Minnesota charities out at least $500M because of Bremer Financial's loss of value

If Bremer Financial had agreed to sell in 2019 when buyout offers were plentiful, the payoff would likely have been around $2 billion.

Instead, after a nearly five-year court battle and a downturn in Bremer's fortunes, the venerable St. Paul bank is now wrapping up a deal worth $1.4 billion.

Much of the $600 million difference represents money lost to Minnesota nonprofits because of Bremer's unusual ownership structure. It's the only U.S. bank largely owned by a charitable trust.

When investment bankers were calculating Bremer's value back in 2019, owner Otto Bremer Trust, one of Minnesota's most prominent philanthropies, pushed hard for a sale. But bank management decided resolutely against it.

An epic court clash ensued.

"It felt like relationships between bank management and the trustees were irreparable," said John Sjaastad, Bremer's corporate treasurer from mid-2019 to September 2024.

Why Bremer's value is less now

In September, after the bank effectively lost the legal war, Bremer hit the sales block. But this time around, interest was tepid. Only Evansville, Ind.-based Old National Bank made a bid.

The court battle, which saw Minnesota Attorney General Keith Ellison rally to Bremer Financial's cause, siphoned tens of millions of dollars in legal fees from the bank and the trust.

Worse, while the feud raged, U.S. interest rates soared, eroding bank profits and deflating the acquisition market.

There's been an "absolute cratering" of bank deals, said Nathan Stovall, director of financial institutions research at S&P Global Market Intelligence. "2023 and 2024 were two of the slowest years in bank mergers and acquisitions since the Great Recession."

Adding to Bremer woes, its financial performance trailed that of its peer banks over the past couple of years. Bremer Financial didn't manage rising interest rates as well as its competitors did, regulatory reports and Standard & Poor's data show.

Indeed, Bremer sold at a discount when measured against other bank deals announced in 2024, according to S&P.

Bremer Financial declined to comment beyond referencing a statement it issued in November: "When our majority shareholder, the Otto Bremer Trust, reaffirmed its interest in selling Bremer Bank, we appreciated the opportunity to identify a partner through a collaborative process to ensure the best possible outcome."

Otto Bremer an American success story

The bank and the trust fought over the legacy of Otto Bremer, a classic American success story.

Bremer started as bookkeeper at a St. Paul bank in 1887, shortly after emigrating from Germany. By the early 1920s, he was a bank chairman and part owner of St. Paul's Schmidt Brewery.

Bremer, who died in 1951, created a trust to own his banks post-mortem. The trust would direct profits to communities that hosted Bremer banks.

The Bremer trust gave out $80 million in 2024, 24% less than in 2023 because of the declining value of its main asset — Bremer bank stock.

The trust, which currently owns 86% of the bank, will net over $500 million less from the Old National deal than it could have if Bremer was sold five years ago.

Bremer Financial, with $16 billion in assets, operates 70 branches combined in Minnesota, Wisconsin and North Dakota. The bank's 1,500 employees — 80% of whom are in Minnesota — own 8% of Bremer.

The Bremer battle began after Sioux Falls-based Great Western Bank came calling in February 2019 about a potential "merger of equals."

Bremer hired an investment bank, J.P. Morgan, to review the offer and evaluate alternatives.

With a merger, Bremer CEO Jeanne Crain and top bank executives would have likely kept their jobs. J.P. Morgan initially valued Bremer in 2019 at $1.85 billion, $800 million more than the book value of its stock at the time, court records show.

The battle with the trust begins

Bremer decided against the merger — and that was just fine with the Otto Bremer Trust.

To the trust, an outright sale was more financially advantageous than a merger. And the trust, whose three trustees sat on the bank's board, was intent on selling.

The trustees hired their own investment banker, determined to divest their shares.

They got a letter of interest from another bank to buy Bremer for $1.9 billion. J.P. Morgan concluded that the suitor had room to up its bid to at least $2.1 billion, court records show.

Morgan investment bankers also identified several other potential buyers they believed would pay at least $2 billion for Bremer.

TCF Financial, Huntington Bancshares and BMO Bank all expressed interest. But bank management didn't want to sell.

So, the Bremer trust sold a chunk of its shares to several private equity outfits in October 2019, a gambit to gain voting control of Bremer bank's board and force a sale.

The bank countered a month later, suing the trust's three directors for hatching a "disloyal scheme" to seize control and personally enrich themselves.

