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 March 31, 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, May 4,
1998.
17,272,622 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)
March 31, December 31,
1998 1997
____________ ____________
</CAPTION>
<S> <C> <C>
Assets:
Cash and due from banks $ 82,084,796 77,468,210
Interest-bearing deposits with banks 1,441,341 1,319,700
Federal funds sold and securities purchased
under agreements to resell 36,600,000 9,300,000
Trading account securities -- 77,220
Investment securities:
Available for sale 484,327,765 486,653,872
Held to maturity (approximate market value of
$67,840,000 and $69,852,000 at March 31, 1998,
and December 31, 1997, respectively) 67,018,282 69,079,622
_____________ _____________
Investment securities 551,346,047 555,733,494
_____________ _____________
Loans held for sale 31,107,387 19,303,411
Loans 989,009,123 993,189,110
Allowance for loan losses (13,349,509) (12,732,131)
_____________ _____________
Loans, net 975,659,614 980,456,979
_____________ _____________
Premises and equipment 31,630,870 28,898,589
Accrued interest receivable 15,126,421 15,233,682
Other assets 32,182,095 30,692,512
_____________ _____________
Total assets $1,757,178,571 1,718,483,797
============== =============
Liabilities and Stockholders' Equity:
Deposits:
Noninterest-bearing $ 162,559,300 161,007,156
Interest-bearing:
Demand 115,472,400 117,664,352
Savings 561,300,498 527,364,856
Time 540,973,012 558,234,127
_____________ _____________
Total deposits 1,380,305,210 1,364,270,491
_____________ _____________
Federal funds purchased and securities sold
under agreements to repurchase 104,101,892 92,632,576
Other short-term borrowings 76,000,000 73,700,000
Accrued expenses and other liabilities 16,846,228 16,980,763
Long-term borrowings 44,662,000 36,662,000
_____________ _____________
Total liabilities 1,621,915,330 1,584,245,830
_____________ _____________
Minority interest in consolidated subsidiaries 4,858,107 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;
17,285,626 and 17,334,048 shares issued and outstanding
at March 31, 1998 and December 31, 1997, respectively 43,214,065 43,335,120
Capital surplus -- --
Retained earnings 84,158,383 82,824,333
Accumulated other comprehensive income--
unrealized gains on securities available for sale, net 3,032,686 3,219,846
_____________ _____________
Total common stockholders' equity 130,405,134 129,379,299
_____________ _____________
Total liabilities and stockholders' equity $1,757,178,571 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)
Three Months Ended
March 31,
1998 1997
______________ ____________
</CAPTION>
<S> <C> <C>
Interest Income
Interest and fees on loans $21,870,666 20,441,367
Interest and dividends on investments:
Available for sale - taxable 5,864,593 5,648,122
Available for sale - tax-exempt 1,282,017 1,163,010
Held to maturity - taxable 144,531 314,181
Held to maturity - tax-exempt 701,028 619,760
__________ __________
Total interest and dividends on investments 7,992,169 7,745,073
__________ __________
Interest on federal funds sold and securities
purchased under agreements to resell 391,204 277,144
Other interest income 66,215 9,338
__________ __________
Total interest income 30,320,254 28,472,922
__________ __________
Interest Expense
Interest on deposits 12,283,180 12,078,873
Interest on federal funds purchased and securities
sold under agreements to repurchase 1,062,067 710,599
Interest on other short-term borrowings 1,010,802 527,244
Interest on long-term borrowings 700,260 538,575
__________ __________
Total interest expense 15,056,309 13,855,291
__________ __________
Net interest income 15,263,945 14,617,631
Provision for loan losses 1,050,000 900,000
__________ __________
Net interest income after provision for loan losses 14,213,945 13,717,631
__________ __________
Noninterest Income
Service charges on deposit accounts 1,837,674 1,710,458
Investment brokerage commissions 1,439,729 1,015,603
Mortgage banking income 1,411,058 550,272
Fiduciary income 842,248 809,137
Insurance commissions and fees 357,663 959,549
Other service charges, collection and exchange
charges, commissions and fees 1,014,607 738,874
Net realized gains from securities available for sale 119,311 250,665
Other operating income 464,390 415,103
__________ __________
Total noninterest income 7,486,680 6,449,661
__________ __________
Noninterest Expense
Compensation 6,817,520 6,282,594
Employee benefits 1,516,948 1,294,553
Occupancy expense of premises, net 1,463,805 1,466,058
Furniture and equipment expense 961,635 968,768
Data processing expense 634,287 723,907
Marketing 350,026 344,979
Supplies 325,420 273,788
FDIC deposit insurance assessment 69,559 71,287
