BRENTON BANKS, INC.
APPENDIX TO THE PROXY STATEMENT
FISCAL YEAR 1998
TABLE OF CONTENTS
PAGE
General Information 1
Financial Highlights 2
Management's Discussion and Analysis 3
Consolidated Average Balances and Rates 11
Selected Financial Data 12
Consolidated Statements of Condition 13
Consolidated Statements of Operations 14
Consolidated Statements of Cash Flows 15
Consolidated Statements of Changes in
Common Stockholders' Equity 16
Consolidated Statements of Comprehensive
Income 17
Notes to Consolidated Financial Statements 18
Management's Report 33
Independent Auditors' Report 33
Stock Information 34
Corporate Structure 35
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 the largest, Iowa-based bank holding company, with
47 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, commercial and business
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.
1
BRENTON BANKS, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
1998 1997 1996
Operating Results
Net interest income $ 61,387,326 60,133,764 56,052,142
Provision for loan losses 4,200,000 3,900,000 2,900,000
Total noninterest income 33,357,827 27,505,789 23,327,441
Total noninterest expense 61,391,528 57,698,564 56,090,571
Income before income
taxes and minority
interest 29,153,625 26,040,989 20,389,012
Net income 20,350,921 18,010,107 14,015,430
Per Common Share*
Net income-basic $ 1.07 .94 .70
Net income-diluted 1.05 .91 .69
Cash dividends .349 .248 .188
Book value, including
unrealized gains
(losses)** 7.21 6.79 6.23
Book value, excluding
unrealized gains
(losses)*** 7.03 6.62 6.18
Closing price 16.75 18.18 11.42
At December 31
Assets $1,939,556,765 1,718,483,797 1,632,095,082
Loans 1,033,554,556 993,189,110 941,943,513
Nonperforming loans 11,289,000 6,712,000 6,167,000
Deposits 1,496,675,131 1,364,270,491 1,353,057,111
Common stockholders'
equity** 135,210,319 129,379,299 121,954,229
Market capitalization of
common stock 314,102,382 346,646,292 223,367,021
Ratios
Return on average common
stockholders' equity
(ROE)** 15.37% 14.47 11.76
Return on average assets
(including minority
interest) (ROA) 1.18 1.14 .92
Net interest margin 3.97 4.16 4.03
Net noninterest margin (1.61) (1.86) (2.09)
Efficiency ratio 62.71 63.66 68.27
Loan to deposit ratio 69.06 72.80 69.62
Allowance for loan losses
to total loans 1.37 1.28 1.20
Primary capital to
assets*** 7.74 8.32 8.33
Equity to assets*** 6.81 7.36 7.41
Tier 1 leverage capital
ratio*** 7.17 7.63 7.62
Nonperforming loans as a
percent of loans 1.09 .68 .65
Net charge-offs as a
percent of average loans .28 .26 .29
Allowance for loan losses
as a percent of
nonperforming loans 125.54 189.69 183.69
<FN>
* Restated for the 2-for-1 stock split effective
February 1998 and the 10 percent common stock
dividends effective in 1998 and 1997.
** Including unrealized gains (losses) on securities
available for sale.
*** Excluding unrealized gains (losses) on securities
available for sale.
2
Management's Discussion and Analysis
Introduction
The following presentation describes Brenton Banks, Inc. and Subsidiaries'
("Brenton" or the "Company") results of operations for the three-year period
ended December 31, 1998, capital resources, market risk management,
asset/liability management, liquidity, Year 2000 efforts and the impact of
recently issued accounting standards. This discussion should be read in
conjunction with the Consolidated Financial Statements of the Company and the
notes thereto which are included elsewhere in this report.
Forward-Looking Information
Forward-looking information relating to the financial results or
strategies of the Company is referenced throughout Management's Discussion and
Analysis. The following paragraphs identify forward-looking statements and the
risks that need to be considered when reading those statements.
Forward-looking statements include such words as believe, expect,
anticipate, target, goal, objective or other words with similar meaning. The
Company is under no obligation to update such forward-looking information
statements.
The risks involved in the operations and strategies of the Company include
competition from other financial institutions and other financial service
providers, changes in interest rates, changes in economic or market conditions
and changes in regulations from federal and state regulators. These risks,
which are not all inclusive, cannot be estimated.
Results of Operations - 1998 Compared to 1997
Net Income
For the year ended December 31, 1998, Brenton recorded net income of
$20,350,921, an increase of 13.0 percent over 1997, which totaled $18,010,107.
Diluted earnings per common share were $1.05 compared to $.91 for 1997.
Return on average assets (ROA) was 1.18 percent in 1998, compared to 1.14
percent in 1997. The return on average equity (ROE) was 15.37 percent,
compared to 14.47 percent one year earlier. Both the ROA and ROE were the
highest ever achieved by the Company.
Net Interest Income
Net interest income rose 2.1 percent to $61,387,326 for 1998 as favorable
volume variances exceeded unfavorable rate variances. Average earning assets
increased 7.4 percent over 1997 while average interest-bearing liabilities
increased 7.2 percent. The average yield earned on earning assets declined 17
basis points, due to the declining interest rate environment. Meanwhile, the
average rate paid on interest-bearing liabilities increased three basis points
as a result of an aggressive effort to gain new client relationships, which
resulted in the sale of higher-priced transaction deposit products.
The net interest spread, which is the difference between the yield earned
on assets and the rate paid on liabilities, declined to 3.49 percent from 3.69
percent a year earlier. Net interest margin, which is tax-equivalent net
interest income as a percent of average earning assets, averaged 3.97 percent
in 1998 compared to 4.16 percent in 1997.
Loan Growth/Loan Quality
At December 31, 1998, total loans had grown 4.1 percent to $1,033.6
million from $993.2 million a year earlier. This $40.4 million increase was
achieved despite a $39.4 million decline in the residential real estate loan
portfolio, which resulted from increased refinancings as borrowers took
advantage of the lower long-term fixed-rate interest environment. Loan quality
remained good with nonperforming loans at December 31, 1998, totaling
$11,289,000, or 1.09 percent of loans. This compares to $6,712,000 at December
31, 1997, or .68 percent of loans. The increase was primarily due to a small
number of commercial loans for which collateral exists; however, worst case
analysis suggests losses of less than $500,000 for which a specific reserve has
been established. 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.
Loan quality control and risk management is cautiously 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 and external third party loan
review professionals, as well as by regulatory examiners.
