UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-6216
BRENTON BANKS, INC.
(Exact name of registrant as specified in its charter)
Incorporated in Iowa No. 42-0658989
(State or other jurisdiction of (I.R.S. Employer Identification)
incorporation or organization)
Suite 200, Capital Square, 400 Locust, Des Moines, Iowa 50309
(Address of principle executive offices) (zip code)
515-237-5100
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date, November
2, 1998.
18,789,813 shares of Common Stock, $2.50 par value
<PAGE>
<TABLE>
PART 1 - Item 1. Financial Statements
<CAPTION>
Brenton Banks, Inc. and Subsidiaries
Consolidated Statements of Condition
(Unaudited)
September 30, December 31,
1998 1997
____________ ____________
</CAPTION>
<S> <C> <C>
Assets:
Cash and due from banks $ 66,805,736 77,468,210
Interest-bearing deposits with banks 2,049,620 1,319,700
Federal funds sold and securities purchased
under agreements to resell 500,000 9,300,000
Trading account securities -- 77,220
Investment securities:
Available for sale 541,329,960 486,653,872
Held to maturity (approximate market value of
$53,848,000 and $69,852,000 at September 30, 1998,
and December 31, 1997, respectively) 52,909,407 69,079,622
_____________ _____________
Investment securities 594,239,367 555,733,494
_____________ _____________
Loans held for sale 32,515,189 19,303,411
Loans 1,023,845,769 993,189,110
Allowance for loan losses (14,222,622) (12,732,131)
_____________ _____________
Loans, net 1,009,623,147 980,456,979
_____________ _____________
Premises and equipment 32,351,287 28,898,589
Accrued interest receivable 17,370,876 15,233,682
Other assets 38,313,068 30,692,512
_____________ _____________
Total assets $1,793,768,290 1,718,483,797
============== =============
Liabilities and Stockholders' Equity:
Deposits:
Noninterest-bearing $ 169,523,435 161,007,156
Interest-bearing:
Demand 98,332,824 117,664,352
Savings 573,548,216 527,364,856
Time 563,087,217 558,234,127
_____________ _____________
Total deposits 1,404,491,692 1,364,270,491
_____________ _____________
Federal funds purchased and securities sold
under agreements to repurchase 116,727,687 92,632,576
Other short-term borrowings 63,500,000 73,700,000
Accrued expenses and other liabilities 16,259,809 16,980,763
Long-term borrowings 54,223,000 36,662,000
_____________ _____________
Total liabilities 1,655,202,188 1,584,245,830
_____________ _____________
Minority interest in consolidated subsidiaries 4,963,110 4,858,668
Redeemable preferred stock, $1 par; 500,000 shares
authorized; issuable in series, none issued -- --
Common stockholders' equity:
Common stock, $2.50 par; 50,000,000 shares authorized;
18,765,883 and 17,334,048 shares issued and outstanding
at September 30, 1998 and December 31, 1997, respectively 46,914,707 43,335,120
Capital surplus -- --
Retained earnings 82,064,962 82,824,333
Accumulated other comprehensive income--
unrealized gains on securities available for sale, net 4,623,323 3,219,846
_____________ _____________
Total common stockholders' equity 133,602,992 129,379,299
_____________ _____________
Total liabilities and stockholders' equity $1,793,768,290 1,718,483,797
============= =============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PART 1 - Item 1. Financial Statements
<CAPTION>
Brenton Banks, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
____ ____ ____ ____
</CAPTION>
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $66,866,025 63,794,768 22,702,244 22,223,397
Interest and dividends on investments:
Available for sale - taxable 17,530,400 16,430,788 5,839,805 5,377,811
Available for sale - tax-exempt 4,149,085 3,622,530 1,503,639 1,255,996
Held to maturity - taxable 240,744 663,075 40,801 167,422
Held to maturity - tax-exempt 1,983,337 1,960,890 616,100 670,574
__________ __________ __________ __________
Total interest and dividends on investments 23,903,566 22,677,283 8,000,345 7,471,803
__________ __________ __________ __________
Interest on federal funds sold and securities
purchased under agreements to resell 1,281,330 1,281,514 452,502 448,429
Other interest income 151,884 69,031 34,869 24,188
__________ __________ __________ __________
Total interest income 92,202,805 87,822,596 31,189,960 30,167,817
__________ __________ __________ __________
Interest Expense
Interest on deposits 37,641,982 36,742,184 12,865,427 12,359,775
Interest on federal funds purchased and
securities sold under agreements
to repurchase 3,639,521 2,476,270 1,368,474 823,664
Interest on other short-term borrowings 2,862,511 2,079,292 872,957 881,801
Interest on long-term borrowings 2,270,159 1,636,215 823,029 565,843
__________ __________ __________ __________
Total interest expense 46,414,173 42,933,961 15,929,887 14,631,083
__________ __________ __________ __________
Net interest income 45,788,632 44,888,635 15,260,073 15,536,734
Provision for loan losses 3,150,000 2,900,000 1,050,000 1,100,000
__________ __________ __________ __________
Net interest income after provision for
loan losses 42,638,632 41,988,635 14,210,073 14,436,734
__________ __________ __________ __________
Noninterest Income
Service charges on deposit accounts 5,738,903 5,380,520 2,046,248 1,851,396
Investment brokerage commissions 4,098,108 3,507,317 1,275,256 1,351,216
Mortgage banking income 5,327,034 2,208,019 1,868,328 970,000
Fiduciary income 2,471,855 2,293,351 813,607 770,703
Insurance commissions and fees 1,058,744 2,359,806 289,943 632,362
Other service charges, collection and
exchange charges, commissions and fees 3,154,827 2,472,327 1,073,952 942,698
Net realized gains from securities
available for sale 466,765 418,199 222,189 141,743
Other operating income 1,825,501 1,888,068 959,382 1,179,270
__________ __________ __________ __________
Total noninterest income 24,141,737 20,527,607 8,548,905 7,839,388
