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, 2000
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, 2000.
20,364,559 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,
2000 1999
_________ ____________
</CAPTION>
<S> <C> <C>
Assets:
Cash and due from banks $ 83,317,827 85,064,053
Interest-bearing deposits with banks 2,824,100 2,361,784
Investment securities:
Available for sale 542,573,034 556,191,355
Held to maturity (approximate market value of $21,421,000 and
$25,351,000 at June 30, 2000, and December 31, 1999, respectively) 21,254,162 25,201,876
Total investment securities 563,827,196 581,393,231
Loans held for sale 23,486,654 26,201,221
Loans 1,215,969,612 1,195,986,791
Allowance for loan losses (15,393,504) (14,413,104)
Loans, net 1,200,576,108 1,181,573,687
Premises and equipment 40,351,433 37,978,240
Accrued interest receivable 14,667,175 15,856,895
Other assets 55,367,947 55,025,590
Total assets $1,984,418,440 1,985,454,701
Liabilities and Stockholders' Equity:
Deposits:
Noninterest-bearing $ 206,439,609 189,333,019
Interest-bearing:
Demand 135,242,894 145,131,184
Savings 635,854,420 640,963,380
Time 590,617,527 554,655,720
Total deposits 1,568,154,450 1,530,083,303
Federal funds purchased and securities sold under agreements
to repurchase 163,401,235 166,806,442
Other short-term borrowings 58,340,000 110,423,584
Accrued expenses and other liabilities 17,964,406 13,896,056
Long-term borrowings 34,888,000 27,704,000
Total liabilities 1,842,748,091 1,848,913,385
Minority interest in consolidated subsidiaries 4,753,957 4,607,865
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;
20,361,001 and 20,354,454 shares issued and outstanding at
June 30, 2000, and December 31, 1999, respectively 50,902,502 50,886,135
Capital surplus 43,394 ---
Retained earnings 92,406,921 86,682,119
Accumulated other comprehensive income (loss) --unrealized
gains (losses) on securities available for sale (6,436,425) (5,634,803)
Total common stockholders' equity 136,916,392 131,933,451
Total liabilities and stockholders' equity $1,984,418,440 1,985,454,701
<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,
2000 1999 2000 1999
____ ____ ____ ____
</CAPTION>
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $ 50,793,931 45,119,310 25,664,464 22,776,986
Interest and dividends on investments:
Available for sale--taxable 12,167,824 12,902,939 6,108,567 6,371,722
Available for sale--tax-exempt 3,649,316 3,538,827 1,809,446 1,750,353
Held to maturity--taxable 34,388 60,739 16,924 22,804
Held to maturity--tax-exempt 589,338 937,815 286,794 442,011
Total interest and dividends on investments 16,440,866 17,440,320 8,221,731 8,586,890
Interest on federal funds sold 176,883 61,203 105,857 24,610
Other interest income 82,944 75,985 46,365 36,936
Total interest income 67,494,624 62,696,818 34,038,417 31,425,422
Interest Expense
Interest on deposits 28,682,494 25,372,518 14,945,108 12,675,003
Interest on federal funds purchased and
securities sold under agreements to
repurchase 3,640,134 2,740,784 1,907,294 1,486,934
Interest on other short-term borrowings 2,280,065 2,811,434 796,772 1,380,395
Interest on long-term borrowings 904,188 1,189,711 477,789 551,647
Total interest expense 35,506,881 32,114,447 18,126,963 16,093,979
Net interest income 31,987,743 30,582,371 15,911,454 15,331,443
Provision for loan losses 2,100,000 2,100,000 1,050,000 1,050,000
Net interest income after provision for
loan losses 29,887,743 28,482,371 14,861,454 14,281,443
Noninterest Income
Service charges on deposit accounts 4,938,980 4,454,296 2,459,488 2,346,041
Investment brokerage commissions 2,437,464 2,208,159 1,176,066 1,183,343
Fiduciary income 2,021,567 1,938,384 1,047,341 872,466
Mortgage banking income 1,573,056 2,989,405 847,503 1,351,308
Insurance commissions and fees 558,169 720,734 290,035 436,221
Other service charges, collection and
exchange charges, commissions and fees 2,497,754 2,461,388 1,264,005 1,200,158
Net realized gains from securities available
for sale 28,204 206,919 --- 143,983
Other operating income 889,337 1,062,291 331,746 713,079
Total noninterest income 14,944,531 16,041,576 7,416,184 8,246,599
Noninterest Expense
Compensation 14,304,273 15,130,432 7,277,478 7,886,086
Employee benefits 2,774,539 3,076,176 1,303,042 1,315,515