3
The allowance for loan losses, which totaled $14.2 million, represented
125.54 percent of nonperforming loans at the end of 1998, compared to 189.69
percent one year ago. The provision for loan losses totaled $4,200,000 for the
year ended December 31, 1998, compared to $3,900,000 for 1997. The increase in
the provision is related to the $29.1 million increase in average loans
outstanding during 1998 and projected future loan growth. The Company's net
charge-offs as a percent of average loans was .28 percent for 1998 compared to
.26 percent for 1997, both of which were better than historical industry peer
group averages. Loan losses for both years were primarily concentrated in the
consumer loan portfolio.
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 individual loans by loan officers, loan
administration officers and internal loan review personnel.
Using the Company's standard evaluation process, each loan is evaluated
based on its specific characteristics, the borrower's financial condition and
collateral values. All loans are rated on a 1 to 8 rating scale. From these
assessments, the Reserve Adequacy Committee performs quarterly reviews of the
loan portfolio quality, quantifies the results and reviews the calculations of
the allowance for loan losses. In addition, the Reserve Adequacy Committee
approves charge-offs and reviews subsequent collection action plans for problem
loans.
Management believes the allowance for loan losses at December 31, 1998,
was sufficient to absorb potential loan losses within the portfolio.
Net Noninterest Margin/Efficiency Ratio
To measure operating efficiency, Brenton uses the net noninterest margin,
which is the difference between noninterest income (excluding security gains or
losses) and noninterest expense as a percent of average assets. For 1998, the
net noninterest margin improved to (1.61) percent compared to (1.86) percent in
1997. Another ratio the Company utilizes to measure productivity is the
efficiency ratio. This ratio is computed by dividing noninterest expense by
the sum of tax-equivalent net interest income plus noninterest income
(excluding gains and losses on the sale of securities). For the year ended
December 31, 1998, the Company's efficiency ratio improved to 62.71 percent,
compared to 63.66 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.
Noninterest Income
Brenton achieved record levels of noninterest income in 1998. For 1998,
total noninterest income (excluding securities transactions) increased 21.0
percent to $32,692,377 from $27,011,967 one year ago. Noninterest income
(excluding securities gains and losses) for 1998 represented 1.84 percent of
average assets and 34.8 percent of total operating income, which were the
highest levels in the history of the Company. All categories of noninterest
income, except insurance commissions and fees, reflected strong growth from the
prior year.
Service charges on deposit accounts increased 8.2 percent in 1998 to
$7,885,513. This growth related to increased account analysis charges on
commercial and business deposit accounts due to a higher number of clients.
Mortgage banking revenue rose 138.2 percent to $7,797,577 for 1998
compared to $3,274,215 in 1997. This revenue growth was the result of a
significantly higher volume of mortgage loan originations produced by a growing
staff of mortgage loan originators and the favorable interest rate environment.
Residential real estate loan closings for 1998 totaled $513.4 million compared
to $179.1 million in 1997. Refinancings represented 58.7 percent of the
closings in 1998 and 41.6 percent in 1997.
Investment brokerage commissions totaled $5,334,309 for 1998, an increase
of 11.0 percent over 1997 due to greater broker productivity and active
financial markets.
Fiduciary revenues climbed 11.5 percent to $3,497,030 in 1998 compared to
$3,136,078 in 1997. This revenue improvement was due to increased assets from
existing trust accounts and new business.
Insurance commissions and fees declined 50.7 percent to $1,382,917 in 1998
due to the third quarter 1997 sale of one of the Company's insurance agencies
and a 44.7 percent decline in credit-related insurance commissions.
Other service charges, commissions and fees increased 22.3 percent to
$4,208,330 in 1998 compared to 1997 as a result of increases from real estate
sales commissions, ATM/debit card fees, international fees and commercial line
of credit fees.
4
Other operating income increased by $329,277 from one year ago. The
increase was primarily due to higher levels of income from bank-owned life
insurance policies and miscellaneous one-time items, which exceeded a 1997 gain
on the sale of one of the Company's insurance agencies as discussed above.
Securities transactions also contributed to the increase in noninterest
income. Securities gains of $665,450 were recorded in 1998 versus gains of
$493,822 in 1997.
The growth in various noninterest income categories has enabled Brenton to
reach targeted levels of total income. The Company will continue to focus on
generating fee income by providing a broad array of financial products and
services to existing and new clients. The continued growth rate of fee income
could be vulnerable to future economic conditions and competition from other
financial institutions and other financial service providers that cannot be
estimated by the Company.
Noninterest Expense
Total noninterest expense increased 6.4 percent in 1998 to $61,391,528
from $57,698,564 one year ago.
Compensation, the largest component of noninterest expense, increased
$2,317,134, or 8.6 percent, over 1997. Standard salaries, which comprised 69.3
percent of total compensation expense, increased by 11.6 percent compared to
1997 due to an increase in the number of full-time equivalent employees and
normal annual salary increases. Variable compensation increased 43.3 percent
as a result of higher sales of fee-related products and services. Other
compensation decreased $1,917,090 because of the expiration of a long-term
stock compensation plan. The number of full-time equivalent employees
increased 9.8 percent at December 31, 1998, compared to the end of 1997 as a
result of filling a number of open positions. Benefit expense increased 13.3
percent due to increased compensation, higher health insurance premiums and
increased retirement plan contributions.
Occupancy expense rose 3.5 percent, or $197,959, in 1998 as a result of
increases in depreciation expense, repairs and maintenance and utility costs.
Furniture and equipment expense grew to $4,163,137, a 14.6 percent
increase from the prior year. The increase was due to depreciation on
technology upgrades and increased repairs and maintenance expense.
Transferring the personal computer "help desk" function to an internal
operation reduced data processing expense $226,668, or 8.0 percent.
Other operating expenses increased $173,054, or 1.5 percent, when
comparing 1998 results to 1997. Increases in consulting fees, personnel
recruitment expenses, check processing fees and correspondent bank service
charges exceeded reductions in legal fees, bank operational losses,
miscellaneous expense and loss on sale of fixed assets.
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
Brenton'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 27.7 percent for 1998 compared to
28.0 percent for 1997.
Results of Operations - 1997 Compared to 1996
Net Income
For the year ended December 31, 1997, Brenton recorded net income of
$18,010,107, an increase of 28.5 percent over 1996 net income of $14,015,430.
Diluted earnings per common share were $.91 compared to $.69 for 1996. Return
on average assets (ROA) was 1.14 percent in 1997, compared to .92 percent in
1996. The return on average equity (ROE) was 14.47 percent, compared to 11.76
percent one year earlier.
