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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005

Commission File Number 0-18342

Bremer Financial Corporation

(Exact name of registrant as specified in its charter)

Minnesota

41-0715583(State or other jurisdictionof incorporation or organization)

(IRS EmployerIdentification No.)


445 Minnesota StreetSuite 2000, St. Paul, MN

55101(Address of principal executive offices)

(Zip Code)


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

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.   Yes o   No
x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.   Yes o   No
x

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 o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange
Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x


Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o   No
x

Based upon the $42.60 per share price at which shares of class A common stock of the Company were last
sold before June 30, 2005, the aggregate value of the Companys shares of class A common stock held by non-affiliates as
of such date was approximately $32.2 million. All of the Companys class B common stock is owned by the Otto Bremer
Foundation, an affiliate of the Company.

As of March 22, 2006, there were 1,200,000 shares of class A common stock and 10,800,000 shares of
class B common stock outstanding.

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BREMER FINANCIAL CORPORATION
Annual Report on Form 10-K
for the year ended December 31, 2005
INDEX

|                                                                                                                           |  | Page
|-------------------------------------------------------------------------------------------------------------------------- |  | ----
|Documents Incorporated by Reference                                                                                        |  | ii  
|Cross Reference Sheet                                                                                                      |  | iii 
|Part I                                                                                                                     |  |     
|Item  1.      Business                                                                                                     |  | 1   
|Item  1A.   Risk Factors                                                                                                   |  | 9   
|Item  2.      Properties                                                                                                   |  | 12  
|Item  3.      Legal Proceedings                                                                                            |  | 12  
|Part II                                                                                                                    |  |     
|Item  5.      Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities |  | 12  
|Item  6.      Selected Financial Data                                                                                      |  | 15  
|Item  7.      Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 16  
|Item  7A.   Quantitative and Qualitative Disclosures About Market Risk                                                     |  | 36  
|Item  8.      Financial Statements and Supplementary Data                                                                  |  | 37  
|Item  9A.   Controls and Procedures                                                                                        |  | 67  
|Part III                                                                                                                   |  |     
|Item 10 through Item 14.      See Documents Incorporated by Reference (Page ii)                                          |  |     
|Part IV                                                                                                                    |  |     
|Item 15.      Exhibits and Financial Statement Schedules                                                                   |  | 67  
|Signatures                                                                                                                 |  | 69  



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DOCUMENTS INCORPORATED BY REFERENCE

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

Parts of Annual Report on Form 10-K
 Documents Incorporated by ReferencePart IIItem 5.

Market for Registrants Common Equity and Related Stockholder Matters

Reference is made to the portions described herein of the final Prospectus of the Company dated April 20, 1989 filed
with the Securities and Exchange Commission on April 20, 1989.Part IIIItem 10.

Directors and Executive Officers of the Registrant

Reference is made to the Registrants definitive proxy statement (Proxy Statement), which will be filed
with the Securities and Exchange Commission (Commission) within 120 days after December 31, 2005.Item 11.

Executive Compensation

Reference is made to the Registrants Proxy Statement.Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Reference is made to the Registrants Proxy Statement.Item 13.

Certain Relationships and Related Transactions

Reference is made to the Registrants Proxy Statement.Item 14.

Principal Accounting Fees and Services

Reference is made to the Registrants Proxy Statement.


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

Item Number and Caption
Subject HeadingsIn Proxy StatementItem 10.     Directors and Executive Officers of the Registrant

Information About Nominees for Election as Directors; Information About Executive Officers of the CompanyItem 11.     Executive Compensation

Information About Nominees for Election as Directors; Compensation of Executive Officers; Long-Term Incentive Compensation
of Executive OfficersItem 12.     Security Ownership of Certain Beneficial Owners and                  Management and Related Stockholder Matters

Principal ShareholdersItem 13.     Certain Relationships and Related Transactions

Certain TransactionsItem 14.     Principal Accounting Fees and Services

Independent Registered Public Accountants


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PART I

Certain statements in this Annual Report on Form 10-K and in the documents incorporated by reference
herein constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21B of the Securities Exchange Act of 1934, as amended (Exchange Act). For this purpose, any
statements contained herein or incorporated herein that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words believes, anticipates, plans,
intends, expects and similar expressions are intended to identify forward-looking statements. Because
these forward-looking statements involve risk and uncertainties, there are important factors, including the factors discussed in
Risk Factors filed with this Annual Report on Form 10-K as Item 1A., that could cause actual results to differ
materially from those expressed or implied by these forward-looking statements.

ITEM 1.   BUSINESS

General

Bremer Financial Corporation is a regional financial services company with $6.6 billion in assets as of
December 31, 2005, operating 102 offices in Minnesota, Wisconsin and North Dakota. We offer a wide range of banking and
related products and services, including transaction and savings deposits, commercial, consumer, agricultural and real estate
loans, mortgage origination services, insurance, trust, and retail brokerage services. From December 31, 2001 to
December 31, 2005, we increased our asset base from $5.1 billion to $6.6 billion. During the same period, our loans and
leases increased from $3.5 billion to $4.6 billion, and our deposits increased from $3.8 billion to $4.9 billion. Our most recent
acquisition was made in 2001, and acquisitions are not a significant part of our current strategy.

Business Developments

Branch Expansion.    As part of our Twin Cities expansion strategy, we opened a
new full service office in Woodbury in October 2005.

History

Otto Bremer incorporated Bremer Financial Corporation in December 1943 to consolidate his majority stock
holdings in community banks located throughout Minnesota, Wisconsin and North Dakota. Mr. Bremer formed the Otto Bremer
Foundation in 1944 to own Bremer Financial Corporations stock. Today we are owned by the foundation and the employees and
directors of the company. The foundation is organized as a non-profit trust for the benefit of individuals and entities who are
residents of or are located in Minnesota, Wisconsin, North Dakota and Montana. The foundation is a key part of our community-based
philosophy. Earnings from its investment in us and other investments are returned to the bank communities in the form of grants
and program-related investments. In 2005, the Otto Bremer Foundation made over $28.0 million in grants to over 800 community
organizations and programs.

From our incorporation in 1943 and through the late 1980s, we relied on our existing community banks to
generate loan and deposit growth in our market area. From 1990 through 2001, we augmented this growth through 11 bank and branch
acquisitions. During this period, we used bank and branch acquisitions to fill in gaps in our geographic markets in order to
provide better customer service and leverage existing operations. Over the past few years, our expansion focus has been primarily
in higher growth metropolitan areas such as Minneapolis/St. Paul, Fargo/Moorhead and St. Cloud.

Our Strategy

We seek to be the preeminent community bank in each market we serve. In order to achieve this objective,
we must create value by taking action for our clients and communities. We understand it is through our employees that action is
delivered and value is created. Our business model is designed

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to help provide individualized solutions to our clients total financial services needs through a
local, community bank network. This means our clients are interfacing directly with financial experts who are empowered to make
decisions on their behalf. Our strategic priorities are centered around taking action to continually improve our sales and service
delivery.

| |  | Sales Effectiveness
| | - | -------------------

| |  | » | Providing personalized service through a relationship development approach
| |  | - | --------------------------------------------------------------------------

| | We seek to identify the total financial services needs of our clients and provide them with individualized solutions to
meet those needs. We emphasize a client-centered sales approach in which an assigned relationship manager is responsible for
delivering the entire range of our solutions to our client base, as opposed to assigning sales people from each product area
to a specific client. In this role, our relationship managers work in tandem with representatives from our product areas to
develop an effective overall client solution. As a result, our relationship managers gain a more thorough understanding of
their clients needs, and clients gain more convenient access to our diverse product line.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | » | Offering a wide variety of innovative financial products to our clients
| |  | - | -----------------------------------------------------------------------

| | Bremer is more than a bank. We are a total financial services provider for families, businesses, non-profits, and agricultural
producers. The company offers traditional banking products and services, along with a comprehensive line of wealth management
soultions including private banking, brokerage, investment management and trust, and insurance services. Additionally, Bremer
offers a competitive range of convenient access options for clients, including over 100 branch locations across the three-state
region, 24-hour Internet and telephone banking, and over 3,700 free ATMs. We continue to invest significantly in technology
and product development to ensure our clients have access to competitive products and services to meet their changing needs.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | » | Empowering employees to make decisions locally
| |  | - | ----------------------------------------------

| | We believe clients in our markets seek financial services relationships managed by a trusted financial advisor who can deliver
prompt and professional responses to their requests. As smaller, independent banks have been acquired by national, multi-bank
holding companies, we believe that the personal relationships that these clients maintained with the management of such banks
have increasingly eroded, and the banks responsiveness and general service levels have declined. Consistent with our
long heritage of community banking, we operate under a philosophy of local market decision-making, which means our clients
are working directly with individuals that can make things happen for them.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Service Excellence
| | - | ------------------

| |  | » | Delivering exceptional client experiences in every interaction
| |  | - | --------------------------------------------------------------

| | In order to earn the right to ask for the clients business, Bremer knows it must first demonstrate an ability to deliver
consistent and reliable service in a highly professional and responsive manner. The company continues to make significant investments
in employee training, as well as ongoing research to measure and monitor client satisfaction and loyalty. The company has recently
introduced a new program called Bremer Action Experience, which is intended to help the organization and its employees
stay closely linked to our clients, their service expectations, and how we are performing against those expectations. To be
a premier financial services company, we believe you have to take action.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | » | Managing, minimizing, and solving problems
| |  | - | ------------------------------------------

| | We believe that one of the best tests of whether an organization delivers exceptional service is how it responds when a
problem arises. Obviously, our goal is to proactively manage and minimize any problems from occurring in the first place. However,
its inevitable in any business as complex as financial services that some issue could surface. We use the phrase internally,
Ill take care of it, to describe the service culture at Bremer. If and when a problem occurs, our employees
are empowered to own and resolve that issue on behalf of our clients. We hope our clients never experience a problem at Bremer,
but if they do they can rest assured that it will be taken care of in a highly responsive and professional manner.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our Banks

Our nine subsidiary banks, which are organized into four banking regions, are located in Minnesota,
Wisconsin and North Dakota. At December 31, 2005, the individual banks ranged in size from $76.7 million to $2.3 billion in
total assets and from $62.7 million to $1.8 billion in total deposits. Each of our banks is a community bank that provides a full
range of commercial and consumer banking services, primarily to customers within its market area. All of our banks are nationally
chartered, operate under the name of Bremer Bank, National Association, and are regulated by the Office of the Comptroller of the
Currency. The locations, total assets and total deposits of our banks are as follows:

Region/Location of Subsidiary Bank Charter
 Branch Locations

Assets

Deposits(in thousands as of December 31, 2005)Greater Minnesota RegionAlexandria, MN

Alexandria, MN (2)Brandon, MNBreckenridge, MNFergus Falls, MNMorris, MNStarbuck, MNWahpeton, ND

$526,025

$382,638Brainerd, MN

Brainerd, MN (2)Aitkin, MNBaxter, MN (2)

$315,846

$250,130International Falls, MN

International Falls, MN

$  76,658

$  62,687St. Cloud, MN

St. Cloud, MN (2)Rice, MNSartell, MNSauk Rapids, MN

$675,320

$435,280Willmar, MN

Marshall, MNRedwood Falls, MNWillmar, MN (2)

$460,016

$344,662   3  Table of Contents Region/Location of Subsidiary Bank Charter
 Branch Locations

Assets

Deposits(in thousands as of December 31, 2005)North Dakota RegionFargo, ND

Fargo, ND (2)Berthold, NDCarrington, NDCasselton, NDDetroit Lakes, MNDevils Lake, NDLeonard, NDLisbon,
NDMax, NDMinnewaukan, NDMinot, ND (3)Moorhead, MNPerham, MNRichardton, NDRugby, ND

$1,146,578

$743,572Grand Forks, ND

Grand Forks, ND (2)Crookston, MNFisher, MNFordville, NDGilby, NDGrafton, NDHoople, NDLarimore,
NDSt. Thomas, NDWarren, MN

$   683,281

$487,115              4  Table of Contents Region/Location of Subsidiary Bank Charter
 Branch Locations

Assets

Deposits(in thousands as of December 31, 2005)Twin Cities RegionSouth St. Paul, MN

South St. Paul, MNSt. Paul, MN (3)Minneapolis, MN (3)Arden Hills, MNBrooklyn Center, MNBrooklyn Park,
MNEagan, MNEden Prairie, MNEdina, MNInver Grove Heights, MNMaplewood, MNMilaca, MNMinnetonka, MNOgilvie,
MNPlymouth, MNPrinceton, MNRichfield, MNRoseville, MNSt. Anthony, MNSt. Louis Park, MNWatertown,
MNWhite Bear Lake, MNWoodbury, MNZimmerman, MN

$2,251,108

$1,788,156Wisconsin RegionMenomonie, WI

Menomonie, WI (3)Amery, WIBayfield, WIColfax, WIDanbury, WIDeer Park, WIEau Galle, WIElk Mound,
WIFrederic, WIKnapp, WILa Pointe, WINew Richmond, WIRock Falls, WISiren, WIWashburn, WI

$   531,067

$   423,257


Communities Served By Our Banks

We operate in 84 communities across Minnesota, Wisconsin and North Dakota. Over the past few years, we
have been expanding significantly in more urban metropolitan areas, including Minneapolis/St. Paul, Fargo/Moorhead, and St. Cloud.
Before that time, we had our strongest market presence in communities outside major metropolitan areas. In Minnesota, these
non-metropolitan communities are a blend of agricultural-based areas in the southwestern portion of the state and more
recreational and resort-based communities in west central Minnesota. Our North Dakota

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

Lending Activities

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

Commercial Loans.    Loans in this category include term loans and operating lines
of credit primarily for manufacturing, wholesale, or retail businesses. Although we rely on the borrowers business
operations as the principal source of repayment, we also generally obtain personal guarantees and security interests in inventory,
receivables, and equipment as collateral support for the loans. We utilize standard advance rates in determining amounts that can
be advanced for each collateral type. Approximately 67% of our commercial loan portfolio consists of short-term floating rate
advances that are normally secured by inventory and receivables. The remaining 33% of the commercial loan portfolio consists of
fixed rate loans typically amortizing over approximately five years and secured by equipment.

Commercial Real Estate Loans.   Our commercial real estate portfolio, which
includes interim commercial real estate construction and land development loans, consists primarily of loans to business customers
who occupy the property or use the property for income production. Commercial real estate loans generally are made for up to 80%
of appraised value or cost and typically have a term of five years with 15 to 20 year amortization. Approximately 49% of our
commercial real estate loans are fixed rate loans and 51% are adjustable rate loans.

Agricultural Loans.    Our agricultural loans include term loans secured by farm
property or equipment and operating loans used for commodity production. Our agricultural customers and agricultural-based
communities are diversified across the three states we serve, and we extend credit to 12 different areas of commodity production,
including crops, dairy, and livestock. Approximately 70% of our agricultural loans are short-term floating rate loans. The
remainder of the agricultural loans are fixed rate loans with terms generally under five years.

Residential Real Estate Loans.    The residential real estate portfolio includes
home equity loans, first mortgage residential real estate loans, and some construction loans. The construction loans are typically
made to builders on homes under construction that have been pre-sold. Loan to value ratios for home equity loans typically range
from 80% to 100%. Approximately 25% of our home equity loans are fixed rate loans with terms of five to 12 years. The remaining
75% of our home equity loans are floating rate lines of credit. In September 2005, we transferred approximately 35% of our home
equity lines of credit to a special interest trust in a securitization transaction and subsequently sold $200.0 million of the
sellers interest in these loans to a commercial paper conduit. First mortgage residential real estate lending is generally
conducted in compliance with secondary market underwriting guidelines, and most newly originated fixed rate first mortgage loans
are sold into the secondary market. The first mortgage residential real estate loans that we keep in our portfolio are generally
adjustable rate loans and often involve vacation homes in our recreational and resort-based communities.

Consumer Loans.    Loans in this category include automobile loans, student loans
and personal lines of credit. In addition to our direct lending operations, our subsidiary banks also purchase indirect retail
installment sales contracts primarily from automobile dealers, certain recreational vehicle dealers, and certain sport recreation
dealers where the selling dealer is well known to us and located in our primary trade area. We became more selective with respect
to indirect lending during 2005, and our indirect portfolio declined by 21% during 2005 as a result. Approximately 63% of our
consumer loans are fixed rate loans with terms of three to five years.

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

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Deposits

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

Other Products and Services

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

Bremer Trust, National Association.
   Bremer Trust, National Association has trust powers and offers trust and other fiduciary services in the
majority of our markets. Services that Bremer Trust provides to our customers include serving as trustee, investment agent,
custodian, personal representative, and conservator for individuals, businesses, and public and tax-exempt organizations. Bremer
Trust directly serves as an investment advisor for the proprietary stock and bond mutual funds we offer to our trust client
accounts. It also operates on a limited basis as a registrar and transfer agent. As of December 31, 2005, Bremer Trust had 75
employees. Our total trust revenues for 2005 were $11.8 million.

Bremer Insurance Agencies, Inc.
   Bremer Insurance Agencies, Inc. is an independent insurance agency with offices in Minnesota, Wisconsin and
North Dakota, representing many different insurance companies. This gives agency personnel the ability to tailor coverage to meet
the differing needs of our diverse customer base. The agencys book of business is generated by selling personal, life,
health, commercial and agricultural insurance products. In 2005, Bremer Insurance generated insurance commissions of $11.6 million
and, as of December 31, 2005, it had 97 employees.

Brokerage Services.    Bremer
Investments provides consumer investment products and services at our subsidiary bank offices through INVEST Financial
Corporation of Tampa, Florida. We have an agreement with INVEST to deliver investment services to our customers through our
branch network, and we receive a portion of the commissions earned by the investment representatives in those branches. We had
$6.4 million in brokerage commissions in 2005.

Subsidiaries No Longer Conducting New Business
Activities.    Bremer Life Insurance Company was formed as a reinsurer of credit life and credit accident and
health insurance sold by the Bremer banks. In 2003, we discontinued selling credit life and disability insurance products through
Bremer Life Insurance Company and replaced them with a bank product. Bremer Business Finance Corporation is a subsidiary
originally formed in 1996 that was engaged in secured lending activities. Bremer Business Finance Corporation discontinued
accepting new loan applications in 2003, and its loan portfolio has declined to $6.4 million at December 31, 2005.

Operations and Administration

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

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

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Credit.    The credit administration division, under the leadership of the Chief
Credit Officer, is responsible for managing the Companys credit granting process. We evaluate and approve credit through a
system of credit authorities that provides market personnel and market executives with authority levels that are designed to
balance responsiveness to the customer, efficiency, and soundness of credit decisions. We assign credit authorities in the markets
at the individual lender, market manager, and region credit manager levels. Each region has a credit committee which approves
larger credits. An executive credit committee approves those extensions of credit that exceed the limits established for the
regional credit committees and approves all credit policy and guideline changes. Members of the executive credit committee
includes the Companys Chief Credit Officer, the four regional credit managers, the special assets manager, and the business
loan portfolio manager.

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

| |  | Credit examination provides an independent assessment of our credit process and quality on a regular basis. The
frequency of examination is based on a risk assessment and provides for more frequent examinations for units exhibiting higher
risk factors.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Internal audit conducts periodic operational, financial, and internal control reviews of all of our affiliates and system-wide
operations and reports its findings to the audit committee and, where applicable, bank boards of directors.                  
| |  | Compliance administration and compliance counsel provide assistance to the centralized functions and affiliates in meeting
their compliance responsibilities and provides centralized Bank Secrecy Act / Anti-Money Laundering support.                     
| |  | Information security provides risk oversight of information technology activities by monitoring internal and external environments,
reporting findings to the audit committee, and ensuring appropriate responses to findings.                              

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

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

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

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

Competition

We conduct business in the highly competitive financial
services industry. The financial services industry in which we compete is comprised of commercial banks, thrifts, credit unions,
investment banks, brokerage houses, money managers, mortgage banks, insurance companies and other providers of financial products
and services. These firms compete with us for loans, deposits, trust services, investment products and a host of other financial
products and services.

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

Employees

As of February 28, 2006, we had 1,680 full-time
equivalent employees. We provide our employees with a comprehensive program of benefits, some of which are on a contributory
basis, including comprehensive medical and dental plans, life insurance plans, and 401(k) plans. In addition, all the employees
have the opportunity to invest in our class A common stock. None of our employees is a member of a collective bargaining unit.
We consider our relationship with our employees to be good.