Other operating expense 2,768,513 2,610,240
__________ __________
Total noninterest expense 14,907,713 14,036,174
__________ __________
Income before income taxes and minority interest 6,792,912 6,131,118
Income taxes 1,906,849 1,753,721
__________ __________
Income before minority interest 4,886,063 4,377,397
Minority interest 167,085 176,041
__________ __________
Net income $ 4,718,978 4,201,356
========== ==========
Per common share:
Net income-basic $ .27 .24
Net income-diluted .27 .23
Cash dividends .085 .059
<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 three months ended March 31,
1998 1997
_______________ _______________
</CAPTION>
<S> <C> <C>
Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,718,978 4,201,356
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for loan losses . . . . . . . . . . . . . . 1,050,000 900,000
Depreciation and amortization . . . . . . . . . . . . 1,106,733 1,152,131
Net realized gains from securities available
for sale . . . . . . . . . . . . . . . . . . . . . . (119,311) (250,665)
Investment securities amortization and accretion 86,721 405,852
Net (increase) decrease in loans held for sale . . . . .(11,803,976) 656,306
Net increase in accrued interest
receivable and other assets (1,366,362) (1,252,928)
Net increase (decrease) in accrued expenses, other
liabilities and minority interest . . . . . . . . (128,513) 996,675
__________ ___________
Net cash provided (used) by operating activities (6,455,730) 6,808,727
__________ ___________
Investing Activities:
Investment securities available for sale:
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . (65,767,641) (57,537,041)
Maturities . . . . . . . . . . . . . . . . . . . . . . . . 62,667,015 42,647,478
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,142,023 32,361,209
Investment securities held to maturity:
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . (2,559,836) (5,300,724)
Maturities . . . . . . . . . . . . . . . . . . . . . . . . 4,628,489 4,073,626
Net (increase) decrease in loans . . . . . . . . . . . . . . . 3,747,365 (21,975,508)
Purchases of premises and equipment . . . . . . . . . . . (3,738,730) (885,368)
Proceeds from sale of premises and equipment . . . . . . -- (25,300)
___________ ____________
Net cash provided (used) by investing activities . . . . . . . 4,118,685 (6,641,628)
___________ ____________
Financing Activities:
Net increase (decrease) in noninterest-bearing, interest-
bearing demand and savings deposits . . . . . . . . . . . 33,295,834 (9,272,420)
Net decrease in time deposits . . . . . . . . . . . . . . . . (17,261,115) (1,582,329)
Net increase in federal funds purchased and
securities sold under agreements to repurchase . . . . . . 11,469,316 8,535,480
Net increase (decrease) in other short-term borrowings . . . . 2,300,000 (3,000,000)
Proceeds of long-term borrowings . . . . . . . . . . . . . . . 8,010,000 66,000
Repayment of long-term borrowings . . . . . . . . . . . . . . (10,000) (99,024)
Dividends on common stock . . . . . . . . . . . . . . . . . . (1,486,409) (1,050,544)
Proceeds from issuance of common stock under
the employee stock purchase plan . . . . . . . . . . . . . . 294,210 188,631
Proceeds from issuance of common stock under
the stock option plan -- 131,832
Proceeds from issuance of common stock under
the long-term stock compensation plan 1,094,155 457,561
Payment for shares reacquired under common stock
repurchase plan . . . . . . . . . . . . . . . . . . . . . . (3,407,939) (3,116,138)
___________ ___________
Net cash provided (used) by financing activities 34,298,052 (8,740,951)
___________ ___________
Net increase (decrease) in cash and cash equivalents 31,961,007 (8,573,852)
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 $120,126,137 84,258,226
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Supplemental Cash Flow Information
(Unaudited)
</CAPTION>
<S> <C> <C>
Interest paid during the period . . . . . . . . . . . . . . . . $ 14,278,996 13,632,710
Income taxes paid during the period . . . . . . . . . . . . . . -- --
=========== ==========
<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)
Three Months Ended
March 31,
1998 1997
______________ ____________
</CAPTION>
<S> <C> <C>
Net Income $4,718,978 4,201,356
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 (261,729) (643,854)
Less: reclassification adjustment for net gains
including in net income, net of tax (74,569) (156,666)
__________ _________
Other comprehensive income, net of tax (187,160) (487,188)
__________ _________
Comprehensive income $4,531,818 3,714,168
========== =========
<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
statement of comprehensive income has been added to the accompanying
financial statements.
