Strategic Options for BFC

News and information from OBT related to its exploration of strategic options for its investment in Bremer Financial Corporation (BFC).

Frequently Asked Questions

  • General Questions
  • Otto Bremer Trust
  • Bremer Financial Corporation
  • Trustee Compensation
  • Attorney General Investigation
  • Other Litigation
  • More Information
Why have the trustees decided to now explore strategic options for Bremer Financial Corporation?

This is the most important question asked since our announcement in October, so we want to be as clear about this as we can in our answer: Our only motivation is to manage OBT in the manner that Otto Bremer set forth in his Trust Instrument and for the purposes he intended.

In creating OBT, Otto Bremer sought to help communities, families, and individuals in our four-state service area. We believe in that purpose; our predecessors believed in it and entrusted it to us. We take this responsibility seriously, on par with the most binding and consequential promises we make in any facet of our lives.

A related question is why we’re motivated to act now. Here, too, we want to be as clear as we can: Our actions and decisions over the last several months have been driven by (1) new information indicating that the fair market value of our BFC stock is substantially greater than the previously calculated value, and (2) our fiduciary duties as BFC directors to all BFC shareholders.

The new information triggers a number of mandatory responsibilities for us, including two that are relevant here:

  1. This increased fair market value of our BFC stock must be reported on our next 990-PF tax return; and
  2. We must distribute at least 5 percent of the fair market value of our assets each year.

To illustrate the effect of these requirements, if the fair market value of OBT’s assets is $1 billion, we are required to distribute at least $50 million each year; if the value of OBT’s assets is $2 billion, we are required to distribute at least $100 million.

These responsibilities are not discretionary for us; federal tax law is clear and unambiguous on both points.

When you say “legal obligations”, what are you referring to?

By law, a charitable trust like OBT is required to disburse at least 5 percent of the fair market value of its assets every year. Based on our estimate of our assets’ value, our required distributions must increase substantially compared to previous years. In 1989, we restructured the organization to comply with tax laws, including creating an ownership structure that allowed the dividends from BFC to fund OBT’s philanthropic distributions. The Trustees do not believe it is prudent or even realistic to expect BFC to generate sufficient dividends to meet these disbursement needs going forward.

What is the nature of the new information you learned in the last several months that led OBT to consider its strategic options for its BFC shares?

Now that BFC has filed a lawsuit, in which they have disclosed a substantial amount of previously confidential information, we can now provide additional background on this point:

Beginning in April, BFC engaged in a series of discussions—including in-person meetings—with the senior management and directors of a publicly traded bank about a merger. BFC’s management told us in two separate meetings that they were very interested in this opportunity as a way to grow.

The trustees explained to BFC that the occurrence of these discussions would have a significant impact on OBT and that the trustees would have to retain outside counsel and an investment advisor (which we did).

At a June board meeting, BFC’s management continued to promote the exploration of this merger, including analytical materials prepared by BFC’s investment banking firm. We concluded following this meeting that BFC’s management and several board members, all of whom would have retained or enhanced their current positions in this merger scenario, were strongly advocating for this transaction.

These analytical materials reflected an implied value for BFC that was greater than any value OBT had ever concluded was fair market value for its BFC shares. It’s important to note that, as BFC’s lawsuit states, the investment bank claimed that this higher value “was almost exactly the same” whether or not BFC was sold.

Even so, we—the OBT directors—shared with the BFC board and management the conclusions of our own financial advisor, Keefe, Bruyette & Woods (KBW): First, that the proposed merger transaction carried substantial risk. Second, that BFC’s shareholders—all of them—could achieve a much higher valuation in an outright sale for cash or stock.

Once this information—the implied value of BFC as reported by BFC’s investment bank and KBW’s determination that BFC’s value was higher still—was known to us, we were required by IRS regulations to take into account this new information when determining a fair market value of our BFC stock.

In early August, OBT received an unsolicited offer from a well-known financial institution to acquire BFC either through a share purchase or a corporate merger. The value of that offer was substantially higher than the June merger transaction and served to validate KBW’s analysis. It also provided additional data supporting an even greater upward adjustment that we will need to take into account when valuing our shares.

What was the BFC board’s reaction to the August offer?