ITEM 1A.   RISK FACTORS

Our geographic concentration is in the Upper Midwest, and many of the communities we
serve are dependent upon agriculture.

Our success depends to a great extent upon the general
economic conditions of the communities we serve in Minnesota, Wisconsin and North Dakota. Many of the communities we serve are
predominantly dependent on agriculture. We estimate that approximately 33% of our deposits and 30% of our loans and leases
originate in such communities. Agriculture in these communities is affected by many factors beyond our control, including weather,
government policies, fluctuating commodity prices, energy costs, and natural disasters. Flooding, high fuel costs, and low
commodity prices in recent years in some of the areas we serve have resulted in reduced levels of economic activity. Similar
events in the future may adversely affect our loan quality, local loan demand and other aspects of our business and results of
operations.

Changes in interest rates could have an adverse effect on our profitability.

Our ability to make a profit, like that of most financial
institutions, substantially depends upon our net interest income. This is the difference between the interest income we earn
on our interest-earning assets, such as loans, and the interest expense we pay on our interest-bearing liabilities, such as
deposits. When interest rates are rising, the interest income we earn on loans and interest-bearing investments may not increase
as rapidly as the interest expense paid on our liabilities. Conversely, when interest rates are declining, the interest income
we earn on loans and interest-bearing investments may decrease more rapidly than the interest expense paid on our liabilities.
In either case, our earnings may be adversely affected.

Factors such as inflation, recession, unemployment,
money supply, international disorders, instability in domestic and foreign financial markets and other factors beyond our control
may affect interest rates. Changes in market interest rates will also affect the level of voluntary prepayments on our loans
and payments on our mortgage-backed securities, resulting in the receipt of proceeds that may be reinvested at a lower rate
than the loan or mortgage-backed security being prepaid. Although we have an asset-liability management strategy designed to
control our risk from changes in market interest rates, changes in interest rates still could have an adverse effect on our
profitability.

We may be adversely affected by government monetary policy.

As a bank holding company, our business is affected
by the monetary policies of the Board of Governors of the Federal Reserve System (Federal Reserve Board), which
regulates the national

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money supply in order to mitigate recessionary and inflationary pressures. In setting its policy, the
Federal Reserve Board may use techniques such as the following:

| |  | engaging in open market transactions in United States government securities;
| | - | ----------------------------------------------------------------------------
| |  | setting the discount rate on member bank borrowing; and                     
| |  | determining reserve requirements.                                           

These techniques may have an adverse effect on our
deposit levels, net interest margin, loan demand or business and operations.

Credit losses are inherent in our business, and our allowances for credit losses
may be inadequate to cover actual credit losses.

Credit losses are inherent in the lending business
and could have a material adverse effect on our operating results. Every credit we make carries a certain risk of non-payment.
This risk is affected by, among other things:

| |  | the credit risks of a particular borrower;                                                                     
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | changes in economic and industry conditions;                                                                   
| |  | the duration of the credit; and                                                                                
| |  | in the case of a collateralized credit, the changes and uncertainties as to the future value of the collateral.

We make various assumptions and judgments about the
collectability of our loan portfolio and provide an allowance for potential losses based on a number of factors. The amount
of this allowance is determined by management through a periodic review and consideration of several factors, including:

| |  | an ongoing review of the quality, size and diversity of our credit portfolio;    
| | - | ---------------------------------------------------------------------------------
| |  | evaluation of non-performing loans;                                              
| |  | historical loan loss experience; and                                             
| |  | the amount and quality of collateral, including guarantees, securing the credits.

If our assumptions are wrong, our allowances for credit
losses may be insufficient to cover our actual losses, thereby having an adverse effect on our operating results and perhaps
causing us to increase the allowance in the future. The actual amount of future provisions for credit losses cannot now be
determined and may exceed the amounts of past provisions.

Commercial loans and commercial real estate loans represent a significant portion
of our loan portfolio, and repayment of these loans may depend on factors outside of our control or the control of our borrowers.

As of December 31, 2005, our commercial loans
and commercial real estate loans, including commercial real estate construction loans, totaled $2.8 billion, or 60.1%, of our
total loan portfolio. Commercial lending and commercial real estate lending typically involve higher principal amounts, and
the repayment of the loans generally depends, in large part, on sufficient income from the borrowers and cash flow from the
collateral securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside
of the control of the borrower or lender could negatively impact the future cash flow of the borrowers and the value of the
collateral securing the loans.

Changes in the regulatory structure or the statutes or regulations that apply to
us could have a material impact on our operations.

We are subject to extensive regulation, supervision
and examination by the Federal Reserve Board and the Office of the Comptroller of the Currency. The supervision, regulation
and examination of

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banks and bank holding companies by bank regulatory agencies are intended primarily for the protection
of depositors rather than the shareholders of these entities. Our success depends on our continued ability to comply with these
regulations. Some of these regulations may increase our costs and thus place non-bank financial institutions in stronger, more
competitive positions. Regulatory authorities have extensive discretion in carrying out their supervisory and enforcement
responsibilities. They have also implemented regulations that have increased capital requirements, increased insurance premiums,
required approval of acquisitions and changes of control and resulted in increased administrative and professional expenses. Any
change in the existing regulatory structure or the applicable statutes or regulations could have a material impact on our
operations. Additional legislation and regulations may be enacted or adopted in the future which could significantly affect our
powers, authority and operations, which in turn could have a material adverse effect on our operations.

If we do not adjust to rapid changes and consolidation in the financial services
industry, our financial performance may suffer.

Our ability to compete successfully in our market areas will depend in part on our ability to expand the
financial services we offer to meet the requirements and demands of our customers. In addition to the challenge of attracting and
retaining customers for traditional banking services, our competitors now include securities dealers, brokers, mortgage bankers,
investment advisors, finance companies, and insurance companies who seek to offer one-stop financial services to their customers.
This may include services that banks have not been able or allowed to offer to their customers in the past. The increasingly
competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems and the
accelerating pace of consolidation among financial service providers.

We continually encounter technological change, and we may have fewer resources than our
competitors to continue to invest in technological improvements.

The financial services industry is undergoing rapid technological changes, with frequent introductions
of new technology-driven products and services. In addition to allowing us to better serve customers, the effective use of
technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon
our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer
demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have
substantially greater resources to invest in technological improvements. We cannot assure you that we will be able to effectively
implement new technology-driven products and services or be successful in marketing these products and services to our
customers.

We currently offer a wide range of Internet-based
services to customers. The use of these services involves the transmission of confidential information over public networks.
We cannot be sure that advances in computer capabilities, new discoveries in the field of cryptography or other developments
will not result in a compromise or breach in the commercially available encryption and authentication technology that we use
to protect our customers transaction data. If we were to experience such a breach or compromise, we could suffer losses,
and our operations could be adversely affected.

The Otto Bremer Foundations ownership interest in Bremer is significant, which
may affect us in various ways.

The Otto Bremer Foundation, a non-profit charitable
trust, is our largest shareholder. It owns 240,000 shares, or 20%, of our class A common stock and 10,800,000 shares, or 100%,
of our class B common stock. Holders of class A common stock have full voting rights with regard to all matters, while holders
of class B common stock have the right to vote on an equivalent per share basis with the holders of the class A common stock
only with respect to certain extraordinary transactions. Three of the members of our board of directors are also the only trustees
of the Foundation. As a result, the Foundation may exert significant influence over our corporate affairs. As a private foundation,
the

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Foundation is subject to tax laws and other regulations at both the federal and state level. Any change
in these tax laws or other regulations that had a significant impact on the Foundation could also impact us. The Foundations
expectations regarding dividends needed to fund its annual distribution requirements and our two-class common stock structure may
limit our access to capital and consequently our ability to grow through any future acquisitions.

ITEM 2.   PROPERTIES

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

Substantially all of the offices and branches of the subsidiary banks outside of the Minneapolis/St.Paul
market are owned, with the primary exception of small leased spaces in supermarkets. Within the St. Paul/Minneapolis market area,
we lease 12 of our 28 banking offices. Our bank facilities range in size from less than 400 square feet to more than 52,000 square
feet.

ITEM 3.   LEGAL PROCEEDINGS

There are no legal proceedings pending other than ordinary routine litigation incidental to our
business, the resolution of which, either individually or in the aggregate, will not have a material adverse effect on the company
or its financial condition.

PART II

ITEM 5.   MARKET FOR REGISTRANTS COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND
                  ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

There is no established trading market for the shares of our class A common stock. To the best of our
knowledge, during the period from May 18, 1989 (the closing date of the registered initial public offering of Bremers
class A common stock) through February 28, 2006, a majority of the purchases and sales of shares of the class A common stock
have consisted of transfers effected upon the exercise of the options described in the portions of Bremers Prospectus dated
April 20, 1989 (Prospectus) entitled Description of Capital Stock  Description of Class A Common
Stock  Restrictions on Transfer on page 62 of the Prospectus and Description of Capital Stock  Description
of Class A Common Stock First Call Option to Company on page 64 of the Prospectus (which portions are hereby
incorporated by reference pursuant to Rule 12b-23 under the Securities Exchange Act of 1934). We are not obligated to purchase any
shares of class A common stock from a holder upon the exercise of a put option if the purchase price paid for the shares subject
to the put option, when added to the purchase price paid for all previous purchases of class A common stock during the preceding
12-month period, would exceed 10% of our net worth as of the date of such purchase. As of December 31, 2005, our net worth,
including redeemable class A common stock, was $546.6 million, and 10% of our net worth and redeemable class A common stock was
$54.7 million.

During the period from January 1, 2005 through
February 28, 2006, we did not directly purchase any shares of class A common stock but assigned to various parties our
options to purchase a total of 131,951.8250 shares. These options were assigned to the Bremer Financial Corporation Employee
Stock Ownership Plan (ESOP) (10,941.3090 shares), the Bremer 401(k) Plan (401(k)) (88,040.5160 shares)
and executives and directors under the Executive Stock Purchase Plan (32,970.0000 shares). To our knowledge, shares purchased
by these parties upon exercise of these assigned options were the only transfers of shares of class A common stock effected
during the

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period from January 1, 2005 through February 28, 2006. The sales price of the shares of class
A common stock in such transactions occurring during that period ranged from $42.02 to $62.50 per share. These prices were equal
to either the per share book value of the class A common stock as shown in our consolidated balance sheet dated as of the last day
of the immediately preceding fiscal quarter or, and only with respect to shares transferred that had been held for employees in
the ESOP, the per share fair market value as determined by an independent appraiser. At December 31, 2005, the most recent
date for which a per share book value for the class A common stock is available, such value was $45.55.

To the best of our knowledge, no brokers are used to sell the shares of class A common stock, and there
are no market makers for the class A common stock. The Company has sold none of its equity securities during the three years ended
December 31, 2005.

Holders

As of February 28, 2006, there were 107 holders of record of the shares of class A common
stock.

Dividends

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

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

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

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

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

As of December 31, 2005, the subsidiary banks had retained earnings of $35.5 million which were
available for distribution to the parent as dividends in 2006 subject to regulatory and administrative restrictions. Of this
amount, approximately $34.8 million was available for distribution without obtaining the prior approval of the appropriate bank
regulator. The subsidiary banks paid total dividends of $38.8 million in 2005 and $23.0 million in 2004 to the parent. The range
of dividend payouts (dividends paid divided by net income) was 7.8% to 105.61% in 2005 and 0.0% to 82.0% in 2004.

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

Under the 401(k), all cash dividends paid on the class A common stock are allocated to the accounts of
the participants holding shares of the class A common stock in their 401(k) accounts. All such proceeds are available to the
participants for investment under the 401(k) in accordance with the terms and conditions of the 401(k) plan. All dividends paid in
the form of class A common stock are allocated to the account of the participant in which the shares are held. In no event are
dividends paid on the class A common stock held by the participants accounts within the 401(k) forfeited or otherwise
allocated and held by the trustees of the 401(k) plan.

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

We declared and paid dividends to the Foundation and all other holders of our class A common stock of
$25.0 million in 2005 and $22.8 million in 2004. We paid $7.0 million of dividends in the last quarter of 2005, $6.0 million of
dividends in each of the first three quarters of 2005 and the last two quarters of 2004 and $5.4 million in the first two quarters
of 2004. The dividend yield, which consists of dividends paid during the year divided by shareholders equity as of the last
day of the preceding year, was 5.0% and 4.9% for the years ended December 31, 2005 and 2004.

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ITEM 6.   SELECTED FINANCIAL DATA

BREMER FINANCIAL CORPORATION AND SUBSIDIARIES

At or for the year ended December 31,2005


2004


2003


2002


2001(dollars in thousands, except per share data)Operating resultsTotal interest income



$
357,230


$
286,895


$
274,381


$
298,960


$
329,230Net interest income




222,399



198,056



185,770



195,059



171,666Net interest income (1)




231,845



206,610



193,973



203,374



179,806Provision for loan losses




12,365



7,042



14,805



18,161



12,054Noninterest income




85,227



79,720



86,780



74,643



67,738Noninterest expense




184,730



172,470



164,543



159,129



148,673Net income




72,031



64,177



61,092



61,649



51,626Dividends




24,960



22,800



21,600



19,800



19,200Average balancesTotal assets



$
6,306,334


$
5,829,367


$
5,357,353


$
5,000,244


$
4,657,716Securities (2)




1,237,951



1,249,306



1,165,642



1,088,518



1,104,541Loans and leases (3)




4,679,784



4,213,097



3,802,654



3,540,323



3,210,537Total deposits




4,449,128



4,069,376



3,788,738



3,647,435



3,461,900Short-term borrowings




914,266



798,611



573,608



427,309



450,407Long-term debt




356,407



429,505



482,115



447,912



307,708Redeemable class A common stock




42,033



38,865



36,061



32,960



29,758Shareholders equity




483,380



446,944



414,700



379,044



342,216Period-end balancesTotal assets



$
6,555,895


$
6,141,519


$
5,673,709


$
5,261,963


$
5,096,484Securities (2)




1,374,065



1,193,446



1,314,440



1,126,501



1,201,645Loans and leases (3)




4,639,766



4,541,993



3,964,015



3,679,669



3,498,839Total deposits




4,878,352



4,210,096



4,050,976



3,750,329



3,806,018Short-term borrowings




736,560



988,457



639,358



511,476



448,912Long-term debt




322,016



380,700



460,158



496,545



394,790Redeemable class A common stock




43,730



40,335



37,394



34,728



31,193Shareholders equity




502,904



463,856



430,033



399,368



358,719Financial ratiosReturn on average assets




1.14
%


1.10
%


1.14
%


1.23
%


1.11
%Return on average equity (4)




13.7



13.2



13.6



15.0



13.9Average equity to average assets (4)




8.3



8.3



8.4



8.2



8.0Tangible equity to assets (4)




7.0



6.7



6.6



6.4



5.7Dividend payout




34.7



35.5



35.4



32.1



37.2Net interest margin (1)




3.90



3.77



3.89



4.38



4.15Operating efficiency ratio (5)




58.3



60.2



58.6



57.2



60.1Reserve for loan losses to total loans and leases




1.20



1.28



1.49



1.60



1.54Net charge-offs to average loans and leases




0.30



0.11



0.39



0.37



0.26Per share of common stock (4)Net income-basic and diluted



$
6.00


$
5.35


$
5.09


$
5.14


$
4.30Dividends paid




2.08



1.90



1.80



1.65



1.60Book value




45.55



42.02



38.95



36.17



32.49


---

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

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

Application of Critical Accounting Policies

In preparing the financial statements, we follow accounting principles generally accepted in the United
States of America, which in many cases require us to make assumptions, estimates and judgments that affect the amounts reported. A
summary of our significant accounting policies can be found in Note A of the Notes to Consolidated Financial Statements included
in this Annual Report on Form 10-K, and many of these policies are relatively straightforward. However, management has identified
the accounting policies described below as those that are critical to an understanding of our consolidated financial statements
and managements discussion and analysis due to the judgments, estimates and assumptions inherent in those policies.

The difficulty in applying these policies arises from the assumptions, estimates and judgments that have
to be made currently about matters that are inherently uncertain, such as future economic conditions, operating results and
valuations as well as management intentions. As the difficulty increases, the level of precision decreases, meaning that actual
results can and probably will be different from those currently estimated. We base our assumptions, estimates and judgments on a
combination of historical experiences and other reasonable factors.

Reserves for Loan Losses.    In general, determining the amount of the reserve for
loan losses requires the use of significant judgment and estimates by management. We maintain an allowance for loan 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 loan losses include charges to reduce the recorded balances of loans receivable and real estate to their estimated
net realizable value or fair value, as applicable. The policy for accounting for the reserves for loan losses is described in the
later section entitled - Financial Condition  Reserve for Loan Losses and in Note A of the Notes to Consolidated
Financial Statements.

Loan securitizations.    We transfer loans through special interest trusts to
independent third parties under the terms of a revolving securitization facility agreement. These transfers are accounted for as
sales if the requirements of Statement of Financial Accounting Standards (SFAS) No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, are met.

When the requirements for sale accounting are met, the carrying amount of the assets transferred to the
special interest trust is allocated between assets sold and retained interests based on relative fair values at the date of sale.
A gain or loss on the sale of loans is recorded for the difference between the carrying amount and the fair value of the assets
sold. The retained interests include the sellers interest in loans which have not yet been sold to a third party, retained
interest-only strips, and reserve accounts. Because quoted market prices are not available, we estimate the fair value of the
retained interests by determining the present value of the future expected cash flows using modeling techniques that incorporate
managements best estimates of key variables, including credit losses, prepayment speeds, weighted average life, interest
rates on variable rate contracts, and discount rates commensurate with the risks involved. Credit loss assumptions are based upon
historical experience and the characteristics of the loans securitized. Prepayment speed estimates are determined utilizing data
obtained from market participants, where available, or based on historical prepayment rates on similar assets. Discount rate
assumptions are determined using data obtained from market participants. Estimates of interest rates on variable rate contracts
are based on spreads over the applicable benchmark interest rate using market-based yield curves. The sellers interest in
loans is recorded on the balance sheet in loans at the allocated carrying amount. Interest-only strips and reserve accounts are
included in other assets and are recorded at fair value with any differences between fair value and carrying value which are
deemed to be temporary, reported net of tax, as a separate component of shareholders equity. Any differences between fair
value and carrying value which are deemed to be other than temporary are recorded in earnings.

There are many assumptions and estimates underlying the determination of the fair value of retained
interests in securitization transactions. The use of different, but still reasonable assumptions, could

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significantly impact the amount recorded on the balance sheet for retained interests and the amount of
gain or loss recorded on the sale of loans in securitization transactions.

Investment Securities.    Investments in marketable equity and debt securities are
classified into three categories  held-to-maturity, available-for-sale, or trading  pursuant to SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. As of December 31, 2005, 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 that may be sold under only 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, as a
separate component of shareholders equity until realized. A portion of the unrealized holding gains and losses is allocated
to redeemable class A common stock. Gains or losses on these securities are computed based on the amortized cost of the specific
securities when sold.

Management periodically evaluates investment and mortgage-backed securities for other than temporary
declines in fair value. Declines in fair value of individual investment and mortgage-backed securities below their amortized cost
that are deemed to be other than temporary are written down to current market value and included in earnings as realized losses in
the period the securities are deemed to be impaired. The initial indicator of impairment is a sustained decline in market price
below the amount recorded for the investment. We consider the length of time and the extent to which market value has been less
than cost, the cause of the price decline, the extent to which the price decline is due to the general level of interest rates or
other issuer specific factors, the issuers financial condition and ability to make future payments in a timely manner, and
our investment horizon. Our analysis as of December 31, 2005 indicates that our unrealized losses were caused by market
interest rate increases. We intend to hold these investments until a recovery of fair value, which may be at maturity, and, as a
result, there were no investment securities which management identified to be other-than-temporarily impaired for the year ended
December 31, 2005. If the financial markets experience deterioration and investments decline in fair value, charges to income
could occur in future periods. See Note C of the Notes to Consolidated Financial Statements.

Goodwill and Other Intangible Assets.    SFAS No. 142, Accounting for
Goodwill and Other Intangible Assets, establishes standards for the amortization of acquired intangible assets and the
non-amortization and impairment assessment of goodwill. In addition, SFAS No. 147, Acquisitions of Certain Financial
Institutions, establishes standards for unidentifiable intangible assets acquired specifically in branch purchases that
qualify as business combinations. At December 31, 2005, we had $84.2 million of goodwill, which is not subject to
periodic amortization, and $12.2 million in other intangible assets, which is subject to periodic amortization. The largest
component of our other intangible assets at December 31, 2005 consisted of core deposit premiums of $9.5 million. The core
deposit premiums are being amortized over an estimated deposit life of 10 years from the date of acquisition. Other intangibles
are being amortized on the basis of estimated remaining life.

