses, investment securities, goodwill and other intangible assets and retirement plans are outlined in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. We believe that there have been no significant changes to the methods described in that Annual Report for making the estimates and judgments necessary to apply these policies.

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Overview

Earnings. We reported net income of $14.4 million or $1.20 in basic and diluted earnings per share for the first quarter of 2004. This compares to $16.2 million or $1.35 basic and diluted earnings per share in the first quarter of 2003. Return on average equity was 12.23% for the first quarter of 2004 compared to 15.02% for the same quarter of 2003. Return on average assets decreased to 1.03% in the first quarter of 2004 from 1.28% in the first quarter of 2003.

Results of Operations

Net Interest Income. Net interest income for the first quarter of 2004 was $45.8 million, a decrease of $318 thousand from the $46.1 million reported for the same period a year ago, as our net interest margin decreased to 3.66% in the first quarter of 2004 from 4.10% in the first quarter of 2003. Offsetting some of the decline in net interest margin when comparing the two quarterly periods was an increase in our average loans and leases of $291.1 million, or 8.0%.

The continued decline in our net interest margin is primarily the result of the prolonged low interest rate environment. The average yield on our earning assets declined 75 basis points when comparing the first quarter of 2004 with the first quarter of 2003. 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 35 basis points when comparing the same two periods.

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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: