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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 June 30, 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 June 30, 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)

Three months ended June 30,
 Six months ended June 30,
2004
2003
Change
2004
2003
Change
Operating Results:                            
     Total interest income   $ 68,678   $ 69,113    (0.63 )% $135,826   $138,013  (1.58 )%
     Total interest expense    21,245    22,696    (6.39 )  42,634    45,519    (6.34 )
     Net interest income    47,433    46,417    2.19    93,192    92,494  0.75
     Provision for credit losses    943    2,678    (64.79 )  3,886    6,156  (36.87 )
     Net interest income after provision for
        credit losses    46,490    43,739    6.29    89,306    86,338    3.44  
     Noninterest income    19,388    22,460    (13.68 )  39,728    45,265  (12.23 )
     Noninterest expense    43,226    42,293    2.21    84,584    83,179  1.69
     Income before income tax expense    22,652    23,906    (5.25 )  44,450    48,424  (8.21 )
     Income tax expense    7,706    8,519    (9.54 )  15,106    16,849  (10.35 )
     Net income   $ 14,946   $ 15,387    (2.87 )% $29,344 $31,575    (7.07 )%
 
     Net income per share   $1.25   $1.28  (2.87 )% $2.45   $2.63    (7.07 )%
     Dividends paid per share    0.45  0.45  —  0.90  0.90  —
 
     Tax equivalent net interest income   $ 49,500   $ 48,415    2.24 % $97,331 $96,486    0.88 %
     Net (recoveries)/charge-offs    (345 )  1,633    NM  1,504  2,640  (43.03 )

Selected Financial Ratios: 		  
     Return on average assets    1.04 %  1.16 %  (0.12 )  1.04 %  1.22 %  (0.18 )
     Return on average equity (1)    12.58  13.83  (1.25 )  12.51  14.36  (1.85 )
     Average equity to average assets (1)    8.26  8.42  (0.16 )  8.28  8.50  (0.22 )
     Net interest margin (2)    3.66  3.93  (0.27 )  3.66  4.02  (0.36 )
     Operating efficiency ratio (3)    62.75  59.67  3.08  61.71  58.68  3.03
     Net charge-offs to average loans and leases    (0.03 )  0.17  (0.20 )  0.07  0.14  (0.07 )
 
June 30,
2004
June 30,
2003
December 31,
2003
Change
Balance Sheet Data:   
     Total assets   $ 5,870,480   $ 5,445,232    7.81 % $5,673,709  3.47 %    
     Securities (4)    1,237,419    1,193,827    3.65    1,314,440    (5.86 )
     Loans and leases (5)    4,280,321    3,847,940    11.24    3,964,015    7.98      
     Total deposits    4,037,001    3,760,254    7.36    4,050,976    (0.34 )
     Short-term borrowings    891,244    677,422    31.56    639,358    39.40      
     Long-term debt    426,929    494,291    (13.63 )  460,158    (7.22 )
     Total shareholders’ equity and redeemable
       Class A common stock    475,643    452,516    5.11    467,427    1.76      
     Per share book value of common stock    39.64  37.71  5.11  38.95  1.76

Asset Quality: 		  
     Reserve for credit losses   $ 61,288   $ 62,315    (1.65 )% $58,906  4.04 %    
     Nonperforming assets    18,045    33,834    (46.67 )  23,936    (24.61 )
     Nonperforming assets to total loans, leases
       and OREO    0.42 %  0.88 %  (0.46 )  0.60 %  (0.18 )    
     Reserve to nonperforming loans and leases    409.95  203.91  206.04  289.63  120.32
     Reserve to total loans and leases    1.43  1.62  (0.19 )  1.49  (0.06 )    

_________________

(1)   Calculation includes shareholders’ equity and redeemable class A common stock.
(2)   Tax-equivalent basis (TEB).
(3)   Noninterest expense as a percentage of tax-equivalent net interest income and noninterest income.
(4)   Includes securities held-to-maturity and securities available-for-sale.
(5)   Net of unearned discount and includes nonaccrual loans and leases.



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

Three months ended June 30,
 Six months ended June 30,
2004
2003
2004
2003
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)   $ 4,129,993    5.72 % $ 3,775,010    6.26 % $ 4,038,246    5.75 % $ 3,715,534    6.35 %
     Total securities (3)    1,295,194    3.71    1,152,295    4.21    1,294,012    3.78    1,116,217    4.50  
     Total other earning assets    16,385    1.28    11,824    2.55    14,658    1.33    14,257    1.80  
     Total interest earning assets (4)   $ 5,441,572    5.23 % $ 4,939,129    5.77 % $ 5,346,916    5.26 % $ 4,846,008    5.91 %
     Total noninterest earning assets    344,023        364,361        350,315        368,221    
     Total assets   $ 5,785,595       $ 5,303,490       $ 5,697,231       $5,214,229    
     Noninterest bearing deposits   $ 723,841     $ 641,834     $ 704,955     $631,626    
     Interest bearing deposits    3,314,223    1.47 %  3,069,224    1.71 %  3,298,560    1.50 %  3,061,457    1.77 %
     Short-term borrowings    793,810    1.19    590,301    1.31    723,761    1.18    520,480    1.31  
     Long-term debt    434,717    6.25    494,375    6.21    447,435    6.22    495,207    6.23  
     Total interest bearing liabilities   $ 4,542,750    1.88 % $ 4,153,900    2.19 % $ 4,469,756    1.92 % $ 4,077,144    2.25 %
     Other noninterest bearing liabilities    41,186        61,253        50,835        62,003
     Minority interest    150        150        150        150    
     Total shareholders’ equity and redeemable  
         Class A common stock    477,668        446,353        471,535        443,306
     Total liabilities and equity   $ 5,785,595       $ 5,303,490       $ 5,697,231       $5,214,229    
 