Occupancy expense of premises, net 3,333,561 2,942,388 1,601,818 1,459,665
Furniture and equipment expense 2,865,530 2,267,131 1,464,900 1,160,479
Data processing expense 1,511,007 1,383,293 755,635 692,391
Marketing 563,871 935,789 257,964 518,394
Supplies 620,869 747,029 334,969 433,432
Other operating expense 6,091,076 5,890,646 2,877,565 3,246,094
Total noninterest expense 32,064,726 32,372,884 15,873,371 16,712,056
Income before income taxes and minority
interest 12,767,548 12,151,063 6,404,267 5,815,986
Income taxes 3,124,685 3,019,254 1,534,100 1,429,915
Income before minority interest 9,642,863 9,131,809 4,870,167 4,386,071
Minority interest 369,613 324,341 185,281 156,833
Net income $ 9,273,250 8,807,468 4,684,886 4,229,238
Per common share:
Net income-basic $ 0.46 0.43 0.23 0.21
Net income-diluted 0.45 0.42 0.23 0.20
Cash dividends 0.174 0.172 0.087 0.086
<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 Flow
(Unaudited)
For the six months ended June 30,
2000 1999
_____________ _______________
</CAPTION>
<S> <C> <C>
Operating Activities:
Net income $ 9,273,250 8,807,468
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 2,100,000 2,100,000
Depreciation and amortization 3,585,839 2,405,948
Net realized gains from securities available for sale (28,204) (206,919)
Investment securities amortization and accretion 656,132 1,356,257
Net decrease in loans held for sale 2,714,567 41,431,743
Net (increase) decrease in accrued interest receivable
and other assets 904,546 (3,153,727)
Net increase (decrease) in accrued expenses, other
liabilities and minority interest 4,254,321 (3,057,206)
Net cash provided by operating activities 23,460,451 49,683,564
Investing Activities:
Investment securities available for sale:
Purchases (61,038,708) (85,766,880)
Maturities 65,779,802 68,649,138
Sales 6,944,924 29,037,548
Investment securities held to maturity:
Purchases --- (897,910)
Maturities 3,918,675 9,482,564
Net increase in loans (58,578,021) (71,784,865)
Sale of loans 37,475,600 ---
Sale of deposits (3,790,380) ---
Purchases of premises and equipment (5,621,124) (6,428,689)
Proceeds from sales of premises and equipment 104,612 ---
Net cash used by investing activities (14,804,620) (57,709,094)
Financing Activities:
Net increase in noninterest-bearing, interest-bearing
demand and savings deposits 4,234,753 16,145,449
Net increase (decrease) in time deposits 37,618,984 (39,951,203)
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase (3,405,207) 10,178,113
Net increase (decrease) in other short-term borrowings (53,083,584) 14,720,000
Proceeds of long-term borrowings 9,213,000 7,272,000
Repayment of long-term borrowings (1,029,000) (2,035,000)
Dividends on common stock (3,548,448) (3,554,525)
Proceeds from issuance of common stock under
the employee stock purchase plan 28,440 243,573
Proceeds from issuance of common stock under
the stock option plan 31,321 4,296
Payment for shares reacquired under common stock
repurchase plan --- (2,432,437)
Payment for fractional shares resulting from common
stock dividend --- (14,003)
Net cash provided (used) by financing activities (9,939,741) 576,263
Net decrease in cash and cash equivalents (1,283,910) (7,449,267)
Cash and cash equivalents at the beginning of the year 87,425,837 84,627,337
Cash and cash equivalents at the end of the period $ 86,141,927 77,178,070
</TABLE>
<TABLE>
<CAPTION>
Supplemental Cash Flow Information
(Unaudited)
</CAPTION>
<S> <C> <C>
Interest paid during the period $ 32,814,843 32,263,482
Income taxes paid during the period 2,089,450 1,813,296
<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,
2000 1999
_____________ _______________
</CAPTION>
<S> <C> <C>
Common Stock
Beginning of year balance $ 50,886,135 46,880,953
Ten percent common stock dividend --- 4,655,915
Issuance of shares of common stock
under the stock option plan 9,075 33,280
Issuance of shares of common stock
under the employee stock purchase plan 7,292 33,647
Shares reacquired under the common
stock repurchase plan --- (400,000)
End of period balance 50,902,502 51,203,795
Capital Surplus
Beginning of year balance --- ---
Issuance of shares of common stock
under the stock option plan 22,246 (28,984)
Issuance of shares of common stock
under the employee stock purchase plan 21,148 209,926
Shares reacquired under the common