5. Income Taxes
Federal income tax expense for the three months ended March 31, 1998,
and 1997, was computed using the consolidated effective federal income
tax rates.
For the first three 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 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.
During the first three 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 three months of 1998 and 1997, was $0 and $300,000,
respectively. The Company issued 100,588 and 33,178 shares of common
stock under the long-term stock compensation plan during the first three
months of 1998 and 1997, respectively, adding $1,094,155 and $457,561,
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 March 31, 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 March 31, 1998,
163,000 shares had been repurchased at a cost of $3,407,939.
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
13,990 shares of common stock under this plan during the first three
months of 1998. This transaction added $294,210 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 months ended March 31, 1998 and 1997, was
17,392,866 and 17,708,776, respectively.
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, including the 1996 Stock Option Plan, the 1987
Nonqualified Stock Option Plan and the Long-term Stock Compensation Plan,
outstanding for the three months ended March 31, 1998, and 1997, was
17,754,382 and 18,129,233, respectively.
<PAGE>
PART 1 -- Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Capital Resources
Net income for the first quarter of 1998 was $4,718,978, up 12.3
percent from $4,201,356 one year ago. The Company's annualized return on
average equity (ROE) was 14.42 percent, compared to 13.75 percent one
year ago; the annualized return on average assets (ROA) was 1.14 percent,
compared to 1.09 percent for the same period in 1997.
Common stockholders' equity totaled $130,405,134 as of March 31,
1998, a .8 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 March 31, 1998, was 10.86 percent and the
total risk-based capital ratio was 11.98 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 7.61 percent at March
31, 1998, exceeding the regulatory minimum requirement for well-
capitalized institutions of 5.0 percent.
As part of the Company's ongoing stock repurchase plan, 163,000
shares have been repurchased during the first quarter of 1998 at a cost
of $3,407,939. The Board of Directors has approved the repurchase of $10
million of the Company's common stock during 1998. Since the inception
of the plan in 1994, the Company has repurchased 2,159,746 shares at a
total cost of $27,351,418.
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 2-for-1 stock split.
The Company paid a dividend of $.085 per common share in the first
quarter of 1998, which represents an increase of 44.1 percent over $.059
per share for the first quarter of 1997. The dividend payout ratio for
the first quarter of 1998 was 31.5 percent of diluted earnings per common
share.
The debt-to-equity ratio of Brenton Banks, Inc. (the "Parent
Company") was 7.8 percent at March 31, 1998. This percentage is
unchanged from December 31, 1997. In addition, the Parent Company has a
$2 million line of credit with a regional bank that was unused at the end
of March 1998. Long-term borrowings of the Parent Company at March 31,
1998, consisted entirely of capital notes totaling $10,112,000.
<PAGE>
Part 1 -- Item 2
Page 2 of 9
Brenton Banks, Inc. common stock closed on March 31, 1998, at a bid
price of $21.13 per share, an increase of 67.6 percent over the prior
year. The closing price at March 31, 1998, was 280.2 percent of the book
value per share of $7.54. This closing stock price represented a price-
to-trailing-12-months-diluted-earnings multiple of 20.1 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 are 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.
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 when compared
to 1997.
<PAGE>
Part 1 -- Item 2
Page 3 of 9
The Company uses a third-party computer software simulation modeling
program to measure its exposure to potential interest rate changes. For
various assumed hypothetical changes in market interest rates, numerous
other assumptions are made such as prepayment speeds on loans and
securities backed by mortgages, the slope of the Treasury yield curve,
the rates and volumes on the Company's deposit products and the rates and
volumes on the Company's loan production.
