BRENTON BANKS, INC.
APPENDIX TO THE PROXY STATEMENT
FISCAL YEAR 1996
TABLE OF CONTENTS
PAGE
General Information 1
Financial Highlights 2
Management's Discussion and Analysis 3
Consolidated Average Balances and Rates 9
Selected Financial Data 10
Consolidated Statements of Condition 11
Consolidated Statements of Operations 12
Consolidated Statements of Cash Flows 13
Consolidated Statements of Changes in
Common Stockholders' Equity 14
Notes to Consolidated Financial Statements 15
Management's Report 28
Independent Auditors' Report 28
Stock Information 29
Corporate Structure 30
BRENTON BANKS, INC.
GENERAL INFORMATION
Brenton Banks, Inc. (the "Company") is a bank holding
company registered under the Bank Holding Company Act of 1956 and
a savings and loan holding company under the Savings and Loan
Holding Company Act. Brenton Banks, Inc. was organized as an
Iowa corporation under the name of Brenton Companies in 1948.
Subsequently, the Company's name was changed to its current name,
Brenton Banks, Inc.
Brenton Banks, Inc. is Iowa's largest, home-based bank
holding company, with 45 service locations in metropolitan
markets and regional economic centers across the state. The
Company offers a complete range of financial products and
services - including retail, agricultural and commercial banking;
trust and investment management services; investment, insurance
and real estate brokerage; mortgage banking; cash management and
international banking services as well as our own proprietary
mutual funds. The Company's stock trades on the NASDAQ national
market under the symbol BRBK or BrentB.
BRENTON BANKS, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
1996 1995 1994
Operating Results
Net interest income $ 56,052,142 53,332,143 5,450,526
Provision for loan losses 2,900,000 1,864,801 1,987,909
Total noninterest income 23,327,441 17,846,740 16,592,988
Total noninterest expense 56,090,571 55,051,267 56,656,922
Income before income taxes
and minority interest 20,389,012 14,262,815 13,398,683
Net income 14,015,430 10,407,354 10,107,387
Per Common and Common
Equivalent Share***
Net income $ 1.69 1.22 1.15
Cash dividends .454 .409 .40
Book value, including
unrealized gains
(losses)* 15.08 14.20 12.75
Book value, excluding
unrealized gains
(losses)** 14.95 14.04 13.35
Closing bid price 27.63 19.32 16.59
At December 31
Assets $1,632,095,082 1,582,779,320 1,581,326,849
Loans 941,943,513 910,193,212 970,214,498
Nonperforming loans 6,167,000 5,619,000 5,022,000
Deposits 1,353,057,111 1,361,942,715 1,340,283,110
Common stockholders'
equity 121,954,229 119,533,631 110,430,345
Ratios
Return on average common
stockholders' equity
(ROE) 11.76% 9.04 9.03
Return on average assets
(including minority
interest) (ROA) .92 .71 .70
Net interest margin 4.03 3.89 4.12
Net noninterest margin (2.09) (2.38) (2.61)
Efficiency ratio 68.27 73.70 74.63
Loan to deposit ratio 69.62 66.83 72.39
Allowance for loan losses
to total loans 1.20 1.22 1.12
Primary capital to
assets** 8.33 8.40 8.18
Equity to assets** 7.41 7.47 7.28
Tier 1 leverage capital
ratio** 7.62 7.45 7.23
Nonperforming loans as a
percent of loans .65 .62 .52
Net charge-offs as a
percent of average loans .29 .18 .10
Allowance for loan losses
as a percent of
nonperforming loans 183.69 197.01 217.30
<FN>
* Including unrealized gains (losses) on securities
available for sale.
** Excluding unrealized gains (losses) on securities
available for sale.
*** Restated for the 10% common stock dividend effective in
1996.
Management's Discussion and Analysis
For 1996, Brenton Banks, Inc. and subsidiaries (the "Company")
reported net income of $14,015,430 compared to 1995 earnings of
$10,407,354.
Capital Resources
Common stockholders' equity totaled $121,954,229 as of
December 31, 1996, a 2.0 percent increase from the prior year.
In October 1996, the Board of Directors (the "Board") declared
a 10 percent common stock dividend. As a result of this action,
each shareholder received one additional share of common stock for
every 10 shares they owned. Fractional shares were paid in cash.
All per-share data has been restated to reflect the 10 percent
common stock dividend. Cash dividends for 1996 totaled $3,748,653
or $.454 per common share, which represents an increase of 11.0
percent over 1995 dividends of $.409 per share. The dividend
payout ratio for 1996 was 26.9 percent of earnings per share.
As part of the Company's ongoing stock repurchase plan,
347,700 shares of common stock were repurchased during 1996 at a
cost of $8,248,331. The Board had given the Company authorization
to repurchase up to $10 million during 1996. Since the inception
of the plan in 1994, the Company has repurchased 650,633 shares at
a total cost of $13,929,392. The Board has extended this plan for
1997 by authorizing up to an additional $10 million for stock
repurchase.
The Company continues to monitor its capital position to
balance the goals of maximizing return on average equity, while
maintaining adequate capital levels for regulatory purposes. The
Company's risk-based core capital ratio at December 31, 1996, was
11.57 percent and the total risk-based capital ratio was 12.64
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 7.62 percent at December 31, 1996, exceeding the
regulatory minimum requirement for well-capitalized institutions of
5.0 percent.
The debt-to-equity ratio of Brenton Banks, Inc. (the "Parent
Company") was 9.2 percent at December 31, 1996, compared to 10.4
percent at the end of 1995. The Parent Company's $2 million line
of credit with a regional bank was unused throughout 1996. Long-
term borrowings of the Parent Company at December 31, 1996,
consisted entirely of $11,248,000 of capital notes.
Brenton Banks, Inc. common stock closed on December 31, 1996,
at a bid price of $27.63, an increase of 43.0 percent over the
prior year-end. The closing price at December 31, 1996, was 183
percent of the book value per share of $15.08. The year-end stock
price represented a price-to-1996-earnings multiple of 16.3 times.
Brenton Banks, Inc. continues to pursue acquisition and
expansion opportunities which will enhance the financial
performance of the Company as well as strengthen the Company's
presence in current and new markets. There are currently no
pending acquisitions that would require Brenton Banks, Inc. to
secure capital from public or private markets.
Forward-looking Information
Forward-looking information relating to the financial results
or strategies of the Company are referenced throughout Management's
Discussion and Analysis. The following paragraphs identify
forward-looking statements and the risks that need to be considered
when reading those statements.
Forward-looking statements include such words as believe,
expect, anticipate, target, goal, objective or other words with
similar meaning. The Company is under no obligation to update such
forward-looking information statements.
The risks involved in the operations and strategies of the
Company include competition from other financial institutions,
changes in interest rates, changes in economic or market conditions
and changes in regulations from the federal and state regulators.
These risks, which are not all inclusive, cannot be estimated.
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 4 percent if interest rates
increased or decreased by 300 basis points over a one-year time
horizon. This is within the Company's policy limits.
The slope of the yield curve is also a major determinant in
the net interest income of the Company. Generally, the steeper the
intermediate treasury to LIBOR curve, the better the prospects for
net interest income improvement.
The Company continues to reduce its reliance on residential
real estate loans with long repricing periods. When appropriate
for interest rate management purposes, the Company will consider
securitization of real estate loans. Another key to interest rate
risk management is continuing to increase variable rate loans as a
percent of total earning assets.
In addition to normal balance sheet instruments, the Company
has utilized Federal Home Loan Bank borrowings and interest rate
swaps to reduce interest rate risk.
Liquidity
The Company actively monitors and manages its liquidity
position with the objective of maintaining sufficient cash flows to
fund operations and meet customer commitments. 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. Federal
funds sold and assets available for sale comprised 29.5 percent of
the Company's total assets at December 31, 1996.
Net cash provided from operations of the Company is another
major source of liquidity and totaled $14,997,716 in 1996,
$8,388,374 in 1995 and $18,524,837 in 1994. These strong cash
flows from operations are expected to continue in 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. At December 31, 1996, the
Company had borrowings of $57,700,000 from the Federal Home Loan
Bank ("FHLB") of Des Moines, of which $52,700,000 were used as a
means of providing long-term, fixed-rate funding for certain fixed-
rate assets and managing interest rate risk. The remaining
$5,000,000 represents an advance on a variable rate, short-term
$10,000,000 line of credit used to fund mortgage loans originated
for sale. The Company had additional borrowing capacity available
from the FHLB of approximately $80 million at December 31, 1996.
The combination of high levels of potentially liquid assets,
strong cash flows from operations, low dependence on volatile
liabilities and additional borrowing capacity provided strong
liquidity for the Company at December 31, 1996.
The Parent Company had sufficient cash flow and liquidity at
December 31, 1996. The primary funding source for the Parent
Company is dividends from its subsidiaries. Dividends of
approximately $16 million were available to be paid to the Parent
Company by subsidiary banks without reducing capital ratios below
regulatory minimums. At the end of 1996, the Parent Company had
$5.6 million of interest-bearing deposits with banks, as well as
additional borrowing capacity.
Results of Operations - 1996 Compared to 1995
Net Income
For the year ended December 31, 1996, Brenton Banks, Inc.
recorded net income of $14,015,430, an increase of 34.7 percent
over 1995, which totaled $10,407,354. Earnings per common share
were $1.69 compared to $1.22 for 1995. Return on average assets
(ROA) was .92 percent in 1996, compared to .71 percent in 1995.
The return on average equity (ROE) was 11.76 percent, compared to
9.04 percent one year earlier.
Net Interest Income
Net interest income rose 5.1 percent to $56,052,142 for 1996.
Both average earning assets and average interest-bearing
liabilities increased 1.0 percent from 1995. The Company
experienced a favorable change in the mix of earning assets and
interest-bearing liabilities which contributed to an increase in
net interest margin of 14.1 basis points over 1995. The average
rate earned on earning assets declined 5.9 basis points, while the
average rate paid on interest-bearing liabilities declined 22.4
basis points.
The net interest spread, which is the difference between the
rate earned on assets and the rate paid on liabilities, rose to
3.58 percent from 3.41 percent last year. Net interest margin,
which is tax equivalent net interest income as a percentage of
average earning assets, averaged 4.03 percent in 1996 compared to
3.89 percent in 1995. To improve net interest margin and lessen
interest rate risk, the Company continued its strategy of de-
emphasizing portfolio real estate loans and developing more
commercial and consumer loan business.
Loan Quality
Loan quality remains strong with nonperforming loans at
December 31, 1996 totaling $6,167,000 or .65 percent of loans.
This compares to .62 percent at December 31, 1995, or $5,619,000.
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 majority of the increase in
nonperforming loans was related to two loans that were restructured
within the commercial loan portfolio.
The allowance for loan losses, which totaled $11.3 million,
represented 183.69 percent of nonperforming loans at the end of
1996, compared to 197.01 percent one year ago. The provision for
loan losses totaled $2,900,000 for the year ended December 31,
1996, compared to $1,864,801 for 1995. The increase of $1,035,199
in provision is primarily related to a 933,535, or 54.7 percent,
increase in net loan charge-offs during 1996. The Company's net
charge-offs as a percent of average loans were .29 percent for 1996
compared to .18 percent for 1995. Loan losses for 1996 were
concentrated in the consumer loan portfolio.
Loan quality control and risk management are carefully
balanced with goals for loan growth. The Company has a formal
structure for reviewing and approving all loans. Documentation and
loan quality reviews are performed routinely by internal loan
review personnel, as well as by regulatory examiners.
The allowance for loan losses represents a reserve available
to absorb estimated possible future loan losses within the loan
portfolio. The allowance is based on management's judgment after
considering various factors such as the current and anticipated
economic environment, historical loan loss experience, and most
importantly, the evaluation of larger individual loans by lending
officers and internal loan review personnel.