We performed the annual impairment tests on our goodwill and other intangible assets and have concluded
that the recorded values of goodwill and the other intangible assets, with the exception of mortgage-servicing rights
(MSRs), were not impaired as of December 31, 2005. We evaluate our MSRs on a quarterly basis for possible
impairment based on the difference between the carrying amount and current estimated fair value under SFAS No. 140. See Note H of
the Notes to Consolidated Financial Statements for additional information regarding the valuation of MSRs at December 31,
2005.

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

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comparing that calculation of value to the current book value of the unit. Another estimate using
different, but still reasonable, assumptions could produce a significantly different result. Additionally, future events could
cause management to conclude impairment indicators exist and our goodwill is impaired, which would result in us recording an
impairment loss. Any resulting impairment loss could have a material adverse impact on our financial condition and results of
operations.

Retirement Plan Accounting.    As discussed in Note L of the Notes to Consolidated
Financial Statements, we provide pension benefits to substantially all employees. As of December 31, 2005, the fair value of
the qualified pension plan assets was $77.1 million, compared to an accumulated benefit obligation at that date of $64.2 million.
We account for these plans in accordance with SFAS No. 87 Employers Accounting for Pensions, which requires us
to make a number of economic and other assumptions that can have a significant impact on amounts recorded in our income statement
and statement of financial position. Assumptions regarding long-term discount rates and the expected return on pension plan assets
can have the most material impact on our financial results and funding requirements.

The SFAS No. 87 discount rate is used to calculate the present value of pension obligations and the
service cost and interest components of net periodic pension cost. It is intended to represent the rate at which pension benefit
obligations could be settled by purchase of an annuity contract. Lower discount rate assumptions have the effect of increasing the
service cost and interest cost components of pension expense, while higher discount rates have the opposite effect. The SFAS No.
87 discount rate used in calculating the 2005 and 2004 pension expense was 6.00%. The SFAS No. 87 discount rate which will be used
in calculating 2006 pension expense is 5.75%. Each 25 basis point reduction in the 2006 discount rate assumption of 5.75% would
increase our 2006 pension expense by approximately $442 thousand.

The SFAS No. 87 expected return on pension plan assets is our long-term expectation of the annual
earnings rate on the pension fund and is determined by looking at historical trends, current expectations for certain asset
categories based on broad equity and bond indices and our actual and targeted asset allocation. Higher expected return assumptions
have the effect of decreasing pension costs while lower assumptions have the opposite effect. As of December 31, 2005, 74% of
our pension plan assets were invested in a diversified mix of domestic and foreign equity securities and 26% in debt and other
investments. Our expected return on pension assets used to determine 2005 and 2004 pension expense was 8.5%. Our expected return
as of January 1, 2006 used to determine 2006 pension expense was 8.5%. Each 25 basis point reduction in the 2006 expected
rate of return would increase our 2006 pension expense by approximately $190 thousand.

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 a complex analysis of
many factors, including our interpretation of existing federal and state 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.

18

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Table of Contents

Overview

Earnings.    We reported net income of $72.0 million or $6.00 basic and diluted
earnings per share for the year ended December 31, 2005. This compares to net income of $64.2 million or $5.35 basic and
diluted earnings per share in 2004 and $61.1 million or $5.09 basic and diluted earnings per share in 2003. Return on average
equity was 13.7% in 2005, as compared to 13.2% in 2004 and 13.6% in 2003. Return on average assets was 1.14% in 2005, 1.10% in
2004 and 1.14% in 2003.

Assets.    Total assets at December 31, 2005 increased $414.4 million, or
6.7%, to $6.6 billion from $6.1 billion at December 31, 2004. During 2004, assets increased $467.8 million, or 8.2%, from
$5.7 billion at December 31, 2003. Loans and leases, net of unearned discount, as a percentage of total assets were 70.8% at
December 31, 2005, compared to 74.0% at December 31, 2004 and 69.9% at December 31, 2003.

Results of Operations

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

19

---

Table of Contents

The following table sets forth, for the periods indicated, information regarding average balances of
assets and liabilities and the total dollar amounts of interest income from interest bearing assets and interest expense on
interest bearing liabilities. In addition, the table shows resultant yields or costs, net interest income, net interest spread and
net interest margin:

Years ended December 31,2005

 2004

 2003AverageBalance


Interest (1)


AverageRate/Yield


AverageBalance


Interest (1)


AverageRate/Yield


AverageBalance


Interest (1)


AverageRate/Yield(dollars in thousands)AssetsLoans and leases (2)Commercial



$
1,044,664


$
68,477



6.55
%

$
934,294


$
50,516



5.41
%

$
889,830


$
50,001



5.62
%Commercial real estate




1,670,548



111,312



6.66



1,443,719



86,668



6.00



1,225,989



77,215



6.30Agricultural




499,884



34,140



6.83



474,376



27,434



5.78



444,097



26,011



5.86Residential real estate




925,484



62,976



6.80



851,213



48,719



5.72



779,172



46,635



5.99Consumer




364,370



24,674



6.77



354,912



22,503



6.34



336,321



23,523



6.99Tax-exempt




174,834



13,127



7.51



154,583



11,567



7.48



127,245



10,190



8.01Total Loans and Leases




4,679,784



314,706



6.72



4,213,097



247,407



5.87



3,802,654



233,575



6.14Reserve for loan losses




(60,547
)










(61,683
)










(61,984
)Net Loans and Leases




4,619,237











4,151,414











3,740,670Securities (3)Taxable




1,030,966



36,506



3.54



1,062,961



34,359



3.23



981,430



34,972



3.56Tax-exempt




206,985



14,484



7.00



186,345



13,448



7.22



184,212



13,795



7.49Total Securities




1,237,951



50,990



4.12



1,249,306



47,807



3.83



1,165,642



48,767



4.18Federal funds sold




16,568



512



3.09



12,373



146



1.18



12,593



128



1.02Other earning assets




7,976



468



5.87



4,347



89



2.05



4,249



114



2.68Total Earning Assets (4)



$
5,942,279


$
366,676



6.17
%

$
5,479,123


$
295,449



5.39
%

$
4,985,138


$
282,584



5.67
%Cash and due from banks




169,359











154,520











152,753Other noninterest earning assets




255,243











257,407











281,446Total Assets



$
6,306,334










$
5,829,367










$
5,357,353Liabilities and Shareholders EquityNoninterest bearing deposits



$
795,617










$
745,134










$
668,457Interest bearing depositsSavings and NOW accounts




499,244


$
3,565



0.71
%


486,802


$
1,457



0.30
%


468,406


$
1,386



0.30
%Other interest bearing checking




267,511



1,046



0.39



265,257



318



0.12



250,228



334



0.13Money market savings




1,361,802



31,973



2.35



1,451,353



19,713



1.36



1,202,457



15,954



1.33Savings certificates




961,001



30,263



3.15



871,310



23,101



2.65



979,158



27,885



2.85Certificates over $100,000




563,953



20,265



3.59



249,520



6,615



2.65



220,032



6,005



2.73Total Interest Bearing Deposits




3,653,511



87,112



2.38



3,324,242



51,204



1.54



3,120,281



51,564



1.65Total Deposits




4,449,128











4,069,376











3,788,738Short-term borrowings




914,266



25,984



2.84



798,611



11,042



1.38



573,608



7,202



1.26Long-term debt




356,407



21,735



6.10



429,505



26,593



6.19



482,115



29,845



6.19Total Interest Bearing Liabilities



$
4,924,184


$
134,831



2.74
%

$
4,552,358


$
88,839



1.95
%

$
4,176,004


$
88,611



2.12
%Noninterest bearing liabilities




60,970











45,916











61,981Total Liabilities




5,780,771











5,343,408











4,906,442Minority interest




150











150











150Redeemable class A common stock




42,033











38,865











36,061Shareholders equity




483,380











446,944











414,700Total Liabilities and Equity



$
6,306,334










$
5,829,367










$
5,357,353Net interest income







$
231,845










$
206,610










$
193,973Net interest spread












3.43
%










3.44
%










3.55
%Net Interest margin












3.90
%










3.77
%










3.89
%


---

|(1) | Interest income includes $9,446, $8,554 and $8,203 in 2005, 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 loan losses.                                                                                                        

20

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Table of Contents

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:

Year Ended December 31,2005 vs. 2004

 2004 vs. 2003Increase (Decrease)Due to Change in

 Increase (Decrease)Due to Change inVolume


Rate


Total


Volume


Rate


Total(in thousands)Interest earning assets:Loans and leases (1)



$
27,406


$
39,893


$
67,299


$
25,212


$
(11,380
)

$
13,832Taxable securities




(1,035
)


3,182



2,147



2,905



(3,518
)


(613
)Tax-exempt securities (1)




1,490



(454
)


1,036



160



(507
)


(347
)Federal funds sold




50



316



366



(2
)


20



18Other interest earning assets




74



305



379



3



(28
)


(25
)Total interest earning assets



$
27,985


$
43,242


$
71,227


$
28,278


$
(15,413
)

$
12,865Interest bearing liabilities:Savings and NOW accounts



$
(49
)

$
2,157


$
2,108


$
204


$
(133
)

$
71Money market and other interest bearing checking




(680
)


13,668



12,988



2,394



1,349



3,743Savings certificates




10,714



10,098



20,812



(2,214
)


(1,960
)


(4,174
)Short-term borrowings




1,599



13,343



14,942



2,825



1,015



3,840Long-term debt




(4,526
)


(332
)


(4,858
)


(3,257
)


5



(3,252
)Total interest bearing liabilities




7,058



38,934



45,992



(48
)


276



228Change in net interest income



$
20,927


$
4,308


$
25,235


$
28,326


$
(15,689
)

$
12,637


---

|(1) | Interest income includes $9,446, $8,554 and $8,203 in 2005, 2004 and 2003 to adjust to a fully taxable basis
using the federal statutory rate of 35%.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

Tax-equivalent net interest income for 2005 was $231.8 million, an increase of 12.2% from the 2004 total
of $206.6 million. Our net interest margin increased to 3.90% in 2005 from 3.77% in 2004 and 3.89% in 2003. The average yield on
our earning assets increased 78 basis points when comparing 2005 with 2004. Meanwhile, the average cost of our interest bearing
liabilities increased by 79 basis points when comparing the same two periods. Offsetting this slightly negative impact on the net
interest spread when comparing 2005 to 2004 were increases in average noninterest bearing deposits, which increased by $50.5
million or 6.8% in 2005 from 2004, and average earning assets, which increased by $463.2 million or 8.5% in 2005 from 2004. Most
of the increase in average earning assets was due to growth in loans. Average loans and leases increased by $466.7 million, or
11.1%, in 2005 from 2004.

Tax-equivalent net interest income for 2004 was $206.6 million, an increase of 6.5% from the 2003 total
of $194.0 million. Our net interest margin declined to 3.77% in 2004 from 3.89% in 2003 and 4.38% in 2002. The average yield on
our earning assets declined 28 basis points when comparing 2004 with 2003. Meanwhile, we were able to reduce the average cost of
our interest bearing liabilities by only 17 basis points when comparing the same two periods. Offsetting some of the decline in
net interest margin when comparing 2004 to 2003 was an increase in average earning assets, which increased by $494.0 million or
9.9% in 2004 from 2003. Most of the increase in average earning assets was due to growth in loans. Average loans and leases
increased by $410.4 million, or 10.8%, in 2004 from 2003.

Provision for Loan Losses.    We establish the provision for loan losses based on
a quarterly assessment of the adequacy of the reserve for loan losses. The provision for loan losses was $12.4 million in 2005,
$7.0 million in 2004 and $14.8 million in 2003. Net charge-offs were $13.9 million in

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Table of Contents

2005, $4.5 million in 2004 and $14.7 million in 2003. For further information regarding the provision
for loan losses, see the section entitled - Financial Condition - Reserve for Loan Losses.

Noninterest Income.    Noninterest income was $85.2 million in 2005 compared to
$79.7 million in 2004 and $86.8 million in 2003. The following table summarizes the components of noninterest income:

Years Ended December 31,2005


2004


2003(in thousands)Service charges



$
31,524


$
31,337


$
29,966Insurance




11,606



10,946



9,346Investment management and trust fees




11,796



11,031



9,933Brokerage




6,369



6,245



5,559Gain on sale of loans




16,926



10,510



19,302Gain on sale of securities








2,072



5,856Other noninterest income




7,006



7,579



6,818Total noninterest income



$
85,227


$
79,720


$
86,780


Service charge income increased by 0.6% in 2005 from 2004 and 4.6% in 2004 from 2003. Insurance revenue
increased by 6.0% in 2005 following an increase of 17.1% in 2004 as compared to 2003. Investment management and trust revenue
increased by 6.9% in 2005 and 11.1% in 2004. Brokerage revenue increased by 2.0% in 2005 and 12.3% in 2004. Income from loan sales
increased by 61.0% in 2005 following a decrease of 45.5% in 2004. The increase in gain on sales of loans in 2005 is largely the
result of a $5.3 million gain on sale of loans related to the September 2005 transfer of $229.9 million of home equity loans to a
special interest trust in connection with a securitization transaction. The decline in gains on sale of loans in 2004 compared to
2003 can be attributed to a reduced level of residential mortgage loan refinancing activity. We recorded no investment securities
gains in 2005, compared to $2.1 million in gains recorded in 2004 and gains of $5.9 million recorded in 2003.

Noninterest Expense.    Noninterest expense increased $12.3 million, or 7.1%, in
2005 and $7.9 million, or 4.8%, in 2004. The following table summarizes the components of noninterest expense:

Years ended December 31,2005


2004


2003(in thousands)Salaries and wages



$
86,915


$
81,651


$
76,247Employee benefits




25,363



22,501



21,603Occupancy




12,523



12,014



11,210Furniture and equipment




11,826



10,406



10,651Printing, postage and telephone




6,413



6,205



6,695Marketing




6,429



6,272



6,140Data processing fees




11,362



10,959



10,413Professional fees




3,504



4,339



3,360Other real estate owned




211



119



282FDIC premiums and examination fees




1,920



1,830



1,753Amortization of intangibles




2,601



2,739



2,866Other noninterest expense




15,663



13,435



13,323Total noninterest expense



$
184,730


$
172,470


$
164,543


Personnel costs, which include salaries, wages and employee benefits, increased by $8.1 million, or
7.8%, in 2005 from 2004 and $6.3 million, or 6.4%, in 2004 from 2003 and accounted for 66.3% of the increase in noninterest
expense from 2004 to 2005. During 2005 and 2004, we added additional staff to support higher rates of growth and incurred higher
costs associated with our variable pay programs.

22

---

Table of Contents

Excluding personnel costs, noninterest expense increased $4.1 million, or 6.1%, from 2004 to 2005.
Excluding personnel costs, noninterest expense increased $1.6 million, or 2.4%, from 2003 to 2004. Other noninterest expense
increased by $2.2 million, or 16.6%, from 2004 to 2005 and by $112.0 thousand, or 0.8%, when comparing 2003 to 2004. The higher
rate of increase in 2005 in other noninterest expense was largely due to increased provisions for losses associated with
activities other than loans, higher courier costs due to increases in energy costs, and increased employee training and
development expenses.

A common industry statistic used to measure the productivity of banking organizations is the operating
efficiency ratio. The operating efficiency ratio measures the cost required to generate each dollar of revenue and is calculated
by dividing noninterest expense by tax-equivalent net interest income and noninterest income. Our operating efficiency ratio was
58.3% in 2005, 60.2% in 2004 and 58.6% in 2003. Our strategic goal is to move the operating efficiency ratio to 55.0% or
below.

Income Taxes.    Income tax expense, which consists of provisions for federal and
state income taxes, was $38.5 million for 2005 compared to $34.1 million in 2004 and $32.1 million in 2003. Our effective tax rate
was 34.8% in 2005, 34.7% in 2004 and 34.5% in 2003. Our effective tax rate increased slightly in 2005 and 2004 primarily due to an
increase in effective state income tax rates.

Financial Condition

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

At December 31,2005

 2004

 2003

 2002

 2001Amount


%


Amount


%


Amount


%


Amount


%


Amount


%(dollars in thousands)Commercial



$
1,050,364



22.6
%

$
1,001,508



22.1
%

$
900,395



22.7
%

$
872,597



23.7
%

$
883,099



25.2
%Commercial real estate




1,553,559



33.5



1,432,738



31.5



1,230,752



31.0



1,052,194



28.6



957,318



27.3Construction




184,989



4.0



145,071



3.2



99,213



2.5



76,460



2.1



83,388



2.4Agricultural




521,182



11.2



496,019



10.9



449,765



11.4



436,364



11.9



417,069



11.9Residential real estate




756,601



16.3



910,352



20.0



780,351



19.7



768,068



20.9



708,334



20.2Construction




33,663



0.7



30,139



0.7



23,041



0.6



23,546



0.6



19,300



0.6Consumer




350,290



7.6



362,620



8.0



337,449



8.5



331,975



9.0



333,023



9.6Tax-exempt




189,118



4.1



163,546



3.6



143,049



3.6



118,465



3.2



97,308



2.8Total loans and leases



$
4,639,766



100.0
%

$
4,541,993



100.0
%

$
3,964,015



100.0
%

$
3,679,669



100.0
%

$
3,498,839



100.0
%


At December 31, 2005, our loan and lease portfolio of $4.6 billion was comprised of 64.2%
commercial credit, 24.6% consumer credit and 11.2% agricultural credit. The loan and lease portfolio increased $97.8 million, or
2.2%, in 2005 and $578.0 million, or 14.6%, in 2004.

Our commercial portfolio is primarily secured with collateral consisting of inventory, receivables and
equipment. We utilize standard advance rates in determining amounts that can be advanced for each collateral type. Advances
secured by inventory and receivables are normally short-term floating rate advances. Equipment loans typically amortize over five
years. The commercial portfolio increased by $48.9 million, or 4.9%, to $1.1 billion as of December 31, 2005 following an
increase of $101.1 million in 2004 from 2003.

Our commercial real estate portfolio, which includes interim commercial real estate construction loans
and land development loans, consists primarily of loans to business customers who occupy the property or use the property for
income production. Commercial real estate loans are generally made for up to 80.0% of appraised value or cost and typically have a
term of five years with a 15 to 20 year amortization. We added additional experienced staff in this area over the past few years,
particularly in the Twin Cities market, and as a result the commercial real estate portfolio increased $160.7 million, or 10.2%,
in 2005 and $247.8 million, or 18.6%, in 2004.

Our agricultural loans include term loans secured by farmland or equipment and operating loans used for
commodity production. Our agricultural customers and agricultural-based communities are

23

---

Table of Contents

diversified across the three states we serve, and we extend credit to 12 different types of commodity
producers. Agricultural loans increased to $521.2 million, an increase of $25.2 million, or 5.1%, in 2005 compared to an increase
of $46.3 million, or 10.3%, in 2004. For our agricultural customers, 2005 was a fairly average year with respect to crop
conditions and prices. Government support programs continue to play an important role in the overall economics of farm production.
At December 31, 2005, agricultural loans represented 11.2% of our total loans and leases, up from 10.9% at December 31,
2004.

Residential real estate loans decreased $150.2 million, or 16.0%, in 2005 following an increase of
$137.1 million, or 17.1%, in 2004. The residential real estate portfolio includes home equity loans, first mortgage residential
real estate loans, and some construction loans. The construction loans are typically made to builders on homes under construction
that have been pre-sold. Home equity loans comprise approximately 78% of our $790.3 million in residential real estate loans as of
December 31, 2005. Combined loan to value ratios for home equity loans typically range from 80.0% to 100.0%. The decrease in
residential real estate loans in 2005 was largely due to the transfer of approximately 35% of our home equity lines of credit to a
special interest trust in a securitization transaction and the subsequent sale of $200.0 million of the sellers interest in
these loans to a commercial paper conduit. As a result of this sale in 2005, home equity loans decreased $158.7 million, or 20.4%,
in 2005 following an increase of $114.8 million, or 17.3%, in 2004. First mortgage residential real estate loans increased $5.0
million, or 3.8%, in 2005 following an increase of $15.2 million, or 13.1%, in 2004. In general, we sell newly originated first
mortgage residential real estate loans into the secondary market.

