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 June 30, 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, August
2, 1999.
20,471,518 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)
June 30, December 31,
1999 1998
_________ ____________
</CAPTION>
<S> <C> <C>
Assets:
Cash and due from banks $ 75,080,865 76,460,049
Interest-bearing deposits with banks 2,097,205 2,167,288
Federal funds sold and securities purchased
under agreements to resell --- 6,000,000
Trading account securities 23,000 ---
Investment securities:
Available for sale 582,290,103 605,183,788
Held to maturity (approximate market value of
$34,867,000 and $44,011,000 at June 30, 1999,
and December 31, 1998, respectively) 34,385,857 43,027,501
_____________ _____________
Investment securities 616,675,960 648,211,289
_____________ _____________
Loans held for sale 56,715,648 98,147,391
Loans 1,103,313,424 1,033,554,556
Allowance for loan losses (14,298,867) (14,172,264)
_____________ _____________
Loans, net 1,089,014,557 1,019,382,292
_____________ _____________
Premises and equipment 36,746,209 32,523,113
Accrued interest receivable 15,322,729 16,458,066
Other assets 48,067,300 40,207,277
_____________ _____________
Total assets $1,939,743,473 1,939,556,765
============== =============
Liabilities and Stockholders' Equity:
Deposits:
Noninterest-bearing $ 201,845,814 190,625,140
Interest-bearing:
Demand 141,826,104 131,602,358
Savings 598,068,369 603,367,340
Time 531,129,090 571,080,293
_____________ _____________
Total deposits 1,472,869,377 1,496,675,131
_____________ _____________
Federal funds purchased and securities sold
under agreements to repurchase 166,025,413 155,847,300
Other short-term borrowings 110,270,000 87,050,000
Accrued expenses and other liabilities 15,259,746 18,315,348
Long-term borrowings 38,283,000 41,546,000
_____________ _____________
Total liabilities 1,802,707,536 1,799,433,779
_____________ _____________
Minority interest in consolidated subsidiaries 4,684,196 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;
20,481,518 and 18,752,381 shares issued and outstanding
at June 30, 1999 and December 31, 1998, respectively 51,203,795 46,880,953
Capital surplus --- ---
Retained earnings 83,742,099 85,010,569
Accumulated other comprehensive income (loss) --
unrealized gains (losses) on securities available for
sale (2,594,153) 3,318,797
_____________ _____________
Total common stockholders' equity 132,351,741 135,210,319
_____________ _____________
Total liabilities and stockholders' equity $1,939,743,473 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)
Six Months Ended Three Months Ended
June 30, June 30,
1999 1998 1999 1998
____ ____ ____ ____
</CAPTION>
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $44,636,242 44,163,781 22,585,090 22,293,115
Interest and dividends on investments:
Available for sale -- taxable 12,902,939 11,690,595 6,371,722 5,826,002
Available for sale -- tax-exempt 3,538,827 2,645,446 1,750,353 1,363,429
Held to maturity -- taxable 60,739 199,943 22,804 55,412
Held to maturity -- tax-exempt 937,815 1,367,237 442,011 666,209
__________ __________ __________ __________
Total interest and dividends on investments 17,440,320 15,903,221 8,586,890 7,911,052
__________ __________ __________ __________
Interest on federal funds sold and securities
purchased under agreements to resell 61,203 828,828 24,610 437,624
Other interest income 559,053 117,015 228,832 50,800
__________ __________ __________ __________
Total interest income 62,696,818 61,012,845 31,425,422 30,692,591
__________ __________
Interest Expense
Interest on deposits 25,372,518 24,776,555 12,675,003 12,493,375
Interest on federal funds purchased and
securities sold under agreements
to repurchase 2,740,784 2,271,047 1,486,934 1,208,980
Interest on other short-term borrowings 2,811,434 1,989,554 1,380,395 978,752
Interest on long-term borrowings 1,189,711 1,447,130 551,647 746,870
__________ __________ __________ __________
Total interest expense 32,114,447 30,484,286 16,093,979 15,427,977
__________ __________ __________ __________
Net interest income 30,582,371 30,528,559 15,331,443 15,264,614
Provision for loan losses 2,100,000 2,100,000 1,050,000 1,050,000
__________ __________ __________ __________
Net interest income after provision for
loan losses 28,482,371 28,428,559 14,281,443 14,214,614
__________ __________ __________ __________
Noninterest Income
Service charges on deposit accounts 4,454,296 3,692,655 2,346,041 1,854,981
Mortgage banking income 2,989,405 3,458,706 1,351,308 2,047,648
Investment brokerage commissions 2,208,159 2,822,852 1,183,343 1,383,123
Fiduciary income 1,938,384 1,658,248 872,466 816,000
Insurance commissions and fees 720,734 768,801 436,221 411,138
Other service charges, collection and
exchange charges, commissions and fees 2,461,388 2,318,496 1,200,158 1,153,016
Net realized gains from securities
available for sale 206,919 244,576 143,983 125,265
Other operating income 1,062,291 628,498 713,079 314,981
__________ __________ __________ __________
Total noninterest income 16,041,576 15,592,832 8,246,599 8,106,152
__________ __________ __________ __________
Noninterest Expense
Compensation 15,130,432 13,979,392 7,886,086 7,161,872
Employee benefits 3,076,176 2,669,280 1,315,515 1,152,332
Occupancy expense of premises, net 2,942,388 2,940,789 1,459,665 1,476,984
Furniture and equipment expense 2,267,131 2,040,497 1,160,479 1,078,862
Data processing expense 1,383,293 1,286,203 692,391 651,916
Marketing 935,789 737,172 518,394 387,146
Supplies 747,029 613,003 433,432 287,583
Other operating expense 5,890,646 5,795,276 3,246,094 2,957,204
__________ __________ __________ __________
Total noninterest expense 32,372,884 30,061,612 16,712,056 15,153,899
__________ __________ __________ __________
Income before income taxes and minority interest 12,151,063 13,959,779 5,815,986 7,166,867
Income taxes 3,019,254 3,900,410 1,429,915 1,993,561
__________ __________ __________ __________
Income before minority interest 9,131,809 10,059,369 4,386,071 5,173,306
Minority interest 324,341 344,829 156,833 177,744
__________ __________ __________ __________
Net income $ 8,807,468 9,714,540 4,229,238 4,995,562
========== ========== ========== ==========
Per common share:
Net income--basic $ 0.43 0.46 0.21 0.24
Net income--diluted 0.42 0.45 0.20 0.23
Cash dividends 0.172 0.149 0.086 0.079
<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 six months ended June 30,
1999 1998
_____________ _______________
</CAPTION>
<S> <C> <C>
Operating Activities:
Net income $ 8,807,468 9,714,540
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for loan losses 2,100,000 2,100,000
Depreciation and amortization 2,405,948 2,295,890
Net realized gains from securities available
for sale (206,919) (244,576)
Investment securities amortization and accretion 1,356,257 232,573
Net (increase) decrease in loans held for sale 41,431,743 (9,988,699)
Net increase in accrued interest
receivable and other assets (3,153,727) (2,268,848)
Net decrease in accrued expenses, other
liabilities and minority interest (3,057,206) (1,998,618)
____________ ____________
Net cash provided (used) by operating activities 49,683,564 (157,738)
____________ ____________
Investing Activities:
Investment securities available for sale:
Purchases (85,766,880) (178,348,015)
Maturities 68,649,138 154,499,821
Sales 29,037,548 18,674,948
Investment securities held to maturity:
Purchases (897,910) (3,209,835)
Maturities 9,482,564 16,789,103
Net increase in loans (71,784,865) (13,148,273)
Purchase of other assets for investment --- (5,000,000)
Purchases of premises and equipment (6,428,689) (5,256,803)
Proceeds from sale of premises and equipment --- ---
____________ ____________
Net cash used by investing activities (57,709,094) (14,999,054)
____________ ____________
Financing Activities:
Net increase in noninterest-bearing, interest-
bearing demand and savings deposits 16,145,449 30,078,287
Net decrease in time deposits (39,951,203) (18,398,381)
Net increase in federal funds purchased and
securities sold under agreements to repurchase 10,178,113 14,861,860
Net increase (decrease) in other short-term borrowings 14,720,000 (20,700,000)
Proceeds of long-term borrowings 7,272,000 14,324,000
Repayment of long-term borrowings (2,035,000) (1,303,000)
Dividends on common stock (3,554,525) (3,127,307)
Proceeds from issuance of common stock under