Three months ended June 30,
 Six months ended June 30,
2004
2003
$ Change
% Change
2004
2003
$ Change
% Change
Summary Income Statement:   
     Total interest income   $ 68,678   $ 69,113   $ (435 )  (0.63 )% $ 135,826   $ 138,013   $ (2,187 )  (1.58 )%
     Total interest expense    21,245    22,696    (1,451 )  (6.39 )  42,634    45,519    (2,885 )  (6.34 )
     Net interest income    47,433    46,417    1,016    2.19    93,192    92,494    698    0.75  
     Provision for credit losses    943    2,678    (1,735 )  (64.79 )  3,886    6,156    (2,270 )  (36.87 )
     Net interest income after provision
        for credit losses		    46,490    43,739    2,751    6.29    89,306    86,338    2,968    3.44  
     Service charges    7,823    7,634    189    2.48    15,095    14,732    363    2.46  
     Insurance    2,132    1,786    346    19.37    4,915    4,024    891    22.14  
     Trust    2,745    2,444    301    12.32    5,364    4,784    580    12.12  
     Brokerage    1,781    1,345    436    32.42    3,316    2,582    734    28.43  
     Gain on sale of loans    3,166    6,208    (3,042 )  (49.00 )  5,427    10,520    (5,093 )  (48.41 )
     Gain on sale of securities    18    1,637    (1,619 )  (98.88 )  2,068    5,839    (3,771 )  (64.58 )
     Other    1,723    1,406    317    22.40    3,543    2,784    759    27.26  
         Total noninterest income    19,388    22,460    (3,072 )  (13.68 )  39,728    45,265    (5,537 )  (12.23 )
     Salaries and wages    20,489    19,599    890    4.54    39,995    37,887    2,108    5.56  
     Employee benefits    5,542    6,100    (558 )  (9.15 )  11,144    12,271    (1,127 )  (9.18 )
     Occupancy    3,002    2,801    201    7.18    6,061    5,590    471    8.43  
     Furniture and equipment    2,524    2,570    (46 )  (1.79 )  5,154    5,072    82    1.62  
     Data processing fees    2,704    2,498    206    8.25    5,343    4,983    360    7.22  
     FDIC premiums and examination fees    457    439    18    4.10    920    876    44    5.02  
     Amortization of intangibles    684    716    (32 )  (4.47 )  1,369    1,433    (64 )  (4.47 )
     Other    7,824    7,570    254    3.36    14,598    15,067    (469 )  (3.11 )
         Total noninterest expense    43,226    42,293    933    2.21    84,584    83,179    1,405    1.69  
     Income before income tax expense    22,652    23,906    (1,254 )  (5.25 )  44,450    48,424    (3,974 )  (8.21 )
         Income tax expense    7,706    8,519    (813 )  (9.54 )  15,106    16,849    (1,743 )  (10.35 )
     Net income   $ 14,946   $ 15,387   $ (441 )  (2.87 )% $ 29,344   $ 31,575   $ (2,231 )  (7.07 )%

_________________

(1)   Calculation is based on interest income including $2,068 and $1,998 for the three months ended June 30, 2004 and June 30, 2003 and $4,139 and $3,992 for the six months ended June 30, 2004 and June 30, 2003 to adjust to a fully taxable basis using the federal statutory rate of 35%.
(2)   Net of unearned discount and includes nonaccrual loans and leases.
(3)   Excluding net unrealized gain (loss) on securities available-for-sale.
(4)   Before deducting the reserve for credit losses.




BREMER FINANCIAL CORPORATION


FORM 10-Q

QUARTER ENDED JUNE 30, 2004


INDEX


Page


PART I  —  FINANCIAL INFORMATION



Item 1.

Financial Statements

3


Item 2.

Management’s Discussion and Analysis of Financial

12

Condition and Results of Operations


Item 3.

Quantitative and Qualitative Disclosure About Market Risk

25


Item 4.

Controls and Procedures

25


PART II  —  OTHER INFORMATION


Item 4.

Submission of Matters to a Vote of Security Holders

26


Item 6.

Exhibits and Reports on Form 8-K

27


Signatures

28


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.





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” 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)

June 30,
2004
December 31,
2003
(unaudited)
Assets            
     Cash and due from banks   $ 156,951   $ 195,165  
     Investment securities available-for-sale  
       (cost: 6/30/04 – $1,062,429; 12/31/03 – $1,133,958)    1,047,186    1,135,928  
     Investment securities held-to-maturity
       (fair value: 6/30/04 – $193,409; 12/31/03 – $186,890)    190,233    178,512  
     Loans and leases    4,280,321    3,964,015  
       Reserve for credit losses    (61,288 )  (58,906 )
           Net loans and leases     4,219,033    3,905,109  
     Interest receivable    32,072    33,540  
     Premises and equipment, net    84,278    85,970  
     Other intangibles    16,921    18,274  
     Other assets    39,580    36,985  
     Goodwill    84,226    84,226  
Total assets    $ 5,870,480   $ 5,673,709  

Liabilities and Shareholders’ Equity 		  
     Noninterest bearing deposits   $ 750,171   $ 783,260  
     Interest bearing deposits    3,286,830    3,267,716  
           Total deposits     4,037,001    4,050,976  
     Federal funds purchased and repurchase agreements    443,358    519,759  
     Other short-term borrowings    447,886    119,599  
     Long-term debt    426,929    460,158  
     Accrued expenses and other liabilities    39,513    55,640  
Total liabilities     5,394,687    5,206,132  
     Minority interests    150    150  
     Redeemable class A common stock, 960,000 shares  
       issued and outstanding    38,052    37,394  
     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    443,391    426,331  
       Accumulated other comprehensive (loss) income    (8,419 )  1,083  
           Total shareholders’ equity     437,591    430,033  
Total liabilities and shareholders’ equity    $ 5,870,480   $ 5,673,709  