The following table sets forth the estimated changes in net interest
income (expressed as a percent of 1997 net interest income) for projected
hypothetical changes in market interest rates. As shown in the table,
the Company's net interest income is more sensitive in a falling rate
scenario than in a rising rate scenario. As market rates decline, the
assumed speed of fixed-rate loan repayments increases, causing the funds
received to be reinvested at lower rates. Current interest rates on
certain liabilities are at a level that does not allow for significant
downward repricing should market interest rates decline significantly.
As market rates increase, fixed-rate loans are less likely to prepay,
therefore, slowing the opportunity to reinvest at the assumed higher
rates. In either a rising or falling interest rate environment, the
Company believes it has taken actions to minimize the actual impact on
net interest income. Those actions include the origination of variable-
rate consumer and commercial loans, the use of fixed-rate Federal Home
Loan Bank advances as alternatives to certificates of deposit and active
management of the investment securities portfolio to provide for cash
flows that will facilitate interest rate risk management. In selected
cases, the Company may enter into interest rate swaps, however, the
amount of swaps at March 31, 1998, and assumed in the projection of net
interest income are not material. The Company entered into an interest
rate floor contract at the end of 1997 to mitigate the effect falling
interest rates would have on certain deposit accounts with contracted
minimum interest rates. Actual changes in net interest income may differ
from estimated changes set forth in this table due to various risks and
uncertainties concerning how actual repricing opportunities will differ
from assumed repricing opportunities.
<PAGE>
Part 1 -- Item 2
Page 4 of 9
Change in net interest income due to projected
hypothetical changes in market interest rates:
<TABLE>
<CAPTION>
Assumed changes
in market rates 1998 1999 2000
</CAPTION>
<S> <C> <C> <C>
- -300 bps -4.8% -10.8 -14.1
- -200 bps -3.5 -8.3 -10.9
- -100 bps -2.1 -4.6 -6.2
Flat -0.5 -1.4 -2.0
+100 bps 0.6 1.6 2.3
+200 bps -1.7 0.3 2.3
+300 bps -3.6 -0.4 3.0
<FN>
(Changes in hypothetical interest rates are assumed to be instantaneous
and sustained parallel shifts in the yield curve.)
</TABLE>
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, as previously discussed, 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 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 intermediate
treasury to LIBOR curve, the better the prospects for net interest income
improvement. This curve is very flat 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 variable-
rate loans. Other actions taken to minimize interest rate risk were
previously discussed under the heading "Market Risk Management."
<PAGE>
Part 1 -- Item 2
Page 5 of 9
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, 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, respond to market changes or adjust the
Company's interest rate risk position. Readily marketable assets, as
defined above, comprised 31.4 percent of the Company's total assets at
March 31, 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 March 31, 1998, the Company had advances
of $110,550,000 from the Federal Home Loan Bank ("FHLB") of Des Moines,
of which $90,550,000 were used as a means of providing long-term, fixed-
rate funding for certain fixed-rate assets and managing interest rate
risk. The remaining $20,000,000 represents an advance on a variable-
rate, short-term $20,000,000 line of credit used to fund mortgage loans
originated for sale. The Company had additional borrowing capacity
available from the FHLB of approximately $35 million at March 31, 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 March 31, 1998.
Results of Operations
The three months ended March 31, 1998, compared to the three months ended
March 31, 1997.
Net Income
For the three months ended March 31, 1998, Brenton recorded net
income of $4,718,978, which is an increase of 12.3 percent from net
income for the first three months of 1997, which totaled $4,201,356.
Diluted net income per common share was $.27 per share for the first
quarter of 1998, compared to $.23 per share for the first quarter of
1997, an increase of 17.4 percent.
<PAGE>
Part 1 -- Item 2
Page 6 of 9
Net Interest Income
Average interest-earning assets rose 6.1 percent, while average
interest-bearing liabilities increased 5.7 percent from the first three
months of 1997 to the first three months of 1998. Net interest income
increased 4.4 percent to $15,263,945, compared to $14,617,631 for the
first quarter of 1997 as favorable volume variances exceeded unfavorable
rate variances. Net interest margin declined 3 basis points from 4.12
percent for the first three months of 1997 to 4.09 percent for the
current quarter. An increase in the cost of funds resulted from higher
NOW account volume and an aggressive effort to win new client deposit
relationships through the sale of competitively-priced products.