the employee stock purchase plan 243,573 463,289
Proceeds from issuance of common stock under
the stock option plan 4,296 ---
Proceeds from issuance of common stock under
the long-term stock compensation plan --- 970,220
Payment for shares reacquired under common stock
repurchase plan (2,432,437) (4,568,126)
Payment for fractional shares resulting from
common stock dividend (14,003) (13,961)
____________ ____________
Net cash provided by financing activities 576,263 12,586,881
____________ ____________
Net decrease in cash and cash equivalents (7,449,267) (2,569,911)
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 $ 77,178,070 85,595,219
============ ============
</TABLE>
<TABLE>
<CAPTION>
Supplemental Cash Flow Information
(Unaudited)
</CAPTION>
<S> <C> <C>
Interest paid during the period $ 32,263,482 30,165,166
Income taxes paid during the period 1,813,296 4,217,500
=========== ==========
<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 six months ended June 30,
1999 1998
_____________ _______________
</CAPTION>
<S> <C> <C>
Common Stock
Beginning of year balance $ 46,880,953 43,335,120
Ten percent common stock dividend 4,655,915 4,315,397
Issuance of shares of common stock
under the stock option plan 33,280 ---
Issuance of shares of common stock
under the long-term stock compensation plan --- 268,960
Issuance of common stock
under the employee stock purchase plan 33,647 58,150
Shares reacquired under the common
stock repurchase plan (400,000) (546,250)
____________ ___________
End of period balance 51,203,795 47,431,377
____________ ___________
Capital Surplus
Beginning of year balance --- ---
Ten percent common stock dividend --- (78,529)
Issuance of shares of common stock
under the stock option plan (28,984) ---
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 209,926 405,139
Shares reacquired under the common
stock repurchase plan (180,942) (1,169,295)
____________ ___________
End of period balance --- ---
____________ ___________
Retained Earnings
Beginning of year balance 85,010,569 82,824,333
Net income 8,807,468 9,714,540
Dividends on common stock (3,554,525) (3,127,307)
Ten percent common stock dividend (4,655,915) (4,236,868)
Fractional shares resulting from common
stock dividend (14,003) (13,961)
Issuance of shares of common stock
under the long-term stock compensation plan --- (141,425)
Shares reacquired under the common
stock repurchase plan (1,851,495) (2,852,581)
____________ ___________
End of period balance 83,742,099 82,166,731
____________ ___________
Accumulated Other Comprehensive Income (Loss)
Beginning of year balance 3,318,797 3,219,846
Change in unrealized holding gains (losses)
on securities, net (5,912,950) (635,170)
____________ ___________
End of period balance (2,594,153) 2,584,676
____________ ___________
Total Stockholders' Equity $ 132,351,741 132,182,784
============ ===========
<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 (Loss)
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
1999 1998 1999 1998
____ ____ ____ ____
</CAPTION>
<S> <C> <C> <C> <C>
Net Income $ 8,807,468 9,714,540 4,229,238 4,995,562
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 $2,635,614 and $3,515,185, respectively,
for the three and six months ended June 30,
1999, and $221,832 and $289,386, respectively,
for the three and six months ended June 30,
1998) (5,784,246) (482,310) (4,336,911) (369,719)
Less: reclassification adjustment for net
realized gains included in net income (net
of tax expense of $54,426 and $78,215,
respectively, for the three and six months
ended June 30, 1999, and $46,974 and
$91,716, respectively, for the three and six
months ended June 30, 1998) (128,704) (152,860) (89,557) (78,291)
__________ __________ _________ _________
Other comprehensive income (loss), net of tax (5,912,950) (635,170) (4,426,468) (448,010)
__________ __________ _________ _________
Comprehensive income (loss) $ 2,894,518 9,079,370 (197,230) 4,547,552
========== ========= ========= =========
<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 that 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 six months ended June 30, 1999,
and 1998, was computed using the consolidated effective federal
income tax rates.