Our consumer loan portfolio decreased by $12.3 million, or 3.4%, in 2005 following an increase of $25.2
million, or 7.5%, in 2004. As of December 31, 2005, approximately $122.9 million, or 35.1%, of the consumer portfolio
consisted of indirect auto loans, generally to borrowers within our market area. We became more selective with respect to indirect
lending during 2005, and our indirect portfolio declined by 21.2% during 2005 as a result. The remainder of the portfolio
consisted of direct consumer loans, with credit card loans making up only about 2.0% of the total consumer portfolio.

Tax-exempt loans and leases, which are made to qualifying organizations located within our primary trade
area, increased by $25.6 million, or 15.6%, in 2005 and $20.5 million, or 14.3%, in 2004.

The following table summarizes the amount and maturity of the loan and lease portfolio as of
December 31, 2005:

At December 31, 2005, Maturing inOne Yearor Less


One toFive Years


OverFive Years


Total(in thousands)Commercial



$
623,660


$
380,092


$
46,612


$
1,050,364Commercial real estate




277,857



936,226



339,476



1,553,559Construction




50,605



90,857



43,527



184,989Agricultural




232,802



215,595



72,785



521,182Residential real estate




57,913



555,791



142,897



756,601Construction




27,486



5,482



695



33,663Consumer




153,657



182,728



13,905



350,290Tax-exempt




19,678



42,781



126,659



189,118Total loans and leases



$
1,443,658


$
2,409,552


$
786,556


$
4,639,766Loans and leases maturing after one yearFixed interest rate







$
1,169,338


$
367,678


$
1,537,016Variable interest rate








1,240,214



418,878



1,659,092Total







$
2,409,552


$
786,556


$
3,196,108


Nonperforming Assets.    Nonperforming assets include nonaccrual loans,
restructured loans, and other real estate acquired in loan settlements. The accrual of interest on loans and leases is suspended

24

---

Table of Contents

when the interest or principal payments are contractually past due 90 days or more, unless the loan is
fully secured and in the process of collection. Payments received on nonaccrual loans are typically applied to principal and not
recorded as income. Restructured loans generally continue to accrue interest but include concessions in terms as a result of the
borrowers deteriorated financial condition.

The following table presents comparative data for nonperforming assets:

At December 31,2005


2004


2003


2002


2001(dollars in thousands)Nonaccrual loans and leases



$
13,420


$
9,933


$
20,058


$
28,782


$
20,307Restructured loans and leases




133



210



280



323



499Total nonperforming loans and leases




13,553



10,143



20,338



29,105



20,806Other real estate owned (OREO)




554



1,229



3,598



2,805



1,616Total nonperforming assets



$
14,107


$
11,372


$
23,936


$
31,910


$
22,422Accruing loans and leases 90 days or more past due



$
2,237


$
5,160


$
3,284


$
3,407


$
2,995Nonperforming loans and leases to total loans and leases




0.29
%


0.22
%


0.51
%


0.79
%


0.60
%Nonperforming assets to total loans, leases and OREO




0.30



0.25



0.60



0.87



0.64Nonperforming assets and accruing loans and leases 90 days or more past due to total loans, leases and OREO




0.35



0.36



0.69



0.96



0.73


Nonperforming assets were $14.1 million at December 31, 2005, compared to $11.4 million at the end
of 2004 and $23.9 million at the end of 2003. Correspondingly, nonperforming assets as a percentage of total loans, leases, and
other real estate owned was 0.30% at December 31, 2005 as compared to 0.25% in 2004 and 0.60% in 2003. Nonperforming loans
and leases, including nonaccrual and restructured loans and leases, totaled $13.6 million, or 0.29% of total loans and leases, at
December 31, 2005, versus $10.1 million, or 0.22% of total loans and leases, at December 31, 2004, and $20.3 million, or
0.51% of total loans and leases, at December 31, 2003. The $3.4 million increase in nonperforming loans and leases between
December 31, 2004 and December 31, 2005 was due to economic conditions, including rising interest rates which increased
borrower debt service requirements. This reversed the declining trend in the amount of nonperforming loans and leases of the prior
two years, which was a result of an improving economy and a decline in the level of nonperforming commercial credits originated in
our finance company subsidiary.

Other real estate owned (OREO) decreased to $554.0 thousand at December 31, 2005,
compared to $1.2 million at December 31, 2004 and $3.6 million at December 31, 2003.

Reserve for Loan Losses.    We maintain a reserve for loan losses to absorb losses
inherent in the loan and lease portfolio. The reserve is based on ongoing, quarterly assessments of the probable estimated losses
inherent in the loan and lease portfolio. The reserve is increased by the provision for loan losses, which is charged against
current period operating results, and decreased by the amount of charge-offs, net of recoveries. Our methodology for assessing the
appropriateness of the reserve consists of several key elements, which include the formula reserve, specific reserves, and the
unallocated reserve.

The formula reserve is calculated by applying loss factors to our outstanding loans. Loss factors for
each loan type are based on our historical loss experience through the course of the business cycle and may be adjusted for
significant factors that, in managements judgment, affect the collectibility of the portfolio as of the evaluation date.
Specific reserves are established in cases where management

25

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has identified significant conditions or circumstances related to a particular credit that management
believes indicate the probability that a loss has been incurred in excess of the amount determined by the application of the
formula reserve.

The unallocated reserve is comprised of two elements. The first element recognizes the model and
estimation risk associated with the formula and specific reserves. The second element is based upon managements evaluation
of various conditions that are not directly measured in the determination of the formula and specific reserves. The conditions
evaluated in connection with the unallocated reserve may include existing general economic and business conditions affecting our
key lending areas, credit quality trends, collateral values, loan volumes and concentrations, maturation of the loan portfolio,
specific industry conditions within portfolio segments, recent duration of the current business cycle, and findings of our
internal loan review examiners.

The reserve also incorporates the results of measuring impaired loans and leases as provided in SFAS No.
114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosures. These accounting standards prescribe the measurement methods, income
recognition, and disclosures related to impaired loans and leases. A loan is considered impaired when management determines that
it is probable that we will be unable to collect all amounts due according to the original contractual terms of the loan or lease
agreement. Impairment is measured by the difference between the recorded investment in the loan or lease (including accrued
interest, net deferred loan fees or costs, and unamortized premium or discount) and the estimated present value of total expected
future cash flows, discounted at the loans effective rate, or the fair value of the collateral, if the loan is collateral
dependent. Impairment is recognized by adjusting the reserve for loan losses.

26

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The reserve for loan losses was $55.6 million, or 1.20% of total loans and leases, at December 31,
2005, compared to $60.0 million, or 1.28% of loans and leases, at December 31, 2004, and $58.9 million, or 1.49% of loans and
leases, at December 31, 2003. Activity in the reserve for loan losses for the past five years is shown in the following
table:

For the Years Ended December 31,2005


2004


2003


2002


2001(dollars in thousands)Beginning of period



$
57,965


$
58,906


$
58,799


$
53,716


$
45,895Charge-offs:Commercial




11,148



3,258



4,645



9,368



6,316Commercial real estate




195



167



7,728



2,510



174Agricultural




22



25



114



330



377Residential real estate




1,658



962



855



301



422Consumer




2,768



2,189



2,291



2,662



2,563Total charge-offs




15,791



6,601



15,633



15,171



9,852Recoveries:Commercial and other




946



275



194



874



555Commercial real estate




327



1,161



36



105



100Construction
















6



Agricultural




23



99



84



399



384Residential real estate




66



149



57



70



35Consumer




527



459



564



639



545Total recoveries




1,889



2,143



935



2,093



1,619Net charge-offs




13,902



4,458



14,698



13,078



8,233Provision for loan losses




12,365



7,042



14,805



18,161



12,054Reserve related to (sold) acquired assets




(800
)














4,000Reclassification to reserve for unfunded credit commitments








(3,525
)










End of period



$
55,628


$
57,965


$
58,906


$
58,799


$
53,716Average loans and leases



$
4,679,784


$
4,213,097


$
3,802,654


$
3,540,323


$
3,210,537Annualized net charge-offs to average loans and leases




0.30
%


0.11
%


0.39
%


0.37
%


0.26
%Reserve for loan losses as a percentage of:Period-end loans and leases




1.20
%


1.28
%


1.49
%


1.60
%


1.54
%


Net charge-offs were $13.9 million in 2005, $4.5 million in 2004, and $14.7 million in 2003. Expressed
as a percentage of average loans and leases, net charge-offs increased to 0.30% in 2005 from 0.11% in 2004 and 0.39% in 2003.
Charge-offs of commercial loans increased to $11.1 million in 2005 from $3.3 million in 2004. This increase was primarily
attributable to the charge-off of a $10.2 million aircraft lease to a major U.S. airline which filed for bankruptcy during 2005.
The higher level of charge-offs in 2003 was largely the result of credits originated in our finance company subsidiary, which is
no longer making loans. The provision for loan losses was $12.4 million in 2005, $7.0 million in 2004, and $14.8 million in
2003.

The ratio of classified loans and leases, which include those loans and leases with an internal loan
review rating of substandard, doubtful or loss, to total loans and leases was 2.3% at December 31, 2005 and December 31,
2004 and 2.9% at December 31, 2003.

Management has allocated the reserve to sectors based on relative risk characteristics of the loan and
lease portfolio. Commercial allocations are based on a quarterly review of individual loans outstanding. Consumer allocations are
based on an analysis of product mix, credit scoring and risk

27

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composition of the portfolio, fraud loss and bankruptcy experiences, historical and expected
delinquency, and charge-off statistics for each homogenous category or group of loans.

The following table shows the allocation of the reserve for loan losses to sectors for each of the last
five years:

At December 31,2005

 2004

 2003

 2002

 2001Amount


Percent ofLoans andLeases toTotal Loansand Leases


Amount


Percent ofLoans andLeases toTotal Loansand Leases


Amount


Percent ofLoans andLeases toTotal Loansand Leases


Amount


Percent ofLoans andLeases toTotal Loansand Leases


Amount


Percent ofLoans andLeases toTotal Loansand Leases(dollars in thousands)Commercial



$
14,302



22.6
%

$
15,620



22.1
%

$
18,052



22.7
%

$
22,400



23.7
%

$
18,800



25.2
%Commercial real estate




21,167



37.5



18,716



34.7



17,720



33.5



14,200



30.7



13,900



29.7Agricultural




5,934



11.2



8,526



10.9



8,304



11.4



8,400



11.9



8,700



11.9Residential real estate




3,920



17.0



3,876



20.7



4,639



20.3



4,400



21.5



3,600



20.8Consumer




2,667



7.6



2,762



8.0



2,981



8.5



2,800



9.0



2,800



9.6Tax-exempt




2,471



4.1



2,250



3.6



1,440



3.6



1,200



3.2



100



2.8Unallocated




5,167







6,215







5,770







5,399







5,816



Total reserve



$
55,628



100.0
%

$
57,965



100.0
%

$
58,906



100.0
%

$
58,799



100.0
%

$
53,716



100.0
%


Approximately $5.2 million, or 9.3%, of the reserve for loan and lease losses is not allocated to
specific credits at December 31, 2005, compared to $6.2 million, or 10.7%, at December 31, 2004, and $5.8 million, or
9.8%, at December 31, 2003.

Securities.    Our investment portfolio consists of investments that we intend to
hold to maturity which are valued at amortized cost and debt and equity securities that are available-for-sale which are valued at
current market value. The investment portfolio is maintained primarily for liquidity and collateral purposes and to generate
interest income. Our investment portfolio consists primarily of low-risk government and government agency-backed securities and
high-grade municipal bonds.

The securities portfolio increased by $180.6 million, or 15.1%, to $1.4 billion at December 31,
2005 from $1.2 billion at December 31, 2004 and $1.3 billion at December 31, 2003. We sold $21.9 million of securities
during 2005. An additional $402.2 million of securities matured during 2005. We reinvested all of the proceeds from sales and
maturities in securities purchases totaling $616.4 million in 2005.

The following table presents the amortized cost and fair value of securities held on December 31,
2005:

At December 31, 2005AmortizedCost


GrossUnrealizedGains


GrossUnrealizedLosses


FairValue(in thousands)Securities available-for-sale:U. S. Treasury securities



$
312


$



$
4


$
308U. S. government agency obligations




62,509







782



61,727Obligations of state and political subdivisions




2,035



159







2,194Mortgage-backed securities




1,032,198



1,966



14,344



1,019,820Equity securities




40,805











40,805Other




679







1



678Total securities available-for-sale



$
1,138,538


$
2,125


$
15,131


$
1,125,532Securities held-to-maturity:U. S. government agency obligations



$
1,000


$



$



$
1,000Obligations of state and political subdivisions




247,533



4,708



1,613



250,628Total securities held-to-maturity



$
248,533


$
4,708


$
1,613


$
251,628


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The following table presents the maturity of securities held at December 31, 2005 and the weighted
average rates by range of maturity. The table includes projected payments on mortgage-backed securities. Certain equity
securities, which include Federal Home Loan Bank stock and Federal Reserve Bank stock, do not have a stated face rate or maturity.
Equity securities are presented in this table based on estimated rates at December 31, 2005:

At December 31, 2005Amortized CostWithin 1 Year

 1-5 Years

 5-10 Years

 After 10 Years

 TotalsAmount


Yield


Amount


Yield


Amount


Yield


Amount


Yield


Amount


Yield(dollars in thousands)U.S. Treasury securities and obligations of U.S. government agencies



$
37,365



2.84
%

$
26,186



4.00
%

$





%

$





%

$
63,821



3.32
%Obligations of states and political subdivisions (1)




2,702



7.58



31,565



7.00



72,687



7.36



142,614



6.39



249,568



6.85Mortgage-backed securities




131,041



4.07



501,206



4.39



266,156



4.65



133,795



4.90



1,032,198



4.48Equity securities




































40,805



3.71Other securities




679



4.00



























679



4.00Total Investment Securities



$
172,057



3.86
%

$
558,957



4.52
%

$
338,843



5.23
%

$
276,409



5.67
%

$
1,387,071



4.83
%


---

|(1) | Yields are presented on a tax-equivalent basis to reflect the tax-exempt nature of these securities. The
incremental federal statutory rate applied is 35%.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

The average maturity of the portfolio was 62 months at December 31, 2005, with an average
tax-equivalent yield to maturity on the portfolio of 4.83%, unrealized gains of $6.8 million and unrealized losses of $16.7
million. This compares to an average maturity of 56 months at December 31, 2004 and an average tax-equivalent yield to
maturity of 3.97%, unrealized gains of $10.0 million, and unrealized losses of $8.2 million. At December 31, 2005, the market
value of our securities was $1.4 billion, or $9.9 million under their amortized cost. This compares to a market value of $1.2
billion, or $1.8 million over amortized cost, at December 31, 2004.

Total Deposits.    Deposits increased by $668.3 million, or 15.9%, in 2005, and
$159.1 million, or 3.9%, in 2004. Noninterest bearing deposits increased by $66.9 million, or 8.1%, in 2005, and $42.5 million, or
5.4%, in 2004. Savings, NOW, and money market accounts decreased $7.5 million, or 0.3%, in 2005, reversing an increase of $8.8
million, or 0.4%, in 2004. The decline in our savings, NOW, and money market accounts in 2005 was the result of competitive
pressure in deposit markets combined with the increased attractiveness of savings certificates in a higher rate environment.

Savings certificate balances increased by $608.8 million, or 50.4%, in 2005, a continuation of the
growth of $107.8 million, or 9.8%, in 2004. Savings certificates continued to be a more attractive product to consumers in 2005 as
interest rates continued to rise. At December 31, 2005, savings certificates included $283.2 million of deposits acquired
through brokers, while at December 31, 2004, $66.3 million of deposits were acquired through brokers and, in 2003, savings
certificates included $10.0 million of deposits acquired through brokers. We expect to continue to use brokered deposits as a
source of funding in the future.

29

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The following table sets forth the distribution of our deposits by type:

At December 31,2005

 2004

 2003Amount


Percent


Amount


Percent


Amount


Percent(dollars in thousands)Noninterest bearing deposits



$
892,624



18.3
%

$
825,755



19.6
%

$
783,260



19.3
%Savings and NOW accounts




527,406



10.8



514,318



12.2



488,457



12.1Money market and other interest bearing checking




1,641,073



33.7



1,661,612



39.5



1,678,678



41.4Time certificates of deposit:Less than $100,000




1,065,604



21.8



885,946



21.0



890,304



22.0$100,000 or more




751,645



15.4



322,465



7.7



210,277



5.2Total deposits



$
4,878,352



100.0
%

$
4,210,096



100.0
%

$
4,050,976



100.0
%


Maturities of time deposits that had balances of $100,000 or more included in interest bearing deposits
are summarized as follows:

At December 31,2005


2004(in thousands)Three months or less



$
143,408


$
54,419Over three months to six months




103,492



42,510Over six months to 12 months




173,413



98,168Over 12 months




331,332



127,368Total



$
751,645


$
322,465


Maturities of time deposits that had balances of less than $100,000 included in interest bearing
deposits are summarized as follows:

At December 31,2005


2004(in thousands)Three months or less



$
139,728


$
129,289Over three months to six months




151,582



127,468Over six months to 12 months




365,213



191,112Over 12 months




409,081



438,077Total



$
1,065,604


$
885,946


Short-Term Borrowings.    Short-term borrowings include federal funds purchased,
securities sold under agreements to repurchase, treasury tax and loan notes, Federal Home Loan Bank (FHLB) advances
with original maturities of one year or less, and advances under an unsecured revolving credit facility. Short-term borrowings
decreased 25.5% to $736.6 million at December 31, 2005 from $988.5 million at December 31, 2004 following an increase
from $639.4 million at December 31, 2003. Repurchase agreements with customers, which constituted 71.2% of short-term
borrowings at December 31, 2005, were $524.4 million at December 31, 2005 and December 31, 2004 and $446.8 million
at December 31, 2003. At December 31, 2005, 79.5% of the customer repurchase agreements were related to daily checking
account sweep mechanisms that are part of our cash management product line. FHLB advances with maturities of one year or less
decreased to $210.0 million at December 31, 2005 from $461.0 million at December 31, 2004 and $118.0 million at
December 31, 2003. We were able to reduce our short-term borrowings in 2005 as our deposit growth exceeded our growth in
earning assets. The total amount that can be borrowed currently under the unsecured revolving credit facility is $15.0 million.
The facility is maintained primarily for contingency purposes. There were no advances outstanding under this short-term revolving
credit facility at December 31, 2005, 2004 or 2003.

30

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The following table presents a summary of our short-term borrowings for the periods ended on the dates
indicated:

Federal Fundsand RepurchaseAgreements


Federal HomeLoan BankBorrowings


TreasuryTax and LoanNotes(dollars in thousands)Balance at December 312005



$
524,449


$
210,000


$
2,1112004



$
524,432


$
461,000


$
3,025Weighted average interest rate at December 312005




3.48
%


4.20
%


3.84
%2004




1.52
%


2.34
%


1.72
%Maximum amount outstanding at any month end2005



$
599,602


$
507,082


$
2,9962004



$
556,619


$
461,000


$
3,082Average amount outstanding during the year2005



$
536,502


$
376,323


$
1,4412004



$
474,294


$
322,708


$
1,610Weighted average interest rate during the year2005




2.59
%


3.19
%


2.97
%2004




1.28
%


1.53
%


1.10
%


Long-Term Debt.    Long-term debt, which includes senior notes, junior
subordinated deferrable interest debentures, FHLB advances with original maturities of greater than one year, and installment
promissory notes, decreased $58.7 million, or 15.4%, in 2005, and $79.5 million, or 17.3%, in 2004. The following table summarizes
long-term debt for the last three years:

At December 31,2005


2004


2003(in thousands)Senior notes



$
19,000


$
19,000


$
65,000Junior subordinated deferrable interest debentures




78,867



78,867



78,867Federal Home Loan Bank borrowings




223,514



281,775



314,809Installment promissory notes




635



1,058



1,482Total



$
322,016


$
380,700


$
460,158


We issued the senior notes in November 1999. The proceeds were used in connection with acquisitions. The
installment promissory note obligations were also incurred in connection with acquisitions. We paid off $46.0 million of the
senior debt in November 2004. The remaining $19.0 million of senior debt matures in November 2006.