stock repurchase plan --- (180,942)
End of period balance 43,394 ---
Retained Earnings
Beginning of year balance 86,682,119 85,010,569
Net income 9,273,250 8,807,468
Dividends on common stock (3,548,448) (3,554,525)
Ten percent common stock dividend --- (4,655,915)
Fractional shares resulting from common stock dividend --- (14,003)
Shares reacquired under the common stock repurchase plan --- (1,851,495)
End of period balance 92,406,921 83,742,099
Total Stockholders' Equity before Accumulated
Other Comprehensive Income (Loss) 143,352,817 134,945,894
Accumulated Other Comprehensive Income (Loss)
Beginning of year balance (5,634,803) 3,318,797
Change in unrealized holding gains (losses)
on securities, net (801,622) (5,912,950)
End of period balance (6,436,425) (2,594,153)
Total Stockholders' Equity $ 136,916,392 132,351,741
<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,
2000 1999 2000 1999
_________ ________ ____ ____
</CAPTION>
<S> <C> <C> <C> <C>
Net Income $ 9,273,250 8,807,468 4,684,886 4,229,238
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 $(428,068) and $470,397, respectively,
for the three and six months ended June 30,
2000, and $2,635,614 and $3,515,185,
respectively, for the three and six months
ended June 30, 1999) (783,995) (5,784,246) 713,447 (4,336,911)
Less: reclassification adjustment for net
realized gains included in net income (net
of tax expenses of $0 and $10,577,
respectively, for the three and six months
ended June 30, 2000, and $54,426 and
$78,215, respectively, for the three and
six months ended June 30, 1999) (17,627) (128,704) --- (89,557)
__________ __________ _________ _________
Other comprehensive income (loss), net of tax (801,622) (5,912,950) 713,447 (4,426,468)
__________ __________ _________ _________
Comprehensive income (loss) $ 8,471,628 2,894,518 5,398,333 (197,230)
========= ========== ========= =========
<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, 1999.
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.
4. Changes in Accounting Policies
There have been no changes in accounting policy in the six months ended June
30, 2000.
5. Income Taxes
Federal income tax expense for the six months ended June 30, 2000, and 1999,
was computed using the consolidated effective federal income tax rates.
For the first six months of 2000 and 1999, the Company also recognized income
tax expense pertaining to state franchise taxes payable individually by the
subsidiary banks.
6. Common Stock Transactions
On May 20, 1999, the Board of Directors declared a ten- 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.
<PAGE>
Part 1 -- Item 1
Page 2 of 2
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, 2000, were 20,358,288 and 20,357,333, respectively, and
20,516,133 and 20,564,809, respectively, for the three and six months ended
June 30, 1999.
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, 2000, were 20,468,610 and 20,467,655,
respectively, and 20,840,904 and 20,889,580, respectively, for the three and
six months ended June 30, 1999.
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, 2000, and 1999 (in thousands):
<TABLE>
<CAPTION>
All Parent Intersegment Reported
Banking Other Company Eliminations Balances
_______________________________________________________________
</CAPTION>
<S> <C> <C> <C> <C> <C>
2000
____________________________
Net interest income $ 31,598 455 (65) --- 31,988
Noninterest income from
Nonaffiliates 9,975 4,913 56 --- 14,944
Noninterest income from
Affiliates 48 --- 6,060 (6,108) ---
Income before income taxes
and minority interest 13,130 222 5,474 (6,058) 12,768
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
</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, 2000, and 1999, capital resources, market risk
management, asset/liability management, liquidity management and the impact of
recently issued accounting standards. 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.
Brenton recently announced it has agreed to be acquired by Wells Fargo &
Company, subject to shareholder and regulatory approval. The acquisition is
expected to close in the second half of 2000. Additional details can be found
under the heading "Capital Resources" on page 7.
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, 2000, compared to the six months ended June 30,
1999.