For the first six 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 20, 1999, the Board of Directors declared a 10 percent
common stock dividend for stockholders of record on June 1, 1999.
The stock dividend certificates were distributed on June 18, 1999.
Fractional shares resulting from this stock dividend were paid in
cash. All appropriate per-share data has been restated to reflect
the ten percent common stock dividend.
During the first six months of 1999, options on 14,643 shares of
common stock (restated for the ten percent common stock dividend)
were exercised under the Company's 1996 Stock Option Plan. The
exercise price on these options was the fair market value of the
Company's common stock at the date of grant. These transactions
added $4,296 to the equity of the Company.
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 June 30, 1999, 173,400 common shares (restated for the ten
percent common stock dividend) had been repurchased at a cost of
$2,432,437.
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 14,804 shares of common stock (restated for the ten
percent common stock dividend) under this plan during the first
six 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 and six months ended June
30, 1999, was 20,516,133 and 20,564,809, respectively, and
20,894,249 and 20,969,829, respectively, for the three and six
months ended June 30, 1998.
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 six
months ended June 30, 1999, was 20,840,904 and 20,889,580,
respectively, and 21,346,662 and 21,422,242, respectively, for the
three and six months ended June 30, 1998.
<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,
commercial and agricultural lending, providing deposit account
services and trust services, and management of the investment
securities portfolio. 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 six months ended June 30, 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 $ 30,019 838 (275) - 30,582
Noninterest income from
nonaffiliates 9,483 6,513 46 - 16,042
Noninterest income from
affiliates 96 --- 8,712 (8,808) ---
Income before income taxes
and minority interest 11,731 1,280 7,850 (8,710) 12,151
1998
____________________________
Net interest income $ 30,509 350 (330) - 30,529
Noninterest income from
nonaffiliates 8,003 7,533 57 - 15,593
Noninterest income from
affiliates 150 --- 8,437 (8,587) ---
Income before income taxes
and minority interest 12,544 2,311 7,540 (8,435) 13,960
</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 and six month periods ended June 30, 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 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 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 six months ended June 30, 1999, compared to the six months
ended June 30, 1998.
Net Income
For the six months ended June 30, 1999, Brenton recorded net
income of $8,807,468, which was a decline of 9.3 percent from
record net income of $9,714,540 for the first six months of 1998.
Continued compression of the net interest margin, lower investment
brokerage and mortgage banking income, and normal expense growth
including costs associated with the Company's growth initiatives
(see Looking Ahead on page 12) contributed to the reduction.
Diluted net income per common share was $.42 for the first half of
1999, compared to $.45 per share for the first half of 1998.
<PAGE>
Part 1 -- Item 2
Page 2 of 12
The Company's annualized return on average equity (ROE) was 13.07
percent for the six months ended June 30, 1999, compared to 14.83
percent for the same period last year. The annualized return on
average assets (ROA) was .96 percent, compared to 1.16 percent for
the first six months of 1998.
Net Interest Income
During the first six months of 1999, net interest income grew only
slightly to $30,582,371, compared to $30,528,559 for the same
period a year ago. Favorable volume variances were virtually
offset by unfavorable rate variances as the yield on interest-
earning assets declined more than the rate on interest-bearing
liabilities. Net interest margin declined 35 basis points to 3.70
percent for the first half of 1999 from 4.05 percent for the same
period last year. The compression of net interest margin, caused
by Iowa's highly competitive banking environment and the Federal
Reserve's 1998 rate reductions, limited net interest income
growth. Year-to-date 1999 average interest-earning assets
increased 10.4 percent, while average interest-bearing liabilities
rose 10.5 percent compared to the first half of 1998.