Using the Company's standard evaluation process, individual
loan officers evaluate loan characteristics, the borrower's
financial condition and collateral values. From these assessments,
the Reserve Adequacy Committee performs quarterly reviews of the
loan portfolio quality, quantifies the results and reviews the
calculations of the required allowance for loan losses. In
addition, the Reserve Adequacy Committee approves charge-offs and
reviews subsequent collection action plans for problem credits.
Management believes the allowance for loan losses at December
31, 1996, was sufficient to absorb potential loan losses within the
portfolio.
Net Noninterest Margin
To measure operating efficiency, the Company uses the net
noninterest margin, which is the difference between noninterest
income and noninterest expense as a percent of average assets. For
1996, the net noninterest margin improved to (2.09) percent
compared to (2.38) percent in 1995. Another ratio that the Company
utilizes to measure productivity is the efficiency ratio. This
ratio divides noninterest expense by the sum of tax-equivalent net
interest income plus noninterest income (excluding gains and losses
on the sale of securities and loans). At December 31, 1996, the
Company's efficiency ratio was 68.27 percent, compared to 73.70
percent one year ago. To enhance operating efficiency throughout
the organization, the Company continues to focus on cost management
and the development of strategic improvements in noninterest income
and expense.
Noninterest Income
The Company achieved record levels of noninterest income in
1996. For 1996, total noninterest income (excluding securities
transactions) increased 28.9 percent to $23,006,185 from
$17,849,743 one year ago. Noninterest income (excluding securities
gains and losses) for 1996 represented 1.45 percent of average
assets and 41.04 percent of total operating income, which were the
highest levels in the history of the Company. All categories of
noninterest income reflect strong gains from the prior year.
Service charges on deposit accounts rose 21.0 percent in 1996
compared to one year ago. This growth related to full
implementation of standardized service charges as well as a new
focus on collecting a higher percentage of fees assessed.
Investment brokerage commissions totaled $3,766,436 for 1996,
an increase of 23.7 percent over the 1995 total of $3,044,107.
Strong financial markets and successful new sales initiatives drove
the increase in this category.
Insurance commissions and fees increased 24.6 percent to
$2,915,666 in 1996 due primarily to higher sales of both credit-
related insurance and insurance agency operations.
Mortgage banking income totaled $2,168,593 for 1996 compared
to $1,427,342 in 1995, an increase of 51.9 percent. This increase
is attributable to a higher volume of real estate mortgage loan
originations, which totaled $110.8 million, and a greater
percentage of loans being sold into the secondary market with the
servicing rights being retained.
Fiduciary income rose 13.2 percent to $2,744,530 in 1996
compared to $2,425,105 in 1995. This increase in revenue is
related to increased volumes of personal trusts, investment
management fees and employee benefit plans.
Other operating income increased by $1,288,140 when comparing
1996 to 1995. Gains on the sale of loans of $83,440 were recorded
in 1996 versus losses in 1995 of $232,454.
Securities transactions produced an additional increase in
noninterest income. Securities gains of $321,256 were recorded in
1996 versus losses of $3,003 in 1995.
The growth in various noninterest income categories has
enabled the Company to reach targeted levels of total income. The
Company will continue to focus on providing a broad array of
financial products and services to our customers that generate fee
income. The continued growth rate of fee income could be
vulnerable to future economic conditions and competition by other
financial institutions that cannot be estimated by the Company.
Noninterest Expense
Total noninterest expense increased 1.9 percent in 1996 to
$56,090,571 from $55,051,267 one year ago. Noninterest expense for
1996 includes a nonrecurring charge for a special assessment by the
FDIC. This assessment is based upon all deposits insured by the
Savings Association Insurance Fund (SAIF) as of March 31, 1995, and
equals approximately 65.7 basis points per $100 of SAIF-insured
deposits. Brenton's assessment was $1,288,000. Excluding this
one-time assessment, noninterest expense would have actually
decreased by .5 percent.
Salaries and wages, the largest component of noninterest
expense, increased $2,645,244 or 11.6 percent over 1995. This
increase is primarily related to commissions paid on higher sales
of fee-related products, expense tied to a stock performance plan
and severance costs. Fixed salaries, those that are not based on
commissions, actually decreased by 6.6 percent. The number of
full-time equivalent employees decreased by 3.8 percent and 13.6
percent at December 31, 1996 and 1995, respectively. The total
increase in salaries and wages led to a proportionate increase in
employee benefits.
Several new facilities and remodeling projects were completed
in the past two years, which explain the combined increase in the
categories of occupancy and furniture and equipment expense.
Occupancy expense totaled $5,502,904 for 1996, compared to
$4,912,417 for 1995. Increases within the occupancy category were
associated with rents, leases and depreciation expense related to
these new facilities. Results for 1996 include the first full year
of expense for these new facilities.
Furniture and equipment expense actually decreased $21,871
from the prior year. Depreciation expense increased by $197,130
due to technology updates throughout the Company. Decreases in
repairs and maintenance, and furniture and equipment rentals offset
the increase in depreciation expense. The Company continues to
focus on using technology to improve efficiency and provide better
service to our customers. During 1996, 62.8 percent of the
Company's capital expenditures were in the technology area.
Data processing expense totaled $2,591,485, an increase of 8.9
percent compared to 1995. This increase is related to new data
servicing contracts in 1996 for mortgage loan processing and
personal computer network maintenance and support. The expense
associated with core main frame processing actually decreased which
offset the cost of the new contracts.
Expense related to the FDIC deposit assessments increased 1.0
percent in 1996 to $1,801,646, which includes the previously
discussed one-time $1,288,000 assessment to fully fund SAIF. This
assessment related to the deposits insured by SAIF, which
represented approximately 16.4 percent of the Company's total
deposits at the end of 1996. The Company continues to pay the
lowest premiums available under the FDIC's risk-based premium
system.
Other operating expenses decreased $2.6 million or 21.2
percent when comparing 1996 results to 1995. This decline is the
result of benefits derived in 1996 from the 1995 merger of the
Company's 13 commercial banks into one bank charter, cost control
measures and one time costs incurred in 1995.
The Company continues to focus on cost management and
evaluates all major expense items in an effort to control the
growth rate of noninterest expenses.
Income Taxes
The Company's income tax strategies include reducing income
taxes by purchasing securities and originating loans that produce
tax-exempt income. The goal is to maintain the maximum level of
tax-exempt assets in order to benefit the Company on both a tax-
equivalent yield basis and in income tax savings. The effective
rate of income tax expense as a percent of income before income tax
and minority interest was 28.3 percent for 1996 compared to 22.5
percent for 1995.
Results of Operations - 1995 Compared to 1994
Net Income
For the year ended December 31, 1995, Brenton recorded net
income of $10,407,354. Earnings per common share were $1.34
compared to $1.27 for 1994.
The Company's total assets were consistent with 1994 levels of
$1.6 billion on December 31, 1995. Return on average assets (ROA)
was .71 percent in 1995, compared to .70 percent in 1994. The
return on average equity (ROE) was 9.04 percent, compared to 9.03
percent one year earlier.
Net Interest Income
Net interest income declined $2,118,383 or 3.8 percent to
$53,332,143 for 1995. Although average earning assets increased
1.3 percent from 1994, average interest-bearing liabilities
increased 2.7 percent. In addition, the average rate earned on
earning assets rose 55 basis points, while the average rate paid on
interest-bearing liabilities increased 83 basis points.
The net interest spread fell to 3.41 percent in 1995 from 3.69
percent in 1994. Net interest margin declined 23 basis points in
1995 and averaged 3.89 percent, compared to 4.12 percent in 1994.
Loan Quality
Brenton's loan quality remained strong in 1995. The Company's
nonperforming loans were a low .62 percent of loans or $5,619,000
at December 31, 1995, up from $5,022,000 and .52 percent from one
year earlier. The increase in nonperforming loans from one year
ago was due to an increase in commercial and consumer loans that
were 90 days or more past due. Nonaccrual and renegotiated loans
are below 1994 levels.
The allowance for loan losses, which totaled $11.1 million,
represented 197.01 percent of nonperforming loans at the end of
1995, compared to 217.3 percent for 1994. The provision for loan
losses totaled $1,864,801 for the year ended December 31, 1995,
compared to $1,987,909 for 1994. The Company's net charge-offs to
average loans were .18 percent for 1995 compared to .10 percent for
1994.
Beginning January 1, 1995, the Financial Accounting Standards
Boards mandated a standard that changed certain accounting
procedures for impaired loans, including the determination of the
allowance for loan losses and financial disclosures. This new
Standard has not had a material effect on the financial statements
of the Company.
Noninterest Income
For 1995, total noninterest income (excluding securities
transactions) increased 5.4 percent to $17,849,743 from $16,932,612
one year earlier. Noninterest income (excluding securities gains
and losses) for 1995 represented 1.14 percent of average assets and
33.47 percent of total operating income. Increases were seen in
substantially all noninterest income categories.
Service charges on deposit accounts rose 2.3 percent in 1995,
compared to one year earlier. This increase occurred in the fourth
quarter of 1995, when the Company implemented standardized service
charges and initiatives to reduce the amount of waived charges and
fees.
Insurance commissions and fees increased 10.6 percent to
$2,339,817 in 1995 primarily due to higher sales of both credit-
related insurance and insurance agency operations.
Fiduciary income rose 12.2 percent to $2,425,105 in 1995
compared to $2,160,492 in 1994. This increase was due to a growing
customer base in the areas of personal trusts, investment
management, employee benefit plans and the Brenton Family of Mutual
Funds.
Securities transactions produced an additional increase in
noninterest income. Securities losses for 1995 totaled $3,003
compared to 1994 losses of $339,624.
Offsetting the overall increase in noninterest income was a
20.6 percent decline in other operating income. The major cause
for the decline was $232,454 of net losses on the sale of loans in
1995 compared to 1994 gains of $167,519.
Noninterest Expense
Total noninterest expense decreased 2.8 percent in 1995 to
$55,051,267 from $56,656,922 one year ago. Included in 1994
expense was a one-time restructuring charge of $2,645,000. The
restructuring charge was taken to cover costs related to the
Company's strategic plan that included consolidating the Company's
13 commercial banks, reducing Brenton's overall personnel levels
and closing selected banking branches.
A summary of the estimated costs expensed in 1994 and the
actual costs incurred in 1995 follows:
1994 Estimated 1995 Actual
Costs Costs
Salaries and wages $1,089,000 $ 565,263
Employee benefits 289,000 83,409
Occupancy expense 192,000 --
Data processing expense 527,500 389,432
Abandonment losses 267,000 164,945
Legal, regulatory and other 280,500 409,085
_________ _________
$2,645,000 $1,612,134
_________ _________
_________ _________
The difference between the estimated costs recorded in 1994
and the actual costs incurred was reversed, thereby reducing or
crediting the above expense categories in 1995. The major
restructuring charge reversals occurred in salaries and wages and
employee benefit categories. These actual costs were well below
original estimates due to employee attrition, which assisted in
meeting necessary salary reductions without incurring severance
costs. In addition, occupancy costs and abandonment losses were
lower than original estimates, due to a planned branch closing that
was estimated for 1995, but did not occur until 1996. Another
branch which was expected to be abandoned was sold, with the
Company incurring no loss.
Salary expense declined approximately $710,000 from one year
ago after eliminating the effects of the restructuring charge, due
to overall staff reductions. The number of full-time equivalent
employees decreased by 13.6 percent when comparing year-end 1995
personnel levels to year-end 1994. The decrease in salaries was
offset by increases in incentives, insurance sales commissions and
stock compensation plan expenses. The reductions in salaries and
wages led to a proportionate decline in employee benefits.