The junior subordinated deferrable interest debentures were issued in 2001 in connection with the
issuance by the company of $76.5 million of mandatorily redeemable preferred securities in two separate transactions. In February
2001, the company issued $16.5 million of 10.2% Capital Securities through Bremer Statutory Trust I (BST), and in May
2001, the company issued $60.0 million of 9.0% Cumulative Capital Securities through Bremer Capital Trust I (BCT). The
proceeds of both of these offerings, combined with the $2.4 million in proceeds from the sale by BST and BCT to the parent of
their common securities, were invested by BST and BCT in Junior Subordinated Deferrable Interest Debentures
(debentures) of the parent company. The debentures mature not earlier than July 15, 2006 and not later than
July 15, 2031. At December 31, 2005, the $76.5 million in Capital Securities qualified as Tier I capital under
guidelines of the Federal Reserve Board.

We expect to issue additional junior subordinated debentures in June 2006 in connection with the planned
issuance of $60 million of mandatorily redeemable preferred securities. We expect that these mandatorily redeemable preferred
securities will be issued on a floating rate basis in a trust preferred pool transaction. We expect that the proceeds from this
anticipated transaction will be used to retire

31

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the $60 million of 9.0% Cumulative Capital Securities issued through BCT in 2001. We have entered into a
forward starting interest rate swap with a notional amount of $60 million and an effective date of June 1, 2006 to
effectively convert the floating rate interest payments associated with the anticipated transaction to a fixed rate for ten years.
At December 31, 2005, the estimated fair value of the interest rate swap was $0.04 million. This unrealized gain, which is
recorded on the balance sheet in other assets, has been excluded from earnings and reported, net of tax, as a separate component
of shareholders equity until realized.

Equity of Shareholders and Redeemable Class A Common Stock.
   Shareholders equity and redeemable class A common stock was $546.6 million at December 31, 2005
compared to $504.2 million at December 31, 2004 and $467.4 million at December 31, 2003. Book value per share increased
to $45.55 at December 31, 2005 from $42.02 at December 31, 2004 and $38.95 at December 31, 2003. Dividends paid per
share increased to $2.08 in 2005 from $1.90 in 2004 and $1.80 in 2003. The dividends paid in 2005 of $25.0 million represented
5.0% of the equity of shareholders at December 31, 2004 and 34.7% of 2005 net income.

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 our subsidiary banks in each of these categories
met or exceeded the well-capitalized ratios as of December 31, 2005.

The following table compares the consolidated capital ratios with the minimum requirements for well
capitalized and adequately capitalized banks:

At December 31, 2005Minimum RequirementsCapital Category

 Actual


WellCapitalized


AdequatelyCapitalizedTier I capital to risk-weighted assets




10.49
%


6.00
%


4.00
%Total capital to risk-weighted assets




11.66



10.00



8.00Tier I capital to average tangible assets




8.55



5.00



4.00


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

Risk Management

Liquidity Management.    The objective of liquidity management is to ensure 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.

Our primary source of funding is through the acquisition and retention of funds in the local markets we
serve. This in-market funding provides a historically stable source of funding. The combination of in-market funding and capital
funded 83% of average total assets during 2005. 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 FHLB advances, brokered
deposits, and federal funds purchased. As of December 31, 2005, we had short term and long term borrowings from the FHLB in
the amount of $433.5 million. In order to secure those borrowings, we had pledged $2.0 billion in loan assets to the FHLB. In
addition to the amounts borrowed as of

32

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December 31, 2005, we had the capacity to borrow an additional $544.3 million from the FHLB without
the need to provide additional collateral. In the brokered deposit market, we maintain relationships with six major securities
dealers that function as intermediaries between investors and banks in the national market for FDIC insured time savings
certificates. Our deposit balances at December 31, 2005 include $283.2 million acquired through these broker sources, and we
have the capacity to add significant additional funding from these sources as needed. In 2005, we improved our liquidity position
through the transfer of $229.9 million of home equity loan assets to a special interest trust in a securitization transaction and
the subsequent sale of $200.0 million of the sellers interest in these loans to a commercial paper conduit. The terms of the
revolving securitization facility agreement allow the company to sell additional loans to the commercial paper conduit each month
to replace paid off loans up to the maximum limit of $200 million. As of December 31, 2005, we also had available $15.0
million of borrowing capacity under an unsecured credit facility. As of December 31, 2005, there were no advances outstanding
under this facility. This credit facility is used primarily for contingency purposes.

Interest Rate Risk Management.    Interest rate risk is the risk that changing
interest rates will adversely affect net income and balance sheet valuations. The objective of interest rate risk management is to
control this risk exposure. The responsibility for this process rests with ALCO. ALCO establishes appropriate risk management
policies and monitors asset liability activities to minimize our exposure to adverse interest rate trends. The tools used to
measure interest rate risk include a valuation model which measures the sensitivity of balance sheet valuations to changes in
interest rates, gap analysis, and simulation of future net income.

In the valuation model, the market value of each asset and liability as of the reporting date is
calculated by computing the present value of all cash flows to be generated. In each case, the cash flows are discounted by a
market interest rate chosen to reflect as closely as possible the characteristics of the given asset or liability as obtained from
independent broker quotations and other public sources. The impact on valuations is then calculated for a 200 basis point rate
shock. The rate shock is an instantaneous change in market rates across the yield curve. Significant assumptions required in the
use of the valuation model include estimates regarding prepayment activity and the behavior of non-maturity deposits in various
interest rate environments. The model does not reflect actions that ALCO could initiate in response to a change in interest rates.
The valuation model indicates that the value of assets would decline approximately 2.9% with a 200 basis point increase in
interest rates. After considering the impact on liabilities and tax effects, the market value of equity impact from this 200 basis
point increase in rates would be a decline of approximately 6.9%, which is within our maximum risk limit of 20.0% for this risk
measure.

The matching of assets and liabilities may be analyzed by examining the extent to which such assets and
liabilities are interest rate sensitive and by monitoring an institutions interest rate sensitivity
gap. An asset or liability is said to be interest rate sensitive within a specific time period if it matures or
reprices within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest
earning assets anticipated, based on certain assumptions, to mature or reprice within a specific time period and the amount of
interest bearing liabilities anticipated, based on certain assumptions, to mature or reprice within that same time period. An
interest rate sensitivity gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities that mature or reprice within a specified time period. An interest rate gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets that mature
or reprice within a specified time period.

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The following table sets forth the amounts of interest earning assets and interest bearing liabilities
maturing or repricing within the time periods indicated, based on the information and assumptions set forth in the notes
thereto:

At December 31, 2005Amount Repricing or MaturingWithin3 Months


3 - 12Months


1 - 5Years


Over 5Years


Total(dollars in thousands)Interest earning assets (1)Loans and leases



$
2,386,690


$
607,226


$
1,377,328


$
268,522


$
4,639,766Securities




135,152



255,892



577,460



405,561



1,374,065Other earning assets




87,862







13,107







100,969Total interest earning assets



$
2,609,704


$
863,118


$
1,967,895


$
674,083


$
6,114,800Interest bearing liabilitiesInterest bearing deposits (2)



$
1,594,059


$
981,589


$
1,409,305


$
775


$
3,985,728Short-term borrowings (3)




689,228



41,048



6,284







736,560Long-term debt








64,635



138,514



118,867



322,016Total interest bearing liabilities



$
2,283,287


$
1,087,272


$
1,554,103


$
119,642


$
5,044,304Rate sensitive gap



$
326,417


$
(224,154
)

$
413,792


$
554,441


$
1,070,496Cumulative rate sensitive gap



$
326,417


$
102,263


$
516,055


$
1,070,496Rate sensitive gap % to total assets




5.0
%


(3.4
)%


6.3
%


8.5
%


16.3
%Cumulative rate sensitive gap % to total assets




5.0
%


1.6
%


7.9
%


16.3
%





---

|(1) | Adjustable and floating rate assets are included in the period in which interest rates are next scheduled to
adjust rather than in the period in which they are due. Fixed rate assets are included in the periods in which they are scheduled
to be repaid based on scheduled amortization, except for mortgage backed securities, which are adjusted for prepayment assumptions.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes non-maturity savings and NOW accounts positioned to run off evenly over 60 months and money market
savings accounts, most of which are positioned to reprice within three months.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Adjustable and floating rate borrowings are included in the period in which their interest rates are next scheduled
to adjust rather than in the period in which they are due.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The repricing gaps are within our risk tolerances, which limit the maximum 90-day and one-year gaps to
15.0% of total assets.

We also use simulation modeling of future net interest income and net income as a risk management tool.
Simulation modeling results indicate that net income would decrease by approximately 0.8% over the next year with a 300 basis
point increase in the level of rates. Modeling results indicate that net income would decrease by approximately 0.7% over the next
year with a 100 basis point decrease in the level of rates and by approximately 2.7% over the next year with a 300 basis point
decrease in rates. Our current policy requires that the projected change in net income over the next 12 months from a 300 basis
point movement in rates not exceed 8%.

Other Market Risk.    Other types of market risk, such as foreign currency
exchange rate risk and commodity price risk, do not arise in the normal course of our business activities.

Bank Secrecy Act Compliance Risk.    An organization-wide formal Bank Secrecy
Act/Anti-money Laundering program has been adopted that is managed by a centralized risk management unit that provides services on
behalf of our affiliates. The unit provides training for our personnel, centralized monitoring of high risk accounts with
automated assistance, review of required filings, independent testing of transactions, and follow-up of findings from regulatory
examinations or internal audits. Internal audit conducts a regular review of this function. The centralized function provides a
quarterly status report to the audit committee.

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Impact of Inflation and Changing Prices

The consolidated financial statements and related data presented herein have been prepared in accordance
with accounting principles generally accepted in the United States of America, which require the measurement of financial position
and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over
time due to inflation.

The assets and liabilities of a financial institution are primarily monetary in nature. As a result,
interest rates have more impact on our performance than the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices of goods and services. The liquidity and the
maturity structure of our assets and liabilities are important to the maintenance of acceptable performance levels. We disclose
the estimated fair values of our financial instruments in accordance with SFAS No. 107, Disclosures about Fair Value of
Financial Instruments.

Effects of the Economic Environment

During the past year, the economy has continued to perform well, leading to fairly stable levels of
classified and nonperforming assets. However, increasing interest rates have begun to place additional pressures on the cash flow
of borrowers, and the level of classified and nonperforming assets is likely to increase from their current levels as a
result.

Off-Balance Sheet Commitments, Contingencies, and Contractual Obligations

We utilize various off-balance sheet instruments to satisfy the financing needs of customers. These
instruments represent our contractual obligations to provide funding, within a specified time period, to a customer. The following
represents the outstanding obligations:

At December 31,2005


2004(in thousands)Standby letters of credit



$
49,413


$
52,772Commercial letters of credit




53,878



47,772Loan commitments




1,664,169



1,386,761


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. Commercial letters of credit facilitate
trade or commerce. Under the terms of a commercial letter of credit, as a general rule, drafts will be drawn when the underlying
transaction is consummated as intended. 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.

Our 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.

We are routinely involved in legal actions which are incidental to our business. 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 consolidated financial position or operations.

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We enter into contractual obligations in the ordinary course of business, including long-term debt
issuance for the funding of operations and leases for premises and equipment. The following table summarizes our significant
contractual obligations at December 31, 2005:

Contractual Payments by Period(in thousands)

 One Yearor Less


1-3 Years


3-5 Years


More than5 Years


TotalLong-term debt



$
64,423


$
130,032


$
8,694


$
118,867


$
322,016Operating leases




3,263



4,504



3,252



16,302



27,321Purchase obligations (1)




3,322



4,891











8,213Total Contractual Obligations



$
71,008


$
139,427


$
11,946


$
135,169


$
357,550


---

|(1) | Represents agreements to purchase item processing and data processing services.
|--- | -------------------------------------------------------------------------------

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

See the information regarding disclosures about market risk in Item 1A. Risk Factors and in
Managements Discussion and Analysis of Financial Condition and Results of Operations  Risk Management on
pages 32 through 36.

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Table of Contents

Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004
(in thousands except share data)

2005


2004AssetsCash and due from banks



$
313,613


$
203,930Investment securities available-for-sale   (cost: 12/31/05 - $1,138,538; 12/31/04 - $1,003,307)




1,125,532



997,900Investment securities held-to-maturity   (fair value: 12/31/05 - $251,628; 12/31/04 - $202,767)




248,533



195,546Loans and leases




4,639,766



4,541,993Reserve for loan losses




(55,628
)


(57,965
)Net loans and leases




4,584,138



4,484,028Interest receivable




45,476



36,901Premises and equipment, net




88,487



83,914Other intangibles




12,203



15,391Other assets




53,687



39,683Goodwill




84,226



84,226Total assets



$
6,555,895


$
6,141,519Liabilities and Shareholders EquityNoninterest bearing deposits



$
892,624


$
825,755Interest bearing deposits




3,985,728



3,384,341Total deposits




4,878,352



4,210,096Federal funds purchased and repurchase agreements




524,449



524,432Other short-term borrowings




212,111



464,025Long-term debt




322,016



380,700Accrued expenses and other liabilities




72,183



57,925Total liabilities




6,009,111



5,637,178Minority interests




150



150Redeemable class A common stock, 960,000 shares issued and outstanding




43,730



40,335Shareholders equityCommon stockClass A, no par, 12,000,000 shares authorized; 240,000 shares issued and outstanding




57



57Class B, no par, 10,800,000 shares authorized, issued and outstanding




2,562



2,562Retained earnings




507,704



464,398Accumulated other comprehensive loss




(7,419
)


(3,161
)Total shareholders equity




502,904



463,856Total liabilities and shareholders equity



$
6,555,895


$
6,141,519


See notes to consolidated financial statements.

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BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2005, 2004 and 2003
(in thousands, except per share amounts)

2005


2004


2003Interest incomeLoans and leases, including fees



$
310,215


$
243,454


$
230,089Securities




46,035



43,206



44,050Federal funds sold




512



146



128Other




468



89



114Total interest income




357,230



286,895



274,381Interest expenseDeposits




87,112



51,204



51,564Federal funds purchased and repurchase agreements




13,889



6,047



5,425Other short-term borrowings




12,095



4,995



1,777Long-term debt




21,735



26,593



29,845Total interest expense




134,831



88,839



88,611Net interest income




222,399



198,056



185,770Provision for loan losses




12,365



7,042



14,805Net interest income after provision for loan losses




210,034



191,014



170,965Noninterest incomeService charges




31,524



31,337



29,966Insurance




11,606



10,946



9,346Investment management and trust fees




11,796



11,031



9,933Brokerage




6,369



6,245



5,559Gain on sale of loans




16,926



10,510



19,302Gain on sale of securities








2,072



5,856Other




7,006



7,579



6,818Total noninterest income




85,227



79,720



86,780Noninterest expenseSalaries and wages




86,915



81,651



76,247Employee benefits




25,363



22,501



21,603Occupancy




12,523



12,014



11,210Furniture and equipment




11,826



10,406



10,651Data processing fees




11,362



10,959



10,413FDIC premiums and examination fees




1,920



1,830



1,753Amortization of intangibles




2,601



2,739



2,866Other




32,220



30,370



29,800Total noninterest expense




184,730



172,470



164,543Income before income tax expense




110,531



98,264



93,202Income tax expense




38,500



34,087



32,110Net income



$
72,031


$
64,177


$
61,092Per common share amounts:Net income-basic and diluted



$
6.00


$
5.35


$
5.09Dividends paid




2.08



1.90



1.80


See notes to consolidated financial statements.

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Table of Contents

BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years Ended December 31, 2005, 2004 and 2003
(in thousands, except per share amounts)

Common Stock

 AccumulatedOtherComprehensiveIncome (Loss)

 ComprehensiveIncome

 RetainedEarnings

 TotalClass A


Class BBalance, December 31, 2002



$
57


$
2,562


$
6,751






$
389,998


$
399,368Comprehensive incomeNet income















$
61,092



61,092



61,092Other comprehensive income, net of tax:Net unrealized losses on securities available for sale:Unrealized holding losses arising during the period, net of tax of $5,603












(8,407
)


(8,407
)Less: Reclassified adjustment for gains included in income, net of tax of $2,342












(3,514
)


(3,514
)Minimum pension liability, net of tax of $3,840












5,760



5,760Other comprehensive loss












(6,161
)


(6,161
)






(6,161
)Comprehensive income
















54,931Dividends, $1.80 per share




















(21,600
)


(21,600
)Allocation of net income and other comprehensive income in excess of dividends to redeemable class
A common stock












493







(3,159
)


(2,666
)Balance, December 31, 2003




57



2,562



1,083







426,331



430,033Comprehensive incomeNet income
















64,177



64,177



64,177Other comprehensive income, net of tax:Net unrealized losses on securities available for sale:Unrealized holding losses arising during the period, net of tax of $2,121












(3,184
)


(3,184
)Less: Reclassified adjustment for gains included in income,net of tax of $829












(1,243
)


(1,243
)Minimum pension liability, net of tax of $124












(185
)


(185
)Other comprehensive loss












(4,612
)


(4,612
)






(4,612
)Comprehensive income
















59,565Dividends, $1.90 per share




















(22,800
)


(22,800
)Allocation of net income and other comprehensive income in excess of dividends to redeemable class
A common stock












368







(3,310
)


(2,942
)Balance, December 31, 2004




57



2,562



(3,161
)






464,398



463,856Comprehensive incomeNet income
















72,031



72,031



72,031Other comprehensive income, net of tax:Net unrealized losses on securities available for sale and other retained interests:Unrealized holding losses arising during the period, net of tax of $3,217












(4,823
)


(4,823
)Minimum pension liability, net of tax of $11












(17
)


(17
)Net unrealized gains on derivatives and hedging activities:Unrealized holding gains arising during the period, net of tax of $141












212



212Other comprehensive loss












(4,628
)


(4,628
)






(4,628
)Comprehensive income















$
67,403Dividends, $2.08 per share




















(24,960
)


(24,960
)Allocation of net income and other comprehensive income in excess of dividends to redeemable class
A common stock












370







(3,765
)


(3,395
)Balance, December 31, 2005



$
57


$
2,562


$
(7,419
)





$
507,704


$
502,904


See notes to consolidated financial statements.

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BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2005, 2004 and 2003
(in thousands)

2005


2004


2003Cash flows from operating activitiesNet income



$
72,031


$
64,177


$
61,092Adjustments to reconcile net income to net cash provided by operating activitiesProvision for loan losses




12,365



7,042



14,805Depreciation and amortization




16,549



17,329



18,038Deferred income taxes




(450
)


484



1,248Gain on sale of securities








(2,072
)


(5,856
)Other assets and liabilities, net




(7,706
)


(5,870
)


(5,457
)Gain on sale of loans




(16,926
)


(10,510
)


(19,302
)Proceeds from loans originated for sale




462,936



383,282



770,175Loans originated for sale




(455,846
)


(370,978
)


(744,595
)Net cash provided by operating activities




82,953



82,884



90,148Cash flows from investing activitiesPurchases of available-for-sale investment securities




(548,962
)


(314,407
)


(808,430
)Purchases of held-to-maturity securities




(67,408
)


(34,932
)


(31,957
)Proceeds from maturities of available-for-sale investment securities




387,609



314,426



391,432Proceeds from maturities of held-to-maturity securities




14,550



18,042



16,936Proceeds from sales of available-for-sale investment securities




21,583



126,704



223,584Proceeds from sales of other real estate owned




3,393



4,525



3,836Loans and leases, net




(102,639
)


(587,755
)


(305,322
)Purchase of premises and equipment




(14,111
)


(6,683
)


(12,504
)Net cash used in investing activities




(305,985
)


(480,080
)


(522,425
)Cash flows from financing activitiesNoninterest bearing deposits, net




66,869



42,495



59,158Savings, NOW and money market accounts, net




(7,451
)


8,795



491,007Certificates of deposits, net




608,838



107,830



(249,518
)Federal funds purchased and repurchase agreements, net




17



4,673



69,789Other short-term borrowings, net




(251,914
)


344,426



58,093Proceeds from issuance of long-term debt












14,820Repayments of long-term debt




(58,684
)


(79,458
)


(51,207
)Common stock dividends paid




(24,960
)


(22,800
)


(21,600
)Net cash provided by financing activities




332,715



405,961



370,542Net increase (decrease) in cash and due from banks




109,683



8,765



(61,735
)Cash and due from banks at beginning of period




203,930



195,165



256,900Cash and due from banks at end of period



$
313,613


$
203,930


$
195,165Supplemental disclosures of cash flow informationCash paid during the year for interest



$
124,352


$
87,675


$
90,755Cash paid during the year for income taxes




38,873



26,199



31,088


See notes to consolidated financial statements.