Loan Quality
At June 30, 1999, total loans had grown 9.7 percent to $1,103.3
million from $1,005.4 million a year earlier. Increases of $38.7
million (24.7 percent) in average indirect consumer loans, $18.0
million (8.0 percent) in average direct consumer loans and $20.9
million (5.0 percent) in average commercial/business/agricultural
loans led the growth. Average residential real estate loans
declined $36.7 million, primarily due to refinancings, which the
Company typically sells 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 10.2 percent compared to the prior year.
<PAGE>
Part 1 -- Item 2
Page 3 of 12
With the current weakness in the agricultural economy, the Company
is continually monitoring and evaluating agricultural loans, which
account for less than 12 percent of Brenton's total loan
portfolio. The Company will continue to work closely with its
agricultural clients and will assist them where possible through
this difficult period. Overall loan quality remained good with
nonperforming loans declining to $10,686,000, or .97 percent of
total loans, at June 30, 1999, compared to $11,289,000, or 1.09
percent, at the close of 1998 and $11,165,000, or 1.11 percent, at
June 30, 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 $14.3 million, represented 133.81
percent of nonperforming loans and 1.30 percent of total loans at
June 30, 1999. At June 30, 1998, the same ratios were 124.68
percent and 1.38 percent, respectively.
The provision for loan losses totaled $2,100,000 for the six
months ended June 30, 1999, and 1998. Annualized year-to-date net
charge-offs for 1999 were .38 percent of average loans, compared
to .18 percent for the first half of 1998 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 June 30, 1999, is sufficient to
absorb probable loan losses within the portfolio.
Noninterest Income
Noninterest income for the six months ended June 30, 1999, was
$15,834,657 (excluding securities gains and losses), a 3.2 percent
increase from $15,348,256 for the first six months of 1998. Growth
in service charges on deposits, trust fees, other service charges
and fees and other income exceeded declines in mortgage banking
income and investment brokerage commissions.
Compared to the same period a year ago, service charges on
deposits climbed $761,641, or 20.6 percent. This growth was the
result of increased account analysis charges on commercial and
business deposit accounts by virtue of a higher number of clients
and revised fee schedules for deposit products.
Fiduciary revenues grew $280,136 to $1,938,384 as a result of
increased assets from existing trust accounts.
Other service charges, collection and exchange charges,
commissions and fees increased $142,892, or 6.2 percent. The
growth was caused by improvements in merchant credit card fees,
ATM/debit card fees, international fees and commercial letter of
credit fees exceeding a decline in real estate sales commissions.
<PAGE>
Part 1 -- Item 2
Page 4 of 12
An increase of $433,793 in other operating income resulted from
higher levels of income on bank-owned life insurance policies and
gains on sale of mortgage loan servicing rights and an other
asset.
Mortgage banking revenues declined 13.6 percent to total
$2,989,405 for the first half of 1999, despite an increase in
volume of loan closings. The decline was due to an uptick in
interest rates, which caused higher losses on the sale of loans
and mortgage-backed securities. Residential real estate loan
closings for the first half of 1999 totaled $248 million, compared
to $228 million for the first half of 1998.
Investment brokerage commissions decreased by $614,693, or 21.8
percent, to $2,208,159 primarily due to having fewer brokers on
staff.
Investment securities gains totaled $206,919 compared to gains of
$244,576 for the same period in 1998.
Noninterest Expense
Year-to-date noninterest expense totaled $32,372,884 through June
30, 1999, a 7.7 percent increase from the first six months of
1998.
Compensation expense, the largest component of noninterest
expense, increased 8.2 percent to $15,130,432 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 5.7 percent over June 30, 1998, to 775.3.
Employee benefits expense increased 15.2 percent, or $406,896,
because of the annual salary increases, growth in the number of
employees, higher medical insurance premiums and an award of
Company stock to employees during the first quarter of 1999.