The increases in occupancy and furniture and equipment expense
were due primarily to rents and depreciation for new and renovated
banking offices in Ames, Ankeny, Cedar Rapids, Davenport and Iowa
City. The Company invested approximately $7 million in these new
facilities.
Data processing expenses were unchanged from last year after
eliminating the impact of the restructuring charge. Advertising
and promotion expenses were also unchanged from one year earlier.
In September 1995, the FDIC refunded assessments retroactively
to May 1995 and lowered deposit insurance premiums for all well-
capitalized banks. This was a result of the full funding of
reserves required by the FDIC to insure the deposits of the banking
industry. This reduced 1995 expenses by $1,124,169, in comparison
to 1994.
Other operating expenses rose $2.5 million or 22.6 percent
after eliminating the impact of the restructuring charge. A large
part of this increase relates to payments made to EDS, a management
consulting firm that was hired to re-engineer the retail and
commercial banking process and assist in developing a formalized
program for enhancing noninterest income. In addition, the Company
has contracted with other consultants to perform sales training and
develop management reporting systems.
Income Taxes
The Company's income tax strategies include reducing income
taxes by purchasing securities and originating loans that produce
tax-exempt income. The effective rate of income tax expense as a
percent of income before income tax and minority interest was 22.5
percent for 1995 compared to 20.2 percent for 1994.
In 1994, the Company established out-of-state investment
subsidiaries to manage the investment portfolios of each Brenton
bank. These subsidiaries provided an opportunity to lower the
amount of state franchise taxes paid by the Company. Effective
July 1, 1995, the state of Iowa enacted legislation that eliminated
the tax benefits derived from these subsidiaries. The Company
dissolved these subsidiaries on June 30, 1995.
BRENTON BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCES AND RATES
Average Balances (In thousands) 1996 1995 1994 1993 1992
Assets:
Cash and due from banks $ 65,439 57,138 46,301 46,025 41,715
Interest-bearing deposits
with banks 1,393 1,076 124 762 6,240
Federal funds sold and
securities purchased under
agreements to resell 26,188 39,763 37,666 23,725 27,082
Trading account securities --- --- 116 --- ---
Investment securities:
Available for sale-taxable 330,002 244,786 245,913 53,174 6,512
Available for sale-tax-exempt 85,471 100,859 132,040 --- ---
Held to maturity-taxable 46,271 65,959 35,794 299,993 384,301
Held to maturity-tax-exempt 51,639 50,235 44,584 164,520 139,296
Loans held for sale 7,983 5,908 2,575 6,165 2,553
Loans 919,578 945,724 936,370 802,088 736,646
Allowance for loan losses (11,440) (11,166) (10,502) (9,615) (8,894)
Premises and equipment 31,728 31,436 24,545 23,045 21,400
Other 28,642 29,508 25,663 26,543 30,422
__________ _________ _________ _________ _________
$ 1,582,894 1,561,226 1,521,189 1,436,425 1,387,273
Liabilities and Stockholders'
Equity:
Deposits
Noninterest-bearing $ 131,051 128,770 127,464 119,322 112,054
Interest-bearing:
Demand 376,259 355,819 250,520 217,754 209,642
Savings 241,250 231,633 294,715 299,640 260,568
Time 583,508 626,497 625,981 622,789 646,261
__________ _________ _________ _________ _________
Total deposits 1,332,068 1,342,719 1,298,680 1,259,505 1,228,525
Federal funds purchased and
securities sold under agreements
to repurchase 59,276 40,237 61,656 42,715 33,240
Other short-term borrowings 17,295 6,536 4,860 33 2,170
Accrued expenses and other
liabilities 17,520 14,896 13,254 12,805 13,735
Long-term borrowings 33,094 37,264 26,500 14,077 14,067
__________ _________ _________ _________ _________
Total liabilities 1,459,253 1,441,652 1,404,950 1,329,135 1,291,737
Minority interest 4,471 4,391 4,290 4,150 3,845
Common stockholders' equity 119,170 115,183 111,949 103,140 91,691
__________ _________ _________ _________ _________
$ 1,582,894 1,561,226 1,521,189 1,436,425 1,387,273
Summary of Average Interest Rates
Average rates earned:
Interest-bearing deposits with
banks 4.87% 6.20 6.65 2.88 4.92
Trading account securities --- --- --- 6.36 ---
Federal funds sold and securities
purchased under agreements to
resell 5.41 5.69 4.53 2.05 2.41
Investment securities:
Available for sale-taxable 6.08 5.96 5.30 5.28 6.63
Available for sale-tax exempt
(tax equivalent basis) 7.13 6.71 6.37 --- ---
Held to maturity-taxable 6.22 6.17 5.20 5.54 6.88
Held to maturity-tax-exempt
(tax equivalent basis) 6.68 8.05 7.70 6.97 7.66
Loans held for sale 8.47 6.71 7.50 8.43 9.33
Loans 8.69 8.69 8.14 8.77 9.65
Average rates paid:
Deposits 4.12% 4.37 3.55 3.70 4.70
Federal funds purchased and
securities sold under agreements
to repurchase 4.17 4.08 3.38 2.41 2.78
Other short-term borrowings 5.87 5.67 5.42 3.63 5.57
Long-term borrowings 7.07 7.03 6.86 8.60 9.14
Average yield on interest-earning
assets 7.80% 7.86 7.31 7.57 8.43
Average rate paid on interest-
bearing liabilities 4.22 4.45 3.62 3.71 4.70
Net interest spread 3.58 3.41 3.69 3.86 3.73
Net interest margin 4.03 3.89 4.12 4.28 4.23
BRENTON BANKS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
Year-end Balances
(In thousands) 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
Total assets $1,632,095 1,582,779 1,581,327 1,480,596 1,431,140 1,360,942 1,274,301 961,370 921,207 908,933
Interest-earning assets 1,497,600 1,461,218 475,473 1,400,709 1,323,252 1,267,402 1,181,172 883,721 845,571 836,029
Interest-bearing liabilities 1,335,609 1,300,508 1,315,378 1,224,951 1,181,013 1,141,008 1,052,597 769,717 733,133 728,597
Demand deposits 153,284 143,220 136,548 127,132 137,212 115,479 125,626 113,349 118,392 116,830
Long-term borrowings 34,860 38,178 28,939 20,055 13,284 13,634 12,675 14,701 16,215 17,509
Preferred stock --- --- --- --- --- --- --- --- --- 2,000
Common stockholders'
equity** 121,954 119,534 110,430 112,418 97,430 86,712 77,258 63,522 56,401 49,618
Results of operations
(In thousands)
Interest income $ 111,383 111,040 101,223 98,656 106,560 115,561 106,826 85,722 76,745 74,774
Interest expense 55,331 57,708 45,772 44,427 54,773 68,687 64,431 49,102 43,180 43,149
Net interest income 56,052 53,332 55,451 54,229 51,787 46,874 42,395 36,620 33,565 31,625
Provision for loan losses 2,900 1,865 1,988 1,252 1,411 799 869 760 1,214 2,132
Net interest income after
provision for loan losses 53,152 51,467 53,463 52,977 50,376 46,075 41,526 35,860 32,351 29,493
Noninterest income 23,327 17,847 16,593 17,863 14,684 12,715 11,554 10,113 10,367 9,064
Noninterest expense 56,090 55,051 56,657 50,415 46,591 42,284 37,820 32,781 32,066 32,952
Income before income
taxes and minority
interest 20,389 14,263 13,399 20,425 18,469 16,506 15,260 13,192 10,652 5,605
Income taxes 5,771 3,205 2,701 5,508 4,884 4,308 4,388 4,016 2,527 408
Minority interest 603 651 591 667 632 539 533 472 422 290
Net income 14,015 10,407 10,107 14,250 12,953 11,659 10,339 8,704 7,703 4,907
Preferred stock dividend
requirement --- --- --- --- --- --- --- --- 81 265
Net income available
to common stockholders $ 14,015 10,407 10,107 14,250 12,953 11,659 10,339 8,704 7,622 4,642
Average common shares
outstanding
(In thousands)* 8,312 8,528 8,747 8,711 8,561 8,534 8,520 7,916 7,916 7,916
Per common and common
equivalent share*
Net income $ 1.69 1.22 1.15 1.64 1.52 1.36 1.21 1.10 .96 .59
Cash dividends .454 .409 .400 .364 .318 .294 .248 .200 .106 .000
Common stockholders'
equity*** 14.95 14.04 13.35 12.62 11.34 10.15 9.06 8.03 7.13 6.26
Selected operating ratios
Return on average assets
(including minority
interest) .92% .71 .70 1.04 .98 .93 .95 1.00 .90 .57
Return on average common
stockholders' equity 11.76 9.04 9.03 13.82 14.13 14.27 14.39 14.50 14.34 9.78
Equity to assets*** 7.41 7.47 7.28 7.40 6.81 6.37 6.06 6.61 6.12 5.46
Common dividend payout 26.86 33.58 34.65 22.22 21.00 21.56 20.50 18.23 11.01 .00
Allowance for loan losses
as a percent of loans 1.20 1.22 1.12 1.12 1.20 1.14 1.25 1.55 1.60 1.75
Net charge-offs to average
loans outstanding .29 .18 .10 .05 .13 .15 .12 .08 .18 .75
<FN>
* Restated for 10% common stock dividend effective in 1996, 3-for-2 stock split effective in 1994 and 2-for-1 stock split
effective in 1990.
** Including unrealized gains (losses) on securities available for sale.
*** Excluding unrealized gains (losses) on securities available for sale
</table
BRENTON BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
December 31 1996 1995
Assets:
Cash and due from banks (note 2) $ 76,900,524 71,159,078
Interest-bearing deposits with banks 731,554 265,072
Federal funds sold and securities purchased
under agreements to resell 15,200,000 37,600,000
Investment securities:
Available for sale (note 3) 461,099,272 396,370,443
Held to maturity (market value of
$73,316,000 and $109,131,000
at December 31, 1996 and 1995,
respectively (note 3) 72,754,985 108,082,213
Investment securities 533,854,257 504,452,656
Loans held for sale 5,870,298 8,707,309
Loans (notes 4, 9 and 10) 941,943,513 910,193,212
Allowance for loan losses (note 5) (11,328,359) (11,069,869)
Loans, net 930,615,154 899,123,343
Premises and equipment (notes 6 and 10) 30,379,446 32,849,842
Accrued interest receivable 14,417,786 14,494,261
Other assets (note 8) 24,126,063 14,127,759
$ 1,632,095,082 1,582,779,320
Liabilities and Stockholders' Equity:
Deposits (note 7):
Noninterest-bearing $ 153,284,094 143,220,373
Interest-bearing:
Demand 99,277,477 399,308,392
Savings 527,791,360 215,488,846
Time 572,704,180 603,925,104
Total deposits 1,353,057,111 1,361,942,715
Federal funds purchased and securities sold
under agreements to repurchase 66,826,120 41,107,411
Other short-term borrowings (note 9) 34,150,000 2,500,000
Accrued expenses and other liabilities 16,633,068 15,083,453
Long-term borrowings (note 10) 34,860,024 38,177,803
Total liabilities 1,505,526,323 1,458,811,382
Minority interest in consolidated subsidiaries 4,614,530 4,434,307
Redeemable preferred stock, $1 par; 500,000
shares authorized; issuable in series, none
issued --- ---
Common stockholders' equity (notes 12, 13, 14
and 16):
Common stock, $5 par; 25,000,000 shares
authorized; 8,085,684 and 7,653,252 shares
issued and outstanding at December 31, 1996
and 1995, respectively 40,428,420 38,266,260
Capital surplus --- 2,020,518
Retained earnings 80,448,768 77,888,451
Unrealized gains on securities available for
sale 1,077,041 1,358,402
Total common stockholders' equity 121,954,229 119,533,631
$ 1,632,095,082 1,582,779,320
<FN>
Commitments and contingencies (notes 17 and 18).