__________ __________ __________ __________
Noninterest Expense
Compensation 21,288,088 19,476,360 7,308,696 6,887,007
Employee benefits 3,793,292 3,322,924 1,124,012 1,003,507
Occupancy expense of premises, net 4,345,228 4,247,228 1,404,439 1,382,862
Furniture and equipment expense 3,151,141 2,709,025 1,110,644 946,833
Data processing expense 1,956,001 2,157,305 669,798 716,929
Marketing 1,101,570 1,080,326 364,398 300,049
Supplies 939,568 845,441 326,565 325,534
FDIC deposit insurance assessment 206,963 212,749 68,065 69,525
Other operating expense 8,451,717 8,539,328 2,795,339 3,248,383
__________ __________ __________ __________
Total noninterest expense 45,233,568 42,590,686 15,171,956 14,880,629
__________ __________ __________ __________
Income before income taxes and minority interest 21,546,801 19,925,556 7,587,022 7,395,493
Income taxes 6,001,631 5,739,483 2,101,221 2,176,484
__________ __________ __________ __________
Income before minority interest 15,545,170 14,186,073 5,485,801 5,219,009
Minority interest 534,874 567,632 190,045 208,874
__________ __________ __________ __________
Net income $15,010,296 13,618,441 5,295,756 5,010,135
========== ========== ========== ==========
Per common share:
Net income-basic $ .79 .71 .28 .26
Net income-diluted .77 .69 .27 .26
Cash dividends .254 .175 .090 .063
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PART 1 - Item 1. Financial Statements
<CAPTION>
Brenton Banks, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the nine months ended September 30,
1998 1997
_____________ _______________
</CAPTION>
<S> <C> <C>
Operating Activities:
Net income $ 15,010,296 13,618,441
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 3,150,000 2,900,000
Depreciation and amortization 3,467,589 3,223,459
Net realized gains from securities available
for sale (466,765) (418,199)
Investment securities amortization and accretion 460,599 833,890
Net increase in loans held for sale (13,211,778) (9,390,132)
Net increase in accrued interest
receivable and other assets (5,939,281) (3,564,096)
Net decrease in accrued expenses, other
liabilities and minority interest (669,270) (10,458)
____________ ____________
Net cash used by operating activities 1,801,390 7,192,905
____________ ____________
Investing Activities:
Investment securities available for sale:
Purchases (316,176,477) (220,255,909)
Maturities 227,955,392 126,999,985
Sales 35,950,119 107,268,391
Investment securities held to maturity:
Purchases (7,671,143) (18,197,078)
Maturities 23,779,382 22,601,362
Net increase in loans (32,316,168) (59,528,448)
Purchase of other assets for investment (5,000,000) (5,000,000)
Purchases of premises and equipment (6,619,501) (1,655,853)
Proceeds from sale of premises and equipment --- 76,213
____________ ____________
Net cash provided by investing activities (80,098,396) (47,691,337)
____________ ____________
Financing Activities:
Net increase in noninterest-bearing, interest-
bearing demand and savings deposits 35,368,111 14,141,844
Net increase (decrease) in time deposits 4,853,090 (9,143,481)
Net increase in federal funds purchased and
securities sold under agreements to repurchase 24,095,111 3,674,347
Net increase (decrease) in other short-term borrowings (20,700,000) 20,050,000
Proceeds of long-term borrowings 29,394,000 11,798,000
Repayment of long-term borrowings (1,333,000) (1,682,024)
Dividends on common stock (4,834,838) (3,385,769)
Proceeds from issuance of common stock under
the employee stock purchase plan 649,593 341,202
Proceeds from issuance of common stock under
the stock option plan --- 990,420
Proceeds from issuance of common stock under
the long-term stock compensation plan 970,220 207,920
Payment for shares reacquired under common stock
repurchase plan (8,961,094) (7,632,352)
Payment for fractional shares resulting from
common stock dividend (13,961) (16,398)
____________ ____________
Net cash provided by financing activities 59,487,232 29,343,709
____________ ____________
Net decrease in cash and cash equivalents (18,809,774) (11,154,723)
Cash and cash equivalents at the beginning of the year 88,165,130 92,832,078
____________ ____________
Cash and cash equivalents at the end of the period $ 69,355,356 81,677,355
============ ============
</TABLE>
<TABLE>
<CAPTION>
Supplemental Cash Flow Information
(Unaudited)
</CAPTION>
<S> <C> <C>
Interest paid during the period $ 44,995,212 41,749,179
Income taxes paid during the period 5,683,252 6,166,115
=========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PART 1 - Item 1. Financial Statements
<CAPTION>
Brenton Banks, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
_________ ________ ______ ______
</CAPTION>
<S> <C> <C> <C> <C>
Net Income $15,010,296 13,618,441 5,295,756 5,010,135
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities
available for sale:
Unrealized holding gains (losses) arising
during the period, net of tax 1,695,205 2,159,712 2,177,515 533,871
Less: reclassification adjustment for net gains
including in net income, net of tax (291,728) (261,374) (138,868) (88,589)
__________ __________ _________ _________
Other comprehensive income, net of tax 1,403,477 1,898,338 2,038,647 445,282
__________ __________ _________ _________
Comprehensive income $16,413,773 15,516,779 7,334,403 5,455,417
========== ========== ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
PART 1 -- ITEM 1. FINANCIAL STATEMENTS
BRENTON BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Adjustments and Reclassifications
The accompanying financial statements for the interim periods were
prepared without audit. In the opinion of management, all
adjustments which were necessary for a fair presentation of
financial position and results of operations have been made. These
adjustments were of a normal recurring nature.
