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, 1999
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 3,
1999.
18,656,840 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,
1999 1998
_________ ____________
</CAPTION>
<S> <C> <C>
Assets:
Cash and due from banks $ 66,110,480 76,460,049
Interest-bearing deposits with banks 2,154,327 2,167,288
Federal funds sold and securities purchased
under agreements to resell --- 6,000,000
Investment securities:
Available for sale 608,691,627 605,183,788
Held to maturity (approximate market value of
$42,285,000 and $44,011,000 at March 31, 1999,
and December 31, 1998, respectively) 41,373,529 43,027,501
_____________ _____________
Investment securities 650,065,156 648,211,289
_____________ _____________
Loans held for sale 60,926,507 98,147,391
Loans 1,032,165,249 1,033,554,556
Allowance for loan losses (14,489,385) (14,172,264)
_____________ _____________
Loans, net 1,017,675,864 1,019,382,292
_____________ _____________
Premises and equipment 33,541,716 32,523,113
Accrued interest receivable 16,783,318 16,458,066
Other assets 43,413,521 40,207,277
_____________ _____________
Total assets $1,890,670,889 1,939,556,765
============== =============
Liabilities and Stockholders' Equity:
Deposits:
Noninterest-bearing $ 181,146,179 190,625,140
Interest-bearing:
Demand 150,104,369 131,602,358
Savings 588,504,516 603,367,340
Time 561,606,798 571,080,293
_____________ _____________
Total deposits 1,481,361,862 1,496,675,131
_____________ _____________
Federal funds purchased and securities sold
under agreements to repurchase 108,274,220 155,847,300
Other short-term borrowings 105,650,000 87,050,000
Accrued expenses and other liabilities 16,208,816 18,315,348
Long-term borrowings 38,561,000 41,546,000
_____________ _____________
Total liabilities 1,750,055,898 1,799,433,779
_____________ _____________
Minority interest in consolidated subsidiaries 4,861,137 4,912,667
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;
18,700,840 and 18,752,381 shares issued and outstanding
at March 31, 1999 and December 31, 1998, respectively 46,752,100 46,880,953
Capital surplus --- ---
Retained earnings 87,169,439 85,010,569
Accumulated other comprehensive income--
unrealized gains on securities available for sale, net 1,832,315 3,318,797
_____________ _____________
Total common stockholders' equity 135,753,854 135,210,319
_____________ _____________
Total liabilities and stockholders' equity $1,890,670,889 1,939,556,765
============= =============
<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,
1999 1998
____ ____
</CAPTION>
<S> <C> <C>
Interest Income
Interest and fees on loans $22,051,152 21,870,666
Interest and dividends on investments:
Available for sale -- taxable 6,531,217 5,864,593
Available for sale -- tax-exempt 1,788,474 1,282,017
Held to maturity -- taxable 37,935 144,531
Held to maturity -- tax-exempt 495,804 701,028
__________ __________
Total interest and dividends on investments 8,853,430 7,992,169
__________ __________
Interest on federal funds sold and securities
purchased under agreements to resell 93,652 391,204
Other interest income 330,221 66,215
__________ __________
Total interest income 31,328,455 30,320,254
__________ __________
Interest Expense
Interest on deposits 12,697,515 12,283,180
Interest on federal funds purchased and
securities sold under agreements
to repurchase 1,310,909 1,062,067
Interest on other short-term borrowings 1,431,039 1,010,802
Interest on long-term borrowings 638,064 700,260
__________ __________
Total interest expense 16,077,527 15,056,309
__________ __________
Net interest income 15,250,928 15,263,945
Provision for loan losses 1,050,000 1,050,000
__________ __________
Net interest income after provision for
loan losses 14,200,928 14,213,945
__________ __________
Noninterest Income
Service charges on deposit accounts 2,108,255 1,837,674
Mortgage banking income 1,638,097 1,411,058
Investment brokerage commissions 1,024,816 1,439,729
Fiduciary income 1,065,918 842,248
Insurance commissions and fees 284,513 357,663
Other service charges, collection and
exchange charges, commissions and fees 1,261,230 1,165,480
Net realized gains from securities
available for sale 62,936 119,311
Other operating income 349,212 313,517
__________ __________
Total noninterest income 7,794,977 7,486,680
__________ __________
Noninterest Expense
Compensation 7,244,346 6,817,520
Employee benefits 1,760,661 1,516,948
Occupancy expense of premises, net 1,482,723 1,463,805
Furniture and equipment expense 1,106,652 961,635
Data processing expense 690,902 634,287
Marketing 417,395 350,026
Supplies 313,597 325,420
Other operating expense 2,644,552 2,838,072