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
June 30, 		For the Six Months Ended
June 30,
2004
2003
2004
2003
Interest income                    
     Loans and leases, including fees   $ 57,792   $ 58,119   $ 113,626   $ 115,306  
     Securities    10,833    10,919    22,103    22,579  
     Federal funds sold    28    22    48    58  
     Other    25    53    49    70  
           Total interest income    68,678    69,113    135,826    138,013  
Interest expense   
     Deposits    12,144    13,123    24,568    26,860  
     Federal funds purchased and repurchase agreements    1,396    1,382    2,754    2,657  
     Other short-term borrowings    948    541    1,476    714  
     Long-term debt    6,757    7,650    13,836    15,288  
           Total interest expense    21,245    22,696    42,634    45,519  
        Net interest income    47,433    46,417    93,192    92,494  
     Provision for credit losses    943    2,678    3,886    6,156  
Net interest income after provision for credit losses    46,490    43,739    89,306    86,338  
Noninterest income   
     Service charges    7,823    7,634    15,095    14,732  
     Insurance    2,132    1,786    4,915    4,024  
     Trust    2,745    2,444    5,364    4,784  
     Brokerage    1,781    1,345    3,316    2,582  
     Gain on sale of loans    3,166    6,208    5,427    10,520  
     Gain on sale of securities    18    1,637    2,068    5,839  
     Other    1,723    1,406    3,543    2,784  
        Total noninterest income    19,388    22,460    39,728    45,265  
Noninterest expense   
     Salaries and wages    20,489    19,599    39,995    37,887  
     Employee benefits    5,542    6,100    11,144    12,271  
     Occupancy    3,002    2,801    6,061    5,590  
     Furniture and equipment    2,524    2,570    5,154    5,072  
     Data processing fees    2,704    2,498    5,343    4,983  
     FDIC premiums and examination fees    457    439    920    876  
     Amortization of intangibles    684    716    1,369    1,433  
     Other    7,824    7,570    14,598    15,067  
        Total noninterest expense    43,226    42,293    84,584    83,179  
Income before income tax expense     22,652    23,906    44,450    48,424  
     Income tax expense    7,706    8,519    15,106    16,849  
Net income    $ 14,946   $ 15,387   $ 29,344   $ 31,575  
     Per common share amounts:  
        Net income-basic and diluted   $ 1.25   $ 1.28   $ 2.45   $ 2.63  
        Dividends paid    0.45    0.45    0.90    0.90  

See notes to consolidated financial statements.


4



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

Common Stock
Accumulated
Other
Comprehensive
Income (Loss)
Comprehensive
Income
Retained
Earnings
Total
Class A
Class B
For the Six Months ended June 30, 2003                            

Balance, December 31, 2002 		    $ 57   $ 2,562   $ 6,751       $ 389,998   $ 399,368  
    Comprehensive income    
      Net income                 $ 31,575     31,575     31,575  
      Other comprehensive income, net of tax:    
      Net unrealized gains on securities:    
      Unrealized holding losses arising during the period, net of tax               1,149     1,149          
      Less: Reclassified adjustment for gains included in income, net of tax               (3,503 )   (3,503 )
      Other comprehensive income (loss)               (2,354 )   (2,354 )       (2,354 )
      Comprehensive income                 $ 29,221          
    Dividends, $.90 per share                       (10,800 )   (10,800 )
    Allocation of net income in excess of dividends and other    
      comprehensive income to redeemable class A common stock               188         (1,662 )   (1,474 )
Balance, June 30, 2003     $ 57   $ 2,562   $ 4,585       $ 409,111   $ 416,315  

For the Six Months Ended June 30, 2004 		   

Balance, December 31, 2003 		    $ 57   $ 2,562   $ 1,083       $ 426,331   $ 430,033  
    Comprehensive income    
      Net income                 $ 29,344     29,344     29,344  
      Other comprehensive income, net of tax:    
      Net unrealized gains on securities:    
      Unrealized holding losses arising during the period, net of tax               (9,087 )   (9,087 )
      Less: Reclassified adjustment for gains included in income, net of tax               (1,241 )   (1,241 )        
      Other comprehensive income (loss)               (10,328 )   (10,328 )       (10,328 )
      Comprehensive income                 $ 19,016          
    Dividends, $.90 per share                       (10,800 )   (10,800 )
    Allocation of net income in excess of dividends and other
      comprehensive income to redeemable class A common stock               826         (1,484 )   (658 )
Balance, June 30, 2004     $ 57   $ 2,562   $ (8,419 )     $ 443,391   $ 437,591  

See notes to consolidated financial statements.


5



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

For the Six Months
Ended June 30,
2004
 2003
Cash flows from operating activities            
      Net income   $ 29,344   $ 31,575  
      Adjustments to reconcile net income to net cash  
        provided by operating activities:  
           Provision for credit losses    3,886    6,156  
           Depreciation and amortization    8,971    8,502  
           Gain on sale of securities    (2,068 )  (5,839 )
           Other assets and liabilities, net    (14,983 )  (8,159 )
           Gain on sale of loans    (5,427 )  (10,520 )
           Proceeds from loans originated for sale    215,197    412,481  
           Loans originated for sale    (203,971 )  (400,499 )
Net cash provided by operating activities    30,949    33,697  
Cash flows from investing activities   
      Purchases of available-for-sale investment securities    (198,771 )  (411,109 )
      Purchases of held-to-maturity securities    (23,875 )  (13,236 )
      Proceeds from maturities of available-for-sale investment securities    157,630    202,167  
      Proceeds from maturities of held-to-maturity securities    12,154    12,159  
      Proceeds from sales of available-for-sale investment securities    114,738    144,610  
      Proceeds from sales of other real estate owned    1,358    1,411  
      Loans and leases, net    (323,609 )  (172,372 )
      Purchase of premises and equipment    (2,670 )  (6,794 )
Net cash used in investing activities    (263,045 )  (243,164 )
Cash flows from financing activities   
      Noninterest bearing deposits, net    (33,089 )  (14,318 )
      Savings, NOW and money market accounts, net    28,633    193,453  
      Certificates of deposits, net    (9,519 )  (169,210 )
      Federal funds purchased and repurchase agreements,net    (76,401 )  (11,162 )
      Other short-term borrowings, net    328,287    177,108  
      Repayments of long-term debt    (33,229 )  (2,253 )
      Common stock dividends paid    (10,800 )  (10,800 )
Net cash provided by financing activities    193,882    162,818  
Net decrease in cash and due from banks    (38,214 )  (46,649 )
      Cash and due from banks at beginning of period    195,165    256,900  
      Cash and due from banks at end of period   $ 156,951   $ 210,251  
Supplemental disclosures of cash flow information  
      Cash paid for interest   $ 43,174   $ 48,370  
      Cash paid for income taxes    14,859    10,359  

See notes to consolidated financial statements.