2. Additional Footnote Information
In reviewing these financial statements, reference should be made
to the notes to consolidated financial statements contained in the
Appendix to the Proxy Statement for the year ended December 31,
1997.
3. Statements of Cash Flows
In the statements of cash flows, cash and cash equivalents include
cash and due from banks, interest-bearing deposits with banks and
federal funds sold and securities purchased under agreements to
resell.
4. Changes in Accounting Policies
SFAS No. 130, "Reporting Comprehensive Income," was issued in June
1997, and was adopted by the Company effective January 1, 1998.
This statement establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains
and losses) in a full set of general-purpose financial statements.
The adoption of SFAS No. 130 has not had a material effect on the
Company's financial statements.
5. Income Taxes
Federal income tax expense for the nine months ended September 30,
1998, and 1997, was computed using the consolidated effective
federal income tax rate.
For the first nine months of 1998 and 1997, the Company also
recognized income tax expense pertaining to state franchise taxes
payable individually by the subsidiary banks.
<PAGE>
Part 1 -- Item 1
Page 2 of 3
6. Common Stock Transactions
On May 21, 1998, the Board of Directors declared a 10 percent
common stock dividend for stockholders of record on June 1, 1998.
The stock dividend certificates were distributed on June 15, 1998.
Fractional shares resulting from this stock dividend were paid in
cash.
On January 29, 1998, the Board of Directors declared a 2-for-1
stock split for holders of record on February 10, 1998. As a
result, the par value of the Company's common stock was changed
from $5.00 to $2.50 per share and authorized shares were increased
to 50 million. The additional common stock certificates were
distributed on February 20, 1998. All per-share data has been
restated to reflect the 2-for-1 stock split and the ten percent
common stock dividend.
During the first nine months of 1998, no options were exercised
under the Company's 1987 Nonqualified Stock Option Plan.
In 1992, the Company instituted a long-term stock compensation
plan for key management personnel. Compensation expense
associated with this plan for the first nine months of 1998 and
1997, was $0 and $1,350,837, respectively. The Company issued
107,584 and 33,178 shares of common stock under the long-term
stock compensation plan during the first nine months of 1998 and
1997, respectively, adding $970,220 and $207,920, respectively,
to the equity of the Company. All outstanding grants vested as of
December 31, 1997, and no restricted or performance shares are
outstanding as of September 30, 1998.
As part of the Company's on-going stock repurchase plan, in January
1998, the Board of Directors approved the repurchase of up to $10
million of the Company's common stock during 1998. Through
September 30, 1998, 433,500 common shares (restated for the 2-for-1
stock split) had been repurchased at a cost of $8,961,094.
The Company's Employee Stock Purchase Plan allows employees to
purchase the Company's common stock at 85 percent of the current
market price on four defined purchase dates during the year. The
Company issued 31,592 shares of common stock under this plan during
the first nine months of 1998. This transaction added $649,593 to
the equity of the Company.
<PAGE>
Part 1 -- Item 1
Page 3 of 3
7. Income Per Share
Basic net income per common share amounts are computed by dividing
net income by the weighted average number of common shares
outstanding during the period. The weighted average number of
common shares outstanding for the three and nine months ended
September 30, 1998, was 18,925,764 and 19,017,071, respectively,
and 19,167,933 and 19,299,548, respectively, for the three and nine
months ended September 30, 1997.
Diluted net income per common share amounts are computed by
dividing net income by the weighted average number of common shares
and all dilutive potential common shares outstanding during the
period. The weighted average number of common shares and all
dilutive potential common shares outstanding for the three and nine
months ended September 30, 1998, was 19,350,324 and 19,441,631,
respectively, and 19,614,348 and 19,745,963, respectively, for the
three and nine months ended September 30, 1997.
<PAGE>
Part 1 -- Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Capital Resources
Brenton Banks, Inc. and subsidiaries (the "Company") reported
record earnings during the first nine months of 1998, with net
income increasing 10.2 percent to $15,010,296, compared to
$13,618,441 for the first nine months of 1997. The Company's
annualized return on average equity (ROE) was 15.21 percent,
compared to 14.73 percent one year ago; the annualized return on
average assets (ROA) was 1.19 percent, compared to 1.16 percent for
the same period in 1997.
Common stockholders' equity totaled $133,602,992 as of
September 30, 1998, a 3.3 percent increase from December 31, 1997.
The Company continues to monitor its capital position to balance
the goals of maximizing return on average equity, while maintaining
adequate capital levels for business risk and regulatory purposes.