5
Net Interest Income
Net interest income rose 7.3 percent to $60,133,764 for 1997. The increase
in net interest income was directly attributable to both favorable rate and
volume variances. Average earning assets increased 4.3 percent over 1996 while
average interest-bearing liabilities increased 4.0 percent. The average yield
earned on earning assets increased 15 basis points, while the average rate paid
on interest-bearing liabilities increased 4 basis points.
The net interest spread rose to 3.69 percent from 3.58 percent in 1996.
Net interest margin averaged 4.16 percent in 1997 compared to 4.03 percent in
1996.
Loan Quality
Loan quality was strong in 1997 with nonperforming loans at December 31,
1997, totaling $6,712,000 or .68 percent of loans. This compared to .65 percent
at December 31, 1996, or $6,167,000.
The allowance for loan losses, which totaled $12.7 million, represented
189.69 percent of nonperforming loans at the end of 1997, compared to 183.69
percent one year earlier. The provision for loan losses totaled $3,900,000 for
the year ended December 31, 1997, compared to $2,900,000 for 1996. The
increase in the provision of $1,000,000 was primarily related to the $50.5
million increase in average loans outstanding during 1997. The Company's net
charge-offs as a percent of average loans were .26 percent for 1997 compared to
.29 percent for 1996. Loan losses for both years were primarily concentrated
in the consumer loan portfolio.
Net Noninterest Margin/Efficiency Ratio
For 1997, the net noninterest margin improved to (1.86) percent compared
to (2.09) percent in 1996. For the year ended December 31, 1997, the Company's
efficiency ratio was 63.66 percent, compared to 68.27 percent in 1996.
Noninterest Income
For 1997, total noninterest income (excluding securities transactions)
increased 17.4 percent to $27,011,967 from $23,006,185 one year earlier.
Noninterest income (excluding securities gains and losses) for 1997 represented
1.64 percent of average assets and 31.0 percent of total operating income. All
categories of noninterest income, except insurance commissions and fees,
reflected strong growth from the prior year.
Service charges on deposit accounts increased 8.6 percent in 1997 to
$7,290,765. The growth related to a continued focus on collecting a higher
percentage of fees assessed and increased sales of fee generating accounts,
particularly commercial accounts.
Mortgage banking income totaled $3,274,215 for 1997 compared to $2,168,593
in 1996, an increase of 51.0 percent. The increase was attributable to a
higher volume of real estate mortgage loan originations, which totaled $179.1
million compared to $110.8 million in 1996.
Investment brokerage commissions totaled $4,808,048 for 1997, an increase
of 27.7 percent over the 1996 total of $3,766,436. Strong financial markets and
successful sales initiatives drove the increase in this category.
Fiduciary revenues climbed 14.3 percent to $3,136,078 in 1997 compared to
$2,744,530 in 1996. The increase in revenue was due to increased volumes of
personal trusts, investment management fees and employee benefit plan fees.
Insurance commissions and fees declined 3.8 percent to $2,803,983 in 1997
due to the sale of one of the Company's insurance agencies. The decrease in
property and casualty commission income due to the agency sale was largely
offset by a 68.8 percent increase in credit-related insurance commissions. The
significant increase in credit-related insurance was due to the strong increase
in direct consumer lending and increased sales efforts during 1997.
Other service charges, commissions and fees increased 23.8 percent to
$3,441,454 in 1997 compared to 1996 due to increases from letter of credit
fees, fees received from purchased receivables and real estate sales
commissions.
Other operating income increased by $338,840 from one year earlier. The
increase was due to income from bank-owned life insurance policies that did not
exist until December 1996 and a gain on the sale of the Company's insurance
agency as discussed above. Several one-time revenue items also affected this
category in 1996.
Securities transactions produced an additional increase in noninterest
income. Securities gains of $493,822 were recorded in 1997 versus gains of
$321,256 in 1996.
6
Noninterest Expense
Total noninterest expense increased only 2.9 percent in 1997 to
$57,698,564 from $56,090,571 in 1996. Exclusive of a one-time special
assessment by the FDIC totaling $1,288,000 in 1996, noninterest expense
increased 5.3 percent.
Compensation increased $1,363,843, or 5.4 percent, over 1996. The increase
was primarily related to commissions and incentives paid on higher sales of
fee-related products discussed above, and expense tied to bonuses and a stock
performance plan which were both directly related to higher 1997 earnings and
the Company's advancing stock price. Standard salaries, which comprised 67.5
percent of total compensation expense, decreased by 3.8 percent compared to
1996. The number of full-time equivalent employees declined by .2 percent at
December 31, 1997 compared to year-end 1996. The total increase in
compensation expense led to a proportionate increase in employee benefits.
Occupancy expense totaled $5,609,600 for 1997, compared to $5,502,904 for
1996, an increase of 1.9 percent. The increase was primarily related to
building repairs and maintenance. Depreciation expense declined slightly and
lease expense increased due to the sale and relocation of one facility in late
1996.
Furniture and equipment expense declined to $3,634,336, a 2.4 percent
reduction from the prior year. Decreases in furniture and equipment
depreciation, repairs and maintenance, and furniture and equipment rentals more
than offset an increase in depreciation expense for technology-related
equipment.
Data processing expense increased $258,910, or 10.0 percent, due to
increased costs during 1997 associated with contracted core processing.
Expense related to the FDIC deposit assessments declined $1,520,230 from
1996 to $281,416. Prior year's expense included the previously discussed, one-
time $1,288,000 special assessment to fully fund SAIF.
Marketing and supplies expenses declined 22.5 and 15.2 percent,
respectively, for 1997. These cost reductions were the result of concerted
efforts to minimize the growth of overall noninterest expense and renegotiating
pricing with various vendors. Also, 1996 supplies expense included one-time
charges related to the 1995 merger of the commercial banks.
Other operating expenses increased by $2,040,604, or 21.3 percent, when
comparing 1997 results to 1996. The increase was primarily due to increases in
check processing fees, consulting and legal fees and miscellaneous losses.
Income Taxes
The Company's income tax strategies included 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 28.0 percent for 1997 compared to 28.3 percent
for 1996.
Capital Resources
Common stockholders' equity totaled $135,210,319 as of December 31, 1998,
a 4.5 percent increase from the prior year.
In January 1998, the Board of Directors (the "Board") declared a 2-for-1
stock split for holders of record as of February 10, 1998, payable February 20,
1998. As a result of this action, each shareholder received one additional
share of common stock for each share outstanding. The par value of the stock
was reduced from $5.00 to $2.50 and authorized shares were increased to 50
million. In May 1998, 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 2-for-1 stock split
and the 10 percent common stock dividend. Cash dividends for 1998 totaled
$6,622,340, or $.349 per common share, which represents an increase of 40.7
percent over 1997 dividends of $.248 per share. The dividend payout ratio for
1998 was 33.24 percent of earnings per share.