__________ __________
Total noninterest expense 15,660,828 14,907,713
__________ __________
Income before income taxes and minority interest 6,335,077 6,792,912
Income taxes 1,589,339 1,906,849
__________ __________
Income before minority interest 4,745,738 4,886,063
Minority interest 167,508 167,085
__________ __________
Net income $ 4,578,230 4,718,978
========== ==========
Per common share:
Net income--basic $ 0.24 0.25
Net income--diluted 0.24 0.24
Cash dividends 0.095 0.077
<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,
1999 1998
_____________ _______________
</CAPTION>
<S> <C> <C>
Operating Activities:
Net income $ 4,578,230 4,718,978
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for loan losses 1,050,000 1,050,000
Depreciation and amortization 1,197,508 1,106,733
Net realized gains from securities available
for sale (62,936) (119,311)
Investment securities amortization and accretion 687,217 86,721
Net (increase) decrease in loans held for sale 37,220,884 (11,803,976)
Net increase in accrued interest
receivable and other assets (2,631,194) (1,366,362)
Net decrease in accrued expenses, other
liabilities and minority interest (2,101,995) (128,513)
____________ ____________
Net cash provided (used) by operating activities 39,937,714 (6,455,730)
____________ ____________
Investing Activities:
Investment securities available for sale:
Purchases (50,496,605) (65,767,641)
Maturities 34,100,983 62,667,015
Sales 9,799,060 5,142,023
Investment securities held to maturity:
Purchases (872,303) (2,559,836)
Maturities 2,500,289 4,628,489
Net decrease in loans 603,828 3,747,365
Purchases of premises and equipment (2,115,934) (3,738,730)
Proceeds from sale of premises and equipment --- ---
____________ ____________
Net cash provided (used) by investing activities (6,480,682) 4,118,685
____________ ____________
Financing Activities:
Net increase (decrease) in noninterest-bearing, interest-
bearing demand and savings deposits (5,839,774) 33,295,834
Net decrease in time deposits (9,473,495) (17,261,115)
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase (47,573,080) 11,469,316
Net increase in other short-term borrowings 15,600,000 2,300,000
Proceeds of long-term borrowings 15,000 8,010,000
Repayment of long-term borrowings --- (10,000)
Dividends on common stock (1,780,224) (1,486,409)
Proceeds from issuance of common stock under
the employee stock purchase plan 243,573 294,210
Proceeds from issuance of common stock under
the long-term stock compensation plan --- 1,094,155
Payment for shares reacquired under common stock
repurchase plan (1,011,562) (3,407,939)
____________ ____________
Net cash provided (used) by financing activities (49,819,562) 34,298,052
____________ ____________
Net increase (decrease) in cash and cash equivalents (16,362,530) 31,961,007
Cash and cash equivalents at the beginning of the year 84,627,337 88,165,130
____________ ____________
Cash and cash equivalents at the end of the period $ 68,264,807 120,126,137
============ ============
</TABLE>
<TABLE>
<CAPTION>
Supplemental Cash Flow Information
(Unaudited)
</CAPTION>
<S> <C> <C>
Interest paid during the period $ 15,366,685 14,278,996
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 Changes in Common Stockholders' Equity
(Unaudited)
For the three months ended March 31,
1999 1998
_____________ _______________
</CAPTION>
<S> <C> <C>
Common Stock
Beginning of year balance $ 46,880,953 43,335,120
Issuance of shares of common stock
under the long-term stock compensation plan --- 251,470
Issuance of common stock
under the employee stock purchase plan 33,647 34,975
Shares reacquired under the common
stock repurchase plan (162,500) (407,500)
____________ ___________
End of period balance 46,752,100 43,214,065
____________ ___________
Capital Surplus
Beginning of year balance --- ---
Issuance of shares of common stock
under the long-term stock compensation plan --- 842,685
Issuance of shares of common stock
under the employee stock purchase plan 209,926 259,235
Shares reacquired under the common
stock repurchase plan (209,926) (1,101,920)
____________ ___________
End of period balance --- ---
____________ ___________
Retained Earnings
Beginning of year balance 85,010,569 82,824,333
Net income 4,578,230 4,718,978
Dividends on common stock (1,780,224) (1,486,409)
Shares reacquired under the common
stock repurchase plan (639,136) (1,898,519)
____________ ___________
End of period balance 87,169,439 84,158,383
____________ ___________
Accumulated Other Comprehensive Income
Beginning of year balance 3,318,797 3,219,846
Change in unrealized holding gains (losses)
on securities, net (1,486,482) (187,160)
____________ ___________
End of period balance 1,832,315 3,032,686