40

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note A:  Accounting Policies

Nature of business Bremer Financial Corporation (the Company) is a regional
financial services company headquartered in St. Paul, Minnesota. The Company is the sole shareholder of nine subsidiary banks
(Subsidiary Banks) which draw most of their deposits from and make substantially all of their loans within the states
of Minnesota, North Dakota, and Wisconsin. The Company has identified each of the Subsidiary Banks as a separate operating
segment. These operating segments have been combined for segment information reporting purposes as one reportable segment because
the nature and distribution of the products and services, the type of customer, and the regulatory environment are similar.
Additionally, the Company provides trust and insurance services to its customers through wholly-owned nonbanking subsidiaries and
investment services through a third party relationship.

The accounting and reporting policies of the Company and its subsidiaries conform to accounting
principles generally accepted in the United States of America and general practices within the financial services industry. The
more significant accounting policies are summarized below:

Consolidation The consolidated financial statements include the accounts of the Company (a
bank holding company majority owned by the Otto Bremer Foundation) and all subsidiary banks and other subsidiaries in which the
Company has a majority interest. All significant intercompany accounts and transactions have been eliminated.

Cash flows For purposes of this statement, the Company has defined cash equivalents as
cash and due from banks. During the years ended December 31, 2005, 2004, and 2003, the Company received real estate valued at
$2,423,000, $1,733,000 and $4,777,000 in satisfaction of outstanding loan balances.

Investment securities Held-to-maturity securities consist of debt securities which
the Company has the intent and ability to hold to maturity and are valued at amortized historical cost. Under certain
circumstances (including the deterioration of the issuers creditworthiness or a change in tax law or statutory or regulatory
requirements), securities held-to-maturity may be sold or transferred to another portfolio.

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, as a
separate component of shareholders equity until realized. A portion of the unrealized holding gains and losses is allocated
to redeemable class A common stock. Gains or losses on these securities are computed based on the amortized cost of the specific
securities when sold.

All securities with gross unrealized losses on the consolidated balance sheet are subjected to the
Companys process for identifying other-than-temporary impairments. The Company writes down to fair value securities that it
deems to be other-than-temporarily impaired in the period the securities are deemed to be impaired. The initial indicator of
impairment is a sustained decline in market price below the amount recorded for the investment. On a case-by-case basis, the
Company considers the length of time and the extent to which market value has been less than cost, the cause of the price decline,
the extent to which the price decline is due to the general level of interest rates or other issuer specific factors, the
issuers financial condition and ability to make future payments in a timely manner, and the Companys investment
horizon. The Company does not engage in trading activities.

Loans and leases Loans are reported at the principal amount outstanding, net of unearned
income. Interest income is accrued on loan and lease balances based on the principal amount outstanding. Loans and leases are
reviewed regularly by management and placed on nonaccrual status when the collection of interest or principal is unlikely. The
accrual of interest on loans and leases is suspended when the credit becomes 90 days or more past due, unless the loan or lease is

41

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fully secured and in the process of collection. Thereafter, no interest is recognized as income unless
received in cash or until such time the borrower demonstrates the ability to pay interest and principal. Certain net loan and
commitment fees are deferred and amortized over the life of the related loan or commitment as an adjustment of yield. Loans
held-for-sale in the secondary market are recorded at lower of aggregate cost or market.

Reserve for loan losses The reserve for loan losses is maintained to absorb losses
inherent in the loan and lease portfolio. Management determines the adequacy of the reserve based upon a number of factors,
including credit loss experience and a continuous review of the loan and lease portfolio. Being an estimate, the reserve is
subject to change through evaluation of the loan and lease composition, economic conditions, and the economic prospects of
borrowers. The reserve is increased by the provision for loan losses, which is charged against current period operating results,
and decreased by the amount of charge-offs, net of recoveries. The methodology for assessing the appropriateness of the reserve
consists of several key elements, which include the formula reserve, specific reserves, and the unallocated reserve.

The formula reserve is calculated by applying loss factors to our outstanding loans. Loss factors for
each loan type are based on our historical loss experience through the course of the business cycle and may be adjusted for
significant factors that, in managements judgment, affect the collectibility of the portfolio as of the evaluation date.
Specific reserves are established in cases where management has identified significant conditions or circumstances related to a
particular credit that management believes indicate the probability that a loss has been incurred in excess of the amount
determined by the application of the formula reserve.

The unallocated reserve is comprised of two elements. The first element recognizes the model and
estimation risk associated with the formula and specific reserves. The second element is based upon managements evaluation
of various conditions that are not directly measured in the determination of the formula and specific reserves. The conditions
evaluated in connection with the unallocated reserve may include existing general economic and business conditions affecting our
key lending areas, credit quality trends, collateral values, loan volumes and concentrations, maturation of the loan portfolio,
specific industry conditions within portfolio segments, recent duration of the current business cycle, and findings of our
internal loan review examiners.

Under the Companys credit policies and practices, all nonaccrual and restructured commercial,
agricultural, construction, and commercial real estate loans and leases, plus certain other loans and leases identified by the
Company, meet the definition of impaired loans under Statements of Financial Accounting Standards (SFAS) No. 114,
Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures. Impaired loans as defined by SFAS No. 114 and SFAS No. 118 exclude certain large
groups of smaller balance homogeneous loans, such as consumer loans and residential real estate loans. Under these statements,
loan impairment is required to be measured based on the present value of expected future cash flows discounted at the loans
effective interest rate or, as a practical expedient, at the observable market price of the loan or the fair value of the
collateral if the loan is collateral dependent.

The reserve also incorporates the results of measuring impaired loans and leases as provided in SFAS No.
114 and SFAS No. 118. These accounting standards prescribe the measurement methods, income recognition, and disclosures related to
impaired loans and leases. A loan is considered impaired when management determines that it is probable that the Company will be
unable to collect all amounts due according to the original contractual terms of the loan or lease agreement. Impairment is
measured by the difference between the recorded investment in the loan or lease (including accrued interest, net deferred loan
fees or costs, and unamortized premium or discount) and the estimated present value of total expected future cash flows,
discounted at the loans effective rate, or the fair value of the collateral, if the loan is collateral dependent. Impairment
is recognized by adjusting the reserve for loan losses.

Loan securitizations The Company transfers loans through special interest trusts to
independent third parties under the terms of a revolving securitization facility agreement. These transfers are

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accounted for as sales if the requirements of SFAS No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, are met.

When the requirements for sale accounting are met, the carrying amount of the assets transferred to the
special interest trust is allocated between assets sold and retained interests based on relative fair values at the date of sale.
A gain or loss on the sale of loans is recorded for the difference between the carrying amount and the fair value of the assets
sold. The retained interests include the sellers interest in loans which have not been sold to a third party, retained
interest-only strips, and reserve accounts. Because quoted market prices are not available, the Company estimates the fair value
of the retained interests by determining the present value of the future expected cash flows using modeling techniques that
incorporate managements best estimates of key variables, including credit losses, prepayment speeds, weighted average life,
interest rates on variable rate contracts, and discount rates commensurate with the risks involved. Credit loss assumptions are
based upon historical experience and the characteristics of the loans securitized. Prepayment speed estimates are determined
utilizing data obtained from market participants, where available, or based on historical prepayment rates on similar assets.
Discount rate assumptions are determined using data obtained from market participants. Estimates of interest rates on variable
rate contracts are based on spreads over the applicable benchmark interest rate using market-based yield curves. The sellers
interest in loans is recorded on the balance sheet in loans at the allocated carrying amount. Interest-only strips and reserve
accounts are included in other assets and are recorded at fair value with any differences between fair value and carrying value
which are deemed to be temporary, reported net of tax, as a separate component of shareholders equity. Any differences
between fair value and carrying value which are deemed to be other than temporary are recorded in earnings.

Premises and equipment Premises and equipment are stated at cost less accumulated
depreciation and amortization computed principally on accelerated methods based on estimated useful lives of the assets, which
range from three to 40 years. Maintenance and repair costs are charged to expense as incurred. Gains or losses on disposition of
premises and equipment are reflected in income.

Other real estate Other real estate owned, which is included in other assets, represents
properties acquired through foreclosure and other proceedings recorded at the lower of the amount of the loan satisfied or fair
value less selling costs. Any write-down to fair value at the time of foreclosure is charged to the reserve for loan losses.
Property is appraised periodically to ensure that the recorded amount is supported by the current fair value. Market write-downs,
operating expenses and losses on sales are charged to other expenses. Income, including gains on sales, is credited to other
income.

Retirement plan accounting The Company provides pension benefits to substantially all
employees based on years of service and employee compensation while employed with the Company and accounts for these plans in
accordance with SFAS No. 87, Employers Accounting for Pensions. SFAS No. 87 requires the Company to make a
number of economic and other assumptions that can have a significant impact on amounts recorded in its 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 financial results and funding requirements.

Income taxes Bremer Financial Corporation and subsidiaries file a consolidated federal tax
return and, in certain states, combined state tax returns. The determination of the Companys current and deferred income
taxes is a critical accounting estimate requiring significant management judgment. The Company makes these estimates based on a
complex analysis of many factors, including its interpretation of existing federal and state income tax laws as they relate to the
Companys 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 the Companys current financial
accounting standards. Such interpretations could differ from those of the various federal and state tax authorities that examine
the Company periodically. If managements estimates and assumptions vary from the views of the taxing authorities,
adjustments to the periodic tax accruals may be necessary.

Comprehensive income Comprehensive income is defined as the change in equity of a business
enterprise during a period resulting from transactions and other events and circumstances from

43

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nonowner sources. It includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. For the Company, comprehensive income consists of net income, as reported in
the financial statements, and other comprehensive income, which consists of the change in unrealized gains and losses on
available-for-sale securities, other retained interests, and derivatives and hedging activities, and the change in the minimum
pension liability.

Goodwill and other intangible assets Under the provisions of SFAS No. 142,
Accounting for Goodwill and Other Intangible Assets, intangible assets acquired in a business combination, which do
not possess finite useful lives, are not amortized into net income over an estimated useful life. However, these intangible assets
are tested for impairment at least annually. Intangible assets with finite lives continue to be amortized over the period the
Company expects to benefit from such assets. See Note H.

Estimates The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from
those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the
allowance for credit losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans
and leases.

Earnings per share calculations Basic earnings per common share have been computed using
12,000,000 common shares for all periods. The Company does not have any dilutive securities. See Note R.

Note B:  Restrictions on Cash and Due From Banks

The Subsidiary Banks are required to maintain average reserve balances in the form of vault cash or
balances maintained either directly with a reserve bank or in a pass-through account, in accordance with the Federal Reserve Bank
requirements. The amount of those cash reserve balances was approximately $15,597,000 and $14,528,000 as of December 31, 2005
and 2004.

Note C:  Investment Securities

At December 31, 2005 and 2004, investment securities with an amortized cost of $952,793,000 and
$996,434,000 were pledged as collateral to secure public deposits and for other purposes. The amortized cost and estimated fair
value by maturity are shown below (contractual maturity or, with mortgage-backed securities, projected principal payments are
used):

At December 31, 2005Held-to-Maturity

 Available-for-SaleAmortized Cost


Fair Value


Amortized Cost


Fair Value(in thousands)Within 1 year



$
3,600


$
3,612


$
168,457


$
167,4981  5 years




29,632



30,132



529,325



522,3035  10 years




72,688



75,731



266,155



262,507After 10 years




142,613



142,153



133,796



132,419Equity securities












40,805



40,805Total investment securities



$
248,533


$
251,628


$
1,138,538


$
1,125,532


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The amortized cost and fair value of investment securities available-for-sale as of December 31
consisted of the following:

2005

 2004AmortizedCost


GrossUnrealizedGains


GrossUnrealizedLosses


FairValue


AmortizedCost


GrossUnrealizedGains


GrossUnrealizedLosses


FairValue(in thousands)U.S. Treasury securities



$
312


$



$
4


$
308


$
1,309


$



$
2


$
1,307Obligations of U.S. government agencies




62,509







782



61,727



129,732



231



523



129,440Obligations of state and political subdivisions




2,035



159







2,194



2,035



191







2,226Mortgage-backed securities




1,032,198



1,966



14,344



1,019,820



812,312



1,953



7,259



807,006Equity securities




40,805











40,805



53,664











53,664Other




679







1



678



4,255



2







4,257Total securities available-for-sale



$
1,138,538


$
2,125


$
15,131


$
1,125,532


$
1,003,307


$
2,377


$
7,784


$
997,900


Proceeds from sales of investments securities were $21,583,000, $126,704,000 and $223,584,000 for 2005,
2004 and 2003. Gross gains of $0, $2,122,500 and $5,862,400 and gross losses of $0, $50,500 and $6,400 were realized on those
sales for 2005, 2004 and 2003.

A summary of amortized cost and fair value of investment securities held-to-maturity at December 31
consisted of the following:

2005

 2004AmortizedCost


GrossUnrealizedGains


GrossUnrealizedLosses


FairValue


AmortizedCost


GrossUnrealizedGains


GrossUnrealizedLosses


FairValue(in thousands)Obligations of U.S. government agencies



$
1,000


$



$



$
1,000


$
1,000


$



$



$
1,000Obligations of state and political subdivisions




247,533



4,708



1,613



250,628



194,546



7,623



402



201,767Total securities held-to-maturity



$
248,533


$
4,708


$
1,613


$
251,628


$
195,546


$
7,623


$
402


$
202,767


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The following table provides the gross unrealized losses and fair value, aggregated by investment
category, and the length of time the individual securities have been in a continuous unrealized loss position at December 31:

2005Less than 12 Months

 12 Months or More

 TotalFairValue


UnrealizedLosses


FairValue


UnrealizedLosses


FairValue


UnrealizedLosses(in thousands)U.S. Treasury securities



$
108


$
2


$
200


$
2


$
308


$
4Obligations of U.S. government agencies




21,121



355



35,606



427



56,727



782Obligations of state and political subdivisions




63,457



1,168



19,141



445



82,598



1,613Mortgage-backed securities




435,657



5,933



375,919



8,411



811,576



14,344Other securities




97



1











97



1Total



$
520,440


$
7,459


$
430,866


$
9,285


$
951,306


$
16,744


2004Less than 12 Months

 12 Months or More

 TotalFairValue


UnrealizedLosses


FairValue


UnrealizedLosses


FairValue


UnrealizedLosses(in thousands)U.S. Treasury securities



$
999


$
2


$



$



$
999


$
2Obligations of U.S. government agencies




107,488



523











107,488



523Obligations of state and political subdivisions




9,165



81



13,205



321



22,370



402Mortgage-backed securities




299,885



3,311



283,682



3,948



583,567



7,259Other securities
























Total



$
417,537


$
3,917


$
296,887


$
4,269


$
714,424


$
8,186


The Company believes that the unrealized losses in the investment portfolio are the result of increases
in market interest rates and not from the deterioration in the creditworthiness of the issuer. The majority of the investments
have contractual terms which do not permit the issuer to settle the securities at a price less than the amortized cost of the
investment. U.S. Treasury securities and obligations of U.S. government agencies are direct and indirect obligations of the U.S.
government, respectively. Obligations of state and political subdivisions are general obligations of public entities. The
contractual cash flows of the mortgage-backed securities are guaranteed by an agency of the U.S. government. The Company has the
ability and intent to hold these investments until a recovery of fair value, which may be at maturity. The Company does not
consider these investments to be other-than-temporarily impaired.

State and political subdivision investments largely involve governmental entities within the
Companys market area.

46

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Note D:  Loans and Leases

The Company is engaged in lending activities with borrowers in a wide variety of industries. Lending is
concentrated in the areas in which the Subsidiary Banks are located. A decline in the local economies in these areas could
negatively impact the quality of these loans. Loans and leases at December 31 consisted of the following:

2005


2004(in thousands)Commercial



$
1,050,364


$
1,001,508Commercial real estate




1,553,559



1,432,738Construction




184,989



145,071Agricultural




521,182



496,019Residential real estate




756,601



910,352Construction




33,663



30,139Consumer




350,290



362,620Tax-exempt




189,118



163,546Total loans and leases



$
4,639,766


$
4,541,993


Impaired loans and leases were $13,553,000 and $10,143,000 at December 31, 2005 and 2004. Impaired
loans and leases include nonaccrual and restructured loans and leases. Restructured loans and leases are those for which the terms
(principal and/or interest) have been modified as a result of the inability of the borrower to meet the original terms of the loan
or lease. The reserve for loan losses included approximately $4,342,000 and $1,795,000 relating to impaired loans and leases at
December 31, 2005 and 2004.

Following is a summary of information pertaining to impaired loans and leases. No significant amounts of
interest income were recognized during each of the three years ending December 31:

2005


2004


2003(in thousands)Average investment in impaired loans, net of reserves



$
7,791


$
12,302


$
22,416Interest income as originally contracted



$
766


$
887


$
1,635


Other nonperforming assets, consisting of other real estate owned, amounted to $554,000 and $1,229,000
at December 31, 2005 and 2004.

At December 31, 2005 and 2004, loans totaling $1,956,081,000 and $1,917,034,000 had been pledged to
secure Federal Home Loan Bank (FHLB) advances. Acceptable collateral is defined by the FHLB. The Company currently
pledges residential, agricultural and commercial real estate mortgages and certain other eligible business and agricultural
loans.

Certain executive officers, directors and their related interests are loan customers of the Company.
These loans in the aggregate were less than 5% of shareholders equity at December 31, 2005 and 2004.

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Note E:  Reserve for Loan Losses

Changes in the reserve for loan losses are as follows:

For the Year Ended December 31,2005


2004


2003(in thousands)Beginning of period



$
57,965


$
58,906


$
58,799Charge-offs




(15,791
)


(6,601
)


(15,633
)Recoveries




1,889



2,143



935Net charge-offs




(13,902
)


(4,458
)


(14,698
)Provision for loan losses




12,365



7,042



14,805Reserve related to sold assets




(800
)






Reclassification to reserve for unfunded credit commitments








(3,525
)End of period



$
55,628


$
57,965


$
58,906


Note F.  Loan Securitizations

In September 2005, the Company transferred home equity loans with principal balances of $229.9 million
to a special interest trust in a securitization transaction. In September 2005, $200 million of the sellers interest in
these loans was subsequently sold to a commercial paper conduit, and the Company sells additional amounts of the sellers
interest to the commercial paper conduit each month under the terms of a revolving securitization facility agreement. Under the
terms of this agreement, which matures in August 2006, the Company may sell on a revolving basis up to $200 million in eligible
loans, subject to the maintenance of certain covenants regarding the performance of the loan pool. At December 31, 2005, the
Company was in compliance with all applicable covenants. The Company continues to service all of the loans transferred to the
special interest trust. These transactions have been accounted for as sales under SFAS No. 140 and a gain on sale of loans of $5.3
million was recognized during 2005 in connection with these transactions. At December 31, 2005, the Company had retained
interests from securitizations of $21.3 million, including an $8.2 million sellers interest in loans, a $7.8 million
interest-only strip, and a $5.3 million cash reserve account.

Key economic assumptions used in measuring the retained interests were as follows (rate per annum):

At date ofinitial transfer


At December 31, 2005valuation datePrepayment speed (CPR)




42.50
%


50.90
%Expected credit losses




0.26



0.29Weighted average life (in months)




16.7



14.3Discount rates:Sellers interest in loans and interest-only strip




13.00
%


13.00
%Cash reserve account




9.00



9.00


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The following table sets forth the sensitivity of the current fair value of capitalized residual cash
flows at December 31, 2005 to immediate 10% and 20% adverse changes to those key assumptions.

(in millions of dollars and annual percentage rate)Carrying amount/fair value of capitalized residual cash flows







$
13.1Prepayment speed assumption








50.9
%Decrease in fair value due to adverse change of 10%







$
0.4Decrease in fair value due to adverse change of 20%







$
0.8Expected credit losses








0.29
%Decrease in fair value due to adverse change of 10%







$
0.1Decrease in fair value due to adverse change of 20%







$
0.1Residual cash flow discount rate-Interest-only strip








13.0
%Residual cash flow discount rate-Reserve account








9.0
%Decrease in fair value due to adverse change of 10%







$
0.3Decrease in fair value due to adverse change of 20%







$
0.6


The sensitivities in the above table are hypothetical and should be viewed with caution. As the amounts
indicate, changes in fair value based on variations in assumptions are not subject to simple extrapolation, as the relationship of
the change in the assumption to the change in the fair value may not be linear. In addition, the effect of a variation in one
assumption is in reality likely to cause changes in other assumptions, which could potentially magnify or counteract the
sensitivities.