As part of Brenton's ongoing stock repurchase plan, 512,650 shares of
common stock (adjusted for the 2-for-1 stock split and the 10 percent common
stock dividend) were repurchased during 1998 at a cost of $10,000,900. Since
the inception of the plan in 1994, the Company has repurchased 3,040,327 shares
(adjusted for the 2-for-1 stock split and 10 percent common stock dividends) at
a total cost of $33,944,378. The Board has extended this plan for 1999 by
authorizing up to an additional $4 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, 1998, was 10.29 percent and the total risk-based capital ratio was
11.37 percent. These ratios exceeded the minimum regulatory requirements of
4.00 and 8.00 percent, respectively. The Company's tier 1 leverage capital
ratio, which measures capital excluding intangible assets, was 7.17 percent at
December 31, 1998, exceeding the regulatory minimum requirement for well-
capitalized institutions of 5.0 percent.
7
The debt-to-equity ratio of Brenton Banks, Inc. (the "Parent Company") was
6.7 percent at December 31, 1998, compared to 7.8 percent at the end of 1997.
The Parent Company's $5 million line of credit with a regional bank was unused
at the end of the year. Long-term borrowings of the Parent Company at December
31, 1998, consisted entirely of capital notes totaling $9,046,000.
Brenton Banks, Inc. common stock closed on December 31, 1998, at $16.75, a
decrease of 7.9 percent from the prior year-end. The closing price at December
31, 1998, was 232.3 percent of the book value per share of $7.21. The year-end
stock price represented a price-to-1998-diluted-earnings multiple of 16.0
times.
Brenton Banks, Inc. continues to pursue acquisition and expansion
opportunities, which fit the strategic direction of and 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.
Market Risk Management
Market risk is the risk of earnings volatility that results from adverse
changes in interest rates and market prices. The Company's market risk is
comprised primarily of interest rate risk arising from its core banking
activities of lending and deposit taking. Interest rate risk is the risk that
changes in market interest rates may adversely affect the Company's net
interest income. Management continually develops and applies strategies to
mitigate this risk. Management does not believe that the Company's primary
market risk exposures and how those exposures were managed in 1998 changed when
compared to 1997.
The Company uses a third-party computer software simulation modeling
program to measure its exposure to potential interest rate changes. For
various assumed hypothetical changes in market interest rates, numerous other
assumptions are made such as prepayment speeds on loans and securities backed
by mortgages, the slope of the Treasury yield curve, the rates and volumes on
the Company's deposit products and the rates and volumes on the Company's loan
production.
The following table sets forth the estimated changes in net interest
income (expressed as a percent of base net interest income) for projected
hypothetical changes in market interest rates. Base net interest income is the
projected net income assuming no change in interest rates. As shown in the
table, the Company's net interest income is more sensitive in a prolonged
falling rate scenario than in a rising rate scenario. As market rates decline,
the assumed speed of fixed-rate loan repayments increases, causing the funds
received to be reinvested at lower rates. Current interest rates on certain
liabilities are at a level that does not allow for significant downward
repricing should market interest rates decline significantly. As market rates
increase, fixed-rate loans are less likely to prepay, therefore slowing the
opportunity to reinvest at the assumed higher rates. In either a rising or
falling interest rate environment, the Company believes it has taken actions to
minimize the actual impact on net interest income. Those actions include the
origination of variable-rate consumer and commercial loans, the use of fixed-
rate Federal Home Loan Bank advances as alternatives to certificates of deposit
and active management of the investment securities portfolio to provide for
cash flows that will facilitate interest rate risk management. In selected
cases, the Company may enter into interest rate swaps, however, the amount of
swaps at December 31, 1998, and assumed in the projection of net interest
income are not material. The Company entered into an interest rate floor
contract at the end of 1997 to mitigate the effect falling interest rates would
have on certain deposit accounts with contracted minimum interest rates. Actual
changes in net interest income may differ from estimated changes set forth in
this table due to various risks and uncertainties concerning how actual
repricing opportunities will differ from assumed repricing opportunities.
Changes in net interest income due to projected
hypothetical changes in market interest rates
_____________________________________________
Assumed changes
in market rates 1999 2000 2001
_______________ _____ _____ _____
- - -300 bps -0.6% -9.7% -19.9%
- - -200 bps 0.3% -6.6% -14.6%
- - -100 bps 1.8% 0.8% -2.1%
+100 bps -0.3% 0.4% 3.5%
+200 bps -2.4% -3.1% 3.5%
+300 bps -4.5% -6.0% 3.9%
<FN>
(Changes in hypothetical interest rates are assumed to be instantaneous and
sustained parallel shifts in the yield curve.)
8
Asset/Liability Management
Brenton has a fully integrated asset/liability management system to assist
in managing the balance sheet. The process, which is used to project the
results of alternative investment decisions, includes the development of
simulations, as previously discussed, that reflect the effects of various
interest rate scenarios on net interest income. Management utilizes the
simulations to manage interest rate risk, the net interest margin and levels of
net interest income.
The goal of asset/liability management is to structure the balance sheet
so that net interest income and net interest margin fluctuate in a narrow range
during periods of changing interest rates. The Company currently believes that
net interest income would fall by less than 5 percent if interest rates
increased or decreased by 300 basis points over a one-year time horizon. This
is within the Company's policy limits.
The slope of the yield curve is also a major determinant in the net
interest income of the Company. Generally, the steeper the intermediate
treasury curve to the one-week LIBOR rate, the better the prospects for net
interest income improvement. This curve was inverted at December 31, 1998.
To improve net interest income and lessen interest rate risk, management
continued its strategy of de-emphasizing fixed-rate portfolio residential real
estate loans with long repricing periods. When appropriate for interest rate
management purposes, the Company will consider securitization of real estate
loans. The Company continues to focus on reducing interest rate risk by
emphasizing growth in variable-rate loans.
In addition to normal balance sheet instruments, the Company has utilized
Federal Home Loan Bank advances and interest rate swaps to reduce interest rate
risk. Other actions taken to minimize interest rate risk were previously
discussed under the heading "Market Risk Management."
Liquidity Management
Brenton actively monitors and manages its liquidity position with the
objective of maintaining sufficient cash flows to fund operations, meet client
commitments, take advantage of market opportunities and provide a margin
against unforeseeable liquidity needs. Federal funds sold, loans held for sale
and investment securities available for sale are readily marketable assets.