6



BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months ended June 30, 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 period ended June 30, 2004.


7



Note F:   Redeemable Class A Common Stock

At June 30, 2004, 960,000 shares of redeemable class A stock were issued and outstanding. At June 30, 2004, these shares were subject to redemption at a price of $39.64 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. The Company has the option to purchase the shares from holders upon the occurrence of certain events, which include death, retirement or termination of employment. 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 June 30, 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 31,510.1836 shares. These options were assigned to the Bremer Financial Corporation Employee Stock Ownership Plan (“ESOP”) (4,189.7319 shares), the Bremer Banks Profit Sharing Plus Plan (22,650.4517 shares), and executives and directors under the Executive Stock Purchase Plan (4,670.0000 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 June 30, 2004.

Note G:   Goodwill and Intangible Assets

Intangible assets consist of goodwill, core deposit intangibles, and other intangibles. The remaining unamortized balances at June 30, 2004 and 2003 were $101.1 million and $103.7 million. The core deposit and other intangibles amortization lives are five 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.







8



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

As of June 30, 2004
As of June 30, 2003
(in thousands)
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Value
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Value
 
Core deposit premium     $ 21,313   $ 8,411   $ 12,902   $ 21,313   $ 5,985   $ 15,328  
Mortgage servicing rights (1)    4,459    2,582    1,877    3,839    2,354    1,485  
Other    4,400    2,258    2,142    4,525    1,882    2,643  
             Total   $ 30,172   $ 13,251   $ 16,921   $ 29,677   $ 10,221   $ 19,456  

_________________

(1)   Accumulated amortization of mortgage servicing rights includes the related valuation allowance of $732 thousand in 2004 and $1.2 million in 2003.

The Company recorded aggregate intangible amortization expense of $1.4 million for each of the six-month periods ended June 30, 2004 and June 30, 2003. The estimated amortization expense for each of the next five years is approximately $2.4 million.

Goodwill was $84.2 million at June 30, 2004 and June 30, 2003.

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 and six months ended June 30, 2004 and 2003, included the following components:

For the Three Months Ended
For the Six Months Ended
June 30,
June 30,
Pension Benefits
 Other
Postretirement Benefits
 Pension Benefits
 Other
Postretirement Benefits
2004
 2003
 2004
 2003
 2004
 2003
 2004
 2003
(in thousands)
Service cost     $ 946   $ 733   $ 146   $ 113   $ 1,884   $ 1,466   $ 282   $ 226  
Interest cost    921    824    91    80    1,835    1,649    175    159  
Expected return on assets    (1,190 )  (904 )  --    --    (2,370 )  (1,808 )  --    --  
Prior service cost amortization    15    21    (3 )  (3 )  30    42    (6 )  (6 )
Net loss/(gain) amortization    275    291    6    13    547    581    26    26  
Net periodic benefit cost   $ 967   $ 965   $ 240   $ 203   $ 1,926   $ 1,930   $ 477   $ 405  

The Company expects to contribute a total of approximately $3.0 million to the retirement and postretirement plans in 2004. No contributions have been made to these plans in 2004.

Note I:   Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (“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 issued proposed guidance that would not significantly change the capital treatment for Trust Preferred Securities after 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 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.


10



On March 31, 2004, the FASB ratified Emerging Issues Task Force Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” (“EITF No. 03-1”) which provides guidance on recognizing other-than-temporary impairments on certain investments. The Issue is effective for other-than-temporary impairment evaluations for investments accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” as well as non-marketable equity securities accounted for under the cost method for reporting periods beginning after June 15, 2004. The guidance requires that investments which have declined in value must be recorded as other-than-temporarily impaired unless the Company can assert and demonstrate its intention to hold the security for a period of time sufficient to allow for a recovery of fair value up to or beyond the cost of the investment which might mean maturity. This issue also requires disclosures assessing the ability and intent to hold investments in instances in which an investor determines that an investment with a fair value less than cost is not other-than-temporarily impaired. The Company is evaluating the impact of adopting EITF No. 03-1 and has not yet completed this analysis.

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:

June 30,
2004
December 31,
2003
(in thousands)
 
Standby letters of credit     $ 52,806   $ 54,795  
Loan commitments    1,284,915    1,093,759  

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 of 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


11



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 it. However, management does not believe the resolution of any such claim will have a material impact on the financial statements.

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 June 30, 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


13



that are deemed to be other than temporary are written down to current market value and included in earnings as realized losses during the period in which 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. Emerging Issues Task Force Issue No. 03-1 (“EITF No. 03-1”), which provides additional guidance regarding the meaning of other than temporary impairment, will become effective for reporting periods after June 15, 2004. We are evaluating the impact of adopting EITF No. 03-1 but have not yet completed the analysis. There were no investment securities which management identified to be other-than-temporarily impaired for the six months ended June 30, 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 June 30, 2004, we had $84.2 million of goodwill, which is not subject to periodic amortization, and $16.9 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 June 30, 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.

Income Taxes.   The determination of our current and deferred income taxes is a critical accounting estimate requiring significant management judgment. We make these estimates based on complex analysis of many factors, including our interpretation of existing federal and state


14



income tax laws as they relate to our activities, the differences between the tax and financial reporting bases of assets and liabilities (temporary differences), the expected timing of the reversal of these temporary differences, and current financial accounting standards. Such interpretations could differ from those of the various federal and state tax authorities that examine us periodically. If management’s estimates and assumptions vary from the views of the taxing authorities, adjustments to the periodic tax accruals may be necessary.

Our accounting policies for the reserve for credit losses, investment securities, goodwill and other intangible assets, retirement plans, and income taxes 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.