The board and BFC’s management team—despite appearing to be very interested in a more risky merger transaction just two months earlier—were not interested in pursuing a transaction recommended by OBT that appeared to be worth far more to all shareholders. In fact, in response to the possibility of such a transaction, the BFC board—over the objections of the OBT trustees—passed two resolutions: One declaring that the company would not pursue any further exploration of strategic options and a second prohibiting the management team from cooperating with any sales transaction.

Why did the trustees decide to sell some of their shares?

We believe that we are required to explore strategic options for BFC in order to comply with our legal responsibilities and to act in accordance with Otto Bremer’s directions as expressed in the Trust Instrument. We would much prefer to explore those options in partnership with the BFC but have been blocked by the BFC board from doing so. After months of trying to find a collaborative way forward, we were left with this option to meet our responsibilities. The sale to outside investors may make it possible to replace the current BFC board with individuals who are willing to look objectively at strategic options and improve outcomes for all shareholders.

Why can’t OBT simply hold on to its BFC stock and require the bank to provide dividends in an amount sufficient to cover the trust’s larger distribution requirements?

OBT’s continued ownership of BFC is challenging on a number of levels. We believe that the increased dividend demands on the bank would be impossible to fulfill without harming—and perhaps permanently impairing—the bank, something that could harm OBT as well. Allowing this to happen would violate the trustees’ responsibilities both as fiduciaries of OBT and as executives responsible for the top-tier bank holding company.

Also, OBT cannot require BFC to pay a certain level of dividends; the bank—which is governed by its board and led by its management team—has no obligation to increase its dividend to meet OBT’s needs.

Otto Bremer emigrated from Germany in 1886. He settled in St. Paul where he became chairman of the American National Bank as well as a dedicated leader involved in the community’s civic, financial. and corporate lives. His commitment to the many independent banks scattered across the Upper Midwest was so profound that during the Great Depression, Bremer liquidated many of his personal assets to strengthen these banks and help them ride out hard times. For all of his success, Bremer never forgot the challenges of the immigrant experience or the hard lives of many in rural America. His concern for those working to make their lives better, coupled with his commitment to rural banks, became the cornerstone of OBT.

Three individuals serve as Co-CEOs and Trustees of the Otto Bremer Trust:

  • Charlotte S. Johnson has served as a Trustee since July 1991. She has been a Director of Bremer Financial Corporation since April 1993, and a Director of Bremer Bank, National Association since October 2014. She has a bachelor’s degree from Macalester College. In addition to these duties, Ms. Johnson has served on several nonprofit boards.
  • Brian Lipschultz has served as a Trustee since August 2012. He has been a Director of Bremer Financial Corporation since 2012, and a Director of Bremer Bank, National Association since October 2014. Mr. Lipschultz is a co-founder of Eagle Street Partners, a Minnesota investment firm. Previously, he served as chief executive officer of Pulse Mobile and chief financial officer at, DreamWorks Consumer Products, and two divisions of The Walt Disney Company. Mr. Lipschultz holds an MBA from the J.L. Kellogg Graduate School of Management and a BA in economics from Northwestern University. Mr. Lipschultz serves on several nonprofit boards.
  • Daniel C. Reardon has been a Trustee since January 1995. He has been a Director of Bremer Financial Corporation since May 1996, and a Director of Bremer Bank, National Association since October 2014. Mr. Reardon has experience in securities, insurance, and corporate finance. From 2002 to 2005, prior to his full-time commitment to OBT, he served as director of corporate finance for NDX Financial. He has a bachelor’s degree in economics from the University of Minnesota. Mr. Reardon serves on several nonprofit boards.

The Trustees have a legal obligation to follow the directions of the Trust Instrument as detailed by Otto Bremer in 1944. The value of BFC has increased to such a level that it is no longer possible for OBT to own BFC and still comply with current tax regulations.

We think our actions should be valuated in the context of what the trustees have done to discharge responsibilities. The three current trustees have served together since 2012. From 2012 to 2018:

  • The value of OBT’s assets has increased from $761,102,155 to $1,081,311,240.
  • OBT Trustees were instrumental in assessing and managing critical financial services strategies within both BFC and OBT organizations.
  • OBT has distributed $308,279,974 in grants and program-related investments to more than 1,560 nonprofit organizations in Minnesota, Wisconsin, and North Dakota. The distributions over the past seven years represent nearly half of all the charitable distributions made during OBT’s 75-year existence.