Maturities of all investment securities are managed to meet the Company's
normal liquidity needs. Investment securities available for sale may be sold
prior to maturity to meet liquidity needs, to respond to market changes or to
adjust the Company's interest rate risk position. Readily marketable assets,
as defined above, comprised 36.6 percent of the Company's total assets at
December 31, 1998.
Net cash provided from operations (exclusive of increases or decreases in
loans held for sale) of the Company is another major source of liquidity and
totaled $24,749,000 in 1998, $23,303,000 in 1997 and $23,889,000 in 1996.
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 results in a low dependence on
volatile liabilities. At December 31, 1998, the Company had advances of
$119,550,000 from the Federal Home Loan Bank ("FHLB") of Des Moines, of which
$75,550,000 were used as a means of providing both long-term, fixed-rate
funding for certain assets and managing interest rate risk. The remaining
$44,000,000 represents an advance on a variable-rate, short-term line of credit
used to fund mortgage loans originated for sale. The Company had additional
borrowing capacity available from the FHLB of approximately $52 million at
December 31, 1998.
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,
1998.
On December 31, 1998, Brenton entered into an agreement to purchase a
parcel of land for $2.1 million. The land will be utilized for the
construction of an operations and sales support facility. The building, which
is in the planning stage, will replace currently leased space and will also
allow for additional growth.
The Parent Company had sufficient cash flow and liquidity at December 31,
1998. The primary funding source for the Parent Company is dividends from its
subsidiaries. Dividends of approximately $6 million were available to be paid
to the Parent Company by subsidiary banks without reducing capital ratios below
regulatory minimums. At the end of 1998, the Parent Company had $1.1 million
of interest-bearing deposits with banks, a $5 million unused line of credit and
additional borrowing capacity.
Year 2000
The "Year 2000" issue is a top priority for Brenton. The Company's
critical core loan and deposit applications are ALLTEL Information Services,
Inc. ("ALLTEL") software programs and Brenton outsources the data processing
function to ALLTEL. Brenton and
9
ALLTEL are working in partnership to resolve the Year 2000 issues of the
critical core application programs as well as all other computer software
programs used in the Company. Also considered has been the readiness of
vendors and other third parties with which the Company does business, and an
assessment of significant clients is underway.
The Company could be faced with severe consequences if Year 2000 issues
are not identified and resolved in a timely manner by the Company and
significant third parties, which include public utilities and various
governmental agencies. A worst case scenario would result in the short-term
inability to update client financial records due to unforeseen processing
issues. This would result in clients being unable to receive timely
information regarding their balances.
The incremental expense associated with becoming Year 2000 compliant is
not anticipated to be material. However, there is an opportunity cost
associated with this project in that the people involved are regular Brenton
and ALLTEL employees who would normally be spending their time on other
projects. The incremental direct costs associated with this project were
approximately $350,000 in 1998. It is estimated these costs will approach
$500,000 in 1999. There are additional benefits that result from this project
because in addition to becoming Year 2000 compliant, systems are being
improved.
The Company has a Year 2000 committee and a formal plan in place and has
been executing on that plan. The Company completed substantially all Year 2000
work associated with its critical core application systems in 1998 and
remediation of all other critical software products will take place in early
1999, with testing to take place in March and April of 1999. The committee is
also developing contingency plans for unforeseen difficulties related to the
Year 2000 issue. It is anticipated that those plans will be complete by June
30, 1999. As a result of modifications and upgrades to existing systems,
management believes the Year 2000 issue will not be a significant operational
matter for the Company.
The Company has also contracted with an outside consultant to monitor the
progress of Year 2000 efforts and provide reports to management. Management
periodically reports on the status of the Year 2000 project to the Board of
Directors and its Audit Committee. The Company is also subject to review by
various banking regulatory agencies. Those agencies prescribe very strict
guidelines that must be adhered to by financial institutions.
The preceding paragraphs include forward-looking statements that involve
inherent risks and uncertainties. A number of important factors could result
in the actual costs of Year 2000 compliance and impact of Year 2000 issues to
differ from what is anticipated. Those uncertainties include incomplete
inventory and assessment results, higher than anticipated costs to update
software and hardware, and the lack of ability of vendors, significant
customers and other third parties to effectively address the Year 2000 issue.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which will be effective for the
Company for the year beginning January 1, 2000. This statement requires
recognition of all derivative instruments as either assets or liabilities in
the statement of financial position measured at fair value. This statement
requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows gains and losses from derivatives to
offset related results on the hedged item in the income statement, and
requires a company to formally document, designate and assess the
effectiveness of transactions for which hedge accounting is applied.
Management is evaluating the impact adoption of SFAS No. 133 will have on the
Company's financial statements. The Company expects to adopt SFAS No. 133
when required.
In October 1998, the FASB issued Statement of Financial Accounting
Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." This statement requires that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities or other retained interests
based on its ability and intent to sell or hold those investments. This
statement conforms the subsequent accounting for securities retained after the
securitization of mortgage loans by a mortgage banking enterprise with that of
nonmortgage enterprises. The Company will adopt SFAS No. 134 in the first
quarter of 1999. Adoption is not expected to have a material effect on the
Company.