Loan Quality
At March 31, 1998, total loans had grown 2.6 percent to $989.0
million from $963.7 million a year earlier. Loan quality remains strong
with nonperforming loans totaling $10,380,000, or 1.05 percent of loans,
at March 31, 1998, compared to $5,838,000, or .61 percent, at March 31,
1997. The increase was primarily due to two commercial loans for which
losses are not anticipated. 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.
The allowance for loan losses, which totaled $13.3 million,
represented 128.61 percent of nonperforming loans at March 31, 1998,
compared to 204.93 percent at March 31, 1997. On March 31, 1998,
reserves stood at 1.35 percent of total loans, compared to 1.24 percent a
year ago.
The provision for loan losses totaled $1,050,000 for the three
months ended March 31, 1998, compared to $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. Net charge-offs were .17 percent
of average loans for the first three months of 1998, compared with .11
percent for the same period last year.
Management believes the allowance for loan losses at March 31, 1998,
was sufficient to absorb potential loan losses within the
portfolio.
Noninterest Income
Noninterest income for the three months ended March 31, 1998, was
$7,367,369 (excluding securities gains and losses), an 18.9 percent
increase from $6,198,996 one year ago.
<PAGE>
Part 1 -- Item 2
Page 7 of 9
Compared to the same period a year ago, service charges on deposits
were up $127,216, or 7.4 percent. This growth was primarily due to
increased account analysis charges on commercial and business deposit
accounts.
Investment brokerage commissions increased by $424,126, or 41.8
percent, due to strong financial markets and successful sales
initiatives.
Mortgage banking revenues rose 156.4 percent to total $1,411,058 for
the first quarter of 1998. The increase in mortgage banking revenues is
the result of significantly higher mortgage loan origination volume
fueled by the lower interest rate environment. Residential real estate
loan closings for the first quarter of 1998 totaled $95 million, compared
to $28 million for the first quarter of 1997.
Other service charges, collection and exchange charges, commissions
and fees increased $275,733, or 37.3 percent, to $1,014,607. The
increase was the result of higher real estate commissions and letter of
credit fees.
Other operating income increased 11.9 percent from one year ago to
$464,390 primarily due to income from bank-owned life insurance policies.
Insurance commissions and fees declined 62.7 percent to $357,663 for
the first quarter of 1998 compared to the same quarter of 1997 due to the
July 1997 sale of one of the Company's insurance agencies. The Company
is committed to the insurance business, but desires to grow its insurance
operations through other distribution channels.
Securities transactions produced gains of $119,311 compared to gains
of $250,665 for the same period in 1997.
Noninterest Expense
Noninterest expense totaled $14,907,713 at March 31, 1998, a 6.2
percent increase from the first quarter of 1997.
Compensation expense, the largest component of noninterest expense,
increased 8.5 percent over the prior year. Standard salaries rose 3.4
percent, while variable compensation, including commissions and
incentives, increased 59.0 percent due to higher sales of fee-related
products. Other compensation decreased by $181,967, primarily due to the
expiration of a long-term stock compensation plan. The number of full-
time equivalent employees increased by 2.0 percent over the first quarter
of 1997.
<PAGE>
Part 1 -- Item 2
Page 8 of 9
Benefits expense increased 17.2 percent, due to higher year-end
bonus and incentive payments and increases in medical insurance premiums
and retirement plan expense. This item is historically higher in the
first quarter of the year than the remaining quarters.
Transferring the distributed computing "help desk" function to an
internal operation reduced data processing expenses by 12.4 percent, or
$89,620, for first quarter 1998.
Supplies expense increased $51,632 from the prior year to $325,420
due to the timing of purchases. Other operating expense increased by 6.1
percent to $2,768,513 due to increases in check processing fees,
personnel recruitment expense and dataline costs.
The Company continues to focus on cost management and evaluates all
major expense items in an effort to control the growth rate of
noninterest expense.