We submit that this record of accomplishment is due to the efforts of many talented people who believe passionately about our strategic approach to integrating finance and philanthropy. Our oversight of the financial and hybrid investment portfolio yields outsized gains that provide resources for highly impactful philanthropy. We’re proud to be judged on all the facts and believe we are always committed to the true and accurate picture of what we value and what motivates us.

That claim is simply wrong. The Trust Instrument explicitly provides the Trustees with the discretion to sell BFC shares in situations such as this. In addition, there’s precedent for our actions: in 1989, OBT sold 8 percent of its holdings to BFC’s management and employees, a transaction that was approved by the Ramsey County District Court.

We believe the right partner will be a larger financial institution looking to expand its capabilities and its geographic reach, one that values the people and culture of Bremer and has a plan to retain existing customers and attract new ones. The opportunities for and the welfare of BFC employees will be critical elements in this process.

The Trustees have extensive experience in banking, investments, and financial services. All three serve on the BFC Board and have done so for between 7 and 28 years—service that requires keen attention to the industry and detailed knowledge of bank management. OBT is itself a bank holding company regulated by the Federal Reserve, and the Trustees work closely with their regulatory counterparts in all manners of compliance. Under the Trustees’ oversight, OBT has maintained an outstanding regulatory track record.

The Otto Bremer Foundation changed its name to the Otto Bremer Trust in 2016. OBT is a Minnesota charitable trust.

Actually both. OBT is a charitable trust and is a Section 501(c)(3) private foundation for tax purposes. But it is also a bank holding company regulated by the Federal Reserve.

The trustees are required by the IRS to distribute at least 5 percent of the fair market value of OBT’s assets every year. If the value of our assets increase, the distributions also have to increase. Should the fair market value of our assets double to $2 billion, the annual charitable distribution would also double from about $50 million to about $100 million.

By way of context, should a doubling of the value of OBT’s assets come to pass, OBT would be Minnesota’s second-largest private foundation (trust) based on the amount of philanthropic distributions.

We will continue to carry out the wishes of Otto Bremer when he set up OBT. Since 1944, we’ve made more than $700 million in charitable distributions in the Upper Midwest, and we’re proud to be among the largest philanthropic funders in the region and in the country. With greater assets from the sale of our investment in BFC, we will be able to greatly increase our philanthropic work, so much so that we could conceivably distribute more grants and program-related investments in the next 5 years than we have in the 75 years since our founding. This increased philanthropy will benefit communities and individuals across Minnesota, Montana, North Dakota, and Wisconsin.

Actually, this expansion is already well underway. Our work exists at the intersection of finance and philanthropy, and we have been growing both our traditional grantmaking as well as increasing financial services offerings to nonprofit organizations. We have formed a new subsidiary, Community Benefit Financial, to consolidate some of these innovative efforts in financial services. In September we announced our geographic expansion into Montana and all of Wisconsin, and we are moving swiftly to enhance our grant-review process. This transaction will add substantially to our assets and philanthropic resources.

In 1944, Otto Bremer directed that the work of OBT be limited to the four states where he did business. Those were his express wishes and will not change.

Prior to the stock sale, BFC had the following shares and shareholders:

1,200,000 Class A voting shares
240,000 owned by OBT (20% of the class)
960,000 owned by BFC’s directors, ESOP and retirement plans (80% of class)

10,800,000 Class B non-voting shares
10,800,000 owned by OBT (100% of the class)

12,000,000 total shares (Class A plus Class B shares)
11,040,000 owned by OBT (92.00% of the total shares outstanding)
960,000 owned by BFC’s directors and ESOP and retirement plans (8.00% of the total)

Class A and Class B shares are the same in terms of economic ownership, but the Class B shares are non-voting except in certain situations, such as a sale of the bank or other extraordinary transactions.

On Friday, October 25, 2019, OBT sold 725,000 Class B non-voting shares to 11 unaffiliated institutional investors. Under the BFC Articles of Incorporation, the purchasers of these shares have a unilateral, unconditional right to convert those non-voting Class B shares into voting Class A shares on a one-for-one basis by giving notice of that conversion to BFC.

It’s our understanding that by October 28, 2019, all of the purchasers had notified BFC of their decisions to convert their Class B shares to Class A shares. It’s worth noting, though, that these new BFC investors, who are independent of one another and are unaffiliated with either OBT or BFC, have no agreement or understanding with OBT as to how they will vote their shares.