Net Income
For the six months ended June 30, 2000, Brenton recorded net income of
$9,273,250, which was an increase of 5.3 percent from net income of $8,807,468
for the first six months of 1999. Improvements were achieved in net interest
income, service charges on deposit accounts, investment brokerage commissions
and a reduction in operating expenses. Offsetting these improvements was a
decline in mortgage banking revenues. Diluted net income per common share was
$.45 for the first half of 2000, compared to $.42 per share for the first half
of 1999.
<PAGE>
Part 1 -- Item 2
Page 2 of 10
The Company's annualized return on average equity (ROE) was 13.95 percent for
the six months ended June 30, 2000, compared to 13.07 percent for the same
period last year. The annualized return on average assets (ROA) was .99
percent, compared to .96 percent for the first six months of 1999.
Net Interest Income
During the first six months of 2000, net interest income rose 4.6 percent to
$31,987,743, compared to $30,582,371 for the same period of 1999 due to
favorable rate variances. The most significant improvement was the 14.3
percent increase in total average loan volume compared to the first six months
of 1999. The yield on interest-earning assets increased 44 basis points while
the rate paid on interest-bearing liabilities increased 33 basis points. This
combination improved net interest margin 11 basis points to 3.81 percent for
the first half of 2000 from 3.70 percent for the same period last year. Year-
to-date 2000 average interest-earning assets increased 1.2 percent, while
average interest-bearing liabilities rose 2.0 percent compared to the first
half of 1999.
Loan Quality
At June 30, 2000, total loans had grown 10.2 percent to $1.2 billion from $1.1
billion a year earlier. Increases of $47.2 million (11 percent) in average
commercial/business/agricultural loans, $43.9 million (22 percent) in average
indirect consumer loans and $43.0 million (18 percent) in average direct
consumer loans led the growth.
Loan quality continued to improve as nonperforming loans declined to
$7,901,000, or .65 percent of total loans, at June 30, 2000, compared to
$9,452,000, or .79 percent, at the close of 1999 and $10,686,000, or .97
percent, at June 30, 1999. 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 $15.4 million, represented 194.83 percent of nonperforming loans
and 1.27 percent of total loans at June 30, 2000. At June 30, 1999, the same
ratios were 133.81 percent and 1.30 percent, respectively.
The provision for loan losses totaled $2,100,000 for the six months ended June
30, 2000, and 1999. Annualized year-to-date net charge-offs for 2000 were .19
percent of average loans, compared to .38 percent for the first half of 1999
and .36 percent for all of 1999.
<PAGE>
Part 1 -- Item 2
Page 3 of 10
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, 2000, is
sufficient to absorb probable loan losses within the portfolio.
Noninterest Income
Noninterest income for the six months ended June 30, 2000, was $14,916,327
(excluding securities gains and losses), a 5.8 percent decline from $15,834,657
for the first six months of 1999. Growth in service charges on deposits and
investment brokerage commissions were exceeded by declines in mortgage banking
revenues and other income.
Compared to the same period a year ago, service charges on deposits climbed
$484,684, or 10.9 percent. This growth was the result of increased account
analysis charges on commercial and business deposit accounts and an increase in
the client base due to the acquisition of offices in Pella and Knoxville in
late 1999.
Investment brokerage commissions increased by $229,305, or 10.4 percent, as per
broker revenue improved over the prior year.
Mortgage banking revenues declined 47.4 percent to total $1,573,056 for the
first half of 2000, compared to $2,989,405 for 1999. Rising mortgage interest
rates led to a 40 percent decline in mortgage loan origination volume and
mortgage banking revenues. Residential real estate loan closings for the first
half of 2000 totaled $148 million, compared to $248 million for the first half
of 1999. Portfolio real estate loans totaling $37.5 million were sold in the
first quarter of 2000, resulting in capitalized servicing income of $337,000.
Other operating income declined $172,954 from one year ago as 1999 revenue
included a one-time gain on sale of mortgage loan servicing rights, which
exceeded several one-time items in the first half of 2000.
Investment securities gains totaled $28,204 compared to gains of $206,919 for
the same period in 1999.
Noninterest Expense
The Company continues to carefully focus on cost management in 2000. Year-to-
date noninterest expense totaled $32,064,726 through June 30, 2000, a 1.0
percent decline from the first six months of 1999.