____________ ___________
Total Stockholders' Equity $ 135,753,854 130,405,134
============ ===========
<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,
1999 1998
_________ ________
</CAPTION>
<S> <C> <C>
Net Income $ 4,578,230 4,718,978
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities
available for sale:
Unrealized holding gains (losses) arising
during the period (net of deferred tax
of $879,571 and $67,554, respectively) (1,447,336) (112,591)
Less: reclassification adjustment for net
realized gains included in net income (net
of tax expenses of $23,790 and $44,742,
respectively) (39,146) (74,569)
__________ __________
Other comprehensive income (loss), net of tax (1,486,482) (187,160)
__________ __________
Comprehensive income $ 3,091,748 4,531,818
========== ==========
<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,
1998.
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. 134, "Accounting for Mortgage-Backed Securities Retained
after the Securitization of Mortgage Loans Held for Sale by a
Mortgage Banking Enterprise," was issued in October 1998, and was
adopted by the Company effective January 1, 1999. This statement
requires that after the securitization of mortgage loans held for
sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interests
based on its ability and intent to sell or hold those investments.
The adoption of SFAS No. 134 did not have a material effect on the
Company.
5. Income Taxes
Federal income tax expense for the three months ended March 31,
1999, and 1998, was computed using the consolidated effective
federal income tax rates.
For the first three months of 1999 and 1998, 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 appropriate per-share data
has been restated to reflect the 2-for-1 stock split and the ten
percent common stock dividend.
In January 1999, as part of the Company's on-going stock repurchase
plan, the Board of Directors approved the repurchase of up to $4
million of the Company's common stock during 1999. Through March
31, 1999, 65,000 shares had been repurchased at a cost of
$1,011,562.
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 13,459 shares of common stock under this plan during
the first three months of 1999. This transaction added $243,573 to
the equity of the Company.
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,
1999, and 1998, was 18,740,024 and 19,132,153, 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 and the 1987 Nonqualified Stock Option Plan, outstanding for
the three months ended March 31, 1999, and 1998, was 19,052,565 and
19,529,820, respectively.
<PAGE>
Part 1 -- Item 1
Page 3 of 3
8. Segment Information
The Company has one reportable operating segment: banking. The
banking segment generates revenues through personal, business,
agricultural and commercial lending, management of the investment
securities portfolio, providing deposit account services and
providing trust services. The Company evaluates the banking
segment's performance on the basis of profit.
Included in "all other" in the table below are mortgage banking,
investment brokerage, insurance sales and real estate brokerage.
All operations are concentrated in the state of Iowa.
The following table presents a summary of the Company's operating
segments for the three months ended March 31, 1999, and 1998 (in
thousands):
<TABLE>
<CAPTION>
All Parent Intersegment Reported
Banking Other Company Eliminations Balances
_______________________________________________________________
</CAPTION>
<S> <C> <C> <C> <C> <C>
1999
____________________________
Net interest income $ 14,926 474 (149) - 15,251
Noninterest income from
nonaffiliates 4,605 3,167 23 - 7,795
Noninterest income from
Affiliates 57 - 4,356 (4,413) -
Income before income taxes
and minority interest 6,103 698 3,889 (4,355) 6,335
1998
____________________________
Net interest income $ 15,270 157 (163) - 15,264
Noninterest income from
nonaffiliates 4,018 3,430 39 - 7,487
Noninterest income from
Affiliates 70 - 4,218 (4,288) -
Income before income taxes
and minority interest 6,201 1,008 3,801 (4,217) 6,793
</TABLE>
<PAGE>
Part 1 -- Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Introduction
The following presentation describes Brenton Banks, Inc. and
Subsidiaries ("Brenton" or the "Company") results of operations for
the three-month periods ended March 31, 1999, and 1998, capital
resources, market risk management, asset/liability management,
liquidity management, Year 2000 efforts, the impact of recently
issued accounting standards and a look towards the future. This
discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and the notes thereto which are
included elsewhere in this report.