10
BRENTON BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCES AND RATES
Average Balances (in thousands) 1998 1997 1996 1995 1994
Assets:
Cash and due from banks $ 65,874 58,681 65,439 57,138 46,301
Interest-bearing deposits
with banks 3,706 2,460 1,393 1,076 124
Federal funds sold and
securities purchased under
agreements to resell 31,048 31,472 26,188 39,763 37,666
Trading account securities --- 12 --- --- 116
Investment securities:
Available for sale--taxable 390,591 348,232 330,002 244,786 245,913
Available for sale--tax-exempt 125,237 99,868 85,471 100,859 132,040
Held to maturity--taxable 3,998 12,700 46,271 65,959 35,794
Held to maturity--tax-exempt 53,130 56,204 51,639 50,235 44,584
Loans held for sale 37,841 10,284 7,983 5,908 2,575
Loans 999,232 970,115 919,578 945,724 936,370
Allowance for loan losses (13,738) (12,171) (11,440) (11,166) (10,502)
Premises and equipment 31,883 29,841 31,728 31,436 24,545
Other assets 51,318 41,771 28,642 29,508 25,663
__________ _________ _________ _________ _________
$ 1,780,120 1,649,469 1,582,894 1,561,226 1,521,189
Liabilities and Stockholders'
Equity:
Deposits:
Noninterest-bearing $ 164,403 139,480 131,051 128,770 127,464
Interest-bearing:
Demand 90,589 81,430 376,259 355,819 250,520
Savings 585,598 551,509 241,250 231,633 294,715
Time 556,056 567,258 583,508 626,497 625,981
__________ ________ _________ _________ _________
Total deposits 1,396,646 1,339,677 1,332,068 1,342,719 1,298,680
Federal funds purchased and
securities sold under
agreements to repurchase 116,388 78,234 59,276 40,237 61,656
Other short-term borrowings 65,205 53,223 17,295 6,536 4,860
Accrued expenses and other
liabilities 17,020 17,097 17,520 14,896 13,254
Long-term borrowings 47,605 32,056 33,094 37,264 26,500
__________ _________ _________ _________ _________
Total liabilities 1,642,864 1,520,287 1,459,253 1,441,652 1,404,950
Minority interest in
consolidated subsidiaries 4,834 4,691 4,471 4,391 4,290
Common stockholders' equity 132,422 124,491 119,170 115,183 111,949
__________ _________ _________ _________ __________
$ 1,780,120 1,649,469 1,582,894 1,561,226 1,521,189
Summary of Average Interest
Rates:
Average yields earned:
Interest-bearing deposits with
banks 4.74% 4.80 4.87 6.20 6.65
Trading account securities --- 4.26 --- --- 6.36
Federal funds sold and
securities purchased under
agreements to resell 5.35 5.54 5.41 5.69 4.53
Investment securities:
Available for sale--taxable 6.09 6.31 6.08 5.96 5.30
Available for sale--tax exempt
(tax equivalent basis) 6.69 7.04 7.13 6.71 6.37
Held to maturity--taxable 6.93 6.39 6.22 6.17 5.20
Held to maturity--tax-exempt
(tax equivalent basis) 6.82 6.72 6.68 8.05 7.70
Loans held for sale 7.11 7.89 8.47 6.71 7.50
Loans 8.74 8.82 8.69 8.69 8.14
Average rates paid:
Deposits 4.12% 4.11 4.12 4.37 3.55
Federal funds purchased and
securities sold under
agreements to repurchase 4.38 4.36 4.17 4.08 3.38
Other short-term borrowings 5.76 5.98 5.87 5.67 5.42
Long-term borrowings 6.34 6.86 7.07 7.03 6.86
Average yield on interest-
earning assets 7.78% 7.95 7.80 7.86 7.31
Average rate paid on interest-
bearing liabilities 4.29 4.26 4.22 4.45 3.62
Net interest spread 3.49 3.69 3.58 3.41 3.69
Net interest margin 3.97 4.16 4.03 3.89 4.12
11
BRENTON BANKS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
Year-end Balances
(in thousands) 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
Total assets $1,939,557 1,718,484 1,632,095 1,582,779 1,581,327 1,480,596 1,431,140 1,360,942 1,274,301 961,370
Interest-earning assets 1,788,081 1,578,923 1,497,600 1,461,218 1,475,473 1,400,709 1,323,252 1,267,402 1,181,172 883,721
Interest-bearing liabilities 1,590,493 1,406,258 1,335,609 1,300,508 1,315,378 1,224,951 1,181,013 1,141,008 1,052,597 769,717
Noninterest-bearing
deposits 190,625 161,007 153,284 143,220 136,548 127,132 137,212 115,479 125,626 113,349
Long-term borrowings 41,546 36,662 34,860 38,178 28,939 20,055 13,284 13,634 12,675 14,701
Common stockholders'
equity** 135,210 129,379 121,954 119,534 110,430 112,418 97,430 86,712 77,258 63,522
Results of Operations
(in thousands)
Interest income $ 124,026 118,239 111,383 111,040 101,223 98,656 106,560 115,561 106,826 85,722
Interest expense 62,639 58,105 55,331 57,708 45,772 44,427 54,773 68,687 64,431 49,102
Net interest income 61,387 60,134 56,052 53,332 55,451 54,229 51,787 46,874 42,395 36,620
Provision for loan losses 4,200 3,900 2,900 1,865 1,988 1,252 1,411 799 869 760
Net interest income after
provision for loan losses 57,187 56,234 53,152 51,467 53,463 52,977 50,376 46,075 41,526 35,860
Noninterest income 33,358 27,506 23,327 17,847 16,593 17,863 14,684 12,715 11,554 10,113
Noninterest expense 61,392 57,699 56,090 55,051 56,657 50,415 46,591 42,284 37,820 32,781
Income before income
taxes and minority
interest 29,153 26,041 20,389 14,263 13,399 20,425 18,469 16,506 15,260 13,192
Income taxes 8,082 7,288 5,771 3,205 2,701 5,508 4,884 4,308 4,388 4,016
Minority interest 720 743 603 651 591 667 632 539 533 472
Net income 20,351 18,010 14,015 10,407 10,107 14,250 12,953 11,659 10,339 8,704
Average common shares
outstanding
(in thousands)* 18,957 19,255 19,901 20,426 21,004 20,893 20,711 20,650 20,615 19,156
Per Common Share*
Net income-basic $ 1.07 .94 .70 .51 .48 .68 .63 .56 .50 .45
Net income-diluted 1.05 .91 .69 .50 .47 .67 .62 .56 .50 .45
Cash dividends .349 .248 .188 .169 .165 .150 .131 .121 .103 .083
Common stockholders'
equity*** 7.03 6.62 6.18 5.80 5.52 5.21 4.69 4.19 3.74 3.32
Closing price 16.75 18.18 11.42 7.98 6.86 6.57 6.51 5.20 3.38 3.82
Selected Operating Ratios
Return on average assets
(including minority
interest) 1.18% 1.14 .92 .71 .70 1.04 .98 .93 .95 1.00
Return on average common
stockholders' equity** 15.37 14.47 11.76 9.04 9.03 13.82 14.13 14.27 14.39 14.50
Equity to assets*** 6.81 7.36 7.41 7.47 7.28 7.40 6.81 6.37 6.06 6.61
Common dividend payout 33.24 27.25 27.25 33.80 35.11 22.39 21.13 21.61 20.60 18.44
Allowance for loan losses
as a percent of loans 1.37 1.28 1.20 1.22 1.12 1.12 1.20 1.14 1.25 1.55
Net charge-offs as a
percent of average
loans .28 .26 .29 .18 .10 .05 .13 .15 .12 .08
<FN>
* Restated for 2-for-1 stock split effective February 1998, 10 percent common stock dividends effective in 1998, 1997 and 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.