The Company's risk-based core capital ratio at September 30, 1998,
was 10.57 percent and the total risk-based capital ratio was 11.71
percent. These ratios exceeded the minimum regulatory requirements
of 4.00 and 8.00 percent, respectively. The Company's tier 1
leverage capital ratio, which measures capital excluding intangible
assets was 7.44 percent at September 30, 1998, exceeding the
regulatory minimum requirement for well-capitalized institutions of
5.0 percent.
As part of the Company's ongoing stock repurchase plan,
433,500 shares of common stock have been repurchased during the
first three quarters of 1998 at a cost of $8,961,094. The Board of
Directors has approved the repurchase of $10 million of Company
stock during 1998. Since the inception of the plan in 1994, the
Company has repurchased 2,980,827 shares (restated for all stock
splits and stock dividends) at a total cost of $32,904,573.
In May 1998, the Board of Directors declared a 10 percent
common stock dividend. As a result of this action, each
shareholder received one additional share of Brenton Banks, Inc.
common stock for every 10 shares they owned. Fractional shares
were paid in cash.
In January 1998, the Board of Directors declared a 2-for-1
stock split for holders of record as of February 10, 1998, payable
February 20, 1998. As a result of this action, each shareholder
received one additional share of common stock for each share
outstanding. The par value of the stock was reduced from $5.00 to
$2.50 and authorized shares were increased to 50 million. All per-
share data has been restated to reflect the 10 percent common stock
dividend and the 2-for-1 stock split.
<PAGE>
Part 1 -- Item 2
Page 2 of 12
The Company paid dividends of $.254 per common share in the
first nine months of 1998, compared to $.175 per common share for
the same period of 1997, an increase of 45.1 percent. Dividends
totaled $4,834,838 for the first nine months of 1998 and the
dividend payout ratio was 33.0 percent of diluted earnings per
common share. In October 1998, the Board of Directors increased
the regular quarterly cash dividend to $.095 per common share,
compared to $.09 per common share for the previous quarter and
$.073 per common share for the prior year.
The debt-to-equity ratio of Brenton Banks, Inc. (the "Parent
Company") was 6.9 percent at September 30, 1998. This percentage
has decreased from the December 31, 1997, ratio of 7.8 percent.
Long-term borrowings of the Parent Company at September 30, 1998,
consisted entirely of capital notes totaling $9,173,000. In
addition, the Parent Company has a $5 million line of credit with a
regional bank that was unused at the end of September 1998.
Brenton Banks, Inc. common stock closed on September 30, 1998,
at a closing price of $18.81 per share, an increase of 27.4 percent
over the prior year. The closing price at September 30, 1998, was
264 percent of the book value per share of $7.12. This closing
stock price represented a price-to-trailing-12-months-diluted-
earnings multiple of 18.8 times.
Brenton Banks, Inc. continues to pursue acquisition and
expansion opportunities that fit the Company's strategic business
and financial plans. There are currently no pending acquisitions
that would require Brenton Banks, Inc. to secure capital from
public or private markets.
Forward-Looking Information
Forward-looking information relating to the financial results
or strategies of the Company is referenced throughout Management's
Discussion and Analysis. The following paragraphs identify
forward-looking statements and the risks that need to be considered
when reading those statements.
Forward-looking statements include such words as believe,
expect, anticipate, target, goal, objective or other words with
similar meaning. The Company is under no obligation to update such
forward-looking information statements.
The risks involved in the operations and strategies of the
Company include competition from other financial institutions,
changes in interest rates, changes in economic or market conditions
and changes in regulations from the federal and state regulators.
These risks, which are not all inclusive, cannot be estimated.
<PAGE>
Part 1 -- Item 2
Page 3 of 12
Market Risk Management
Market risk is the risk of earnings volatility that results
from adverse changes in interest rates and market prices. The
Company's market risk is comprised primarily of interest rate risk
arising from its core banking activities of lending and deposit
taking. Interest rate risk is the risk that changes in market
interest rates may adversely affect the Company's net interest
income. Management continually develops and applies strategies to
mitigate this risk. Management does not believe that the Company's
primary market risk exposures and how those exposures have been
managed to-date in 1998 changed significantly when compared to
1997.
Asset/Liability Management
The Company has a fully integrated asset/liability management
system to assist in managing the balance sheet. The process, which
is used to project the results of alternative investment decisions,
includes the development of simulations that reflect the effects of
various interest rate scenarios on net interest income. Management
analyzes the simulations to manage interest rate risk, the net
interest margin and levels of net interest income.
The goal is to structure the balance sheet so net interest
margin fluctuates in a relatively narrow range during periods of
changing interest rates. The Company currently believes that net
interest income would fall by less than 5 percent if interest rates
increased or decreased by 300 basis points over a one-year time
horizon. This is within the Company's policy limits.
The slope of the yield curve is also a major determinant in
the net interest income of the Company. Generally, the steeper the
curve of the intermediate treasury to the overnight LIBOR rate, the
better the prospects for net interest income improvement. This
yield curve is inverted at this time.
To improve net interest income and lessen interest rate risk,
management continues its strategy of de-emphasizing fixed-rate
portfolio residential real estate loans with long repricing
periods. When appropriate for interest rate management purposes,
the Company will consider securitization of real estate loans. The
Company continues to focus on reducing interest rate risk by
emphasizing growth in the origination of variable-rate consumer and
commercial loans. Other actions include the use of fixed-rate
Federal Home Loan Bank advances as alternatives to certificates of
deposit, active management of the available for sale investment
securities portfolio to provide for cash flows that will facilitate
interest rate risk management and, in selected cases, the use of
interest rate swaps and interest rate floor contracts.