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 and
other financial service providers, 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.
Results of Operations
The three months ended March 31, 1999, compared to the three months
ended March 31, 1998.
Net Income
For the three months ended March 31, 1999, Brenton recorded
net income of $4,578,230, which was a slight decline from record
net income of $4,718,978 in the first three months of 1998. The
cost of growth initiatives (see Looking Ahead on page 10) along
with normal expense growth and continued compression of net
interest margin contributed to the reduction. Diluted net income
per common share held steady at $.24 per share for the first
quarter of both 1999 and 1998.
<PAGE>
Part 1 -- Item 2
Page 2 of 10
The Company's annualized return on average equity (ROE) was
13.65 percent for the first three months of 1999, compared to 14.42
percent for the same period last year. The annualized return on
average assets (ROA) was 1.01 percent, compared to 1.14 percent for
the first three months of 1998.
Net Interest Income
Net interest income remained virtually flat at $15,250,928,
compared to $15,263,945 for the first three months of 1998 due to
last year's declining interest rates and continued compression of
the net interest margin. Net interest margin declined 39 basis
points from 4.09 percent for the first three months of 1998 to 3.70
percent for the current quarter. Average earning assets increased
11.2 percent, while average interest-bearing liabilities increased
11.4 percent from the first three months of 1998 to the first three
months of 1999.
Loan Quality
At March 31, 1999, total loans had grown 4.4 percent to
$1,032.2 million from $989.0 million a year earlier. A $30.9
million (20.1 percent) increase in average indirect consumer loans,
a $14.1 million (6.3 percent) increase in average direct consumer
loans and a $16.5 million (4.0 percent) increase in average
commercial/business/agricultural loans led the growth. Average
residential real estate loans declined $45.0 million, due to
continued refinancing activity. Originated residential real estate
loans are generally sold in the secondary market to reduce the risk
of holding long-term, fixed-rate loans in the portfolio. Excluding
the decline in average residential real estate loans, average total
loans grew 8.5 percent compared to the prior year.
Loan quality remained good with nonperforming loans holding
steady at $10,389,000, or 1.01 percent of total loans, at March 31,
1999, compared to $10,380,000, or 1.05 percent, at March 31, 1998.
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 $14.5 million, represented 139.47 percent of
nonperforming loans and 1.40 percent of total loans at March 31,
1999. At March 31, 1998, the same ratios were 128.61 percent and
1.35 percent, respectively.
<PAGE>
Part 1 -- Item 2
Page 3 of 10
The provision for loan losses totaled $1,050,000 for the three
months ended March 31, 1999, and 1998. Annualized year-to-date net
charge-offs were .29 percent of average loans for the first three
months of 1999, compared with .17 percent for the same period last
year and .28 percent for all of 1998.
The Company has a formal structure for reviewing and approving
loans. Loan quality control and risk management are carefully
balanced with goals for loan growth. Management believes the
allowance for loan losses at March 31, 1999, was sufficient to
absorb potential loan losses within the portfolio.
Noninterest Income
Noninterest income for the three months ended March 31, 1999,
was $7,732,041 (excluding securities gains and losses), a 5.0
percent increase from $7,367,369 one year ago. All categories of
noninterest income increased except for investment brokerage
commissions and insurance commissions and fees.
Compared to the same period a year ago, service charges on
deposits were up $270,581, or 14.7 percent. This growth was the
result of increased account analysis charges on commercial and
business deposit accounts due a higher number of clients and
revised fee schedules for deposit products.