See accompanying notes to consolidated financial statements.
BRENTON BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31 1996 1995 1994
Interest Income:
Interest and fees on loans (note 4) $ 80,301,707 82,525,850 76,456,964
Interest and dividends on investments:
Available for sale-taxable 20,063,114 14,577,652 13,032,050
Available for sale-tax-exempt 4,250,463 4,446,824 5,530,626
Held to maturity-taxable 2,878,982 4,069,617 1,862,628
Held to maturity-tax-exempt 2,404,155 3,090,185 2,619,333
Interest on federal funds sold and
securities purchased under agreements
to resell 1,416,539 2,263,734 1,705,717
Other interest income 68,157 66,705 15,636
___________ ___________ ___________
Total interest income 111,383,117 111,040,567 101,222,954
Interest Expense:
Interest on deposits (note 7) 49,507,425 53,075,352 41,609,766
Interest on federal funds purchased and
securities sold under agreements to
repurchase 2,469,939 1,641,516 2,082,077
Interest on other short-term borrowings
(note 9) 1,015,110 370,642 263,658
Interest on long-term borrowings (note 10) 2,338,501 2,620,914 1,816,927
___________ ___________ ___________
Total interest expense 55,330,975 57,708,424 45,772,428
Net interest income 56,052,142 53,332,143 55,450,526
Provision for loan losses (note 5) 2,900,000 1,864,801 1,987,909
___________ ___________ ___________
Net interest income after provision for
loan losses 53,152,142 51,467,342 53,462,617
Noninterest Income:
Service charges on deposit accounts 6,712,874 5,547,796 5,424,547
Investment brokerage commissions 3,766,436 3,044,107 2,879,401
Insurance commissions and fees 2,915,666 2,339,817 2,115,085
Fiduciary income 2,744,530 2,425,105 2,160,492
Mortgage banking income 2,168,593 1,427,342 1,216,690
Other service charges, collection and
exchange charges, commissions and fees 2,779,502 2,435,132 2,342,210
Net gains (losses) from securities
available for sale (note 3) 321,256 (3,003) (339,624)
Other operating income 1,918,584 630,444 794,187
___________ ___________ ___________
Total noninterest income 23,327,441 17,846,740 16,592,988
Noninterest Expense:
Salaries and wages 25,460,464 22,815,220 24,595,274
Employee benefits (note 15) 4,245,682 4,158,580 4,960,665
Occupancy expense of premises, net
(notes 6 and 17) 5,502,904 4,912,417 4,702,208
Furniture and equipment expense
(notes 6 and 17) 3,725,150 3,747,021 3,060,557
Data processing expense (note 18) 2,591,485 2,379,920 3,083,819
FDIC deposit insurance assessment 1,801,646 1,783,213 2,907,382
Advertising and promotion 1,756,473 1,741,390 1,772,852
Supplies 1,409,690 1,326,928 1,386,639
Other operating expense 9,597,077 12,186,578 10,187,526
___________ ___________ ___________
Total noninterest expense 56,090,571 55,051,267 56,656,922
Income before income taxes and
minority interest 20,389,012 14,262,815 13,398,683
Income taxes (note 8) 5,770,600 3,204,687 2,700,640
___________ ___________ ___________
Income before minority interest 14,618,412 11,058,128 10,698,043
Minority interest 602,982 650,774 590,656
___________ ___________ ___________
Net income $ 14,015,430 10,407,354 10,107,387
Per common and common equivalent share
(note 13):
Net income $ 1.69 1.22 1.15
Cash dividends .454 .409 .400
<FN>
See accompanying notes to consolidated financial statements.
BRENTON BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended December 31 1996 1995 1994
Operating Activities:
Net income $ 14,015,430 10,407,354 10,107,387
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for loan losses 2,900,000 1,864,801 1,987,909
Depreciation and amortization 4,301,776 4,097,022 3,387,034
Deferred income taxes 949,396 (25,181) (1,257,325)
Net (gains) losses from securities
available for sale (321,256) 3,003 339,624
Net (increase) decrease in loans held
for sale 2,837,011 (6,602,817) 2,244,930
Increase in accrued interest receivable
and other assets (11,420,210) (1,678,132) (1,477,154)
Increase in accrued expenses, other
liabilities and minority interest 1,735,569 322,324 3,192,432
_____________ ____________ ____________
Net cash provided by operating activities 14,997,716 8,388,374 18,524,837
Investing Activities:
Investment securities available for sale:
Purchases (289,895,560) (242,871,379) (122,339,026)
Maturities 150,480,123 278,575,538 154,659,319
Sales 67,547,581 5,577,835 21,484,178
Investment securities held to maturity:
Purchases (45,046,248) (121,543,300) (59,384,073)
Maturities 79,614,914 59,896,255 26,687,613
Net (increase) decrease in loans (26,364,596) 28,502,974 (95,225,841)
Purchases of premises and equipment (2,734,491) (9,733,181) (6,920,455)
Proceeds from sales of premises and
equipment 1,356,634 360,470 26,578
_____________ ____________ ____________
Net cash used by investing activities (65,041,643) (1,234,788) (81,011,707)
Financing Activities:
Net increase in noninterest-bearing,
interest-bearing demand and savings
deposits 22,335,320 51,054,199 40,210,540
Net increase (decrease) in time deposits (31,220,924) (29,394,594) 5,708,876
Net increase (decrease) in federal funds
purchased and securities sold under
agreements to repurchase 25,718,709 (29,596,325) 33,039,408
Net increase (decrease) in other
short-term borrowings 15,500,000 (9,500,000) 12,000,000
Proceeds of long-term borrowings 14,604,000 12,429,000 22,176,030
Repayment of long-term borrowings (1,771,779) (3,190,610) (13,291,530)
Dividends on common stock (3,748,653) (3,498,220) (3,471,901)
Proceeds from issuance of common stock
under the employee stock purchase plan 71,675 --- ---
Proceeds from issuance of common stock
under the stock option plan 290,748 187,213 385,767
Proceeds from issuance of common stock
under the long-term stock compensation
plan 334,834 361,602 ---
Payment for shares acquired under common
stock repurchase plan (8,248,331) (4,830,111) (850,950)
Payment for fractional shares resulting
from stock dividend (13,744) --- (4,307)
_____________ ____________ ____________
Net cash provided (used) by financing
activities 33,851,855 (15,977,846) 95,901,933
_____________ ____________ ____________
Net increase (decrease) in cash and
cash equivalents (16,192,072) (8,824,260) 33,415,063
Cash and cash equivalents at the
beginning of the year 109,024,150 117,848,410 84,433,347
_____________ ____________ ____________
Cash and cash equivalents at the end
of the year $ 92,832,078 109,024,150 117,848,410
<FN>
See accompanying notes to consolidated financial statements.
BRENTON BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
Common Capital Retained Unrealized
Stock Surplus Earnings Gains (Losses) Total
Balance, December 31,
1993 $26,265,755 5,598,027 77,517,613 3,036,270 112,417,665
Net income --- --- 10,107,387 --- 10,107,387
Net change in
unrealized gains
(losses) --- --- --- (8,153,316) (8,153,316)
Dividends on common
stock
$.400 per share* --- --- (3,471,901) --- (3,471,901)
3-for-2 stock split
in the form of a
stock dividend
(note 13) 13,169,475 --- (13,169,475) --- ---
Fractional shares
resulting from
stock split --- --- (4,307) --- (4,307)
Issuance of shares of
common stock under
the stock option
plan (note 16) 146,500 239,267 --- --- 385,767
Shares reacquired
under stock
repurchase plan
(note 13) (224,000) (626,950) --- --- (850,950)
Balance, December 31,
1994 39,357,730 5,210,344 70,979,317 (5,117,046) 110,430,345
Net income --- --- 10,407,354 --- 10,407,354
Net change in
unrealized gains
(losses) --- --- --- 6,475,448 6,475,448
Dividends on common
stock
$.409 per share** --- --- (3,498,220) --- (3,498,220)
Issuance of shares of
common stock under
the stock option
plan (note 16) 98,750 88,463 --- --- 187,213
Issuance of shares of
common stock under
the stock compensation
plan (note 16) 100,445 261,157 --- --- 361,602
Shares reacquired under
stock repurchase plan
(note 13) (1,290,665) (3,539,446) --- --- (4,830,111)
Balance, December 31,
1995 38,266,260 2,020,518 77,888,451 1,358,402 119,533,631
Net income --- --- 14,015,430 --- 14,015,430
Net change in
unrealized gains
(losses) --- --- --- (281,361) (281,361)
Dividends on common
stock
$.454 per share** --- --- (3,748,653) --- (3,748,653)
10% common stock
dividend (note 13) 3,684,215 --- (3,684,215) --- ---
Fractional shares
resulting from
stock dividend --- --- (13,744) --- (13,744)
Issuance of shares of
common stock under
the stock option
plan (note 16) 128,000 162,748 --- --- 290,748
Issuance of shares of
common stock under
the stock compensation
plan (note 16) 73,590 261,244 --- --- 334,834
Issuance of shares
of common stock
under the employee
stock purchase plan
(note 16) 14,855 56,820 --- --- 71,675
Shares reacquired under
stock repurchase plan
(note 13) (1,738,500) (2,501,330) (4,008,501) --- (8,248,331)
Balance, December 31,
1996 $40,428,420 --- 80,448,768 1,077,041 121,954,229
<FN>
* Reflects the 10% common stock dividend effective in 1996 and the 3-for-2 stock
split effective in 1994.
** Reflects the 10% common stock dividend effective in 1996.
See accompanying notes to consolidated financial statements.
BRENTON BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) Summary of Significant Accounting Policies and
Related Matters
Nature of Operations Brenton Banks, Inc. and subsidiaries (the
Company) engage in retail, commercial, and agricultural banking
and related financial services from 45 locations throughout the
state of Iowa. The Company provides the usual products and
services of banking such as deposits, commercial loans,
agribusiness loans, personal loans and trust services. The
Company also engages in activities that are closely related to
banking, including mortgage banking, insurance and investment
brokerage.
The accounting and reporting policies of the Company conform
with generally accepted accounting principles and general
practices within the banking industry. The following describe
the more significant accounting policies:
The Principles of Consolidation The consolidated financial
statements include the accounts of Brenton Banks, Inc. (the
Parent Company) and its subsidiaries. All material intercompany
accounts and transactions have been eliminated in the
consolidated financial statements. Certain reclassifications
were made in the financial statements to agree with the current
year presentation.
The excess cost over underlying net assets of consolidated
subsidiaries and other intangible assets are being amortized over
10 to 40 years and are included in other assets in the
consolidated statements of condition. Intangible assets totaled
$4,696,000 and $5,023,000 at December 31, 1996, and 1995,
respectively.
Investment Securities Investment securities are classified based
on the Company's intended holding period. Securities, which may
be sold prior to maturity to meet liquidity needs, to respond to
market changes or to adjust the Company's asset-liability
position, are classified as available for sale. Securities which
the Company intends to hold to maturity are classified as held to
maturity.
Investment securities available for sale are recorded at
fair value. The aggregate unrealized gains or losses, net of the
income tax and minority interest effect, are recorded as a
component of common stockholders' equity. Securities held to
maturity are recorded at cost, adjusted for amortization of
premiums and accretion of discounts. The timing of the
amortization and accretion of mortgage-backed securities are
adjusted for actual and projected prepayments.