Furniture and equipment expense increased $226,634 to $2,267,131
for the first half of 1999 due to depreciation on technology
upgrades and higher costs for software maintenance agreements.
Marketing expense rose $198,617 to $935,789 in the first six
months of 1999 on account of expanded marketing efforts for
various lines of business and costs related to revising the
Company's deposit products.
Supplies expense increased to $747,029 from $613,003 in the prior
year. The increase was primarily due to a higher volume of debit
cards issued and higher volumes of client provided checks and
deposit slips as a result of new accounts opened and changes in
deposit products.
<PAGE>
Part 1 -- Item 2
Page 5 of 12
While the Company's growth initiatives have caused and will
continue to cause some components of expense to increase, the
Company continues to carefully 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 (1.74) percent, compared to (1.70) percent one
year earlier. Another ratio 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). For the first six months of 1999,
the Company's efficiency ratio was 67.09 percent, compared with
62.90 percent one year earlier.
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
taxes and minority interest was 24.9 percent for the first six
months of 1999 compared to 27.9 percent for 1998. The lower
effective income tax rate is due to increased tax-exempt income.
Results of Operations
The three months ended June 30, 1999, compared to the three months
ended June 30, 1998.
Net Income
For the three months ended June 30, 1999, net income was
$4,229,238 compared to $4,995,562 for the second quarter of 1998.
Diluted earnings per common share totaled $.20 for the second
quarter of 1999, compared to $.23 for the second quarter of 1998.
Net Interest Income
Net interest income for the quarter totaled $15,331,443, an
increase of .4 percent over the second quarter of the prior year.
Like the year-to-date comparison, competitive factors have
compressed the net interest margin, thus limiting net interest
income growth. Net interest margin for the second quarter of 1999
was 3.70 percent, compared to 4.02 percent for the second quarter
of 1998. The decrease in net interest margin is related to the
yield on interest-earning assets declining more than the reduction
in the rate paid on interest-bearing liabilities.
<PAGE>
Part 1 -- Item 2
Page 6 of 12
Provision for Loan Losses
The provision for loan losses for the second quarters of both 1999
and 1998 totaled $1,050,000. Annualized net charge-offs as a
percent of average loans were .47 percent for the second quarter
of 1999, compared to .19 percent for the same period of 1998.
Loan losses for both years were primarily concentrated in the
consumer loan portfolio.
Noninterest Income
Noninterest income increased $140,447, or 1.7 percent, from the
second quarter of 1998 to the second quarter of 1999.
Service charges on deposit accounts climbed $491,060, or 26.5
percent, from the prior year due to implementation of revised fee
schedules and increased account analysis charges.
Like the six-month comparison, other operating income grew
$398,098 from higher levels of income on bank-owned life insurance
policies and gains on sale of mortgage loan servicing rights and
an other asset.
While volumes of mortgage loans closed remained steady from
quarter to quarter, mortgage banking income declined 34.0 percent
to $1,351,308. The decline was due to an increase in interest
rates, which caused higher losses on the sale of loans and
mortgage-backed securities.
Investment brokerage commissions declined 14.4 percent to
$1,183,343 for the quarter because of having fewer brokers on
staff than in the prior year.
Net gains from securities transactions totaled $143,983 for the
second quarter of 1999, compared to $125,265 for the same period
of 1998, an increase of $18,718.
Noninterest Expense
Noninterest expense increased by 10.3 percent when comparing the
second quarter of 1999 with the second quarter of 1998. The
Company's net noninterest margin was (1.80) percent for the second
quarter of 1999, compared to (1.64) percent for the second quarter
of 1998.
Compensation costs increased 10.1 percent over the second quarter
of 1998. Similar to the six-month period, compensation increased
due to normal annual salary adjustments and an increase in the
number of employees. Employee benefits increased 14.2 percent on
account of the growth in number of employees, annual compensation
adjustments and higher medical insurance premiums.