Mortgage banking revenues rose 16.1 percent to total
$1,638,097 for the first three months of 1999. The increase in
mortgage banking revenues was the result of higher mortgage loan
origination volume fueled by the continuing low interest rate
environment. Residential real estate loan closings for the first
quarter of 1999 totaled $117 million, compared to $95 million for
the first quarter of 1998. A slight uptick in mortgage interest
rates caused a higher loss on the sale of loans and mortgage-backed
securities and slowed the overall growth rate compared to that in
the past year.
Fiduciary revenues climbed $223,670 to $1,065,918 due to
increased assets from existing trust accounts.
Other service charges and fees increased $95,750, or 8.2
percent, to $1,261,230. Improvements in merchant credit card fees,
ATM/debit card fees, commercial letter of credit fees and
international fees exceeded a decline in commercial line of credit
fees.
Other operating income increased $35,695 from one year ago to
$349,212 primarily because of higher revenue from bank-owned life
insurance policies.
<PAGE>
Part 1 -- Item 2
Page 4 of 10
Investment brokerage commissions decreased by $414,913, or
28.8 percent, primarily due to having fewer brokers on staff.
Insurance commissions and fees declined $73,150, or 20.5
percent, to $284,513 for the first three months of 1999 compared to
the same quarter of 1998 due to a 33.0 percent decline in credit-
related insurance commissions and a slight reduction in other
insurance commissions.
Securities transactions produced gains of $62,936 compared to
gains of $119,311 for the same period in 1998.
Noninterest Expense
Noninterest expense totaled $15,660,828 at March 31, 1999, a
5.1 percent increase from the first three months of 1998.
Compensation expense, the largest component of noninterest
expense, increased 6.3 percent over the prior year as a result of
normal annual salary adjustments and an increase in the number of
employees. The number of full-time equivalent employees increased
by 5.8 percent over March 31, 1998, to 745.9.
Benefits expense increased $243,713 as a result of the growing
number of employees, higher medical insurance premiums and a gift
of Company stock to all employees who were not covered by the
Company's stock option plan and were employed by the Company for
more than six months in 1998. This gift was a "thank you" for
their efforts in contributing to record 1998 earnings.
Furniture and equipment expense increased $145,017, or 15.1
percent, to $1,106,652 due to depreciation on technology upgrades
and increased software maintenance expense.
Data processing expense increased $56,615, or 8.9 percent, due
to increased costs in 1999 associated with contracted core
processing.
Marketing expense rose $67,369 to $417,395 in the first three
months of 1999 because of expanded marketing efforts for various
lines of business and costs related to revising the Company's
deposit products.
Other operating expense decreased by 6.8 percent to
$2,644,552, as reductions in consulting fees, directors' fees and a
recovery on the disposition of other real estate owned exceeded a
postage rate increase.
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.
<PAGE>
Part 1 -- Item 2
Page 5 of 10
The Company's net noninterest margin, which measures operating
efficiency, was 1.68 percent, compared to 1.76 percent one year
ago. Another ratio that the Company utilizes to measure
productivity is the efficiency ratio. This ratio is computed by
dividing 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, 1999, the
Company's efficiency ratio was 65.67 percent compared to 63.17
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 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 25.1 percent for the first three months
of 1999 compared to 28.1 percent for 1998. The rate declined
compared to 1998 due to an increase in tax-exempt income.
Capital Resources
Common stockholders' equity totaled $135,753,854 as of March
31, 1999, a .4 percent increase from December 31, 1998. 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, 1999, was
10.32 percent and the total risk-based capital ratio was 11.41
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 7.18 percent at March 31, 1999, exceeding the
regulatory minimum requirement for well-capitalized institutions of
5.0 percent.
As part of the Company's ongoing stock repurchase plan, 65,000
shares have been repurchased during the first quarter of 1999 at a
cost of $1,011,562. The Board of Directors has approved the
repurchase of $4 million of the Company's common stock during 1999.
Since the inception of the plan in 1994, the Company has
repurchased 3,105,327 shares (adjusted for the 2-for-1 stock split
and 10 percent common stock dividends) at a total cost of
$34,955,940.