Net gains or losses on the sale of securities are shown in
the statements of operations. Gains or losses are computed using
the specific security identification method.
Loans Loans are carried primarily at the unpaid principal
balance. Interest income on loans is accrued and recorded as
income based on contractual interest rates and daily outstanding
principal balances, except on discounted loans where unearned
income is recorded as income over the life of the loans based on
the interest method.
The accrual of interest income is stopped when the ultimate
collection of a loan becomes doubtful. A loan is placed on
nonaccrual status when it becomes 90 days past due, if it is
neither well secured or in the process of collection. Once
determined uncollectible, previously accrued interest is charged
to the allowance for loan losses.
Loans held for sale include real estate mortgage loans
originated with the intent to sell. These loans are carried at
the lower of aggregate cost or fair value.
Allowance for Loan Losses The allowance for loan losses is
maintained at a level necessary to support management's
evaluation of potential losses in the loan portfolio, after
considering various factors including prevailing and anticipated
economic conditions. Loan losses or recoveries are charged or
credited directly to the allowance account.
Premises and Equipment Premises and equipment are stated at cost
less accumulated depreciation. Depreciation is provided
predominantly by the straight-line method over estimated useful
lives of 8 to 40 years for buildings and leasehold improvements,
and 3 to 25 years for furniture and equipment.
Other Real Estate Owned Included in other assets is property
acquired through foreclosure, acceptance of deed in lieu of
foreclosure or other transfers in settlement of outstanding loans
and related contract sales of such property until the contract is
transferred to earning assets based upon sufficient equity in the
asset. Amounts totaled $488,000 and $869,000 at December 31,
1996, and 1995, respectively. Such property is carried at the
lower of cost or estimated fair value, less selling costs.
Periodic appraisals are obtained to support carrying values. Net
expense of ownership and declines in carrying values are charged
to operating expenses.
Employee Retirement Plan All employees of the Company are
eligible, after meeting certain requirements, for inclusion in
the defined contribution retirement plan. The plan is a
combination profit sharing and 401(k) plan. Retirement plan
costs are expensed as the Company contributes to the plan. The
Company does not provide any material post-retirement benefits.
Income Taxes The Company files a consolidated federal income tax
return. Federal income taxes are allocated to the Parent Company
and each subsidiary on the basis of its taxable income or loss
included in the consolidated return.
The effects of current or deferred taxes are recognized as a
current and deferred tax liability or asset based on current tax
laws. Accordingly, income tax expense in the consolidated
statements of operations includes charges or credits to properly
reflect the current and deferred tax asset or liability.
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, federal funds sold and securities
purchased under agreements to resell and trading accounting
securities.
Income Per Common and Common Equivalent Share Income per common
and common equivalent share computations are based on the
weighted average number of common and common stock equivalent
shares outstanding. In October 1996, the Company declared a 10
percent common stock dividend and in May 1994, the Company
declared a 3-for-2 stock split in the form of a stock dividend.
The average number of shares, after considering stock plans and
the stock dividends, was 8,312,420 for 1996, 8,528,153 for 1995
and 8,747,053 for 1994.
Fair Value of Financial Instruments Fair value estimates are
made at a specific point in time, based on relevant market
information and information about the financial instrument.
These estimates do not reflect any premium or discount that could
result from offering the Company's entire holdings of a
particular financial instrument for sale at one time. Unless
included in assets available for sale, it is the Company's
general practice and intent to hold its financial instruments to
maturity and not to engage in trading or sales activities.
Fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Estimated fair values have been determined by the Company
using the best available data and an estimation method suitable
for each category of financial instruments.
Interest Rate Swaps Amounts paid or received, related to
outstanding swap contracts that are used in the asset/liability
management process, are recognized into earnings as an adjustment
to interest income over the estimated life of the related assets.
Gains or losses associated with the termination of interest rate
swap agreements for identified positions are deferred and
amortized over the remaining lives of the related assets as an
adjustment to yield.
Use of Estimates in the Preparation of Financial Statements The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. A
significant estimate that is particularly sensitive to change
relates to the allowance for loan losses.
Changes in Accounting Policies:
Accounting by Creditors for Impairment of a Loan Effective
January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors
for Impairment of a Loan," and its amendment SFAS No. 118 "Income
Recognition and Disclosures." The allowance for loan losses is
maintained at a level considered appropriate to support
management's evaluation of potential losses in the loan
portfolio. Management's evaluation is based upon several factors
including economic conditions, historical loss and collection
experience, risk characteristics of the portfolio, underlying
collateral values, industry risk and credit concentrations.
Under the Company's credit policies, all nonaccrual and
restructured commercial, agricultural, commercial real estate and
construction loans are considered to meet the definition of
impaired loans under SFAS 114 and 118. In determining when a
loan is impaired, management considers the delinquency status of
the borrower, the borrower's ability to generate cash and the
fair market value of the collateral. Specific allowances are
established for any impaired commercial, agricultural, commercial
real estate or construction loan where the recorded investment
exceeds the measured value of the loan. On a practical basis,
the measured value of a loan is obtained by using the observable
market price of a loan or the fair value of the collateral, if
the loan is collateral dependent. Otherwise, the measured value
of a loan is based upon the present value of expected future cash
flows discounted at the loan's effective interest rate. Impaired
loans are charged-off on the basis of management's ongoing
evaluation, but generally when it is deemed probable that the
borrower cannot generate sufficient funds to comply with
contractual terms in the normal course of business. Cash
received on impaired loans is applied to principal until
principal is satisfied or until the borrower demonstrates the
ability to perform according to agreed-upon terms.
SFAS 114 and 118 do not apply to smaller balance,
homogeneous loans which the Company has identified as loans to
consumers, such as home equity, installment and 1-4 family
residential loans. Delinquency status is used to identify risks
within the various consumer loan portfolios. Consumer loans are
generally charged-off when such loans are deemed to be
uncollectible or 90 days past due, whichever occurs first.
Accounting for Mortgage Servicing Rights Effective October 1,
1995, the Company adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights." This statement requires capitalization of
purchased mortgage servicing rights as well as internally
originated mortgage servicing rights. These mortgage servicing
rights are amortized over the estimated servicing period of the
related loans.
Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of Effective January 1, 1996, the
Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of."
This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset is not recoverable. The adoption of SFAS No.
121 did not have a material effect on the Company.
Accounting for Stock-Based Compensation Prior to January 1,
1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. As such, compensation
expense would be recorded on the date of the grant only if the
current market price of the underlying stock exceeded the
exercise price. Effective January 1, 1996, the Company adopted
SFAS No. 123, "Accounting for Stock-Based Compensation," which
permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma
net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the
provisions of
APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
(2) Cash and Due From Banks
The subsidiary banks are required by federal banking regulations
to maintain certain cash and due from banks reserves. This
reserve requirement amounted to $5,538,000 at December 31, 1996.
(3) Investment Securities
The amortized cost and estimated fair value of investment
securities follow. The estimated fair value of investment
securities has been determined using available quoted market
prices for similar securities.
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1996 (In thousands) Cost Gains Losses Value
Investment securities available for sale:
Taxable investments:
U.S. Treasury securities $ 41,330 76 (55) 41,351
Securities of U.S. government agencies 98,357 143 (347) 98,153
Mortgage-backed and related securities 218,865 1,398 (816) 219,447
Other investments 8,213 --- (20) 8,193
Tax-exempt investments:
Obligations of states and political
subdivisions 92,519 1,606 (170) 93,955
_______ _____ _____
$459,284 3,223 (1,408) 461,099
Investment securities held to maturity:
Taxable investments:
Securities of U.S. government agencies $ 15,065 63 (112) 15,016
Mortgage-backed and related securities 3,041 72 --- 3,113
Other investments 2,466 15 (6) 2,475
Tax-exempt investments:
Obligations of states and political
subdivisions 52,183 681 (152) 52,712
_______ _____ _____ ______
$ 72,755 831 (270) 73,316
December 31, 1995
Investment securities available for sale:
Taxable investments:
U.S. Treasury securities $ 27,621 161 (7) 27,775
Securities of U.S. government agencies 72,705 214 (97) 72,822
Mortgage-backed and related securities 190,953 927 (852) 191,028
Other investments 9,089 (18) 9,071
Tax-exempt investments:
Obligations of states and political
subdivisions 94,014 1,893 (233) 95,674
_______ _____ _____ _______
$394,382 3,195 (1,207) 396,370
Investment securities held to maturity:
Taxable investments:
Securities of U.S. government agencies $ 48,595 375 (44) 48,926
Mortgage-backed and related securities 3,653 32 (2) 3,683
Other investments 6,145 25 (4) 6,166
Tax-exempt investments:
Obligations of states and political
subdivisions 49,689 794 (127) 50,356
_______ _____ _____ _______
$108,082 1,226 (177) 109,131
Proceeds from the sale of available for sale securities were
$67,548,000, $5,578,000 and $21,484,000 in 1996, 1995 and 1994,
respectively. Gross gains of $558,000 in 1996, $19,000 in 1995
and $68,000 in 1994 and gross losses of $237,000 in 1996, $22,000
in 1995 and $408,000 in 1994 were realized on those sales.
Other investments at December 31, 1996 and 1995, consisted
primarily of corporate bonds. U.S. government agencies originate
or guarantee primarily all of the mortgage-backed and related
securities. The amortized cost of obligations of states and
political subdivisions included industrial development revenue
bonds of $7,269,000 at December 31, 1995.
Under provisions of the Financial Accounting Standards Board
Special Report entitled "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity
Securities," the Company transferred securities with amortized
costs of $48,049,000 in December 1995 from held to maturity to
available for sale. Unrealized gains related to such securities
transferred were $315,000.
The scheduled maturities of investment securities at
December 31, 1996 follow. Actual maturities may differ from
scheduled maturities because issuers may have the right to call
obligations without penalties. The maturities of mortgage-backed
securities have been included in the period of anticipated
payment considering estimated prepayment rates.
Estimated
Amortized Fair
(In thousands) Cost Value
Investment securities available for
sale:
Due in one year or less $130,194 130,310
Due after one year through
five years 228,980 229,696
Due after five years through
ten years 73,354 73,716
Due after ten years 26,756 27,377
$459,284 461,099
Investment securities held to maturity:
Due in one year or less $ 22,244 22,264
Due after one year through
five years 28,606 28,691
Due after five years through
ten years 15,307 15,388
Due after ten years 6,598 6,973
$ 72,755 73,316
Investment securities carried at $246,552,000 and $163,418,000 at
December 31, 1996 and 1995, respectively, were pledged to secure
public and other funds on deposit and for other purposes.
(4) Loans
A summary of loans follows:
(In thousands) December 31, 1996 1995
Real estate loans:
Commercial construction
and land development $ 42,693 38,123
Secured by 1-4 family
residential property 338,010 319,430
Other 150,395 163,739
Loans to farmer 69,660 68,543
Commercial and industrial loans 132,395 119,368
Loans to individuals for personal
expenditures, net of unearned
income of $59 and $313
at December 31, 1996 and
1995, respectively 207,197 199,489
All other loans 1,594 1,501
$941,944 910,193
The Company originates commercial, real estate, agribusiness and
personal loans with customers throughout Iowa. The portfolio has
unavoidable geographic risk as a result.
Total non-performing loans and assets at December 31 were:
(In thousands) 1996 1995
Impaired loans and leases:
Non-accrual $2,663 2,639
Restructured 568 178
Total impaired loans and leases 3,231 2,817
Loans and leases past due 90 days
or more 2,936 2,802
Total non-performing loans 6,167 5,619
Other real estate owned 488 869
Total non-performing assets $6,655 6,488
The average balances of impaired loans for the years ended
December 31, 1996 and 1995 were $3,378,000 and $3,353,000,
respectively. The allowance for loan losses related to impaired
loans at December 31, 1996 and 1995 was $481,000 and $425,000,
respectively. Impaired loans of $456,000 and $384,000 were not
subject to a related allowance for loan losses at December 31,
1996 and 1995, respectively, because of the net realizable value
of loan collateral, guarantees and other factors.