At the same time, bank representatives began meeting with the attorney general's office, urging action against the trustees. In August 2020, Keith Ellison's office moved to oust the trustees, echoing the bank's claims.

Changes in the market

Since then, the market for banks has drastically changed.

In September, investment bankers hired by Bremer and the trust contacted 12 potential buyers, including Old National, to gauge interest, according to a recent filing with federal securities regulators.

Five banks signed confidentiality agreements to review Bremer's financials — a kick-the-tires procedure.

The trust likely wasn't surprised that Old National's offer fell well short of 2019 valuations.

It had written down the market value of its stock in Bremer bank from $1.9 billion at the beginning of 2023 to $1.5 billion at 2023's end, court records show.

Bank valuations "are simply much lower" now than five years ago, S&P's Stovall said. "There are just fewer buyers out in the market."

The banks interested in Bremer five years ago seem to have moved on.

Huntington bought TCF, giving it a bigger presence in Minnesota than Bremer could have. BMO meanwhile has been digesting a $16 billion 2023 deal that nearly doubled its size in the U.S.

And the banking industry is only now recovering from a vicious interest rate cycle.

After inflation ignited, the Federal Reserve engineered a series of rapid interest rate hikes in 2022 and 2023, the likes of which hadn't been seen since the 1980s.

The rate changes squeezed the banking industry's profits, decreasing loan demand while pushing up the costs of deposits and other funding.

Interest rates pinch hits Bremer hard

Bremer has long focused on commercial lending. The yield on its loan portfolio — what it earns — has typically been below its peers, though, federal bank regulatory reports and S&P data show.

That wasn't a problem until Bremer's funding costs from deposits and borrowings — the money that fuels lending — rose relative to its peers in 2023 and 2024.

At the same time, the yield on Bremer's investment portfolio — banks invest cash not used for loans in securities — also eroded relative to peers in 2023 and 2024, bank reports show

The result: Bremer's net interest margin, which measures interest income relative to interest costs, has been lower than its peers in recent years, according to S&P.

And that has affected Bremer's profits. Bremer's return on assets, a key measure of bank profitability, trailed peers in 2023 and through the first three quarters of 2024.

Adding to Bremer's interest rate woes, the bank began loading up on mortgages and securities with terms of over 15 years back in 2021, regulatory reports indicate. At the end of September 2024, 22.5% of Bremer's assets were in that category, compared with only 8.41% for its peers.

The problem: Interest rates were still low in 2021.

"Much of that asset growth, at very low yields, will stick with the balance sheet for many years to come, and explains part, but not all, of the collapse of Bremer's value," said Sjaastad, the bank's former treasurer.

Unlike other major bank buyouts announced last year, Bremer didn't sell at a premium.

The $1.4 billion price for Bremer equals the tangible book value of the bank's common stock, a 1 to 1 ratio. But the median tangible book value ratio, a common valuation gauge, for the 20 largest bank deals in 2024 was 1.42, according to S&P. Bremer was the fourth-largest sale announced last year.

Lingering effects of litigation

Litigation overshadowed the bank until mid-2024, even though the attorney general's case against the trust was resolved in early 2022.

Ramsey County District Court Judge Robert Awsumb removed Brian Lipschultz, one of the trust's three trustees. Lipschultz had allowed "his own personal interests, enmity or vindictiveness to impact his decisions and behavior as a trustee," Awsumb concluded.

But Awsumb shot down most of the attorney general's claims, concluding that the trustees were acting within their fiduciary duties to sell shares to private equity firms — and ultimately to sell the bank.

Bremer Financial continued pursuing litigation against the trust. Until late last year, the bank also battled suits brought against it by the private equity groups that had purchased stock from the trust.

But in April, another Ramsey County judge, Mark Ireland, dealt the bank a big blow, limiting the claims it could make against the trust. The settlement came soon after.

Crain, Bremer's CEO, testified in October 2021 that the bank had already wracked up $20 million in legal expenses fighting the trust. A private equity firm claimed in court last year that Bremer incurred up to $40 million in litigation expenses over the years.

The trust's litigation expenses soared, too, court filings show. It spent $188,740 on legal counsel in 2018. That number mushroomed to around $10 million in 2020, and then totaled $5.7 million from 2021 through 2023.

Mike Ciresi, an attorney representing the trust, summed up the situation at a court hearing in July.

"There's been a dramatic draining of the resources from the trust — or from the company, money [that] could have gone to serve the citizens in a philanthropic way."