<PAGE>
Part 1 -- Item 2
Page 6 of 10
In May 1998, the Board of Directors declared a 10 percent
common stock dividend for holders of record as of June 1, 1998,
payable June 15, 1998. As a result of this action, each
shareholder received one additional share of common stock for every
10 shares they owned. Fractional shares were paid in cash. All
appropriate per-share data has been restated to reflect the 10
percent common stock dividend.
The Company paid a dividend of $.095 per common share in the
first quarter of 1999, which represents an increase of 23.4 percent
over $.077 per share for the first quarter of 1998. Dividends
totaled $1,780,224 for the three months ended March 31, 1999, and
the dividend payout ratio was 39.6 percent of diluted earnings per
share. The Board of Directors declared a second quarter dividend
of $.095 per share which will be paid on April 27, 1999, to
shareholders of record as of April 15, 1999.
The debt-to-equity ratio of Brenton Banks, Inc. (the "Parent
Company") was 6.7 percent at March 31, 1999. This percentage is
unchanged from December 31, 1998. In addition, the Parent Company
has a $5 million line of credit with a regional bank that was
unused at the end of March 1999. Long-term borrowings of the
Parent Company at March 31, 1999, consisted entirely of capital
notes totaling $9,061,000.
Brenton Banks, Inc. common stock closed on March 31, 1999, at
$13.00 per share, compared to $19.32 a year earlier. The closing
price at March 31, 1999, was 179.1 percent of the book value per
share of $7.26. This closing stock price represented a price-to-
trailing-12-months-diluted-earnings multiple of 12.4 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.
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 1999 changed significantly when compared to
1998.
<PAGE>
Part 1 -- Item 2
Page 7 of 10
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 that net
interest income and net interest margin fluctuate in a narrow range
during periods of changing interest rates. The Company currently
believes that net interest income would fall by less than five
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 the one-week LIBOR rate, the better the
prospects for net interest income improvement. Recently, the yield
curve has started to exhibit a more normal upward sloping
relationship, although it is not yet back to historical norms.
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 securitizes residential real estate loans. The Company
also continues to focus on reducing interest rate risk by
emphasizing growth in variable-rate consumer and commercial loans.
Other actions include the use of fixed-rate Federal Home Loan Bank
(FHLB) 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 8 of 10
Liquidity
The Company actively monitors and manages its liquidity
position with the objective of maintaining sufficient cash flows to
fund operations, meet client 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 to adjust the Company's interest rate
risk position. Readily marketable assets, as defined above,
comprised 35.4 percent of the Company's total assets at March 31,
1999.
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, 1999, the
Company had advances of $135,150,000 from the FHLB of Des Moines,
of which $80,550,000 were used as a means of providing both long-
and short-term, fixed-rate funding for certain fixed-rate assets
and managing interest rate risk. The remaining $54,600,000
represents an advance on a variable-rate, line of credit used to
fund mortgage loans originated for sale.
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,
1999.
On December 31, 1998, Brenton entered into an agreement to
purchase a parcel of land for $2.1 million. The land will be
utilized for the construction of an operations and sales support
facility. The building, which is in the planning stage, will
replace currently leased space and will also allow for additional
growth.
Year 2000
The "Year 2000" issue continues to be 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
considered has been the readiness of vendors and other third
parties with which the Company does business, and an assessment of
significant clients is underway.
<PAGE>
Part 1 -- Item 2
Page 9 of 10
The Company has taken this issue so seriously because it
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 Company has had a Year 2000 Committee and a formal plan in
place since August 1997 and has been executing on that plan. The
Company completed substantially all Year 2000 work associated with
its critical core application systems in 1998 and testing has now
been successfully completed. Remediation of other critical software
products will take place in the first half 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 June 30, 1999. 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 formal plan and monitor the progress of Year 2000
efforts. Management 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 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. The incremental
direct costs associated with this project were approximately
$350,000 in 1998. It is estimated these costs will approach
$500,000 in 1999. There are additional benefits that result from
this project, because in addition to becoming Year 2000 compliant,
systems are being enhanced.
The Company will incur an additional opportunity cost in the
fourth quarter of 1999 when additional cash reserves are maintained
to meet possible client requests for extra cash. The amount of
additional cash reserves has not been determined. Additional cash
reserves will result in lower interest income due to the need to
convert an interest-earning asset to noninterest-earning cash. The
best estimate at this time is that fourth quarter 1999 interest
income will be reduced by $250,000 to $350,000 because of additional
cash reserves.