<PAGE>
Part 1 -- Item 2
Page 4 of 10
Compensation expense, the largest component of noninterest expense, declined
5.5 percent to $14,304,273 from the prior year partially due to lower variable
compensation costs related to lower mortgage loan origination volume. Also
contributing to the reduction in compensation costs was a 12.9 percent decline
in the number of full-time equivalent employees from June 30, 1999. Employee
benefits expense declined 9.8 percent, or $301,637, as a result of reduced
compensation expense.
Occupancy expense increased 13.3 percent to $3,333,561 because of the
accelerated expensing of certain leasehold improvements, the opening of the
Coralville office in the fourth quarter of 1999 and the acquisition of the
office in Pella in September of last year.
Furniture and equipment expense increased $598,399 to $2,865,530 for the first
half of 2000 due to depreciation on technology upgrades and increased costs for
software maintenance agreements.
Marketing and supplies expense declined 39.7 percent and 16.9 percent,
respectively, as a result of cost reduction efforts.
The Company's net noninterest margin, which measures operating efficiency, was
(1.76) percent, compared to (1.74) 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 2000, the Company's efficiency ratio
improved to 65.81 percent compared with 67.09 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 24.5 percent for the first six months of 2000
compared to 24.9 percent for 1999.
<PAGE>
Part 1 -- Item 2
Page 5 of 10
Results of Operations
The three months ended June 30, 2000, compared to the three months ended June
30, 1999.
Net Income
For the three months ended June 30, 2000, net income was $4,684,886 compared to
$4,229,238 for the second quarter of 1999. Diluted earnings per common share
totaled $.23 for the second quarter of 2000, compared to $.20 for the second
quarter of 1999.
Net Interest Income
Net interest income for the quarter totaled $15,911,454, an increase of 3.8
percent over the second quarter of the prior year. Like the year-to-date
comparison, the improvement was due to favorable rate variances. Net interest
margin for the second quarter of 2000 was 3.79 percent, compared to 3.70
percent for the second quarter of 1999. The improvement in net interest margin
is related to the yield on interest-earning assets increasing more than the
rate paid on interest-bearing liabilities.
Provision for Loan Losses
The provision for loan losses for the second quarters of both 2000 and 1999
totaled $1,050,000. Annualized net charge-offs as a percent of average loans
were .22 percent for the second quarter of 2000, compared to .47 percent for
the same period last year. Loan losses for both years were primarily
concentrated in the consumer loan portfolio.
Noninterest Income
Noninterest income declined $686,432, or 8.5 percent, from the second quarter
of 1999 to the second quarter of 2000.
Mortgage banking revenue declined 37.3 percent to $847,503 as a result of
reduced volumes of mortgage loan originations.
Other operating income declined $381,333 in the second quarter 2000 compared to
the prior year as 1999 second quarter included gains on sale of mortgage loan
servicing rights and an other asset.
Somewhat offsetting these declines was an increase in fiduciary income, which
rose 20.0 percent to $1,047,341 due to increased trust assets and a $75,000
recovery of a previously uncollected fee.
<PAGE>
Part 1 -- Item 2
Page 6 of 10
Net gains from securities transactions totaled $0 for the second quarter of
2000, compared to $143,983 for the same period of 1999.
Noninterest Expense
Noninterest expense declined by 5.0 percent when comparing the second quarter
of 2000 with the second quarter of 1999. The Company's net noninterest margin
was (1.75) percent for the second quarter of 2000, compared to (1.80) percent
for the second quarter of 1999.
Compensation expense declined 7.7 percent from the second quarter of 1999.
Similar to the six-month period, compensation declined due to reduced staffing
levels and lower variable compensation costs related to lower mortgage loan
origination volume. The number of full-time equivalent employees declined to
675 from 775 a year earlier.
Marketing expense declined $260,430 to $257,964 as a result of cost reduction
efforts.
Other operating expense for the second quarter of 2000 fell 11.4 percent,
primarily due to the return of the full amount of the $254,619 first quarter
2000 payment to the State of Iowa's sinking fund for the uninsured public funds
at Hartford-Carlisle Savings Bank.
Offsetting these reductions, furniture and equipment expense grew 26.2 percent
from the second quarter of 1999 to $1,464,900. The increase was due to
depreciation on technology upgrades.
Capital Resources
Common stockholders' equity totaled $136.9 million as of June 30, 2000, a 3.8
percent increase from December 31, 1999. Excluding the change in accumulated
other comprehensive income (loss), realized common stockholders' equity
increased 4.2 percent. 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, 2000, was 9.62 percent and
the total risk-based capital ratio was 10.66 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 7.25 percent at June 30, 2000, exceeding the regulatory
minimum requirement for well-capitalized institutions of 5.0 percent.