<PAGE>
Part 1 -- Item 2
Page 7 of 12
Marketing expense increased $131,248 to $518,394 as a result of
expanded marketing efforts for various lines of business and
additional event sponsorships.
Like the year-to-date comparison, supplies expense increased to
$433,432 from $287,583 primarily due to a higher volume of debit
cards issued and higher volumes of client provided checks and
deposit slips as a result of new accounts opened and changes in
deposit products.
Other operating expense for the second quarter of 1999 grew 9.9
percent, primarily due to increases in consulting fees, bank
operational losses and credit agency fees, which increased as a
result of higher consumer loan volumes.
Capital Resources
Common stockholders' equity totaled $132.4 million as of June 30,
1999, a 2.1 percent decrease from December 31, 1998. The
combination of cash dividends, common stock repurchased and a
decline in unrealized gains (losses) on investment securities
exceeded net income for the first six months of 1999. 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 June 30, 1999, was 9.78
percent and the total risk-based capital ratio was 10.80 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 7.17 percent at June 30, 1999, exceeding the regulatory
minimum requirement for well-capitalized institutions of 5.0
percent.
As part of the Company's ongoing stock repurchase plan, 173,400
shares have been repurchased during the first half of 1999 at a
cost of $2,432,437. The Board of Directors has approved the
repurchase of $4 million of Company stock during 1999. Since the
inception of the plan in 1994, the Company has repurchased
3,517,759 shares (adjusted for stock splits/dividends) at a total
cost of $36,376,815.
In May 1999, the Board of Directors again declared a ten 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 as of June 1, 1999.
Fractional shares were paid in cash.
<PAGE>
Part 1 -- Item 2
Page 8 of 12
The Company paid dividends of $.172 per common share in the first
six months of 1999, compared to $.149 per common share for the
same period of 1998, an increase of 15.4 percent. Dividends for
the first six months of 1999 totaled $3,554,525. In July 1999,
the Board of Directors increased the regular quarterly cash
dividend to $.087 per common share, compared to $.086 per common
share for the previous quarter. The dividend payout ratio for the
first half of 1999 was 41.0 percent of diluted earnings per common
share.
The debt-to-equity ratio of Brenton Banks, Inc. (the "Parent
Company") was 5.5 percent at June 30, 1999. This percentage has
decreased by 1.2 percent from the December 31, 1998, ratio of 6.7
percent. Long-term borrowings of the Parent Company at June 30,
1999, consisted entirely of capital notes totaling $7,283,000. In
addition, the Parent Company has a $5 million line of credit with
a regional bank that was unused at the end of June 1999.
Brenton Banks, Inc. common stock closed on June 30, 1999, at
$15.50 per share, compared to $18.58 a year earlier. The closing
price at June 30, 1999, was 239.9 percent of the book value per
share of $6.46. This closing stock price represented a price-to-
trailing-12-months-diluted-earnings multiple of 16.7 times.
Brenton Banks, Inc. continues to pursue acquisition and expansion
opportunities that fit the Company's strategic business and
financial plans. The Company recently announced that it has
entered into an agreement to acquire approximately $60 million of
deposits in Pella and Knoxville from U.S. Bank. This transaction,
which is subject to regulatory approval, is expected to close in
the third quarter. There are currently no other 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 9 of 12
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 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 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 slope, 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 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 10 of 12
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, 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 32.9 percent of the Company's
total assets at June 30, 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 June 30, 1999, the
Company had advances of $141,270,000 from the FHLB of Des Moines,
of which $65,720,000 represents a variable-rate line of credit
used to fund mortgage lending operations. The remaining balance
was 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 combination of high levels of potentially liquid assets, low
dependence on volatile liabilities and additional borrowing
capacity provided sufficient liquidity for the Company at June 30,
1999.
The Company has entered into agreements 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 has been and 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 have been 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 11 of 12
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. The Committee is also developing
contingency plans for unforeseen difficulties related to the Year
2000 issue. 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 regularly 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. These 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
Company has finalized its plan for additional cash reserves. The
additional cash reserves will result in lower interest income due
to the need to convert an interest-earning asset to noninterest-
earning cash. It is estimated that the planned additional cash
reserves will result in reduced interest income of approximately
$100,000 for the fourth quarter of this year.