Overview

Earnings.   We reported net income of $14.9 million or $1.25 in basic and diluted earnings per share for the second quarter of 2004. This compares to $15.4 million or $1.28 in basic and diluted earnings per share in the second quarter of 2003. On a year-to-date basis through June 30, 2004, net income was $29.3 million, compared to $31.6 million earned in the first six months of 2003. Return on average equity was 12.58% for the second quarter of 2004 compared to 13.83% for the same quarter of 2003. On a year-to-date basis, we reported a return on average equity of 12.51%, compared to 14.36% in the first six months of 2003. Return on average assets decreased to 1.04% in the second quarter of 2004 from 1.16% in the second quarter of 2003. On a year-to-date basis, we reported a return on average assets of 1.04%, compared to 1.22% in the first six months of 2003.

Results of Operations

Net Interest Income.   Net interest income for the second quarter of 2004 was $47.4 million, an increase of $1.0 million from the $46.4 million reported for the same period a year ago. Meanwhile, our net interest margin decreased to 3.66% in the second quarter of 2004 from 3.93% in the second quarter of 2003. On a year-to-date basis, net interest income increased $698.0 thousand or .8% from the first six months of 2003, while our net interest margin decreased to 3.66% from 4.02%. Offsetting some of the decline in net interest margin when comparing the two six-month periods was an increase in our average loans and leases of $322.7 million, or 8.7%. The 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 65 basis points when comparing the first six months of 2004 with the first six months 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 33 basis points when comparing the same two periods. With the recent increase in market interest rates, we expect our net interest margin to improve during the second half of 2004.





15



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 June 30,
(unaudited)
2004 2003
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   $ 940,904   $ 12,090    5.17 % $ 916,816   $ 12,957    5.67 %
      Commercial real estate    1,414,531    20,753    5.90    1,191,978    19,213    6.47  
      Agricultural    460,575    6,367    5.56    439,708    6,531    5.96  
      Residential real estate    815,705    11,289    5.57    773,391    11,916    6.18  
      Consumer    348,149    5,457    6.30    332,246    5,897    7.12  
      Tax-exempt    150,129    2,787    7.47    120,871    2,442    8.10  
 
 
         Total Loans and Leases    4,129,993    58,743    5.72    3,775,010    58,956    6.26  
      Reserve for Credit Losses    (61,516 )  (61,856 )
         Net Loans and Leases    4,068,477    3,713,154  
Securities (3)  
      Taxable    1,113,319    8,685    3.14    972,214    8,679    3.58  
      Tax-exempt    181,875    3,265    7.22    180,081    3,402    7.58  
 
 
         Total Securities    1,295,194    11,950    3.71    1,152,295    12,081    4.21  
Federal funds sold    12,050    28    0.93    7,586    22    1.16  
Other earning assets    4,335    25    2.32    4,238    53    5.02  
 
 
         Total Earning Assets (4)   $ 5,441,572   $ 70,746    5.23 % $ 4,939,129   $ 71,112    5.77 $
Cash and due from banks    151,568    147,350  
Other non interest earning assets    253,971    278,867  
         Total Assets   $ 5,785,595   $ 5,303,490  
Liabilities and Shareholders' Equity  
Noninterest bearing deposits   $ 723,841   $ 641,834  
Interest bearing deposits  
      Savings and NOW accounts    483,366   $ 301    0.25 %  456,817   $ 374    0.33 %
      Other interest bearing checking    266,205    76    0.11    249,673    100    0.16  
      Money market savings    1,488,375    4,837    1.31    1,135,665    3,865    1.37  
      Savings certificates    862,847    5,580    2.60    1,006,429    7,274    2.90  
      Certificates over $100,000    213,430    1,350    2.54    220,640    1,510    2.75  
 
 
         Total Interest Bearing Deposits    3,314,223    12,144    1.47    3,069,224    13,123    1.71  
         Total Deposits    4,038,064    3,711,058  
      Short-term borrowings    793,810    2,344    1.19    590,301    1,923    1.31  
      Long-term debt    434,717    6,757    6.25    494,375    7,651    6.21  
 
 
         Total Interest Bearing Liabilities   $ 4,542,750   $ 21,245    1.88 % $ 4,153,900    22,697    2.19 %
Other noninterest bearing liabilities    41,186    61,253  
         Total Liabilities    5,307,777    4,856,987  
Minority Interest    150    150  
Redeemable Class A Common Stock    38,213    35,708  
Shareholders' equity    439,455    410,645  
         Total Liabilities and Equity   $ 5,785,595   $ 5,303,490  
Net interest income   $ 49,501   $ 48,415  
  
 
Net interest spread    3.35 %  3.58 %
Net interest margin    3.66 %  3.93 %
_________________
(1)   Interest income includes $2,068 and $1,998 in 2004 and 2003 to adjust to a fully taxable basis using the federal statutory rate of 35%.
(2)   Net of unearned discount and includes nonaccrual loans and leases.
(3)   Excluding net unrealized gain (loss) on available-for-sale securities.
(4)   Before deducting the reserve for credit losses.


16



For the Six Months Ended June 30,
(unaudited)
2004 2003
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   $ 916,156   $ 23,724    5.21 % $ 893,257   $ 25,370    5.73 %
      Commercial real estate    1,378,749    40,618    5.92    1,169,486    38,015    6.56  
      Agricultural    441,244    12,375    5.64    425,793    12,843    6.08  
      Residential real estate    808,150    22,320    5.55    773,453    23,893    6.23  
      Consumer    345,573    10,923    6.36    333,689    11,989    7.25  
      Tax-exempt    148,374    5,567    7.55    119,856    4,859    8.18  
 
 
          Total Loans and Leases    4,038,246    115,527    5.75    3,715,534    116,969    6.35  
      Reserve for Credit Losses    (60,844 )  (60,964 )
          Net Loans and Leases    3,977,402    3,654,570  
Securities (3)  
      Taxable    1,112,838    17,799    3.22    935,295    18,091    3.90  
      Tax-exempt    181,174    6,542    7.26    180,922    6,818    7.60  
 