<PAGE>
Part 1 -- Item 2
Page 4 of 12
Liquidity
The Company actively monitors and manages its liquidity
position with the objective of maintaining sufficient cash flows to
fund operations, meet customer commitments, take advantage of
market opportunities and provide a margin against unforeseeable
liquidity needs. Federal funds sold, trading account securities,
loans held for sale and investment securities available for sale
are readily marketable assets. Maturities of all investment
securities are managed to meet the Company's normal liquidity
needs. Investment securities available for sale may be sold prior
to maturity to meet liquidity needs, to respond to market changes
or to adjust the Company's interest rate risk position. Readily
marketable assets, as defined above, comprised 32.0 percent of the
Company's total assets at September 30, 1998.
The Company has historically maintained a stable deposit base
and a relatively low level of large deposits, which result in a low
dependence on volatile liabilities. As of September 30, 1998, the
Company had borrowings of $108,550,000 from the Federal Home Loan
Bank ("FHLB") of Des Moines, of which $83,550,000 was used as a
means of providing both long-term, fixed-rate funding for certain
assets and managing interest rate risk. The remaining $25,000,000
represents an advance on a variable-rate, short-term $25,000,000
line of credit used to fund mortgage loans originated for sale.
The Company had additional borrowing capacity available from the
FHLB of approximately $26 million at September 30, 1998.
The combination of high levels of potentially liquid assets,
low dependence on volatile liabilities and additional borrowing
capacity provided sufficient liquidity for the Company at September
30, 1998.
Recently Issued Accounting Standards
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information". This statement requires
public business enterprises to disclosure information about
operating segments in annual and interim financial reports. An
operating segment is defined as a component of an enterprise that
engages in business activities that generate revenue and incur
expenses. A segment is further defined as a component whose
operating results are reviewed by the chief operating decision-
maker in the determination of resource allocation and
performance. It also establishes standards for related
disclosures about products and services, geographic areas and
major customers. The Company will be required to adopt the
provisions of SFAS No. 131 at the end of 1998, and adoption is
not expected to have a material impact on the Company's
consolidated financial statements.
<PAGE>
Part 1 -- Item 2
Page 5 of 12
In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires
recognition of all derivative instruments as either assets or
liabilities in the statement of financial position measured at
fair value. This statement requires that changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows gains and losses from
derivatives to offset related results on the hedged item in the
income statement, and requires a company to formally document,
designate and assess the effectiveness of transactions for which
hedge accounting is applied. The Company will be required to
adopt SFAS No. 133 in the year 2000 and has currently not
determined the impact on its consolidated financial statements.
Year 2000
The "Year 2000" issue is a top priority for Brenton. The
Company's critical core loan and deposit applications are ALLTEL
Information Services, Inc. ("ALLTEL") software programs and Brenton
outsources the data processing function to ALLTEL. Brenton and
ALLTEL are working in partnership to resolve the Year 2000 issues
of the critical core application programs as well as all other
computer software programs used in the Company. Also underway is
an assessment of the readiness of vendors, significant customers
and other third parties with which the Company does business.
Brenton could be faced with severe consequences if Year 2000
issues are not identified and resolved in a timely manner by the
Company and significant third parties, which include public
utilities and various governmental agencies. A worst case scenario
would result in the short-term inability to update client financial
records due to unforeseen processing issues. This would result in
clients being unable to receive timely information regarding their
balances.
The incremental expense associated with becoming Year 2000
compliant is not anticipated to be material. However, there is an
opportunity cost associated with this project in that the people
involved are regular Brenton and ALLTEL employees who would
normally be spending their time on other projects. It is estimated
the costs associated with this project will be $300,000 in 1998 and
approach $400,000 in 1999. There are additional benefits that
result from this project because in addition to becoming Year 2000
compliant, systems are being improved.
<PAGE>
Part 1 -- Item 2
Page 6 of 12
The Company has a Year 2000 committee and plan in place and
has been executing on that plan. The Company expects to complete
substantially all Year 2000 work associated with its critical core
application systems by the end of 1998 and remediation of all other
software products by early 1999, with testing to take place
throughout the remainder of 1998 and during the first quarter of
1999. The committee is also developing contingency plans for
unforeseen difficulties related to the Year 2000 issue. It is
anticipated that those plans will be complete by the end of 1998.
As a result of modifications and upgrades to existing systems,
management believes the Year 2000 issue will not be a significant
operational matter for the Company.
The Company has also contracted with an outside consultant to
review the Year 2000 plan and to monitor the progress of Year 2000
efforts and provide reports to management. Management in turn
periodically reports on the status of the Year 2000 project to the
Board of Directors and its Audit Committee. The Company is also
subject to review by various banking regulatory agencies. Those
agencies prescribe very strict guidelines that must be adhered to
by financial institutions.
The preceding paragraphs include forward-looking statements
that involve inherent risks and uncertainties. A number of
important factors could result in the actual costs of Year 2000
compliance and impact of Year 2000 issues to differ materially from
what is anticipated. Those uncertainties include incomplete
inventory and assessment results, higher than anticipated costs to
update software and hardware, and the lack of ability of vendors,
significant customers and other third parties to effectively
address the Year 2000 issue.
Results of Operations
The nine months ended September 30, 1998, compared to the nine
months ended September 30, 1997.
Net Income
For the nine months ended September 30, 1998, Brenton recorded
net income of $15,010,296, which is an increase of 10.2 percent
from net income of $13,618,441 for the first nine months of 1997.