The effect of non-accrual and restructured loans on interest
income for each of the three years ended December 31 was:
(In thousands) 1996 1995 1994
Interest income
As originally contracted $363 418 537
As recognized 174 136 321
Reduction of interest income $189 282 216
Loan customers of the Company include certain executive
officers, directors and principal shareholders, and their related
interests and associates. All loans to this group were made in
the ordinary course of business at prevailing terms and
conditions. The aggregate indebtedness of all executive
officers, directors and principal shareholders of Brenton Banks,
Inc. and its significant subsidiaries, and indebtedness of
related interests and associates of this group (except where the
indebtedness of such persons was less than $60,000) included in
loans follows:
(In thousands) Amount
Balance at December 31, 1995 $ 4,824
Additional loans 2,488
Loan payments (1,475)
Balance at December 31, 1996 $ 5,837
Mortgage Servicing Rights The fair market value of capitalized
servicing rights at December 31, 1996 was approximately
$1,145,000. To determine the fair value of the servicing rights,
the Company used comparable market prices. There were no charges
to the impairment account. In determining the fair market value
and potential impairment at the end of 1996, the Company
disaggregated the portfolio into its predominate risk factor;
that being interest rate. The fair value of the portfolio was
determined by calculating the present value of future cash flows.
The Company incorporated assumptions that market participants
would use in estimating future net servicing income which include
estimates of the cost of servicing per loan, the discount rate,
float value, an inflation rate, ancillary income per loan,
prepayment speeds and default rates.
Capitalized servicing rights on originated loan servicing is as
follows:
(In thousands) 1996 1995
Beginning of year balance $ 252 ---
Additions from Originations 962 266
Amortization (188) (14)
Impairment --- ---
Balance at end of year $1,026 252
(5) Allowance for Loan Losses
A summary of activity in the allowance for loan losses follows:
(In thousands) 1996 1995 1994
Balance at beginning of year $11,070 10,913 9,818
Provision 2,900 1,865 1,988
Recoveries 1,419 1,669 1,549
Loans charged off (4,061) (3,377) (2,442)
Balance at end of year $11,328 11,070 10,913
(6) Premises and Equipment
A summary of premises and equipment follows:
(In thousands) December 31, 1996 1995
Land $ 2,952 3,614
Buildings and leasehold
improvements 30,876 32,045
Furniture and equipment 23,463 21,756
Construction in progress 275 33
57,566 57,448
Less accumulated depreciation 27,187 24,598
$30,379 32,850
Depreciation expense included in operating expenses amounted to
$3,848,000, $3,626,000 and $2,938,000 in 1996, 1995 and 1994,
respectively.
(7) Deposits
Time deposits include deposits in denominations of $100,000 or
more of $82,011,000 and $64,014,000 at December 31, 1996, and
1995, respectively.
A summary of interest expense by deposit classification
follows:
(In thousands) 1996 1995 1994
Demand $11,194 11,842 5,418
Savings 6,134 6,638 6,878
Time deposits
of $100,000 or more 3,935 4,193 3,110
Other time deposits 28,244 30,402 26,204
$49,507 53,075 41,610
The Company made cash interest payments of $55,455,000,
$55,229,000 and $46,850,000 on deposits and borrowings in 1996,
1995 and 1994, respectively.
At December 31, 1996, the scheduled maturities of time deposits
are as follows (in thousands):
1997 $335,530
1998 166,631
1999 42,068
2000 26,120
2001 and thereafter 2,355
$572,704
(8) Income Taxes
The current and deferred income tax provisions included in the
consolidated statements of operations follow:
1996 (In thousands) Current Deferred Total
Federal $3,754 894 4,648
State 1,067 56 1,123
$4,821 950 5,771
1995
Federal $2,728 (76) 2,652
State 502 51 553
$3,230 (25) 3,205
1994
Federal $3,037 (1,099) 1,938
State 921 (158) 763
$3,958 (1,257) 2,701
Since the income tax returns are filed after the issuance of the
financial statements, amounts reported are subject to revision
based on actual amounts used in the income tax returns. The
Company made cash income tax payments of $4,250,000, $2,500,000
and $2,671,000 to the IRS, and $435,000, $737,000 and $1,226,000
to the state of Iowa in 1996, 1995 and 1994, respectively. Cash
income tax payments for a year include estimated payments for
current year income taxes and final payments for prior year
income taxes. State income tax expense relates to state
franchise taxes payable individually by the subsidiary banks.
The reasons for the difference between the amount computed
by applying the statutory federal income tax rate of 35 percent
in 1996 and 34 percent in 1995 and 1994, and income tax expense
follow:
(In thousands) 1996 1995 1994
At statutory rate $ 7,136 4,849 4,556
Increase (reduction) due to:
Tax-exempt interest (2,556) (2,566) (2,768)
State taxes, net of
federal benefit 730 365 503
Nondeductible interest expense
to own tax-exempts 426 431 363
Other, net 35 126 47
$ 5,771 3,205 2,701
Accumulated deferred income tax assets are included in other
assets in the consolidated statements of condition. There was no
valuation allowance at December 31, 1996, or 1995. A summary of
the temporary differences resulting in deferred income taxes and
the related tax effect on each follows:
(In thousands) 1996 1995
Allowance for loan losses $3,962 3,985
Unrealized (gains) losses on
securities available for sale (670) (694)
Deposit base intangibles (315) (259)
Premises and equipment (588) (452)
Stock compensation plan 682 372
Real estate mortgage
loan points deferred (300) (479)
Alternative minimum tax credit
carry-forward --- 442
Other, net (251) 531
$2,520 3,446
(9) Other Short-Term Borrowings
The Company had short-term borrowings with the Federal Home Loan
Bank of Des Moines (FHLB) totaling $34,150,000 and $2,500,000 at
December 31, 1996, and 1995, respectively. The average rate on
these borrowings at December 31, 1996 was 5.97 percent. These
borrowings were secured by residential mortgage loans equal to
150 percent of the borrowings and FHLB stock.
The Parent Company has arranged an unsecured line of credit
of $2,000,000 which was unused at December 31, 1996. It is at
the prime interest rate and is subject to annual review and
renewal.
(10) Long-Term Borrowings
Long-term borrowings consisted of the following:
(In thousands) December 31, 1996 1995
Capital notes, 6.00% to 10.00%
Total Parent Company $ 11,248 12,435
Borrowings from FHLB, average rate
of 6.18% at December 31, 1996 23,550 25,650
Mortgage debt, average rate of
6.75% at December 31, 1996 62 93
$ 34,860 38,178
Mortgage debt was secured by real property with a carrying value
of $77,000 at December 31, 1996. Borrowings from the FHLB were
secured by residential mortgage loans equal to 150 percent of the
borrowings and FHLB stock.
The mortgage debt and borrowings from the FHLB were direct
obligations of the individual subsidiaries.
Scheduled maturities of long-term borrowings at December 31,
1996, follow:
Parent
(In thousands) Company Consolidated
1997 $ 1,457 1,464
1998 1,097 15,105
1999 1,671 11,268
2000 853 853
2001 1,396 1,396
Thereafter 4,774 4,774
$11,248 34,860
(11) Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments
were as follows:
December 31, 1996 December 31, 1995
Recorded Fair Recorded Fair
(In thousands) Amount Value Amount Value
Financial assets:
Cash and due from banks $ 76,901 76,901 71,159 71,159
Interest-bearing deposits with
banks 732 732 265 265
Federal funds sold and securities
purchased under agreements to
resell 15,200 15,200 37,600 37,600
Investment securities 533,854 534,415 504,452 505,501
Loans held for sale 5,870 5,870 8,707 8,707
Loans, net 930,615 929,113 899,123 910,338
Financial liabilities:
Deposits $ 1,353,057 1,360,457 1,361,943 1,367,680
Federal funds purchased, securities
sold under agreements to repurchase
and other short-term borrowings 100,976 100,976 43,607 43,607
Long-term borrowings 34,860 35,025 38,178 40,610
Off-balance-sheet assets (liabilities):
Commitments to extend credit $ --- --- --- ---
Letters of credit --- (59) --- (63)
Interest rate swaps --- (69) --- (224)
The recorded amount of cash and due from banks and interest-
bearing deposits with banks approximates fair value.
The recorded amount of federal funds sold and securities
purchased under agreements to resell approximates fair value as a
result of the short-term nature of the instruments.
The estimated fair value of investment securities has been
determined using available quoted market prices for similar
securities.
The estimated fair value of loans is net of an adjustment
for credit risk. For loans with floating interest rates, it is
presumed that estimated fair values generally approximate the
recorded book balances. Real estate loans secured by 1-4 family
residential property were valued using trading prices for similar
pools of mortgage-backed securities. Other fixed-rate loans were
valued using a present-value discounted cash flow with a discount
rate approximating the market for similar assets.
Deposit liabilities with no stated maturities have an
estimated fair value equal to the recorded balance. Deposits
with stated maturities have been valued using a present-value
discounted cash flow with a discount rate approximating the
current market for similar deposits. The fair-value estimate
does not include the benefit that results from the low-cost
funding provided by the deposit liabilities compared to the cost
of borrowing funds in the market. The Company believes the value
of these depositor relationships to be significant.
The recorded amount of the federal funds purchased,
securities sold under agreements to repurchase and short-term
borrowings approximates fair value as a result of the short-term
nature of these instruments.
The estimated fair value of long-term borrowings was
determined using a present-value discounted cash flow with a
discount rate approximating the current market for similar
borrowings.
The fair value of commitments to extend credit and standby
letters of credit are estimated using the fees currently charged
to enter into similar agreements.
The fair value of interest rate swaps (used for hedging
purposes) is the estimated amount that the Company would receive
or pay to terminate the swap agreements at the reporting date.
(12) Regulatory Capital
The Company is subject to various regulatory capital requirements
administered by both federal and state banking agencies. Failure
to comply with minimum capital requirements could result in
actions taken by regulators that could have a direct material
impact on the Company's financial statements. Under the capital
adequacy guidelines established by regulators, the Company must
meet specific capital guidelines that involve the measurement of
the Company's assets, liabilities and certain off-balance sheet
items. The Company's capital amounts and classification are also
subject to qualitative judgments by the regulators as it relates
to components, risk weightings and other factors.
Quantitative measures established by regulators to ensure
capital adequacy require the Company to maintain minimum amounts
and ratios (set forth in the following table) of total and tier 1
capital to risk weighted assets and of tier 1 capital to average
assets.
As of December 31, 1996, management believes the Company is
well-capitalized, as defined under the regulatory framework for
prompt corrective action. To be categorized as well-capitalized,
the Company must maintain minimum total risk-based, tier 1 risk-
based and tier 1 leverage ratios as set forth in the table. The
Company's actual capital amounts and ratios are also presented in
the table.