 
          Total Securities    1,294,012    24,341    3.78    1,116,217    24,909    4.50  
Federal funds sold    10,335    48    0.93    10,041    58    1.16  
Other earning assets    4,323    49    2.28    4,216    69    3.30  
 
 
          Total Earning Assets (4)   $ 5,346,916   $ 139,965    5.26 % $ 4,846,008   $ 142,005    5.91 %
Cash and due from banks    152,070    147,948  
Other non interest earning assets    259,089    281,237  
          Total Assets   $ 5,697,231   $ 5,214,229  
Liabilities and Shareholders' Equity  
Noninterest bearing deposits   $ 704,955   $ 631,626  
Interest bearing deposits  
      Savings and NOW accounts    485,767   $ 587    0.24 %  461,446   $ 785    0.34 %
      Other interest bearing checking    264,100    150    0.11    249,319    196    0.16  
      Money market savings    1,465,070    9,810    1.35    1,083,041    7,129    1.33  
      Savings certificates    871,546    11,348    2.62    1,036,551    15,436    3.00  
      Certificates over $100,000    212,077    2,673    2.53    231,100    3,314    2.89  
 
 
          Total Interest Bearing Deposits    3,298,560    24,568    1.50    3,061,457    26,860    1.77  
          Total Deposits    4,003,515    3,693,083  
      Short-term borrowings    723,761    4,230    1.18    520,480    3,371    1.31  
      Long-term debt    447,435    13,836    6.22    495,207    15,288    6.23  
 
 
          Total Interest Bearing Liabilities   $ 4,469,756   $ 42,634    1.92 % $ 4,077,144   $ 45,519    2.25 %
Other noninterest bearing liabilities    50,835    62,003  
          Total Liabilities    5,225,546    4,770,773  
Minority Interest    150    150  
Redeemable Class A Common Stock    37,723    35,465  
Shareholders' equity    433,812    407,841  
          Total Liabilities and Equity   $ 5,697,231   $ 5,214,229  
Net interest income   $ 97,331   $ 96,486  
  
 
Net interest spread    3.35 %  3.66 %
Net interest margin    3.66 %  4.02 %
_________________
(1)   Interest income includes $4,139 and $3,992 in 2004 and 2003 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.


17



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:

Six Months Ended June 30,
2004 vs. 2003
Increase (Decrease)
Due to Change in
Volume Rate Total
(in thousands)
 
Interest earning assets:                
      Loans and leases (1)   $ 10,159   $ (11,601 ) $ (1,442 )
      Taxable securities    3,434    (3,726 )  (292 )
      Tax-exempt securities (1)    9    (285 )  (276 )
      Federal funds sold    2    (12 )  (10 )
      Other interest earning assets    2    (22 )  (20 )
           Total interest earning assets   $ 13,606   $ (15,646 ) $ (2,040 )
 
Interest bearing liabilities:  
      Savings and NOW accounts   $ 184   $ (382 ) $ (198 )
      Money market and other interest bearing checking    1,720    915    2,635  
      Savings certificates    (2,722 )  (2,007 )  (4,729 )
      Short-term borrowings    1,317    (458 )  859  
      Long-term debt    (1,330 )  (122 )  (1,452 )
           Total interest bearing liabilities    (831 )  (2,054 )  (2,885 )
 
Change in net interest income   $ 14,437   $ (13,592 ) $ 845  
_________________
(1)   Interest income includes $4,139 in 2004 and $3,992 in 2003 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. We recorded net recoveries of $345.0 thousand during the second quarter of 2004, including a $1.2 million recovery of a previously charged-off commercial credit, compared to net charge-offs of $1.6 million for the same period in 2003. Partially as a result of this recovery,we were able to record a provision for credit losses of $943.0 thousand for the second quarter of 2004 compared to $2.7 million for the same quarter in 2003. On a year-to-date basis, the provision for credit losses decreased to $3.9 million in the first six months of 2004 from $6.2 million for the first six months of 2003. Our ratio of reserve to total loans and leases decreased to 1.43% at June 30, 2004 from 1.62% at June 30, 2003. Our reserve coverage on nonperforming loans and leases


18



increased to 410% at June 30, 2004 from 204% at June 30, 2003. 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 $3.1 million or 13.7% decrease to $19.4 million for the second quarter of 2004 from the $22.5 million recorded in the second quarter of 2003. On a year-to-date basis, noninterest income was $39.7 million, a $5.5 million or 12.2% decrease from the $45.3 million recorded in the first six months of 2003. Increases of 22.1%, 12.1% and 28.4% in insurance, trust and brokerage revenues, respectively, were more than offset by lower gains on the sale of loans and securities when comparing the two six-month periods. When comparing the first six months of 2004 with the same period in 2003, insurance, trust and brokerage revenues increased a combined $2.2 million or 19.4%, while gains on the sale of loans and securities declined a combined $8.9 million. The decline in gains on sale of loans in the first six months of 2004 can be attributed to a reduced level of residential mortgage loan refinancing activity.

The following table summarizes the components of noninterest income:

Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
(in thousands)
 
Service charges     $ 7,823   $ 7,634   $ 15,095   $ 14,732  
Insurance    2,132    1,786    4,915    4,024  
Trust    2,745    2,444    5,364    4,784  
Brokerage    1,781    1,345    3,316    2,582  
Gain on sale of loans    3,166    6,208    5,427    10,520  
Gain on sale of securities    18    1,637    2,068    5,839  
Other noninterest income    1,723    1,406    3,543    2,784  
     Total noninterest income   $ 19,388   $ 22,460   $ 39,728   $ 45,265  

Noninterest Expense.   Noninterest expense increased $933.0 thousand or 2.2% to $43.2 million in the second quarter of 2004 from $42.3 million in the second quarter of 2003. On a year-to-date basis, total noninterest expense increased $1.4 million or 1.7% to $84.6 million in 2004 from $83.2 million in 2003. Recently improved trends in our medical claims activity, which allowed for a reduction in our employee health costs in the first six months of 2004 as compared to those recorded in the first six months of 2003, positively affected the noninterest expense comparison between the two periods.