<PAGE>
Part 1 -- Item 2
Page 12 of 12
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 originally was scheduled to be effective for the year
beginning January 1, 2000. The effective date has recently been
postponed until January 1, 2001. 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
The Company began a new growth initiative called "Defining Our
Destiny" in late 1998. 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 increasing the
sales staff by 125 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.
<PAGE>
Part 1 -- Item 3. Quantitative and Qualitative Disclosures About
Market Risk.
The information appearing on page 8 of Item 2 under the
heading "Market Risk Management" is incorporated herein by
reference.
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 June 30, 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)
August 5, 1999 /s/ Robert L. DeMeulenaere
- -----------------------------------------------------------------
Dated Robert L. DeMeulenaere
President and Chief Executive
Officer
August 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>
Six Months Ended Three Months Ended
June 30, June 30,
1999 1998 1999 1998
____ ____ ____ ____
</CAPTION>
<S> <C> <C> <C> <C>
Basic EPS Computation
Numerator:
Net income $ 8,807,468 9,714,540 4,229,238 4,995,562
========== ========== ========== ==========
Denominator:
Average common shares
outstanding 20,564,809 20,969,829 20,516,133 20,894,249
========== ========== ========== ==========
Basic EPS $0.43 $0.46 $0.21 $0.24
========== ========== ========== ==========
Diluted EPS Computation
Numerator:
Net income $ 8,807,468 9,714,540 4,229,238 4,995,562
========== ========== ========== ==========
Denominator:
Average common shares
outstanding 20,564,809 20,969,829 20,516,133 20,894,249
Average stock options 324,771 452,413 324,771 452,413
__________ __________ __________ __________
20,889,580 21,422,242 20,840,904 21,346,662
========== ========== ========== ==========
Diluted EPS $0.42 $0.45 $0.20 $0.23
========== ========== ========== ==========
<FN>
Note: 1998 amounts have been restated for the 10 percent common stock dividend
effective in June 1999.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 75,080,865
<INT-BEARING-DEPOSITS> 2,097,205
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 23,000
<INVESTMENTS-HELD-FOR-SALE> 582,290,103
<INVESTMENTS-CARRYING> 34,385,857
<INVESTMENTS-MARKET> 34,867,000
<LOANS> 1,103,313,424
<ALLOWANCE> 14,298,867
<TOTAL-ASSETS> 1,939,743,473
<DEPOSITS> 1,472,869,377
<SHORT-TERM> 276,295,413
<LIABILITIES-OTHER> 19,943,942
<LONG-TERM> 38,283,000
0
0
<COMMON> 51,203,795
<OTHER-SE> 81,147,946
<TOTAL-LIABILITIES-AND-EQUITY> 1,939,743,473
<INTEREST-LOAN> 44,636,242
<INTEREST-INVEST> 17,440,320
<INTEREST-OTHER> 620,256
<INTEREST-TOTAL> 62,696,818
<INTEREST-DEPOSIT> 25,372,518
<INTEREST-EXPENSE> 32,114,447
<INTEREST-INCOME-NET> 30,582,371
<LOAN-LOSSES> 2,100,000
<SECURITIES-GAINS> 206,919
<EXPENSE-OTHER> 32,697,225
<INCOME-PRETAX> 12,151,063
<INCOME-PRE-EXTRAORDINARY> 12,151,063
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,807,468
<EPS-BASIC> .43
<EPS-DILUTED> .42
<YIELD-ACTUAL> 3.47
<LOANS-NON> 8,183,000
<LOANS-PAST> 2,077,000
<LOANS-TROUBLED> 426,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14,172,264
<CHARGE-OFFS> 3,158,849
<RECOVERIES> 1,185,452
<ALLOWANCE-CLOSE> 14,298,867
<ALLOWANCE-DOMESTIC> 14,298,867
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