12
BRENTON BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
December 31 1998 1997
Assets:
Cash and due from banks (note 2) $ 76,460,049 77,468,210
Interest-bearing deposits with banks 2,167,288 1,319,700
Federal funds sold and securities purchased
under agreements to resell 6,000,000 9,300,000
Trading account securities --- 77,220
Investment securities:
Available for sale (note 3) 605,183,788 486,653,872
Held to maturity (market value of
$44,011,000 and $69,852,000
at December 31, 1998, and 1997,
respectively) (note 3) 43,027,501 69,079,622
Investment securities 648,211,289 555,733,494
Loans held for sale 98,147,391 19,303,411
Loans (notes 4, 9 and 10) 1,033,554,556 993,189,110
Allowance for loan losses (note 5) (14,172,264) (12,732,131)
Loans, net 1,019,382,292 980,456,979
Premises and equipment (notes 6) 32,523,113 28,898,589
Accrued interest receivable 16,458,066 15,233,682
Other assets (notes 4 and 8) 40,207,277 30,692,512
$ 1,939,556,765 1,718,483,797
Liabilities and Stockholders' Equity:
Deposits (note 7):
Noninterest-bearing $ 190,625,140 161,007,156
Interest-bearing:
Demand 131,602,358 117,664,352
Savings 603,367,340 527,364,856
Time 571,080,293 558,234,127
Total deposits 1,496,675,131 1,364,270,491
Federal funds purchased and securities sold
under agreements to repurchase 155,847,300 92,632,576
Other short-term borrowings (note 9) 87,050,000 73,700,000
Accrued expenses and other liabilities 18,315,348 16,980,763
Long-term borrowings (note 10) 41,546,000 36,662,000
Total liabilities 1,799,433,779 1,584,245,830
Minority interest in consolidated subsidiaries 4,912,667 4,858,668
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, $2.50 par; 50,000,000 shares
authorized; 18,752,381 and 17,334,048 shares
issued and outstanding at December 31, 1998,
and 1997, respectively 46,880,953 43,335,120
Capital surplus --- ---
Retained earnings 85,010,569 82,824,333
Accumulated other comprehensive income --
Unrealized gains on securities available for
sale, net 3,318,797 3,219,846
Total common stockholders' equity 135,210,319 129,379,299
$ 1,939,556,765 1,718,483,797
<FN>
Commitments and contingencies (notes 17 and 18).
See accompanying notes to consolidated financial statements.
13
BRENTON BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31 1998 1997 1996
Interest Income:
Interest and fees on loans (note 4) $ 89,739,711 86,020,464 80,301,707
Interest and dividends on investments:
Available for sale--taxable 23,770,870 21,969,148 20,063,114
Available for sale--tax-exempt 5,866,972 4,929,898 4,250,463
Held to maturity--taxable 277,075 811,729 2,878,982
Held to maturity--tax-exempt 2,536,082 2,647,149 2,404,155
Interest on federal funds sold and
securities purchased under agreements
to resell 1,659,405 1,742,284 1,416,539
Other interest income 175,678 118,695 68,157
___________ ___________ ___________
Total interest income 124,025,793 118,239,367 111,383,117
Interest Expense:
Interest on deposits (note 7) 50,772,501 49,310,346 49,507,425
Interest on federal funds purchased and
securities sold under agreements to
repurchase 5,092,162 3,413,432 2,469,939
Interest on other short-term borrowings
(note 9) 3,756,817 3,183,053 1,015,110
Interest on long-term borrowings (note 10) 3,016,987 2,198,772 2,338,501
___________ ___________ ___________
Total interest expense 62,638,467 58,105,603 55,330,975
Net interest income 61,387,326 60,133,764 56,052,142
Provision for loan losses (note 5) 4,200,000 3,900,000 2,900,000
___________ ___________ ___________
Net interest income after provision for
loan losses 57,187,326 56,233,764 53,152,142
Noninterest Income:
Service charges on deposit accounts 7,885,513 7,290,765 6,712,874
Mortgage banking income 7,797,577 3,274,215 2,168,593
Investment brokerage commissions 5,334,309 4,808,048 3,766,436
Fiduciary income 3,497,030 3,136,078 2,744,530
Insurance commissions and fees 1,382,917 2,803,983 2,915,666
Other service charges, collection and
exchange charges, commissions and fees 4,208,330 3,441,454 2,779,502
Net realized gains from
securities available for sale (note 3) 665,450 493,822 321,256
Other operating income 2,586,701 2,257,424 1,918,584
___________ ___________ ___________
Total noninterest income 33,357,827 27,505,789 23,327,441
Noninterest Expense:
Compensation 29,141,441 26,824,307 25,460,464
Employee benefits (note 15) 4,873,271 4,303,104 4,245,682
Occupancy expense of premises, net
(notes 6 and 17) 5,807,559 5,609,600 5,502,904
Furniture and equipment expense
(notes 6 and 17) 4,163,137 3,634,336 3,725,150
Data processing expense (note 18) 2,623,727 2,850,395 2,591,485
Marketing 1,472,632 1,361,963 1,756,473
Supplies 1,226,212 1,195,762 1,409,690
FDIC deposit insurance assessment 272,814 281,416 1,801,646
Other operating expense 11,810,735 11,637,681 9,597,077
___________ ___________ ___________
Total noninterest expense 61,391,528 57,698,564 56,090,571
Income before income taxes and
minority interest 29,153,625 26,040,989 20,389,012
Income taxes (note 8) 8,082,355 7,287,628 5,770,600
___________ ___________ ___________
Income before minority interest 21,071,270 18,753,361 14,618,412
Minority interest 720,349 743,254 602,982
___________ ___________ ___________
Net income $ 20,350,921 18,010,107 14,015,430
Per common share (notes 1 and 13):
Net income-basic $ 1.07 .94 .70
Net income-diluted 1.05 .91 .69
Cash dividends .349 .248 .188
<FN>
See accompanying notes to consolidated financial statements.