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The following table summarizes the components of noninterest expense:

Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
(in thousands)
 
Salaries and wages     $ 20,489   $ 19,599   $ 39,995   $ 37,887  
Employee benefits    5,542    6,100    11,144    12,271  
Occupancy    3,002    2,801    6,061    5,590  
Furniture and equipment    2,524    2,570    5,154    5,072  
Printing, postage and telephone    1,508    1,639    3,034    3,419  
Marketing    1,650    1,199    2,996    3,119  
Data processing fees    2,704    2,498    5,343    4,983  
Professional fees    1,069    829    1,992    1,450  
Other real estate owned    61    140    86    160  
FDIC premiums and examination fees    457    439    920    876  
Amortization of intangibles    684    716    1,369    1,433  
Other noninterest expense    3,536    3,763    6,490    6,919  
     Total noninterest expense   $ 43,226   $ 42,293   $ 84,584   $ 83,179  

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 62.8% for the second quarter of 2004, compared to 59.7% for the second quarter of 2003. On a year-to-date basis, the ratio was 61.7% for the six months ended June 30, 2004, compared to 58.7% for the same period in 2003.

Income Taxes.   The provision for income taxes was $7.7 million for the quarter ended June 30, 2004, compared to $8.5 million for the same period in 2003. On a year-to-date basis, the provision for income taxes decreased to $15.1 million in 2004 from $16.8 million in 2003. Comparing the second quarter of 2004 to the same period in 2003, our effective tax rate decreased to 34.0% from 35.6%. Our effective tax rate decreased to 34.0% for the first six months of 2004 from 34.8% for the same period in 2003. Our effective tax rate had increased in 2003 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 June 30, 2004 At December 31, 2003
Amount Percent of
Total Loans		 Amount Percent of
Total Loans
(dollars in thousands)
 
Commercial and other     $ 984,884    23.0 % $ 900,395    22.7 %
Commercial real estate    1,364,561    31.9    1,230,752    31.0  
        - Construction    89,937    2.1    99,213    2.5  
Agricultural    492,203    11.5    449,765    11.4  
Residential real estate    819,290    19.1    780,351    19.7  
        - Construction    17,754    0.4    23,041    0.6  
Consumer    359,124    8.4    337,449    8.5  
Tax-exempt    152,568    3.6    143,049    3.6  
        Total   $ 4,280,321    100.0 % $ 3,964,015    100.0 %

Our total loan and lease portfolio increased to $4.3 billion at June 30, 2004 from $4.0 billion at December 31, 2003. Commercial loans increased by $84.5 million or 9.4% during the first six months of 2004, and commercial real estate loans increased by $124.5 million or 9.4% during the same period. Agricultural loans increased by $42.4 million or 9.4% during the first six months of 2004, while residential real estate loans increased by $33.7 million or 4.2%. Consumer loans increased $21.7 million or 6.4% and tax-exempt loans increased to $152.6 million during the first six months of 2004.

Nonperforming Assets. Nonperforming assets include nonaccrual loans, restructured loans and other real estate owned. Nonperforming assets were $18.0 million at June 30, 2004, a decrease of $5.9 million or 24.6% from the $23.9 million level at December 31, 2003. Nonperforming assets as a percentage of total loans, leases and other real estate owned (“OREO”) decreased to .42% at June 30, 2004 from .60% at December 31, 2003. Approximately $3.4 million or 19.0% 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 $11.0 million at June 30, 2004 compared to $20.0 million at December 31, 2003, 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 $4.6 million at June 30, 2004 compared to $3.3 million at December 31, 2003.





21



Our nonperforming assets are summarized in the following table:

June 30,
2004		 December 31,
2003
(dollars in thousands)
Nonaccrual loans and leases     $ 14,707   $ 20,058  
Restructured loans and leases    243    280  
        Total nonperforming loans and leases    14,950    20,338  
Other real estate owned (OREO)    3,095    3,598  
        Total nonperforming assets   $ 18,045   $ 23,936  
Accruing loans and leases 90 days or more past due   $ 4,607   $ 3,284  
 
Nonperforming loans and leases to total loans and leases    0.35 %  0.51 %
Nonperforming assets to total loans, leases and OREO    0.42    0.60  
Nonperforming assets and accruing loans and leases 90  
        days or more past due to total loans, leases and OREO    0.53    0.69  

Reserve for Credit Losses.   At June 30, 2004, the reserve for credit losses was $61.3 million, an increase of $2.4 million or 4.0% from the balance of $58.9 million at December 31, 2003. The reserve for credit losses as a percentage of total loans and leases was 1.43% at June 30, 2004, compared to 1.49% at December 31, 2003.















22



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

Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
(dollars in thousands)
 
Balance at beginning of period     $ 60,000   $ 61,270   $ 58,906   $ 58,799  
Charge-offs:  
      Commercial and other    444    871    1,741    1,465  
      Commercial real estate    39    143    39    178  
      Agricultural    15    102    20    103  
      Residential real estate    213    31    402    148  
      Consumer    391    707    995    1,183  
           Total charge-offs    1,102    1,854    3,197    3,077  
Recoveries:  
      Commercial and other    1,193    76    1,292    97  
      Commercial real estate    10    10    11    16  
      Agricultural    31    9    34    15  
      Residential real estate    17    2    74    15  
      Consumer    196    124    282    294  
           Total recoveries    1,447    221    1,693    437  
Net (recoveries)/charge-offs    (345 )  1,633    1,504    2,640  
Provision for credit losses    943    2,678    3,886    6,156  
Balance at end of period   $ 61,288   $ 62,315   $ 61,288   $ 62,315  
Average loans and leases   $ 4,129,993   $ 3,775,010   $ 4,038,246   $ 3,715,534  
Annualized net charge-offs to average loans and leases    (0.03 )%  0.17 %  0.07 %  0.14 %
Reserve as a percentage of:  
      Period-end loans and leases    1.43 %  1.62 %
      Nonperforming loans and leases    409.95  203.91
      Nonperforming assets    339.63  184.18