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollar amounts in thousands)
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets):
Consolidated $134,026 12.64% $84,816 > 8.0% N/A
_
Brenton Bank 128,138 12.80 80,099 > 8.0 $100,124 > 10.0%
_ _
Tier 1 Capital
(to Risk Weighted Assets):
Consolidated 122,673 11.57 42,408 > 4.0 N/A
_
Brenton Bank 117,476 11.73 40,050 > 4.0 60,075 > 6.0
_ _
Tier 1 Capital
(to Average Assets):
Consolidated 122,673 7.62 48,312 > 3.0 N/A
_
Brenton Bank 117,476 7.90 59,490 > 4.0 74,362 > 5.0
_ _
(13) Common Stock Transactions
In October 1996, the Company declared a 10 percent common stock
dividend. This transaction resulted in the issuance of 736,843
shares of common stock and the transfer of $3,684,215 from
retained earnings to common stock. Fractional shares resulting
from this stock dividend were paid in cash. In May 1994, the
Company declared a 3-for-2 stock split in the form of a 100
percent stock dividend. This transaction resulted in the
issuance of 2,633,895 shares of common stock and the transfer of
$13,169,475 from retained earnings to common stock. Net income
and cash dividends per share information in the financial
statements have been retroactively restated to reflect these
transactions.
As part of the Company's ongoing stock repurchase plan, in
1996 the Board of Directors increased the amount authorized for
common stock repurchases in 1996 to $10 million. For the years
ended December 31, 1996, 1995 and 1994, the Company repurchased
347,700, 258,133 and 44,800 shares, respectively, at a total cost
of $8,248,331, $4,830,111 and $850,950.
(14) Dividend Restrictions
The Parent Company derives a substantial portion of its cash
flow, including that available for dividend payments to
stockholders, from the subsidiary banks in the form of dividends
received. State and savings banks are subject to certain
statutory and regulatory restrictions that affect dividend
payments.
Based on minimum regulatory capital guidelines as published
by those regulators, the maximum dividends which could be paid by
the subsidiary banks to the Parent Company at December 31, 1996,
were approximately $16 million.
(15) Employee Retirement Plan
The Company provides a defined contribution retirement plan for
the benefit of employees. The plan is a combination profit
sharing and 401(k) plan. All employees 21 years of age or older
and employed by the Company for at least one year are eligible
for the plan. The Company contributes 4 1/2 percent of eligible
compensation of all participants to the profit sharing portion of
the plan, and matches employee contributions to the 401(k)
portion of the plan up to a maximum of 3 percent of each
employee's eligible compensation. Retirement plan costs charged
to operating expenses in 1996, 1995 and 1994 amounted to
$1,284,000, $1,263,000 and $1,367,000, respectively. The Company
offers no material post-retirement benefits.
(16) Stock Plans
In 1996, the Company adopted the 1996 Stock Option Plan (the
"Plan"). The Plan authorizes the granting of options on up to
550,000 shares of the Company's common stock to key employees of
the Company. The price at which options may be exercised cannot
be less than the fair market value of the shares at the date the
options are granted. The options are subject to certain
performance vesting requirements, but if vesting is not achieved
from performance vesting, 100 percent vesting occurs nine years
and six months following the grant date. Options expire ten
years and one month following the grant date.
At December 31, 1996, there were 79,200 shares available for
grant under the Plan. The per-share weighted average fair value
of stock options granted during 1996 was $6.60 based on the date
of grant using the Company's option pricing model with the
following weighted average assumptions: expected dividend yield
of 2.15 percent, risk-free interest rate of 6.85 percent,
expected life of 7.5 years and expected volatility of stock price
of 18 percent.
The Company applies APB Opinion No. 25 in accounting for its
Plan and, accordingly, no compensation cost has been recognized
for its stock options in the financial statements. Had the
Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the
Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
1996
Net income As reported $14,015,430
Pro forma 13,768,662
Earnings per share As reported $1.69
Pro forma 1.66
Pro forma net income reflects only options granted in 1996.
Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro
forma net income amounts presented above because compensation
cost is reflected over the options' expected life of 7.5 years.
There were 470,800 shares granted under the Plan in 1996
with a weighted average exercise price of $22.166. At December
31, 1996, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $22.159 -
$23.625 and 9.7 years, respectively. No options were
exercisable at December 31, 1996.
A total of 349,551 shares were granted over the past four
years to key management personnel under the Company's long-term
stock compensation plan. Under provisions of the plan, no grants
were made after 1995. Each grant of shares covers a three-year
performance period, 35 percent of which vests upon completion of
employment for the performance period and 65 percent of which
vests based on a tiered achievement scale tied to financial
performance goals established by the Board of Directors. The
total stock compensation expense associated with this plan was
$1,302,000, $425,000 and $(102,000) for 1996, 1995 and 1994,
respectively and changes in outstanding grant shares during 1996
were as follows (restated for the 10 percent common stock
dividend effective in 1996 and the 3-for-2 stock split effective
in 1994):
Performance 1992 to 1993 to 1994 to 1995 to
Period 1994 1995 1996 1997
December 31, 1993 100,642 86,509 --- ---
Granted - 1994 --- --- 99,323 ---
Forfeited - 1994 --- (2,188) --- ---
December 31, 1994 100,642 84,321 99,323 ---
Granted - 1995 --- --- --- 98,033
Forfeited - 1995 --- (9,216) (14,724) (7,287)
Expired - 1995 (65,418) --- --- ---
Vested - 1995 (35,224) --- --- ---
December 31, 1995 --- 75,105 84,599 90,746
Forfeited - 1996 --- --- (9,524) (10,369)
Expired - 1996 --- (48,819) --- ---
Vested - 1996 --- (26,286) --- ---
Outstanding grant
shares at
December 31, 1996 --- --- 75,075 80,377
For the performance period 1994 to 1996, 26,278 shares vested and
48,797 shares expired on January 1, 1997.
The Company's 1987 nonqualified stock option plan permits
the Board of Directors to grant options to purchase up to 330,000
shares of the Company's $5 par value common stock. The options
may be granted to officers of the Company. The price at which
options may be exercised cannot be less than the fair market
value of the shares at the date the options are granted. The
options are subject to certain vesting requirements and maximum
exercise periods, as established by the Board of Directors.
Changes in options outstanding and exercisable during 1996,
1995 and 1994 were as follows (restated for the 10 percent common
stock dividend effective in 1996 and the 3-for-2 stock split
effective in 1994):
Exercisable Outstanding Option Price
Options Options Per Share
December 31, 1993 187,110 202,950 $4.02-8.60
Granted - 1994 --- 9,240 17.86
Vested - 1994 7,920 --- 7.99-8.60
Exercised - 1994 (40,535) (40,535) 4.02-7.99
December 31, 1994 154,495 171,655 4.02-17.86
Vested - 1995 3,300 --- 7.99-8.60
Exercised - 1995 (21,725) (21,725) 4.02
Forfeited - 1995 --- (13,860) 7.99-17.86
December 31, 1995 136,070 136,070 4.02-8.60
Exercised - 1996 (26,800) (26,800) 4.02
December 31, 1996
(13,860 shares available
for grant) 109,270 109,270 $4.02-8.60
On May 6, 1997, the shares available for grant will expire.
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. During 1996, 16,612 shares of common stock were purchased
by employees under this plan.
(17) Lease Commitments
Rental expense included in the consolidated statements of
operations amounted to $1,919,000, $1,937,000 and $1,799,000 in
1996, 1995 and 1994, respectively. Future minimum rental
commitments for all noncancelable leases with terms of one year
or more total approximately $1,200,000 per year through 2001,
$600,000 per year through 2006, $200,000 per year through 2011,
and $40,000 per year through 2013, with a total commitment of
$10,500,000.
(18) Commitments and Contingencies
In the normal course of business, the Company is party to
financial instruments necessary to meet the financial needs of
customers, which are not reflected on the consolidated statements
of condition. These financial instruments include commitments to
extend credit, standby letters of credit and interest rate swaps.
The Company's risk exposure in the event of nonperformance by
the other parties to these financial instruments is represented
by the contractual amount of these instruments. The Company uses
the same credit policies in making commitments as it does in
making loans.
Commitments to extend credit are legally binding agreements
to lend to customers. Commitments generally have fixed
expiration dates and may require payment of a fee. Based upon
management's credit assessment of the customer, collateral may be
obtained. The type and amount of collateral varies, but may
include real estate under construction, property, equipment and
other business assets. In many cases, commitments expire without
being drawn upon, so the total amount of commitments does not
necessarily represent future liquidity requirements. The Company
had outstanding commitments to extend credit of $221 million and
$166 million at December 31, 1996, and 1995, respectively.
Standby letters of credit are conditional commitments issued
by the Company guaranteeing the financial performance of a
customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in
extending loans. Outstanding standby letters of credit totaled
$11,770,000 and $20,513,000 at December 31, 1996, and 1995,
respectively. The Company does not anticipate losses as a result
of issuing commitments to extend credit or standby letters of
credit.
The Company enters into interest rate swap agreements as
part of its asset/liability management strategy to manage
interest-rate risk. The notional value of these agreements was
$16,205,000 and $10,960,000 at December 31, 1996, and 1995,
respectively. The interest rate swap agreements subject the
Company to market risk associated with changes in interest rates,
as well as the risk of default by the counterparty to the
agreement. The credit worthiness of the counterparties was
evaluated by the Company's loan committee prior to entering into
the agreements. The agreements run through 1998.
Brenton Savings Bank, FSB converted from a mutual savings
and loan association to a federal stock savings bank in 1990, at
which time a $4 million liquidation account was established.
Each eligible savings account holder who had maintained a deposit
account since the conversion would be entitled to a distribution
if the savings bank were completely liquidated. This distribution
to savers would have priority over distribution to the Parent
Company. The Company does not anticipate such a liquidation.
The Company maintains a data processing agreement with
ALLTEL Financial Information Services, Inc. (ALLTEL), formerly
Systematics, Inc., whereby ALLTEL manages and operates the
Company's data processing facility. The contract involves fixed
payments of $2,412,000 in 1997 and $2,389,000 in 1998 through
2001 and $1,194,000 in 2002. These fixed payments will be
adjusted for inflation and volume fluctuations.
The Company is involved with various claims and legal
actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters
will not have a material adverse effect on the Company's
financial statements.
(19) Restructuring Charge
During the fourth quarter of 1994, the Company finalized plans
for a strategic restructuring program. This plan resulted in a
special charge of $2.6 million ($1.7 million after tax or $.19
per share), in 1994. A summary of the estimated costs expensed
in 1994 and the actual costs incurred in 1995 follows:
1994 Estimated 1995 Actual
Costs Costs
Salaries and wages $1,089,000 $ 565,263
Employee benefits 289,000 83,409
Occupancy expense 192,000 ---
Data processing expense 527,500 389,432
Abandonment losses 267,000 164,945
Legal, regulatory and other 280,500 409,085
$2,645,000 $ 1,612,134
The difference between the estimated costs recorded in 1994 and
the actual costs incurred was credited or charged to the above
expense categories in the fourth quarter of 1995.