The Company's net noninterest margin, which measures operating
efficiency, was 1.76 percent, compared to 1.94 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 March 31,
1998, the Company's efficiency ratio was 63.17 percent, compared to 64.92
percent one year ago.
The "Year 2000 Issue", which has received much media coverage
recently, is a top priority for Brenton. The Company's core loan and
deposit applications are ALLTEL Information Services, Inc. ("ALLTEL")
products and Brenton outsources the data processing function to ALLTEL.
Brenton and ALLTEL are working in partnership to address the Year 2000
issues of the core application programs as well as all other computer
software programs used in the Company. 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.
There will be benefits as a result of this project because systems are
being improved in addition to becoming Year 2000 compliant.
The Company has a Year 2000 Committee and Plan in place and has been
executing on that Plan. The Company expects to have all core application
systems Year 2000 compliant by the end of 1998 and all other software
products compliant by early 1999, with further testing to take place
throughout the remainder of 1999.
<PAGE>
Part 1 -- Item 2
Page 9 of 9
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 the maximum level of tax-exempt assets
in order to benefit the Company on both 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 28.1
percent for the first three months of 1998 compared to 28.6 percent for
1997.
Looking Ahead
The Company will continue refining market competence and selling
skills through ongoing sales training. The Company will also continue to
nurture and support the development of stronger partnerships between
associates throughout the organization. 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 partnerships with clients across Iowa and to
provide them with lifetime financial solutions.
The Company will also aggressively pursue 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 pages 2 through 4 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 three months ended March 31, 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)
May 7, 1997 /s/ Robert L. DeMeulenaere
- -----------------------------------------------------------------Dated
Robert L. DeMeulenaere
President and Chief Executive
Officer
May 7, 1997 /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>
Three Months Ended
March 31,
1998 1997
</CAPTION>
<S> <C> <C>
Basic EPS Computation
Numerator:
Net income $ 4,718,978 4,201,356
Denominator:
Average common shares
outstanding 17,392,866 17,708,776
Basic EPS $ 0.27 $ 0.24
Diluted EPS Computation
Numerator:
Net income $ 4,718,978 4,201,356
Denominator:
Average common shares
outstanding 17,392,866 17,708,776
Average stock options 361,516 252,975
Average long-term stock
compensation plan 0 167,482
17,754,382 18,129,233
Diluted EPS $ 0.27 $ 0.23
<FN>
Note: Amounts are restated for the 2-for-1 stock split effective
February 1998 and the 10% common stock dividend effective in 1997.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> MAR-31-1998
<CASH> 82,084,796
<INT-BEARING-DEPOSITS> 1,441,341
<FED-FUNDS-SOLD> 36,600,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 484,327,765
<INVESTMENTS-CARRYING> 67,018,282
<INVESTMENTS-MARKET> 67,840,000
<LOANS> 989,009,123
<ALLOWANCE> (13,349,509)
<TOTAL-ASSETS> 1,757,178,571
<DEPOSITS> 1,380,305,210
<SHORT-TERM> 180,101,892
<LIABILITIES-OTHER> 21,704,335
<LONG-TERM> 44,662,000
0
0
<COMMON> 43,214,065
<OTHER-SE> 87,191,069
<TOTAL-LIABILITIES-AND-EQUITY> 1,757,178,571
<INTEREST-LOAN> 21,870,666
<INTEREST-INVEST> 7,992,169
<INTEREST-OTHER> 457,419
<INTEREST-TOTAL> 30,320,254
<INTEREST-DEPOSIT> 12,283,180
<INTEREST-EXPENSE> 15,056,309
<INTEREST-INCOME-NET> 15,263,945
<LOAN-LOSSES> 1,050,000
<SECURITIES-GAINS> 119,311
<EXPENSE-OTHER> 15,074,798
<INCOME-PRETAX> 6,625,827
<INCOME-PRE-EXTRAORDINARY> 6,625,827
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,718,978
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
<YIELD-ACTUAL> 3.86
<LOANS-NON> 4,993,000
<LOANS-PAST> 4,938,000
<LOANS-TROUBLED> 449,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12,732,131
<CHARGE-OFFS> 857,533
<RECOVERIES> 424,911
<ALLOWANCE-CLOSE> 13,349,509
<ALLOWANCE-DOMESTIC> 13,349,509
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