Year-to-date diluted earnings per common share grew 11.6 percent to
$.77, compared to $.69 for the first three quarters of 1997.
<PAGE>
Part 1 -- Item 2
Page 7 of 12
Net Interest Income
During the first nine months of 1998, net interest income grew
2.0 percent to $45,788,632, compared to $44,888,635 for the same
period a year ago as favorable volume variances exceeded
unfavorable rate variances. Year-to-date 1998 average interest-
earning assets increased 6.3 percent, while average interest-
bearing liabilities rose 6.1 percent compared to the first three
quarters of 1997. The average balance of consumer loans increased
$30.4 million, or 15.4 percent, and average commercial loans
increased $25.7 million, or 6.5 percent. Meanwhile, the average
balance of residential real estate loans decreased $39.8 million
due to increased refinancing activity as borrowers took advantage
of the lower interest rate environment. Refinanced loans are
generally sold in the secondary market because of the interest rate
risk of holding long-term, low-rate loans in the portfolio. Brenton
generally retains the servicing of these loans.
Net interest margin decreased 15 basis points from 4.17
percent for the first nine months of 1997 to 4.02 percent for the
first nine months of 1998. The decrease in net interest margin is
directly attributable to a decrease in the yield earned on average
earning assets of 8.6 basis points and an increase in the cost of
interest-bearing liabilities of 8.2 basis points. The decrease in
the yield on average earning assets was primarily due to a decline
in the yield of investment securities. An increase in the cost of
funds resulted from higher interest-bearing checking account
balances and an aggressive effort to win new customer deposits
through the sale of competitively priced accounts.
Loan Quality
At September 30, 1998, total loans had grown 2.4 percent to
$1,023.8 million from $999.6 million a year earlier. This $24.2
million increase was achieved despite a $41.2 million decline in
the residential real estate loan portfolio, which resulted from
increased refinancing activity. Excluding the decline in
residential real estate mortgages, loans grew 8.0 percent from one
year ago. Nonperforming loans declined to $10,525,000, or 1.03
percent of total loans, at September 30, 1998, from $11,165,000, or
1.11 percent of total loans, at the end of the second quarter, but
increased from $7,692,000, or .77 percent of total loans, at
September 30, 1997. The increase was primarily due to commercial
loans for which adequate collateral exists and for which losses are
not anticipated. While nonperforming loans have grown from year-
to-year, and are an area of focus and concern, asset quality
remains strong and an increase in loan losses is not expected.
Nonperforming loans include loans on nonaccrual status, loans that
have been renegotiated to below market interest rates or terms and
loans past due 90 days or more. Asset quality remains strong and
reserves are considered adequate at 1.39 percent of total loans.
<PAGE>
Part 1 -- Item 2
Page 8 of 12
The provision for loan losses totaled $3,150,000 for the nine
months ended September 30, 1998, compared to $2,900,000 for the
same period one year ago. The increase in the provision is related
to recent and projected growth in the loan portfolio. Annualized
year-to-date net charge-offs were .22 percent of average loans for
the first nine months of 1998, compared with .25 percent for the
same period last year.
The allowance for loan losses, which totaled $14.2 million,
represented 135.13 percent of nonperforming loans at September 30,
1998, compared to 161.42 percent at September 30, 1997.
The Company has a formal structure for reviewing and approving
loans. Loan quality control and risk management is carefully
balanced with goals for loan growth. Management believes the
allowance for loan losses at September 30, 1998, is sufficient to
absorb potential loan losses within the portfolio.
Noninterest Income
Noninterest income for the nine months ended September 30,
1998, was $23,674,972 (excluding securities gains and losses), a
17.7 percent increase from $20,109,408 one year ago.
Compared to the same period a year ago, service charges on
deposits were up $358,383, or 6.7 percent. This growth is due to
increased account analysis charges on commercial and business
deposit accounts.
Investment brokerage commissions increased by $590,791, or
16.8 percent, by virtue of greater broker productivity and active
financial markets.
Mortgage banking revenue rose 141.3 percent to total
$5,327,034 for the first nine months of 1998. This revenue growth
was the result of a significantly higher volume of mortgage loan
originations produced by the growing staff of mortgage loan
originators. Residential real estate loan closings for the first
nine months of 1998 totaled $335 million, compared to $118 million
for the same period last year. Refinancings, which have been
higher due to the low interest rate environment, represented 58
percent of the closings.
Fiduciary income increased 7.8 percent to $2,471,855. This
increase is related to higher fees from personal trusts, investment
management and employee benefit plans.
<PAGE>
Part 1 -- Item 2
Page 9 of 12
Other service charges, collection and exchange charges,
commissions and fees increased $682,500 from the prior year
primarily due to increases in real estate sales commissions, letter
of credit fees, ATM/debit card fees and international fees.
Insurance commissions and fees declined 55.1 percent to
$1,058,744 for the first nine months of 1998. The reduction was
the result of lower levels of credit-related insurance commissions
and the 1997 third quarter sale of one of the Company's insurance
agencies.
Other operating income declined $62,567 to $1,825,501 as
higher levels of income on bank-owned life insurance policies and
miscellaneous income were exceeded by the third quarter 1997 gain
of approximately $821,000 from the sale of the previously mentioned
insurance agency.
Investment securities gains totaled $466,765 compared to gains
of $418,199 for the same period in 1997.