Assuming that all of the new investors have, in fact, provided their conversion notices, the new investors own 37.66 percent of BFC’s Class A voting shares; OBT owns 12.47 percent of BFC’s Class A voting shares; and BFC’s directors and ESOP and retirement plans own 49.87 percent of the Class A voting shares.

Accordingly, a majority of BFC’s voting shares—50.12 percent—are owned by either OBT or investors unaffiliated with either OBT or BFC.

Here’s the math underlying this scenario (again, assuming full conversion by the new investors):

1,925,000 Class A voting shares
240,000 owned by OBT (12.47% of the class)
960,000 owned by BFC’s directors and ESOP and retirement plans (49.87% of the class)
725,000 owned by the 11 new institutional investors (37.66% of the class)

Note: The number of Class A shares increased from 1,200,000 to 1,925,000 by virtue of the conversion of 725,000 Class B shares to Class A shares. As a result, OBT and the investors own 965,000 of the 1,925,000 Class A shares, which is 50.12 percent of the class.

10,075,000 Class B non-voting shares
10,075,000 owned by OBT (100% of the class)

12,000,000 total shares (Class A plus Class B shares)
10,315,000 owned by OBT (85.96% of the total shares outstanding)
960,000 owned by BFC’s directors and ESOP and retirement plans (8.00% of the total)
725,000 owned by new institutional investors (6.04% of the total)

The authority for these actions is contained in the OBT Trust Instrument, the BFC Bylaws, the BFC Articles of Incorporation, OBT’s 1989 Plan of Reorganization, and Minnesota Statutes.

In accordance with BFC’s bylaws, the three Trustees in their capacity as Directors of BFC and, separately, OBT as a shareholder of BFC have called a special meeting of the shareholders of BFC for the purpose of removing the non-OBT Directors. A majority vote by qualified shareholders at such a meeting would cause the non-OBT Directors to be removed immediately.

New Directors may be appointed by a vote of a majority of the remaining Directors of BFC or elected at a regular or special meeting of BFC shareholders. Each Director appointed by the remaining Directors of BFC will serve until the next regular or special meeting of the shareholders of BFC at which Directors are elected.

In addition to the three OBT Trustees, the BFC Board has seven other members: Jeanne Crain, Ron James, Kevin Rhein, Wendy Schoppert, Charlie Westling, Mary Brainerd, and Glenn McCoy.

While we can’t speak to the motivations behind BFC’s filing—a decision made without any input from the three OBT directors who sit on the bank’s board—the filings in the case are public documents and are available to any interested party to read and draw their own conclusions.

From our perspective, however, it’s disappointing that BFC has chosen a path of obstruction and conflict in this matter. In doing so, it is acting in a manner that seems certain to hurt the bank and its employees, to waste the resources of the company, and to hurt the people Otto Bremer dedicated his life and fortune to helping.

The allegations in the lawsuit are false and without merit.

Bremer Financial Corporation—which most people know simply as “Bremer Bank”—is a fine institution and its historical performance has been strong. We also believe that it has an extraordinary workforce and deep roots in the communities it serves.

At the same time, however, the trends for BFC and similar financial institutions are impossible to ignore: returns and core growth are becoming harder and more expensive to sustain and may ultimately affect the bank’s ability to grow capital and provide dividends. It is our opinion that, as good as BFC has been, the bank will be unable to deliver dividends adequate to meet our future increased distribution requirements.

We respectfully disagree. BFC and its Bremer Bank subsidiary are terrific institutions because of their outstanding employees, quality of service, and locally focused business model. We believe the right partner will recognize and value those strengths and look to build on that foundation. Furthermore, given the challenging industry headwinds, many people feel that there is a greater risk to jobs if we DON’T make this move.

While anxiety about an uncertain future is natural, it’s important to remember that a range of strategic options are being considered, not just one scenario. And even within that scenario it’s far from certain what—if anything—would be “lost.” To the contrary, based on what we know to date, any organization interested in BFC values its strengths, particularly its people and its ties to the communities it serves.

At the same time, there is a certainty that—under any scenario—the ability of OBT to provide greater levels of philanthropy will grow. As the value of the trust’s assets grow—something three generations of trustees have done consistently over the last 75 years—OBT’s ability to do more will grow as well. In any scenario, the communities we serve across Minnesota, Montana, North Dakota, and Wisconsin will benefit from this increase in giving.