Cash flows received during 2005 from securitization activities were as follows:

(in millions)Proceeds from new securitization



$
193.5Proceeds from collections reinvested in revolving-period securitization




34.2Servicing fees received




0.3Other cash flows received on retained interests




4.9


The following table presents information as of December 31, 2005 with respect to securitized loans
and other loans that are managed with them.

(in millions)

 Balance


Loans Past Due90 Days


Loan Losses,Net


2005 AverageBalancesTotal Residential Real Estate LoansManaged or Securitized




957,679



6,981



1,592



946,229Less: Loans Securitized




201,078



231







52,008Loans Held in Portfolio




756,601



6,750



1,592



894,221


Note G:  Premises, Equipment and Lease Commitments

Premises and equipment at December 31 consisted of the following:

2005


2004(in thousands)Land



$
13,980


$
13,097Buildings and improvements




91,830



88,189Furniture and equipment




67,524



65,631Total premises and equipment




173,334



166,917Less: accumulated depreciation and amortization




84,847



83,003Premises and equipment, net



$
88,487


$
83,914


Depreciation and amortization expense on premises and equipment was $9,398,000, $8,590,000 and
$8,434,000 in 2005, 2004 and 2003, respectively. Depreciation on premises and equipment is calculated

49

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on a straight-line basis for book purposes. Buildings are depreciated over an estimated useful life not
to exceed 39 years, furniture and equipment is depreciated over periods of between three and 10 years, and leasehold improvements
are depreciated over the term of the underlying lease, not to exceed the estimated useful life of the improvements.

Certain branch offices and equipment are leased under non-cancelable operating leases. The Company
currently has no leases that meet the definition of a capital lease. All operating leases expire at various dates through the year
2055. However, in the normal course of business, it is expected that the majority of these leases will be renewed or replaced by
leases on other properties, as most of the Companys leases contain renewal options for multi-year periods at determinable
rentals. The following summary reflects the future minimum lease payments required under operating leases that, as of
December 31, 2005, have remaining non-cancelable lease terms in excess of one year:

Years ending December 31,

 Operating Leases(in thousands)2006



$
3,2632007




2,6122008




1,8922009




1,6592010




1,593Thereafter




16,302Total minimum lease payments



$
27,321


Operating lease rental expense, net of rental income, was $2,889,000, $2,982,000 and $2,964,000 in 2005,
2004 and 2003, respectively.

Note H:  Intangible Assets

Intangible assets consist of goodwill, core deposit intangibles, and other intangibles. The remaining
unamortized balances at December 31, 2005 and 2004 were approximately $96,429,000 and $99,617,000. The core deposit and other
intangibles have remaining amortization lives of five to six years. Goodwill is not amortized but is tested regularly for
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. Using this approach, management has performed its 2005 annual impairment test on its goodwill
and other intangible assets, with the exception of mortgage servicing rights, and no impairment loss was recorded as a result. The
Company evaluates mortgage servicing rights (MSRs) on a quarterly basis for possible impairment based on the
difference between the carrying amount and current estimated fair value under SFAS No. 140. As a result of this analysis, a
valuation allowance of $90.0 thousand was recorded for MSRs at December 31, 2005.

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

As of December 31, 2005

 As of December 31, 2004(in thousands)GrossCarryingAmount


AccumulatedAmortization


NetCarryingValue


GrossCarryingAmount


AccumulatedAmortization


NetCarryingValueCore deposit premium



$
21,313


$
11,838


$
9,475


$
21,313


$
9,595


$
11,718Mortgage servicing rights (1)




2,897



1,877



1,020



4,047



2,467



1,580Other




4,294



2,586



1,708



4,322



2,229



2,093Total



$
28,504


$
16,301


$
12,203


$
29,682


$
14,291


$
15,391


---

|(1) | Accumulated amortization of mortgage servicing rights includes the related valuation allowance of $90 thousand in
2005 and $511 thousand in 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------

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The Company recorded aggregate intangible amortization expense of $2.6 million, $2.7 million and $2.9
million in 2005, 2004 and 2003. The estimated amortization expense for each of the next five years is approximately $2.1
million.

Goodwill was $84.2 million at December 31, 2005 and 2004.

Note I:  Deposits

Information related to deposits by type is provided below:

At December 31,2005


2004(in thousands)Noninterest bearing deposits



$
892,624


$
825,755Savings and NOW accounts




527,406



514,318Money market and other interest bearing checking




1,641,073



1,661,612Time certificates of deposit:Less than $100,000




1,065,604



885,946$100,000 or more




751,645



322,465Total deposits



$
4,878,352


$
4,210,096


Time certificates that had balances of $100,000 or more mature as summarized in the following table:

At December 31,2005


2004(in thousands)Three months or less



$
143,408


$
54,419Over three months to six months




103,492



42,510Over six months to 12 months




173,413



98,168Over 12 months




331,332



127,368Total



$
751,645


$
322,465


Time-certificates that had balances less than $100,000 mature as summarized in the following table:

At December 31,2005


2004(in thousands)Three months or less



$
139,728


$
129,289Over three months to six months




151,582



127,468Over six months to 12 months




365,213



191,112Over 12 months




409,081



438,077Total



$
1,065,604


$
885,946


Note J:  Short-term Borrowings

Short-term borrowings consist of federal funds and repurchase agreements (which generally mature within
one to 60 days of the transaction date), treasury tax and loan notes (which generally mature within one to 30 days), FHLB advances
(which mature within one year), and advances under an unsecured revolving credit facility agreement. The available credit facility
of $15.0 million was unused at December 31, 2005. The credit facility agreement contains covenants, including a requirement
to maintain certain minimum levels of capitalization.

51

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Information related to short-term borrowings for the
two years ended December 31, 2005 is provided below:

Federal Fundsand RepurchaseAgreements


Federal HomeLoan BankBorrowings


TreasuryTax and LoanNotes(dollars in thousands)Balance at December 312005



$
524,449


$
210,000


$
2,1112004



$
524,432


$
461,000


$
3,025Weighted average interest rate at December 312005




3.48
%


4.20
%


3.84
%2004




1.52
%


2.34
%


1.72
%Maximum amount outstanding at any month end2005



$
599,602


$
507,082


$
2,9962004



$
556,619


$
461,000


$
3,082Average amount outstanding during the year2005



$
536,502


$
376,323


$
1,4412004



$
474,294


$
322,708


$
1,610Weighted average interest rate during the year2005




2.59
%


3.19
%


2.97
%2004




1.28
%


1.53
%


1.10
%


Note K:  Long-term Debt

Long-term debt (debt with original maturities of more than one year) at December 31 consisted of the
following:

At December 31,2005


2004(in thousands)Senior notes



$
19,000


$
19,000Junior subordinated deferrable interest debentures




78,867



78,867Federal Home Loan Bank borrowings




223,514



281,775Installment promissory notes




635



1,058Total



$
322,016


$
380,700


The $19 million of senior notes are unsecured, bear interest at a rate of 8.47%, and mature on
November 1, 2006. The senior note agreements contain covenants, including a requirement to maintain certain minimum levels of
capitalization.

The junior subordinated deferrable interest debentures were issued in 2001 in connection with the
issuance by the Company of $76.5 million of mandatorily redeemable preferred securities in two separate transactions. In February
2001, the Company issued $16.5 million of 10.2% Capital Securities through Bremer Statutory Trust I (BST), and in May
2001, the Company issued $60.0 million of 9.0% Cumulative Capital Securities through Bremer Capital Trust I (BCT). The
proceeds of both of these offerings, combined with the $2.4 million in proceeds from the sale by BST and BCT to the parent of
their common securities, were invested by BST and BCT in Junior Subordinated Deferrable Interest Debentures
(debentures) of the parent company. The debentures will mature no earlier than July 15, 2006 and no later than
July 15, 2031. At December 31, 2005, the $76.5 million in Capital Securities qualified as Tier I capital under
guidelines of the Federal Reserve.

The Company expects to issue additional junior subordinated debentures in June 2006 in connection with
the planned issuance of $60 million of mandatorily redeemable preferred securities. The Company expects that these mandatorily
redeemable preferred securities will be issued on a floating rate basis in a trust preferred pool transaction. The Company expects
that the proceeds from this anticipated transaction will be used to retire the $60 million of 9.0% Cumulative Capital Securities
issued through BCT in 2001.

52

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The FHLB borrowings bear interest at rates ranging from 3.20% to 5.80%, with maturity dates from 2006
through 2012, and are secured by certain loans.

The installment promissory notes currently bear interest at 4.88% and are payable in semi-annual
installments through 2007.

Maturities of outstanding long-term debt were as follows:

At December 31, 2005(in thousands)2006



$
64,4232007




59,0322008




71,0002009




3,6942010




5,000Beyond 2010




118,867Total



$
322,016


At December 31, 2005, $71 million of the FHLB borrowings due in 2008 were subject to call on a
quarterly basis prior to maturity at the option of the FHLB.

Note L:  Employee Benefit Plans

Pension 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), an
unfunded plan designed to supplement the benefits determined under the Pension Plan for certain highly compensated employees of
the Company to the extent the benefits under the Pension Plan are capped by compensation limits.

In recent years, the Companys funding policy on the qualified plan has been to contribute annually
an amount approaching the maximum amount that can be deducted for federal income tax purposes. Contributions to the Pension Plan
are intended to provide for benefits attributed to service to date and for those expected to be earned in the future.

The Company amended the Bremer Retirement Plan, the Bremer 401(k) Plan (401(k) Plan) and the
Employee Stock Ownership Plan (ESOP) on September 27, 2005. These plan changes include reduced early retirement
benefit factors and a simplified benefit formula under the Bremer Retirement Plan, offset by an increase in the maximum Company
match to employees in the Bremer 401(k) Plan and a guaranteed annual employer contribution to the ESOP. The adoption of these plan
amendments, which became effective on January 1, 2006, are expected to be relatively cost neutral in 2006 and going
forward.

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. On September 27,
2005, the Company amended the Companys Early Retiree Medical Plan to gradually eliminate, over a period of years, the
medical premium subsidy for retired employees, while continuing to allow retired employees access to the Companys group
medical coverage. In accordance with SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than
Pensions, as amended by SFAS No. 132 (Revised 2003), Employers Accounting for Postretirement Benefits Other than
Pensions  an amendment of FASB Statements No. 87, 88, and 106, the Company currently accrues the cost of these
benefits during the employees active service. Benefits under SFAS No. 106 are funded as incurred. The adoption of this plan
amendment, which became effective on January 1, 2006, is expected to reduce Company costs in 2006 and going forward.

53

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The following table sets forth the plans change in the actuarially determined benefit obligation
and plan assets as of the September 30 measurement date, and information on the plans funded status at December 31:

Pension Benefits

 Other Postretirement Benefits2005


2004


2005


2004(in thousands)Change in Benefit ObligationBenefit obligation at beginning of year (9/30)



$
67,877


$
60,579


$
6,788


$
5,971Service cost




3,957



3,687



633



564Interest cost




4,024



3,592



399



351Plan particpants contributions












161



164Actuarial loss/(gain)




5,281



1,540



(454
)


64Benefits paid




(1,680
)


(1,465
)


(313
)


(326
)Curtailments and special termination benefits








(56
)






Benefit obligation at end of year (9/30)



$
79,459


$
67,877


$
7,214


$
6,788Change in Plan AssetsFair value of plan assets at beginning of year (9/30)



$
65,329


$
55,211


$



$
Actual return on assets




9,053



4,216







Employer contributions




4,368



7,367



152



162Plan participants contributions












161



164Benefits paid




(1,680
)


(1,465
)


(313
)


(326
)Fair value of plan assets at end of year (9/30)



$
77,070


$
65,329


$



$
Funded Status of PlansFunded status of plans (12/31)



$
(2,388
)

$
(2,548
)

$
(7,214
)

$
(6,788
)Unrecognized net actuarial loss (12/31)




19,784



19,160



1,218



1,751Unrecognized prior service cost/(benefit) (12/31)




193



210



(17
)


(30
)Prepaid benefit asset/(accrued benefit liability) (12/31)



$
17,589


$
16,822


$
(6,013
)

$
(5,067
)


The 2004 curtailment and special termination benefits were recorded pursuant to a plan amendment to the
Companys SERP, effective June 14, 2004, and the Company recognized $295.8 thousand in curtailment benefit cost in
accordance with SFAS No. 88, Employers Accounting for Settlements and Curtailments of Defined Benefit Plans and for
Termination Benefits. There were no curtailments or special termination benefits incurred in 2005.

Amounts recognized in the statement of financial position as of December 31 consist of:

Pension Benefits

 OtherPostretirement Benefits2005


2004


2005


2004(in thousands)Prepaid benefit cost



$
19,952


$
18,996


$



$
Accrued benefit cost




(2,809
)


(2,620
)


(6,013
)


(5,067
)Intangible asset




109



137







Accumulated other comprehensive income




337



309







Net amount recognized



$
17,589


$
16,822


$
(6,013
)

$
(5,067
)


54

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The accumulated benefit obligation, projected benefit obligation and fair value of plan assets as of
September 30 were as follows:

Pension Benefits2005


2004(in thousands)Accumulated benefit obligation



$
64,221


$
55,792Projected benefit obligation




79,459



67,877Fair value of plan assets




77,070



65,329


Net pension expense for the actuarially developed plans included the following components as of
December 31:

Pension Benefits

 OtherPostretirement Benefits2005


2004


2003


2005


2004


2003(in thousands)Service cost



$
3,957


$
3,687


$
2,932


$
633


$
564


$
452Interest cost




4,024



3,592



3,299



399



351



317Expected return on assets




(5,489
)


(4,637
)


(3,616
)










Prior service cost amortization




15



59



84



(12
)


(12
)


(12
)Net loss amortization




1,094



1,070



1,161



78



84



52Net periodic benefit cost



$
3,601


$
3,771


$
3,860


$
1,098


$
987


$
809


The amounts, net of tax, included within other comprehensive income arising from a change in the
additional minimum pension liability for the years ended December 31, 2005 and December 31, 2004 were $(17) thousand and
$(185) thousand. While the SERP had an additional minimum liability of $446 thousand at December 31, 2005, there was no
additional minimum liability calculated on the Pension Plan as of that date.

Weighted average assumptions used to determine benefit obligations at December 31 were as follows:

Pension Benefits

 OtherPostretirement Benefits2005


2004


2003


2005


2004


2003Discount rate




5.75
%


6.00
%


6.00
%


5.75
%


6.00
%


6.00
%Compensation increase rate




4.25
%


4.25
%


4.25
%


N/A



N/A



N/A


Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31
were as follows:

Pension Benefits

 OtherPostretirement Benefits2005


2004


2003


2005


2004


2003Discount rate




6.00
%


6.00
%


6.75
%


6.00
%


6.00
%


6.75
%Long-term rate of return on assets




8.50
%


8.50
%


9.00
%


N/A



N/A



N/ACompensation increase rate




4.25
%


4.25
%


4.25
%


N/A



N/A



N/A


The discount rate utilized to determine future pension obligations is based primarily on a review of
current high quality fixed income securities rates.

The January 1, 2006 assumption for the long-term rate of return on plan assets is 8.5%. As defined
in SFAS No. 87, this assumption represents the rate of return on plan assets reflecting the average rate of earnings expected on
the funds invested or to be invested to provide for the benefits included in the benefit obligation. The assumption has been
determined by reflecting expectations regarding future long-term rates of return for the investment portfolio, with consideration
given to the distribution of investments by, and historical rates of return of, each individual asset class.

55

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For purposes of postretirement benefits measurements, the Company has assumed the following health care
trend rates as of December 31:

OtherPostretirement Benefits2005


2004


2003Current year trend




8.00
%


8.50
%


9.00
%Ultimate year trend




5.00
%


5.00
%


5.00
%Year of ultimate trend rate




2011



2011



2011


The health-care trend rate assumption has a significant effect on the amounts reported. A one percentage
point change in the health-care trend rate would have the following effects on 2005 service and interest cost on the accumulated
postretirement benefit obligation at December 31, 2005:

One (1) Percentage PointIncrease


Decrease(in thousands)Effect on total of service and interest cost



$
149


$
(127
)Effect on postretirement benefit obligation




856



(741
)


In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
Act) was signed into law. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy
to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the
prescription drug benefit under Medicare. Questions have arisen regarding whether an employer that provides postretirement
prescription drug coverage should recognize the effects of the Act on its accumulated postretirement benefit obligation (APBO) and
net postretirement benefit costs under SFAS No. 106. While the Company does offer postretirement benefits, including prescription
drug coverage, subject to the accounting requirements of SFAS No. 106, those benefits are available to retirees only until age 65,
at which time Medicare coverage becomes effective. As such, the Company does not believe that this specific provision of the Act
will have any material effect on its financial position or results of operations.

The Companys pension plan weighted-average asset allocations at December 31, 2005 and 2004,
by major asset category, were as follows:

Plan Assetsat December 31,2005


2004Equity securities




74
%


66
%Debt securities




23
%


21
%Other




3
%


13
%Total




100
%


100
%


In 2005, as expected, the Companys pension plan long-term asset allocation moved closer to the 75%
equity securities and 25% fixed income targets, as outlined in the Companys current Pension Investment Policy. The current
equity allocation is distributed over 12 professionally managed mutual funds covering eight different equity styles. The Company
regularly reviews the actual asset allocation and periodically rebalances the investments to the targeted allocation when
considered appropriate. The Company believes that 8.5% is a reasonable long-term rate of return on the pension plan assets for
2006, given the asset allocation strategy and investment time horizon. For the year ended December 31, 2005, the pension plan
assets generated a total composite return of 14.2%. The Company will continue to evaluate the actuarial assumptions, including the
expected rate of return, at least annually, and will adjust them as necessary.

In developing strategic asset allocation guidelines for the plan, an emphasis is placed on the long-term
characteristics of individual asset classes, the benefits of diversification among multiple asset classes and the Companys
long-term return expectations for the plan. Consideration is also

56

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given to the proper level of risk of the plan, particularly with respect to the long-term nature of the plans liabilities
and long-term investment horizon of plan assets.

The Company expects to contribute an amount currently
estimated at $4.6 million to the retirement and post-retirement plans in 2006, and to make the following benefit payments,
which reflect expected future service, as appropriate:

For the Year(s) Ended December 31,

 PensionBenefits


OtherPostretirementBenefits(in thousands)2006



$
1,965


$
2602007




2,166



3022008




2,389



3482009




2,634



3952010




2,922



4422011 through 2015




20,720



3,267


401(k) plan The 401(k) Plan is a defined contribution plan. Through 2005, the Company
provided a 50% match of the first 1 to 6% plan compensation the employee contributed on a pre-tax basis and and made additional
contributions to the plan at the discretion of the Board, primarily on the basis of Company earnings. Beginning January 1,
2006, the Company provides a 100% match of the first 1% to 5% of plan compensation the employee contributes on a pre-tax basis.
Total employer contributions made for 2005, 2004 and 2003 were $2,440,000, $2,038,000 and $2,462,000, respectively.

Employee stock ownership plan The ESOP is a defined contribution plan covering
substantially all employees with contributions made exclusively by the Company on a discretionary year-by-year basis. The
contribution was $200,000 for 2005, $600,000 for 2004 and $100,000 for 2003. The Company guarantees a contribution of .75% of
eligible pay to the ESOP beginning January 1, 2006.