<PAGE>
Part 1 -- Item 2
Page 10 of 10
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 from what is
anticipated. Those uncertainties include incomplete inventory and
assessment results, higher than anticipated costs to update
software and hardware, and the inability of vendors, significant
customers and other third parties to effectively address the Year
2000 issue.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging
Activities", which will be effective for the Company for the year
beginning January 1, 2000. 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. Management is evaluating the impact the adoption of
SFAS No. 133 will have on the Company's financial statements.
The Company expects to adopt SFAS No. 133 when required.
Looking Ahead
In late 1998, the Company began a new growth initiative called
"Defining Our Destiny." The objective is to grow profitable
clients at a rate significantly above Iowa's population and
economic growth rates. The initiative is designed to further
evolve the Company's growing sales culture by substantially
increasing the sales staff over the next three years, by creating
opportunities for additional sales from the existing sales staff
and by strengthening partnerships with the sales support staff.
Defining Our Destiny relies on the partnership between Brenton
associates to deliver the entire Company to meet clients'
financial needs. The Company's substantial investment and
commitment to this initiative demonstrate Brenton's resolve to
remain Iowa's Bank and to continue building on the successes of
the past several years.
Part 1 -- Item 3. Quantitative and Qualitative Disclosures About
Market Risk.
The information appearing on page 6 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, 1999.
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 5, 1999 /s/ Robert L. DeMeulenaere
- -----------------------------------------------------------------
Dated Robert L. DeMeulenaere
President and Chief Executive
Officer
May 5, 1999 /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,
1999 1998
____ ____
</CAPTION>
<S> <C> <C>
Basic EPS Computation
Numerator:
Net income $ 4,578,230 4,718,978
========== ==========
Denominator:
Average common shares
outstanding 18,740,024 19,132,153
========== ==========
Basic EPS $ 0.24 $ 0.25
========== ==========
Diluted EPS Computation
Numerator:
Net income $ 4,578,230 4,718,978
========== ==========
Denominator:
Average common shares
outstanding 18,740,024 19,132,153
Average stock options 312,541 397,667
__________ __________
19,052,565 19,529,820
========== ==========
Diluted EPS $ 0.24 $ 0.24
========== ==========
<FN>
Note: 1998 amounts are restated for the 10 percent
Common stock dividend effective in June 1998.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 66,110,480
<INT-BEARING-DEPOSITS> 2,154,327
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 608,691,627
<INVESTMENTS-CARRYING> 41,373,529
<INVESTMENTS-MARKET> 42,285,000
<LOANS> 1,032,165,249
<ALLOWANCE> 14,489,385
<TOTAL-ASSETS> 1,890,670,889
<DEPOSITS> 1,481,361,862
<SHORT-TERM> 213,924,220
<LIABILITIES-OTHER> 21,069,953
<LONG-TERM> 38,561,000
0
0
<COMMON> 46,752,100
<OTHER-SE> 89,001,754
<TOTAL-LIABILITIES-AND-EQUITY> 1,890,670,889
<INTEREST-LOAN> 22,051,152
<INTEREST-INVEST> 8,853,430
<INTEREST-OTHER> 423,873
<INTEREST-TOTAL> 31,328,455
<INTEREST-DEPOSIT> 12,697,515
<INTEREST-EXPENSE> 16,077,527
<INTEREST-INCOME-NET> 15,250,928
<LOAN-LOSSES> 1,050,000
<SECURITIES-GAINS> 62,936
<EXPENSE-OTHER> 15,828,336
<INCOME-PRETAX> 6,335,077
<INCOME-PRE-EXTRAORDINARY> 6,335,077
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,578,230
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
<YIELD-ACTUAL> 3.46
<LOANS-NON> 8,424,000
<LOANS-PAST> 1,826,000
<LOANS-TROUBLED> 139,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14,172,264
<CHARGE-OFFS> 1,346,843
<RECOVERIES> 613,964
<ALLOWANCE-CLOSE> 14,489,385
<ALLOWANCE-DOMESTIC> 14,489,385
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