Those allegations are false. As we’ve said whenever asked, our only motivation is to manage OBT in the manner that Otto Bremer set forth in his Trust Instrument and for the purposes he intended. The compensation the trustees receive will not increase as a result of the sale of BFC, and we are not pursuing this course of action because of our compensation, present or future.

But, because our compensation seems to be an issue of much speculation and allegation, we have committed that our trustee fees will not increase for any reason and that no trustee will receive increased investment management fees for at least the next two years, and of course even then under court supervision.

By way of context, the 1944 Trust Instrument—the written expression of what Otto Bremer intended, his “words,” if you will, that stand as the definitive guide to what he wanted—authorizes the three trustees, in aggregate, to receive compensation of up to 4 percent of OBT’s income. As you can see from OBT’s 990-PFs—which are available on our website—the trustees do not receive anything close to that amount.

We regularly review our compensation in light of our duties and responsibilities and consult with experts for advice about competitive and comparable compensation levels given those duties and responsibilities. Our compensation is in line with the advice received from those experts and has been expressly approved by the Ramsey County District Court.

Additionally OBT is—and will remain, regardless of any transaction involving BFC—a Minnesota charitable trust that will continue to be supervised by the Ramsey County District Court. Matters of trustee compensation will continue to require court approval.

In 2018, Charlotte Johnson earned $365,680, Brian Lipschultz earned $554,661 total, and Dan Reardon earned $555,697 total.

Each of the trustees also receives fees for serving on the BFC board (as do all directors of BFC). In 2018, Johnson received $117,889, Lipschultz received $125,389, and Reardon received $117,889.

We absolutely believe that compensation is a legitimate topic for examination: the trustees’ compensation is—and always has been—a matter of public record and subject to review by both the courts and the Minnesota Attorney General. We also believe that the millions of dollars in compensation that BFC’s management team and board receive should be similarly examined in considering the motivations and conduct of those decisionmakers, particularly as that compensation goes mostly unreported and unscrutinized by any court or any regulatory authority.

At the same time, however, looking at trustee compensation in isolation is a poor measurement of a trust’s effectiveness and efficiency. Some trusts—like OBT—operate with full-time trustees working directly and on a daily basis with a highly effective and efficient professional staff. Other trusts use a structure of part-time trustees who provide non-executive governance for trust executives and a large professional staff. In short, not all trusts (nor trustees) are created equal.

To make an “apples-to-apples” comparison between organizations with such different structures, a more meaningful metric is the relationship between operating expenses (which includes trustee compensation) and IRS-qualified distributions, commonly known as the “expense ratio.” The lower the number, the less of the organization’s financial resources are going to the things most people think of as “overhead.”

We are proud that OBT’s expense-to-distributions ratio has consistently been the best among Minnesota’s large foundations/trusts. In 2017, for example, OBT’s 11 percent ratio (the most recent data available for comparisons) is notable within its peer group:

Charles K. Blandin Foundation, 40.37%
Northwest Area Foundation, 39.95%
The McKnight Foundation, 38.85%
The Bush Foundation, 33.82%
Margaret A. Cargill Philanthropies, 26.55%
Otto Bremer Trust, 11.24%

No. The Trustees have court-approved compensation plans that do not include “success fees” related to a sale transaction. It’s also worth noting that all OBT’s compensation plans comply with the Trust Instrument and are submitted regularly for review by the Minnesota Attorney General and for approval by the Minnesota District Court in Ramsey County.

We appreciate the Attorney General’s thorough review of the current situation and particularly for clarifying the role his office plays in terms of oversight and as the only party with standing to represent the beneficial interests of OBT. We’ve been working closely with the Attorney General’s office for 75 years and welcome its active involvement in this matter to ensure the best outcome for OBT’s beneficiaries.

We believe very strongly that the bank’s employees are the integral component of Bremer’s culture, its successes to date, and its future. And while we disagree with the substance of the January legal filing, we share the plaintiffs’ obvious concern for what comes next for the bank and its people. For that reason, we strongly believe that looking at strategic options for the bank is good for the institution, good for its employees, good for the people and communities who benefit from the philanthropy Otto Bremer made possible, and good for everyone who—like the Trust—is a shareholder in the enterprise.

The Trustees’ Answer and Counterclaim in the lawsuit was filed on December 9, 2019.