Securities.   Our investment portfolio, including available-for-sale securities and held-to-maturity securities, decreased by $77.0 million to $1.2 billion at June 30, 2004 from $1.3 billion at December 31, 2003. The decline in the portfolio occurred during the second quarter of 2004, because proceeds from sales and maturities during that quarter were primarily used to fund loan portfolio growth. We sold $114.7 million in securities during the first six months of 2004, resulting in securities gains of $2.1 million for this period compared to securities gains of $5.8 million in the first six months of 2003. Most of these gains were in connection with the first quarter 2004 sale of callable obligations of state and political subdivisions that had unfavorable call features and mortgage-backed securities pools that had been paid down significantly to balance levels that were not economical to maintain. We replaced these securities with








23



obligations of state and political subdivisions that had more favorable call characteristics and adjustable rate mortgage-backed securities in larger and easier to manage pools.

Deposits.   Total deposits were $4.0 billion at June 30, 2004, compared to $4.1 billion at December 31, 2003. Noninterest bearing deposits decreased $33.1 million or 4.2% to $750.2 million at June 30, 2004 from $783.3 million at December 31, 2003. Interest bearing deposits maintained a $3.3 billion balance at June 30, 2004 and December 31, 2003.

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 $251.9 million or 39.4% to $891.2 million at June 30, 2004 from $639.4 million at December 31, 2003. 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 six months of 2004.

Long-term debt.   Long-term debt consists primarily of FHLB advances, junior subordinated debentures, and $65.0 million of privately-placed senior debt. FHLB advances decreased to $281.8 million at June 30, 2004 from $314.8 at December 31, 2003. The junior subordinated debentures include $61.9 million of 9.0% debentures payable to Bremer Capital Trust I, an unconsolidated affiliate of the Company, bearing quarterly interest payments, and $17.0 million of 10.2% junior subordinated debentures payable to Bremer Statutory Trust I, also an unconsolidated affiliate of the Company, bearing semi-annual interest payments. The debentures mature not earlier than July 15, 2006 and not later than July 15, 2031. At June 30, 2004, $76.5 million qualified 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 June 30, 2004.

The following table compares our consolidated capital ratios with the minimum requirements for well-capitalized and adequately capitalized banks as of June 30, 2004:

Minimum Requirements
June 30,
2004		 December 31,
2003		 Well
Capitalized		 Adequately
Capitalized
 
Tier I capital to risk-weighted assets      10.23%    10.51%    6.00%    4.00%  
Total capital to risk-weighted assets    11.48       11.76       10.00       8.00     
Tier I capital to average tangible assets    8.12       8.10       5.00       4.00     








24



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 82% of total liabilities at June 30, 2004. 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, FHLB advances, and brokered deposits. As of June 30, 2004, we also had available $15.0 million of borrowing capacity under an unsecured credit facility. As of June 30, 2004, 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, 2003 in our Annual Report on Form 10-K for 2003.

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, 2003 in the Annual Report on Form 10-K for 2003.

Item 4.   Controls and Procedures

Our management, including the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness, as of June 30, 2004, of the Company’s internal control over financial reporting and, based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s internal control over financial reporting is effective. There was no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.






25



PART II – OTHER INFORMATION

Item 4.   Submission of Matters to a Vote of Security Holders.

(a)   The Company held its annual meeting of shareholders on April 27, 2004. At the meeting, 65.0% of the outstanding shares of the Company’s class A common stock was represented in person or by proxy.

(b)   The Company solicited proxies for the annual meeting pursuant to Regulation 14 under the Securities Exchange Act of 1934. There was no solicitation in opposition to management’s solicitation.

  The nominees for the Board of Directors consisted of all directors serving as such at the time of the annual meeting except for Patrick J. Donovan. Mr. Donovan, who served as Director of the Company since January 2002, was named Executive Vice President and Chief Operating Officer of the Company effective October 1, 2003. In light of Mr. Donovan’s new responsibilities as an Executive Officer of the Company and current Board of Director independence guidelines, the Board determined that it would be in the best interests of the Company for Mr. Donovan to not stand for re-election as a Director. All other such nominees were re-elected as directors. The directors elected were Terry M. Cummings, Stan K. Dardis, William H. Lipschultz, Charlotte S. Johnson, Daniel C. Reardon, Sherman Winthrop, Ronald James and Terrence W. Glarner.

(c)   The first matter to be voted upon was a proposal to fix the number of directors at not less than four (4) nor more than ten (10). This proposal was passed as follows: 778,431.6199 votes for, 1,271.4569 votes against and 463.6235 votes abstained.

  The second matter voted upon was the election of directors. The votes cast were as follows: 750,396.9387 votes for all nominees, 29,674.9522 votes to withhold authority for all nominees, 14.0092 votes to withhold authority for Stan K. Dardis and 80.8002 votes to withhold authority for Charlotte S. Johnson, Daniel C. Reardon, William H. Lipschultz and Sherman Winthrop.

  The final matter voted upon was the ratification of the appointment of Deloitte & Touche LLP as the Company’s independent accountant to audit the consolidated financial statements of the Company for the year ended December 31, 2004. The appointment was ratified as follows: 773,982.7434 votes for, 4,469.2534 votes against, and 1,714.7035 votes abstained.

  As to each matter, there were no broker non-votes.

  There were no other matters submitted for a vote or voted upon at the annual meeting.





26



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 Section 302 of the Sarbanes-Oxley Act of 2002.

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

  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.

  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.

(b)   During the quarter ended June 30, 2004, the Company filed or furnished the following Current Report on Form 8-K:

  A Current Report on Form 8-K dated April 27, 2004, which disclosed the issuance of a press release under Item 12, was furnished by the Company to the Securities and Exchange Commission on May 4, 2004. The press release described the Company’s financial results for the quarter ended March 31, 2004.













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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:   August 12, 2004   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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INDEX TO EXHIBITS

Description of Exhibits

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

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

  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.

  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.