<PAGE>
Part 1 -- Item 2
Page 7 of 10
Since the inception in 1994 of a stock repurchase plan, the Company has
repurchased 3,644,983 shares (adjusted for stock splits/dividends) at a total
cost of $37,948,804. The Board of Directors has decided not to extend this
plan for 2000.
In May 1999, the Board of Directors declared a ten-percent common stock
dividend for holders of record as of June 1, 1999, payable June 18, 1999. As a
result of this action, each shareholder received one additional share of
Brenton Banks, Inc. common stock for every ten shares they owned. Fractional
shares were paid in cash. All appropriate per-share data has been restated to
reflect the ten-percent common stock dividend.
The Company paid dividends of $.174 per common share in the first six months of
2000, compared to $.172 per common share for the same period of 1999, an
increase of 1.2 percent. Dividends for the first six months of 2000 totaled
$3,548,448 and the dividend payout ratio for the first half of 2000 was 38.3
percent of diluted earnings per common share. In July 2000, the Board of
Directors declared a regular quarterly cash dividend of $.087 per common share,
which was equal to the previous quarter.
The debt-to-equity ratio of Brenton Banks, Inc. (the "Parent Company") was 6.0
percent at June 30, 2000, compared to 4.9 percent at December 31, 1999. Long-
term borrowings of the Parent Company at June 30, 2000, consisted entirely of
capital notes totaling $5,638,000. In addition, the Parent Company has a $5
million line of credit with a regional bank on which $2.6 million was
outstanding as of the end of June 2000.
Brenton Banks, Inc. common stock closed on June 30, 2000, at $13.88 per share,
compared to $15.50 a year earlier. The closing price at June 30, 2000, was
206.5 percent of the book value per share of $6.72. This closing stock price
represented a price-to-trailing-12-months-diluted-earnings multiple of 16.7
times.
As previously announced, on July 7, 2000, Wells Fargo & Company and Brenton
have signed a definitive agreement for the acquisition of the Company by Wells
Fargo & Company. The acquisition, which is subject to regulatory approval and
the approval of Brenton shareholders, is expected to close in the second half
of the year. Under the terms of the agreement, Wells Fargo & Company will
exchange a total of $255,694,000 of its common stock for all of the common
stock of Brenton Banks, Inc. outstanding at the time the acquisition closes.
<PAGE>
Part 1 -- Item 2
Page 8 of 10
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 2000
changed significantly when compared to 1999.
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 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.
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 9 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, to respond to market changes or to
adjust the Company's interest rate risk position. Readily marketable assets,
as defined above, comprised 28.5 percent of the Company's total assets at June
30, 2000.
Net cash provided from Company operations is another primary source of
liquidity. For the six months ended June 30, 2000, and 1999, net cash provided
by operating activities was $23,460,451 and $49,683,564, respectively. The
Company's trend of strong cash flows from operations is expected to continue
into the foreseeable future.
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, 2000, the Company had advances of $84,990,000 from
the FHLB of Des Moines, of which $38,740,000 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 assets and managing interest rate risk. The Company had additional
borrowing capacity available from the FHLB of approximately $55 million at June
30, 2000.
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, 2000.
The Company has entered into agreements for the construction of an operations
and sales support facility with an estimated total cost of $10.3 million,
exclusive of land. Construction has been substantially completed. Due to the
recent announcement of the proposed acquisition of Brenton by Wells Fargo &
Company, the project has been put on hold until a determination of its future
use has been completed.
<PAGE>
Part 1 -- Item 2
Page 10 of 10
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 is scheduled to be
effective for the year beginning January 1, 2001. In June 2000, SFAS No. 138
amended SFAS No. 133. This statement, as amended, 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, as amended by SFAS No. 138, will have on the
Company's financial statements. The Company expects to adopt SFAS No. 133 when
required.
<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, 2000.
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 3, 2000 /s/ Robert L. DeMeulenaere
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Dated Robert L. DeMeulenaere
President and Chief Executive
Officer
August 3, 2000 /s/ Steven T. Schuler
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Dated Steven T. Schuler
Chief Financial Officer/
Treasurer/Secretary and
Chief Accounting Officer