Noninterest Expense
Noninterest expense totaled $45,233,568 at September 30, 1998,
a 6.2 percent increase from the first nine months of 1997.
Compensation, the largest component of noninterest expense,
increased 9.3 percent over the prior year. Standard salaries rose
9.7 percent, while variable compensation increased 49.2 percent due
to higher sales of fee-related products and services, particularly
mortgage banking and investment brokerage. Other compensation
decreased $1,178,601 because of the expiration of a long-term stock
compensation plan. The number of full-time equivalent employees
increased by 8.6 percent to 731.6 as a result of filling a number
of open positions. Benefit expense increased 14.2 percent due to
increased compensation, higher health insurance premiums and
increased retirement plan contributions.
Furniture and equipment expense increased by $442,116 for the
first nine months of 1998. Depreciation on furniture decreased
$24,466, while depreciation on computer equipment increased
$322,622 due to technology upgrades. Repairs and maintenance for
this category increased $113,409 over the prior year.
Transferring the personal computer "help desk" function to an
internal operation has reduced year-to-date data processing expense
by $201,304, or 9.3 percent.
Other operating expense declined by $87,611 as reductions in
legal fees, bank operational losses, miscellaneous expense and loss
on sale of fixed assets exceeded increases in check processing
fees, consulting fees, personnel recruitment expense and
correspondent bank service charges.
<PAGE>
Part 1 -- Item 2
Page 10 of 12
The Company continues to focus on cost management and
evaluates all major expense items in an effort to control the
growth rate of various noninterest expense categories.
The Company's net noninterest margin, which measures operating
efficiency, was (1.65) percent, compared to (1.83) percent one year
ago. Another ratio that the Company utilizes to measure
productivity is the efficiency ratio. This ratio divides
noninterest expense by the sum of tax-equivalent net interest
income plus noninterest income (excluding gains and losses on the
sale of securities and loans). At September 30, 1998, the
Company's efficiency ratio had improved to 62.59 percent, compared
with 63.05 percent one year ago.
Income Taxes
The Company's income tax strategies include reducing income
taxes by purchasing securities and originating loans that produce
tax-exempt income. The goal is to maintain an optimum level of
tax-exempt assets in order to benefit the Company both on a tax-
equivalent yield basis and in income tax savings. The effective
rate of income tax expense as a percent of income before income tax
and minority interest was 27.9 percent for the first nine months of
1998 compared to 28.8 percent for 1997.
Results of Operations
The three months ended September 30, 1998, compared to the three
months ended September 30, 1997.
Net Income
For the three months ended September 30, 1998, net income
totaled $5,295,756, compared to $5,010,135 for the third quarter of
1997, an increase of 5.7 percent. Diluted earnings per common
share was $.27 for the third quarter of 1998, compared to $.26 for
the third quarter of 1997.
Net Interest Income
Net interest income for the quarter totaled $15,260,073, a
decline of $276,661, or 1.8 percent, compared to the third quarter
of the prior year as unfavorable rate variances exceeded favorable
volume variances. The net interest margin for the third quarter of
1998 was 3.96 percent, compared to 4.26 percent for the third
quarter of 1997. Similar to the nine-month comparison, a decline
in net interest margin is primarily related to the decrease in the
yield on investment securities and an increase in the rate paid on
interest-bearing checking accounts due to competitively pricing
accounts. Quarter-to-date average earning assets increased
$103,254,000, or 6.7 percent, over the third quarter of 1997.
<PAGE>
Part 1 -- Item 2
Page 11 of 12
Provision for Loan Losses
The provision for loan losses for the third quarter of 1997
totaled $1,050,000, compared to $1,100,000 for the third quarter of
1997. Annualized net charge-offs as a percent of average loans
were .30 percent for the third quarter of 1998, compared to .39
percent for the same period of 1997.
Noninterest Income
Noninterest income (excluding securities gains) increased by
$629,071, or 8.2 percent, from the third quarter of 1997 to the
third quarter of 1998.
Service charges on deposit accounts increased 10.5 percent to
$2,046,248 over the prior year due to growth in account analysis
charges on commercial and business deposit accounts and increased
overdraft fees.
Mortgage banking income grew by $898,328, or 92.6 percent, due
to higher volumes of real estate mortgage loan originations as
previously discussed.
Insurance commissions and fees declined $342,419 from the
prior year as a result of lower levels of credit-related insurance
commissions. This decline was somewhat offset by the 30.2 percent,
or $44,024, increase in insurance agency commissions.
Other service charges, collection and exchange charges,
commissions and fees increased $131,254 from the prior year, of
which $49,347 was attributable to increases in international fees,
$37,484 from higher real estate sales commissions and $36,653 from
higher ATM/debit card fees.
Other operating income declined $219,888 due to the gain of
approximately $821,000 on the sale of one of the Company's
insurance agencies at the beginning of the third quarter of 1997.
That decline was partially offset by an increase in income from
bank-owned life insurance policies and miscellaneous one-time
items.
Net gains from securities transactions totaled $222,189 for
the third quarter of 1998, versus net gains of $141,743 in the
third quarter of 1997.
Noninterest Expense
Noninterest expense increased by 2.0 percent when comparing
the third quarter of 1998 with the third quarter of 1997. The
Company's net noninterest margin was (1.54) percent for the third
quarter of 1998, compared to (1.74) percent for the third quarter
of 1997.