Note M:  Other Noninterest Income

Other noninterest income at December 31 consisted of the following:

2005


2004


2003(in thousands)Fees on loans



$
5,189


$
5,238


$
4,951Other




1,817



2,341



1,867Total



$
7,006


$
7,579


$
6,818


Note N:  Other Noninterest Expense

Other noninterest expense at December 31 consisted of the following:

2005


2004


2003(in thousands)Printing, postage and telephone



$
6,413


$
6,205


$
6,695Marketing




6,429



6,272



6,140Professional fees




3,504



4,339



3,360Other




15,874



13,554



13,605Total



$
32,220


$
30,370


$
29,800


57

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Note O:  Income Taxes

The components of the provision for income taxes at December 31 were as follows:

2005


2004


2003(in thousands)CurrentFederal



$
30,700


$
26,575


$
24,960State




8,250



7,028



5,902Deferred




(450
)


484



1,248Total



$
38,500


$
34,087


$
32,110


A reconciliation between income tax expense and the amount computed by applying the statutory federal
income tax rate at December 31 was as follows:

2005


2004


2003(in thousands)Tax at statutory rate



$
38,686


$
34,392


$
32,621Plus state income tax, net of federal tax benefits




5,252



4,556



3,88043,938



38,948



36,501Less tax effect of:Interest on state and political subdivision securities




2,957



2,816



2,893Other tax-exempt interest




2,697



2,423



2,215Amortization












(322
)Other




(216
)


(378
)


(395
)5,438



4,861



4,391Income tax expense



$
38,500


$
34,087


$
32,110


The following table sets forth the temporary differences comprising the net deferred taxes included with
other liabilities on the consolidated balance sheet at December 31:

2005


2004(in thousands)Deferred tax assetsProvision for loan losses



$
24,077


$
24,541Employee compensation and benefits accruals




4,779



4,608Deferred fees




1,214



1,012Accumulated other comprehensive income




5,368



2,162Other




573



632Total



$
36,011


$
32,955Deferred tax liabilitiesSecuritization and loan servicing activities



$
2,342


$
632Pension




8,015



7,695Depreciation




20,911



24,422Deferred expense




6,116



5,045Other




135



100Total




37,519



37,894Net deferred tax liabilities



$
1,508


$
4,939


58

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Table of Contents

Note P:  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 represents the outstanding obligations at December 31:

2005


2004(in thousands)Standby letters of credit



$
49,413


$
52,772Commercial letters of credit




53,878



47,772Loan commitments




1,664,169



1,386,761


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. Commercial letters of credit facilitate
trade or commerce. Under the terms of a commercial letter of credit, as a general rule, drafts will be drawn when the underlying
transaction is consummated as intended. 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 most often 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 real
estate, accounts receivable, inventory, and productive assets.

Under substantially noncancelable contracts, the Company is obligated to pay approximately $4.2 million
in annual data processing and item processing fees to third party providers through May 2008. The costs under the item processing
contract are calculated in accordance with a volume-based fee schedule, which is subject to change annually.

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

Note Q:  Derivative Instruments

The Company occasionally enters into derivative transactions to manage its interest rate risk. During
2005, the Company entered into a forward starting interest rate swap in the notional amount of $60 million in connection with the
anticipated issuance during 2006 of a like amount of floating rate junior subordinated debentures. The interest rate swap, which
becomes effective in June 2006, will convert the expected floating rate interest payments on the debentures to a fixed rate for 10
years. This derivative instrument qualifies for hedge accounting as a cash flow hedge, which is a hedge of the
variability of the cash flows to be received or paid related to a recognized asset or liability or a forecasted transaction.
Changes in the fair value of a derivative that is highly effective and designated as a cash flow hedge are recognized in other
comprehensive income until income or expense from the cash flows of the hedged item is recognized. At December 31, 2005, the
estimated fair value of the interest rate swap was $0.4 million. This unrealized gain, which is recorded on the balance sheet in
other assets, has been excluded from earnings and reported, net of tax, as a separate component of shareholders equity until
realized.

59

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Note R:  Common Stock

The Company has authorized 12,000,000 shares of class A common stock and 10,800,000 shares of class B
common stock. The shares of class A common stock have full rights to vote on all matters properly before the Companys
shareholders, including the election of the Companys directors. The class B common stock, all of which is held by the Otto
Bremer Foundation (the Foundation), is non-voting except with respect to certain extraordinary corporate transactions,
upon which the holders would have the right to vote on an equivalent per share basis with the holders of class A common stock.

Each share of class B common stock is convertible into one share of class A common stock upon the
occurrence of the following events: (i) at the affirmative election of a third party or entity, upon the transfer of class B
common stock from the Foundation to any third party or entity, or (ii) at the affirmative election of the holder of class B common
stock, if cash dividends have not been paid on class A and class B common stock with respect to any year in an amount equal to at
least 5% of the Companys net book value as of the last day of the immediately preceding year. The Company has reserved
10,800,000 shares of class A common stock in the event of conversion of the class B common stock.

At December 31, 2005 and 2004, 960,000 shares of redeemable class A stock were issued and
outstanding. At December 31, 2005, these shares were subject to redemption at a price of $45.55 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 upon
their deaths, permanent disabilities or retirements, while the Company has the option to purchase the shares from holders upon the
occurrence of certain events, which include death, retirement or termination of the employees 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 Foundation.

Federal law prevents the Company and its non-bank subsidiaries from borrowing from the Subsidiary Banks
unless the loans are secured by specified U.S. obligations. Further, the secured loans that may be made by Subsidiary Banks are
generally limited in amount to 10% of the Subsidiary Banks equity if made to the Company or any individual affiliate and 20%
of the Subsidiary Banks equity if made to all affiliates and the Company in the aggregate. At December 31, 2005, 2004
and 2003, no Subsidiary Banks had extended credit to the Company.

The payment of dividends by the Company to shareholders and the payment of dividends by Subsidiary Banks
to the Company are both subject to various limitations by bank regulators, which includes maintenance of certain minimum capital
ratios. As of December 31, 2005, $35,521,000 of retained earnings of the Subsidiary Banks was available for distribution to
the Company as dividends subject to these limitations. Approximately $34,812,000 was available for distribution without obtaining
the prior approval of the appropriate bank regulator.

Note S:  Regulatory Matters

The Company is subject to various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material effect on the Companys financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital
guidelines that involve quantitative measures of the Companys assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Companys capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company to
maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier I capital (as defined) to

60

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average assets (as defined). Management believes, as of December 31, 2005, that the Company meets
all capital adequacy requirements to which it is subject.

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%. The
Subsidiary Banks ratios in each of these categories met or exceeded the well-capitalized ratios as of
December 31, 2005.

The Companys and Subsidiary Banks actual capital amounts and ratios as of December 31 are
also presented below:

Actual

 For CapitalAdequacy Purposes

 To Be WellCapitalized UnderPrompt CorrectiveAction ProvisionsAmount


Ratio


Amount

 


Ratio


Amount

 


Ratio(dollars in thousands)As of December 31, 2005:Total capital (to risk weighted assets)Consolidated



$
594,936



11.66
%

$
408,104







8.00
%


N/ASubsidiary Banks



$
567,930



11.20
%

$
405,659







8.00
%

$
507,074







10.00
%Tier I capital (to risk weighted assets)Consolidated



$
535,368



10.49
%

$
204,052







4.00
%


N/ASubsidiary Banks



$
508,718



10.03
%

$
202,830







4.00
%

$
304,244







6.00
%Tier I capital (to average assets)Consolidated



$
535,368



8.55
%

$
250,377







4.00
%


N/ASubsidiary Banks



$
508,718



8.13
%

$
250,251







4.00
%

$
312,813







5.00
%As of December 31, 2004:Total capital (to risk weighted assets)Consolidated



$
545,850



11.38
%

$
383,586







8.00
%


N/ASubsidiary Banks



$
528,496



11.12
%

$
380,310







8.00
%

$
475,388







10.00
%Tier I capital (to risk weighted assets)Consolidated



$
485,895



10.13
%

$
191,793







4.00
%


N/ASubsidiary Banks



$
469,055



9.87
%

$
190,155







4.00
%

$
285,233







6.00
%Tier I capital (to average assets)Consolidated



$
485,895



8.21
%

$
236,788







4.00
%


N/ASubsidiary Banks



$
469,055



7.94
%

$
236,317







4.00
%

$
295,396







5.00
%


Note T:  Disclosure About Fair Value of Financial Instruments

Most of the Companys assets and liabilities are considered financial instruments as defined in
SFAS No. 107. Many of the Companys financial instruments, however, lack an available trading market which is characterized
by an exchange transaction of the instrument by a willing buyer and seller. It is also the Companys general practice and
intent to hold most of its financial instruments to maturity and not engage in trading activities. Therefore, significant
estimations and present value calculations were utilized by the Company for purposes of this disclosure. The use of different
market assumptions and/or estimation methodologies may have a material effect on these estimated fair value amounts.

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The fair value estimates presented herein are based on pertinent information available to the Company as
of December 31, 2005 and 2004. Although the Company is not aware of any factors that would significantly affect the estimated
fair value amounts, these amounts have not been comprehensively revalued for purposes of these financial statements since
December 31, 2005 and, therefore, current estimates of fair value may differ from the amounts presented. As of
December 31, carrying amounts and estimated fair values for on balance sheet financial instruments were:

2005

 2004CarryingAmount


EstimatedFairValue


CarryingAmount


EstimatedFairValue(in thousands)Financial assets:Cash and due from banks



$
313,613


$
313,613


$
203,930


$
203,930Investment securities available-for-sale




1,125,532



1,125,532



997,900



997,900Investment securities held-to-maturity




248,533



251,628



195,546



202,767Loans and leases




4,584,138



4,606,814



4,484,028



4,511,961Financial liabilities:Demand deposits



$
3,061,103


$
3,061,103


$
3,001,685


$
3,001,685Time deposits




1,817,249



1,808,514



1,208,411



1,207,510Short-term borrowings




736,560



736,638



988,457



988,267Long-term debt




322,016



327,242



380,700



397,286


Cash and due from banks and interest bearing deposits The carrying value for these
financial instruments approximates fair value due to the relatively short period of time between the origination of the
instruments and their expected realization.

Securities Fair values of these financial instruments were estimated using quoted market
prices, when available. If quoted market prices were not available, fair value was estimated using market prices for similar
assets. As required by SFAS No. 115, securities available-for-sale are carried at fair market value.

Loans and leases The loan and lease portfolio consists of both variable and fixed rate
obligations. The carrying amounts of variable rate loans, a majority of which reprice within the next three months, and for which
there has been no significant change in credit risk, are assumed to approximate fair value. The fair values for fixed rate loans
and leases are estimated using discounted cash flow analysis. The discount rates applied are based on the current interest rates
for loans with similar terms to borrowers of similar credit quality.

Deposits The estimated fair value of deposits with no stated maturity, such as
non-interest bearing savings and money-market checking accounts, is the amount payable on demand. The fair value of time deposits
is estimated using the rates currently offered for deposits of similar remaining maturities.

Short-term borrowings For variable rate borrowings, fair value approximates carrying
value. For fixed rate borrowings, the fair value is determined by discounting future cash flows at current rates for borrowings
with similar remaining maturities.

Long-term debt For certain junior subordinated deferrable interest debentures, fair value
was estimated using quoted market prices. For other fixed rate debt, the fair value is determined by discounting future cash flows
at current rates for debt with similar remaining maturities and call features or by using market prices for similar assets. For
variable rate debt, fair value approximates carrying value.

Off-balance sheet financial instruments The Company estimates the fair value of loan commitments and letters of credit based on the related amount of unamortized
deferred commitment fees adjusted for probable losses from these arrangements. Substantially all of these commitments have
floating rates and do not expose the Company to interest rate risk. The fair value of these

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unfunded commitments is approximately equal to their carrying value, which was $3.9 million and $3.5
million at December 31, 2005 and 2004, respectively. See Note Q for the discussion of derivatives.

Note U:  Bremer Financial Corporation (Parent Company Only) Condensed Statements:

Balance Sheets

December 31,2005


2004(in thousands)AssetsCash and cash equivalents



$
21,763


$
11,877Investment in and advances to:Bank subsidiaries




595,412



562,770Non-bank subsidiaries




34,942



36,500Other assets




6,785



6,687Total assets



$
658,902


$
617,834Liabilities and Shareholders EquityAdvance from non-bank subsidiary



$
5,200


$
5,200Junior subordinated deferrable interest debentures




78,867



78,867Other long-term debt




19,635



20,058Accrued expenses and other liabilities




8,566



9,518Redeemable class A common stock




43,730



40,335Shareholders equity




502,904



463,856Total liabilities and shareholders equity



$
658,902


$
617,834


Statements of Income

Years Ended December 31,2005


2004


2003(in thousands)IncomeDividends from:Bank subsidiaries



$
38,775


$
23,035


$
32,190Non-bank subsidiaries




4,086



5,303



1,388Interest from subsidiaries




1,252



1,252



1,849Interest income on taxable securities








213



631Gain on sale of securities








12



12Other income




56



256



612Total income




44,169



30,071



36,682ExpensesInterest expense:Short-term borrowings




28



29



59Junior subordinated deferrable interest debentures




7,395



7,402



7,392Other long-term debt




1,683



4,958



5,635Salaries and benefits




1,698



2,570



2,197Operating expense paid to subsidiaries




2,132



1,812



1,682Other operating expenses




1,754



2,300



1,320Total expenses




14,690



19,071



18,285Income before income tax benefit




29,479



11,000



18,397Income tax benefit




5,372



6,489



5,649Income of parent company only




34,851



17,489



24,046Equity in undistributed earnings of subsidiaries




37,180



46,688



37,046Net income



$
72,031


$
64,177


$
61,092


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Note U:  Bremer Financial Corporation (Parent Company Only) Condensed
Statements (continued):Statements of Cash Flows

Years Ended December 31,2005


2004


2003(in thousands)Cash flows from operating activitiesNet income



$
72,031


$
64,177


$
61,092Adjustments to reconcile net income to net cash provided by operating activitiesEquity in undistributed (earnings) of subsidiaries




(37,180
)


(46,688
)


(37,046
)Depreciation and amortization




673



569



1,691Other, net




(1,528
)


2,372



5,876Net cash provided by operating activities




33,996



20,430



31,613Cash flows from investing activitiesInvestment in and advances to subsidiaries, net




1,273



17,809



(5,352
)Purchases of securities








(7,679
)


(40,171
)Proceeds from maturities of securities








729



1,393Proceeds from sales of securities








44,095



39,803Net cash provided (used) by investing activities




1,273



54,954



(4,327
)Cash flows from financing activitiesRepayments of long-term debt




(423
)


(46,424
)


(423
)Dividends paid




(24,960
)


(22,800
)


(21,600
)Net cash used by financing activities




(25,383
)


(69,224
)


(22,023
)Net increase in cash and cash equivalents




9,886



6,160



5,263Cash and cash equivalents at beginning of period




11,877



5,717



454Cash and cash equivalents at end of period



$
21,763


$
11,877


$
5,717


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Table of Contents

Note V:  Quarterly Consolidated Financial Information (Unaudited):

BREMER FINANCIAL CORPORATION
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)

2005 Quarter Ended(dollars in thousands, except per share data)March 31


June 30


September 30


December 31Interest income



$
80,386


$
87,436


$
93,597


$
95,811Interest expense




27,019



32,312



36,471



39,029Net interest income




53,367



55,124



57,126



56,782Net income




16,182



16,782



18,331



20,736Per share of common stockNet income-basic and diluted




1.35



1.40



1.53



1.72


2004 Quarter Ended(dollars in thousands, except per share data)March 31

 June 30

 September 30

 December 31Interest income



$
67,148


$
68,678


$
73,038


$
78,031Interest expense




21,389



21,245



22,541



23,664Net interest income




45,759



47,433



50,497



54,367Net income




14,398



14,946



16,401



18,432Per share of common stockNet income-basic and diluted




1.20



1.25



1.36



1.54


65

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareholders of
Bremer Financial CorporationSaint Paul, Minnesota

We have audited the accompanying consolidated balance sheets of Bremer Financial Corporation and
subsidiaries (the Company), as of December 31, 2005 and 2004, and the related consolidated statements of income,
shareholders equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial
statements are the responsibility of the Companys management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the
financial position of Bremer Financial Corporation and subsidiaries as of December 31, 2005 and 2004, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with
accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP


Minneapolis, Minnesota
March 15, 2006

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ITEM 9A.   CONTROLS AND PROCEDURES

The Company carried out an evaluation, under the supervision and with the participation of the
Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness,
as of December 31, 2005, of the design and operation of the Companys disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Disclosure controls and procedures include
controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Companys management, including
its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Companys
disclosure controls and procedures were effective as of December 31, 2005 to ensure that information required to be disclosed
by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and regulations of the Securities and Exchange Commission. There was no
change in our internal control over financial reporting that occurred during the quarter or year ended December 31, 2005 that
has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial
reporting.

PART III

Items 10 through 14 of the Form 10-K are omitted because the Company will file before April 30,
2006 a definitive Proxy Statement (the Proxy Statement) conforming to Schedule 14A involving the election of
directors. The information required by Items 10, 11, 12, 13 and 14 of Part III of the Form 10-K are hereby incorporated by
reference to such Proxy Statement.

PART IV

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

|(a) |  | The
following documents are filed as part of this report:
|--- |  | ---------------------------------------------------------

| | (1) |  | Consolidated
Balance Sheets  December 31, 2005 and December 31, 2004
| | --- |  | ---------------------------------------------------------------------

| | Consolidated
Statements of Income  Years ended December 31, 2005, 2004 and 2003
| | --------------------------------------------------------------------------------

| | Consolidated
Statements of Shareholders Equity  Years ended December 31, 2005, 2004
and 2003
| | ----------------------------------------------------------------------------------------------

| | Consolidated
Statements of Cash Flows  Years ended December 31, 2005, 2004 and 2003
| | ------------------------------------------------------------------------------------

| | Notes
to Consolidated Financial Statements
| | ------------------------------------------

| | Report
of Independent Registered Public Accounting Firm
| | -------------------------------------------------------

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Table of Contents

| | (3) | The following exhibits are filed as a part of this report:
| | --- | ----------------------------------------------------------

12.1

Statement Regarding Computation of Ratio of Earnings to Fixed Charges.21

Subsidiaries of the Company.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.


The following exhibits are incorporated by reference to Exhibits 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.7 and
4.8, respectively, to Amendment No. 1 to the Companys Registration Statement on Form S-2 filed with the Securities and
Exchange Commission on April 30, 2001:

4.1

Form of Indenture between Wilmington Trust Company and Bremer Financial Corporation.4.2

Form of Junior Subordinated Debenture (included as an exhibit to Exhibit 4.1).4.3

Certificate of Trust for Bremer Capital Trust I.4.4

Declaration of Trust for Bremer Capital Trust I.4.5

Form of Amended and Restated Declaration of Trust for Bremer Capital Trust I.4.6

Form of Capital Securities Certificate (included as an exhibit to Exhibit 4.5).4.7

Form of Capital Securities Guarantee Agreement between Bremer Financial Corporation and Wilmington Trust Company.4.8

Form of Supplemental Indenture.


The following exhibits are incorporated by reference
to Exhibits 3.1, 28.7, and 28.8, respectively, to the Companys Annual Report on Form 10-K for the year ended December 31,
1989:

3.1

Bylaws of the Company in effect on the date hereof.99.1

The portion of the final Prospectus of the Company dated April 20, 1989 (Prospectus), which was filed with
the SEC on April 20, 1989, entitled Description of Capital Stock Description of Class A Common Stock - Restrictions
on Transfer.99.2

The portion of the Prospectus entitled Description of Capital Stock - Description of Class A Common Stock - First
Call Option to Company on page 64 of the Prospectus.


The following exhibit is incorporated by reference
to Exhibit 3.1 to the Companys Registration Statement on Form S-1 filed with the SEC on February 10, 1989:

3.2

Restated Articles of Incorporation of the Company in effect on the date hereof.


The following exhibits are incorporated by reference to Exhibits 4.1 and 4.2, respectively, to the
Companys Amendment No. 1 to Registration Statement on Form S-1 filed with the SEC on March 29, 1989:

4.9

Specimen of Stock Certificate evidencing Class A Common Stock.4.10

Specimen of Stock Certificate evidencing Class B Common Stock.


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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

|March 22, 2006 | Bremer Financial Corporation
|-------------- | ----------------------------
|              
|               | By:                         
|               |                             

Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the
following persons on behalf of the registrant on March 22, 2006 in the capacities indicated.

/s/   Stan K. Dardis
Stan K. DardisPresident and Chief Executive Officer and Director (Principal Executive Officer)

/s/   Robert B. Buck
Robert B. BuckExecutive Vice President andChief Financial Officer(Principal Financial Officer)/S/   TERRY M. CUMMINGS
Terry M. CummingsChairman of the Board and Director

/S/   STUART F. BRADT
Stuart F. BradtController (Principal Accounting Officer)/s/   William H. Lipschultz
William H. LipschultzDirector

/s/   Terrence W. Glarner
Terrence W. GlarnerDirector/s/   Charlotte S. Johnson
Charlotte S. JohnsonDirector

/s/   Ronald James
Ronald JamesDirector/s/   Daniel C. Reardon
Daniel C. ReardonDirector


69

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# INDEX TO EXHIBITS

Description of Exhibits

| | 12.1 |  | Statement
Regarding Computation of Ratio of Earnings to Fixed Charges.
| | ---- |  | ----------------------------------------------------------------------

| | 21 |  | Subsidiaries
of the Company.
| | -- |  | ----------------------------

| | 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.
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

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