(20) Brenton Banks, Inc. (Parent Company) Condensed Financial
Information
Statements of Condition
December 31 (In thousands) 1996 1995
Assets
Interest-bearing deposits with banks $ 5,638 128
Short-term investments --- 7,500
Advances to bank subsidiaries --- 117
Investments in:
Bank subsidiaries 124,383 119,325
Bank-related subsidiaries 45 43
Excess cost over net assets 1,826 1,900
Premises and equipment 618 1,375
Other assets 3,168 3,186
________ _______
$ 135,678 133,574
Liabilities and Stockholders' Equity
Accrued expenses payable
and other liabilities $ 2,476 1,605
Long-term borrowings 11,248 12,435
Common stockholders' equity 121,954 119,534
_______ _______
$ 135,678 133,574
Statements of Operations
Years Ended December 31 (In thousands) 1996 1995 1994
Income
Dividends from subsidiaries $ 10,766 8,997 11,691
Interest income 341 442 317
Management fees --- 1,634 1,222
Other operating income 43 2,644 2,128
________ ______ ______
11,150 13,717 15,358
Expense
Salaries and benefits 1,884 4,021 3,466
Interest on long-term borrowings 970 1,046 1,044
Other operating expense 655 2,006 2,263
________ ______ ______
3,509 7,073 6,773
Income before income taxes and
equity in undistributed earnings
of subsidiaries 7,641 6,644 8,585
Income taxes (1,040) (759) (1,083)
Income before equity in undistributed
earnings of subsidiaries 8,681 7,403 9,668
Equity in undistributed earnings of subsidiaries 5,334 3,004 439
________ ______ ______
Net income $ 14,015 10,407 10,107
</table
(20) Brenton Banks, Inc. (Parent Company) Condensed Financial
Information
Statements of Cash Flows
Years Ended December 31 (In thousands) 1996 1995 1994
Operating Activities
Net income $ 14,015 10,407 10,107
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiaries (5,334) (3,004) (439)
Depreciation and amortization 163 230 230
(Increase) decrease in other assets 18 49 (370)
Increase (decrease) in accrued expenses
payable and other liabilities 871 (148) (373)
________ ______ ______
Net cash provided by operating activities 9,733 7,534 9,155
Investing Activities
(Increase) decrease in short-term investments 7,500 1,000 (5,000)
Redemption (purchase) of subsidiary equity, net (7) 156 (200)
Principal collected from or (advances to)
subsidiaries 115 (97) (270)
Purchase of premises and equipment, net 669 (512) (648)
________ ______ ______
Net cash provided (used) by investing activities 8,277 547 (6,118)
Financing Activities
Net proceeds (repayment) of long-term borrowings (1,187) (209) 622
Proceeds from issuance of common stock under the
long-term stock compensation plan 335 362 ---
Proceeds from issuance of common stock under the
stock option plan 291 188 386
Proceeds from issuance of common stock under the
employee stock purchase plan 72 --- ---
Payment for shares acquired under common stock
repurchase plan (8,248) (4,830) (851)
Payment for fractional shares in stock dividends (14) --- (4)
Dividends on common stock (3,749) (3,498) (3,472)
________ ______ ______
Net cash used by financing activities (12,500) (7,987) (3,319)
Net increase (decrease) in cash and interest-
bearing deposits 5,510 94 (282)
Cash and interest-bearing deposits at the
beginning of the year 128 34 316
Cash and interest-bearing deposits at the end
of the year $ 5,638 128 34
(21) Unaudited Quarterly Financial Information
The following is a summary of unaudited quarterly financial
information (in thousands, except per common and common
equivalent share data):
1996
Three months ended March 31 June 30 Sept. 30 Dec. 31
Interest income $ 27,370 27,512 27,923 28,578
Interest expense 13,701 13,645 13,813 14,172
_______ ______ ______ ______
Net interest income 13,669 13,867 14,110 14,406
Provision for loan losses 700 800 600 800
_______ ______ ______ ______
Net interest income after
provision for loan losses 12,969 13,067 13,510 13,606
Noninterest income 5,552 5,622 5,776 6,377
Noninterest expense 13,355 13,471 14,685 14,579
_______ ______ ______ ______
Income before income taxes
and minority interest 5,166 5,218 4,601 5,404
Income taxes 1,446 1,497 1,275 1,553
Minority interest 140 153 153 157
_______ ______ ______ ______
Net income $ 3,580 3,568 3,173 3,694
Per common and common
equivalent share:
Net income $ .42 .43 .39 .45
1995
Three months ended March 31 June 30 Sept. 30 Dec. 31*
Interest income $ 26,611 27,852 28,442 28,135
Interest expense 13,597 14,807 14,670 14,634
_______ ______ ______ ______
Net interest income 13,014 13,045 13,772 13,501
Provision for loan losses 460 459 486 460
_______ ______ ______ ______
Net interest income after
provision for loan losses 12,554 12,586 13,286 13,041
Noninterest income 4,271 4,499 4,379 4,697
Noninterest expense 13,681 13,736 13,402 14,232
_______ ______ ______ ______
Income before income taxes
and minority interest 3,144 3,349 4,263 3,506
Income taxes 573 661 1,143 828
Minority interest 121 124 122 283
_______ ______ ______ ______
Net income $ 2,450 2,564 2,998 2,395
Per common and common
equivalent share:
Net income $ .28 .30 .36 .28
<FN>
* See footnote 19 regarding the restructure charge.
MANAGEMENT'S REPORT
The management of Brenton Banks, Inc. is responsible for the
content of the consolidated financial statements and other
information included in this annual report. Management believes
that the consolidated financial statements have been prepared in
conformity with generally accepted accounting principles
appropriate to reflect, in all material respects, the substance
of events and transactions that should be included. In preparing
the consolidated financial statements, management has made
judgments and estimates of the expected effects of events and
transactions that are accounted for or disclosed.
Management of the Company believes in the importance of
maintaining a strong internal accounting control system, which is
designed to provide reasonable assurance that assets are
safeguarded and transactions are appropriately authorized. The
Company maintains a staff of qualified internal auditors who
perform periodic reviews of the internal accounting control
system. Management believes that the internal accounting control
system provides reasonable assurance that errors or
irregularities that could be material to the consolidated
financial statements are prevented or detected and corrected on a
timely basis.
The Board of Directors has established an Audit Committee to
assist in assuring the maintenance of a strong internal
accounting control system. The Audit Committee meets
periodically with management, the internal auditors and the
independent auditors to discuss the internal accounting control
system and the related internal and external audit efforts. The
internal auditors and the independent auditors have free access
to the Audit Committee without management present. There were no
matters considered to be reportable conditions under Statement of
Auditing Standards No. 60 by the independent auditors.
The consolidated financial statements of Brenton Banks, Inc.
and subsidiaries are examined by independent auditors. Their
role is to render an opinion on the fairness of the consolidated
financial statements based upon audit procedures they consider
necessary in the circumstances.
Brenton Banks, Inc.
Robert L. DeMeulenaere
President
Steven T. Schuler
Chief Financial Officer/Treasurer/Secretary
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of Brenton Banks, Inc:
We have audited the accompanying consolidated statements of
condition of Brenton Banks, Inc. and subsidiaries as of December
31, 1996, and 1995, and the related consolidated statements of
operations, changes in common stockholders' equity and cash flows
for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Brenton Banks, Inc. and subsidiaries at
December 31, 1996, and 1995, and the results of their operations
and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Des Moines, Iowa
February 7, 1997
STOCK INFORMATION
Brenton Banks, Inc. common stock is traded on the NASDAQ National
Market and quotations are furnished by the NASDAQ System. There
were 1,562 common stockholders of record on December 31, 1996.
MARKET AND DIVIDEND INFORMATION
1996 High Low Dividends
1st quarter $22.05 19.09 .109
2nd quarter 22.05 20.68 .109
3rd quarter 22.73 21.36 .118
4th quarter 28.00 22.50 .118
1995 High Low Dividends
1st quarter $17.05 16.14 .10
2nd quarter 17.27 16.14 .10
3rd quarter 18.64 16.25 .10
4th quarter 20.68 17.50 .109
The above table sets forth the high and low sales prices and cash
dividends per share for the Company's common stock, after
the effect of the October 1996 10% common stock dividend.
The market quotations, reported by NASDAQ, represent prices
between dealers and do not include retail markup, markdown
or commissions.
NASDAQ Symbol: BRBK
Wall Street Journal and
Other Newspapers: Brent B
Market Makers
ABN AMRO Chicago Corporation
Herzog, Heine, Geduld, Inc.
Howe, Barnes Investments, Inc.
Keefe, Bruyette & Woods, Inc.
Stifel, Nicolaus & Co., Inc.
Wedbush Morgan Securities, Inc.
FORM 10-K
COPIES OF BRENTON BANKS, INC. ANNUAL REPORT TO THE
SECURITIES AND EXCHANGE COMMISSION FORM 10-K WILL BE MAILED
WHEN AVAILABLE WITHOUT CHARGE TO SHAREHOLDERS UPON WRITTEN
REQUEST TO STEVEN T. SCHULER, CHIEF FINANCIAL OFFICER/
TREASURER/SECRETARY, AT THE CORPORATE HEADQUARTERS.
STOCKHOLDER INFORMATION
Corporate Headquarters
Suite 200, Capital Square
400 Locust Street
Des Moines, Iowa 50309
Telephone 515/237-5100
Annual Shareholders' Meeting
Wednesday, May 7, 1997, 5:00 p.m.
Des Moines Convention Center
501 Grand Avenue
Des Moines, Iowa 50309
Transfer Agent/Registrar/
Dividend Disbursing Agent
Harris Trust and Savings Bank
311 West Monroe Street
Chicago, Illinois 60690
Legal Counsel
Brown, Winick, Graves, Gross,
Baskerville and Schoenebaum, P.L.C.
Suite 1100, Two Ruan Center
601 Locust Street
Des Moines, Iowa 50309
Independent Auditors
KPMG Peat Marwick LLP
2500 Ruan Center
666 Grand Avenue
Des Moines, Iowa 50309
CORPORATE STRUCTURE
BRENTON BANKS, INC.
BOARD OF DIRECTORS
C. Robert Brenton
Chairman of the Board
Brenton Banks, Inc.
William H. Brenton
Past Chairman (21 Years)
Past Chairman,
Executive Committee (5 Years)
Past President (5 Years)
Brenton Banks, Inc.
J.C. Brenton
Past President
Brenton Banks, Inc.
Gary M. Christensen
President & CEO
Pella Corporation
Robert L. DeMeulenaere
President
Brenton Banks, Inc.
R. Dean Duben
Vice Chairman of the Board
Brenton Bank, Davenport
Hubert G. Ferguson
Financial Services Consultant
New Brighton, Minnesota
BRENTON BANKS, INC.
EXECUTIVE OFFICERS
C. Robert Brenton
Chairman of the Board
Robert L. DeMeulenaere
President
Steven T. Schuler
Chief Financial Officer/Treasurer/
Secretary
BRENTON BANK
SENIOR OFFICERS AND
LINE OF BUSINESS MANAGERS
C. Robert Brenton
Chairman of the Board
Robert L. DeMeulenaere
Chief Executive Officer/President
Larry A. Mindrup
Chief Banking Officer
President, Des Moines
Phillip L. Risley
Chief Administrative Officer/Cashier
Perry C. Atwood
Chief Sales Officer
Woodward G. Brenton
Chief Commercial Banking Officer
Charles N. Funk
Chief Investment/ALCO Officer
Ronald D. Larson
Regional President Eastern Iowa
Division
President, Cedar Rapids
Marc J. Meyer
Regional President Western Iowa
Division
President, Adel
Steven T. Schuler
Chief Financial Officer/Treasurer/
Secretary
Norman D. Schuneman
Chief Credit Officer
Steven D. Agan
President, Knoxville
John H. Anderson
President, Davenport
Thomas J. Friedman
President, Ankeny
Kevin Z. Geis
President, Brenton Savings Bank, FSB
Ames
Robert L. German
President, Dallas Center
John M. Hand
President, Emmetsburg
Dennis H. Hanson
President, Grinnell
Richard H. Jones
President, Perry
V. Blaine Lenz
President, Eagle Grove
James L. Lowrance
President, Marshalltown
Clay A. Miller
President, Clarion
Jeffrey J. Nolan
President, Jefferson
Clark H. Raney
President, Indianola
Gary D. Ernst
President, Trust Division
Marsha A. Findlay
Senior Vice President, Des Moines
Senior Retail Banking Officer
Mark J. Hoffschneider
President, Brenton Mortgages
Douglas F. Lenehan
President, Diversified Commercial
Services Division
Loras J. Neuroth
President, Brenton Insurance
Elizabeth M. Piper/Bach
President, Brenton Investments
Catherine Reed
Senior Marketing Officer
Thomas J. Vincent
President, Agricultural Banking
Division