<PAGE>
Part 1 -- Item 2
Page 12 of 12
Quarter-to-quarter, the largest noninterest expense changes
were in the categories of compensation and benefits, furniture and
equipment and other operating expense.
Compensation and related benefit costs increased by 6.9
percent over the third quarter of 1997. Standard salaries
increased by 15.0 percent, while variable compensation increased by
39.7 percent. Other compensation decreased $752,489 due to the
expiration of a long-term stock compensation plan.
Like the year-to-date comparison, furniture and equipment
expense increased by $163,811 to $1,110,644 due to depreciation on
computer technology upgrades and higher repairs and maintenance
expense.
Other operating expense for the third quarter of 1998 declined
by $453,044, primarily due to decreases in legal and consulting
fees, miscellaneous expense and reduced loss on the sale of fixed
assets.
Looking Ahead
As the largest Iowa-based banking organization, the Company is
committed to providing clients with innovative products and
services designed to help them achieve their lifetime financial
dreams and objectives. The Company is intensifying its company-
wide commitment to making Brenton a proactive sales organization.
The Company will continue to emphasize promoting partnering across
Company business units to better serve our clients' total financial
needs. The objective is to provide tools to Brenton bankers to
enable them to take a more proactive role in understanding their
clients' goals and to develop custom-tailored financial strategies
and solutions for them. The desired results are to strengthen new
and existing relationships with clients across Iowa and to provide
them with lifetime financial solutions.
The Company will also continue to focus on improving value for
our clients and shareholders by aggressively pursuing strategies to
increase loans, fee income and core deposits, while controlling
costs.
Part 1 -- Item 3. Quantitative and Qualitative Disclosures About
Market Risk.
The information appearing on page 3 of Item 2 under the
heading "Market Risk Management" is incorporated herein by
reference.
<PAGE>
PART 2 -- Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K -- There were no reports on Form 8-K filed
for the nine months ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
BRENTON BANKS, INC.
- -----------------------------------
(Registrant)
November 4, 1998 /s/ Robert L. DeMeulenaere
- -----------------------------------------------------------------
Dated Robert L. DeMeulenaere
President and Chief Executive
Officer
November 4, 1998 /s/ Steven T. Schuler
- ----------------------------------------------------------------
Dated Steven T. Schuler
Chief Financial Officer/
Treasurer/Secretary and
Chief Accounting Officer
Exhibit 11
Statements re: Computation of Earnings per Share
Brenton Banks, Inc.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
_____ ____ ______ ______
</CAPTION>
<S> <C> <C> <C> <C>
Basic EPS Computation
Numerator:
Net income $15,010,296 13,618,441 5,295,756 5,010,135
========== ========== ========== ==========
Denominator:
Average common shares
outstanding 19,017,071 19,299,548 18,925,764 19,167,933
========== ========== ========== ==========
Basic EPS $ 0.79 $ 0.71 $ 0.28 $ 0.26
========== ========== ========== ==========
Diluted EPS Computation
Numerator:
Net income $15,010,296 13,618,441 5,295,756 5,010,135
========== ========== ========== ==========
Denominator:
Average common shares
outstanding 19,017,071 19,299,548 18,925,764 19,167,933
Average stock options 424,560 285,067 424,560 285,067
Average long-term stock
compensation plan 0 161,348 0 161,348
__________ __________ __________ __________
19,441,631 19,745,963 19,350,324 19,614,348
========== ========== ========== ==========
Diluted EPS $ 0.77 $ 0.69 $ 0.27 $ 0.26
========== ========== ========== ==========
<FN>
Note: Amounts are restated for the 2-for-1 stock split effective February 1998
and the 10% common stock dividend effective in June 1998.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 66,805,736
<INT-BEARING-DEPOSITS> 2,049,620
<FED-FUNDS-SOLD> 500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 541,329,960
<INVESTMENTS-CARRYING> 52,909,407
<INVESTMENTS-MARKET> 53,848,000
<LOANS> 1,023,845,769
<ALLOWANCE> 14,222,622
<TOTAL-ASSETS> 1,793,768,290
<DEPOSITS> 1,404,491,692
<SHORT-TERM> 180,227,687
<LIABILITIES-OTHER> 21,222,919
<LONG-TERM> 54,223,000
0
0
<COMMON> 46,914,707
<OTHER-SE> 86,688,285
<TOTAL-LIABILITIES-AND-EQUITY> 1,793,768,290
<INTEREST-LOAN> 66,866,025
<INTEREST-INVEST> 23,903,566
<INTEREST-OTHER> 1,433,214
<INTEREST-TOTAL> 92,202,805
<INTEREST-DEPOSIT> 37,641,982
<INTEREST-EXPENSE> 46,414,173
<INTEREST-INCOME-NET> 45,788,632
<LOAN-LOSSES> 3,150,000
<SECURITIES-GAINS> 466,765
<EXPENSE-OTHER> 45,768,442
<INCOME-PRETAX> 21,011,927
<INCOME-PRE-EXTRAORDINARY> 21,011,927
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,010,296
<EPS-PRIMARY> .79
<EPS-DILUTED> .77
<YIELD-ACTUAL> 3.79
<LOANS-NON> 5,397,000
<LOANS-PAST> 4,845,000
<LOANS-TROUBLED> 283,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12,732,131
<CHARGE-OFFS> 3,051,044
<RECOVERIES> 1,391,535
<ALLOWANCE-CLOSE> 14,222,622
<ALLOWANCE-DOMESTIC> 14,222,622
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