14
BRENTON BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31 1998 1997 1996
Operating Activities:
Net income $ 20,350,921 18,010,107 14,015,430
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Provision for loan losses 4,200,000 3,900,000 2,900,000
Depreciation and amortization 4,683,179 4,216,828 4,301,776
Deferred income taxes 1,396,220 (685,223) 949,396
Net realized gains from
securities available for sale (665,450) (493,822) (321,256)
Investment securities amortization and
accretion 1,043,735 1,346,704 1,710,902
Net (increase) decrease in loans held
for sale (78,843,980) (13,433,113) 2,837,011
Net increase in accrued interest
receivable and other assets (7,644,451) (3,501,066) (1,402,881)
Net increase in accrued expenses, other
liabilities and minority interest 1,384,709 509,873 1,735,569
___________ ___________ ___________
Net cash provided (used) by operating
activities (54,095,117) 9,870,288 26,725,947
Investing Activities:
Investment securities available for sale:
Purchases (461,159,506) (303,699,052) (289,154,999)
Maturities 252,551,601 161,716,090 148,785,952
Sales 89,996,385 119,401,553 67,547,581
Investment securities held to maturity:
Purchases (6,166,526) (26,324,353) (45,015,563)
Maturities 32,130,525 29,768,259 78,826,937
Net increase in loans (43,125,313) (53,741,825) (26,364,596)
Purchase of other assets for
investment (5,000,000) (5,000,000) (10,017,329)
Purchases of premises and equipment (7,911,645) (2,526,958) (2,734,491)
Proceeds from sales of premises and
equipment 7,291 225,080 1,356,634
_____________ ___________ ___________
Net cash used by investing activities (148,677,188) (80,181,206) (76,769,874)
Financing Activities:
Net increase in noninterest-bearing,
interest-bearing demand and savings
deposits 119,558,474 25,683,433 22,335,320
Net increase (decrease) in time deposits 12,846,166 (14,470,053) (31,220,924)
Net increase in federal funds
purchased and securities sold under
agreements to repurchase 63,214,724 25,806,456 25,718,709
Net increase (decrease) in other
short-term borrowings (9,700,000) 25,550,000 15,500,000
Proceeds of long-term borrowings 29,394,000 17,806,000 14,604,000
Repayment of long-term borrowings (1,460,000) (2,004,024) (1,771,779)
Dividends on common stock (6,622,340) (4,781,675) (3,748,653)
Proceeds from issuance of common stock
under the employee stock purchase plan 758,090 551,247 71,675
Proceeds from issuance of common stock
under the stock option plan 290,039 1,286,157 290,748
Proceeds from issuance of common stock
under the long-term stock compensation
plan 970,220 246,915 334,834
Payment for shares reacquired under common
stock repurchase plan (10,000,900) (10,014,087) (8,248,331)
Payment for fractional shares resulting
from common stock dividend (13,961) (16,399) (13,744)
_____________ ___________ ___________
Net cash provided by financing
activities 199,234,512 65,643,970 33,851,855
_____________ ___________ ___________
Net decrease in cash and
cash equivalents (3,537,793) (4,666,948) (16,192,072)
Cash and cash equivalents at the
beginning of the year 88,165,130 92,832,078 109,024,150
_____________ ____________ ___________
Cash and cash equivalents at the end
of the year $ 84,627,337 88,165,130 92,832,078
<FN>
See accompanying notes to consolidated financial statements.
15
BRENTON BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
Years Ended December 31 1998 1997 1996
Common Stock
Beginning of year balance $ 43,335,120 40,428,420 38,266,260
Ten percent common stock
dividend (note 13) 4,315,398 3,966,905 3,684,215
Issuance of shares of common
stock under the stock option
plan (note 16) 99,825 501,760 128,000
Issuance of shares of common
stock under the long-term stock
compensation plan (note 16) 268,960 82,945 73,590
Issuance of shares of common
stock under the employee stock
purchase plan (note 16) 94,150 93,790 14,855
Shares reacquired under the common
stock repurchase plan (note 13) (1,232,500) (1,738,700) (1,738,500)
_____________ ___________ ___________
End of year balance 46,880,953 43,335,120 40,428,420
Capital Surplus
Beginning of year balance --- --- 2,020,518
Ten percent common stock
dividend (note 13) (78,529) --- ---
Issuance of shares of common
stock under the stock option
plan (note 16) 190,214 784,397 162,748
Issuance of shares of common
stock under the long-term stock
compensation plan (note 16) 842,685 163,970 261,244
Issuance of shares of common
stock under the employee stock
purchase plan (note 16) 664,018 457,457 56,820
Shares reacquired under the common
stock repurchase plan (note 13) (1,618,388) (1,405,824) (2,501,330)
_____________ ___________ ___________
End of year balance --- --- ---
Retained Earnings
Beginning of year balance 82,824,333 80,448,768 77,888,451
Net income 20,350,921 18,010,107 14,015,430
Dividends on common stock
($.349, $.248, and $.188
per share, respectively*) (6,622,340) (4,781,675) (3,748,653)
Ten percent common stock
dividend (note 13) (4,236,869) (3,966,905) (3,684,215)
Fractional shares resulting from
common stock dividend (13,961) (16,399) (13,744)
Issuance of shares of common
stock under the long-term stock
compensation plan (note 16) (141,425) --- ---
Issuance of shares of common
stock under the employee stock
purchase plan (note 16) (78) --- ---
Shares reacquired under the common
stock repurchase plan (note 13) (7,150,012) (6,869,563) (4,008,501)
_____________ ___________ ___________
End of year balance 85,010,569 82,824,333 80,448,768
Accumulated Other Comprehensive Income
Beginning of year balance 3,219,846 1,077,041 1,358,402
Change in unrealized holding gains
(losses) on securities, net 98,951 2,142,805 (281,361)
_____________ ___________ ___________
End of year balance 3,318,797 3,219,846 1,077,041
_____________ ___________ ___________
Total Stockholder's Equity $ 135,210,319 129,379,299 121,954,229
<FN>
* Reflects the 2-for-1 stock split effective February 1998 and the 10 percent common
stock dividends effective in 1998 and 1997.
See accompanying notes to consolidated financial statements.
16
BRENTON BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31 1998 1997 1996
Net income $ 20,350,921 18,010,107 14,015,430
Other comprehensive income (loss),
net of tax:
Unrealized gains (losses) on
securities available for sale:
Unrealized holding gains (losses)
arising during the period (net
Of deferred tax of $(311,674),
$(1,470,886) and $48,346,
respectively) 512,861 2,451,444 (80,576)
Less: reclassification adjustment
for net realized gains included
in net income (net of tax expense
of $251,540, $185,183 and
$120,471, respectively) (413,910) (308,639) (200,785)
_____________ __________ __________
Other comprehensive income (loss),
net of tax 98,951 2,142,805 (281,361)
_____________ __________ __________
Comprehensive income $ 20,449,872 20,152,912 13,734,069
<FN>
See accompanying notes to consolidated financial statements.
17
BRENTON BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(1) Summary of Significant Accounting Policies and
Related Matters
______________________________________________________________________________
Nature of Operations Brenton Banks, Inc. and subsidiaries (the Company)
engage in retail, commercial, business, and agricultural banking and related
financial services from 47 locations throughout the state of Iowa. The
Company provides the usual products and services of banking such as deposits,
commercial loans, business loans, agribusiness loans, personal loans and trust
and investment management services. The Company also engages in activities
that are closely related to banking, including mortgage banking, investment,
insurance and real estate 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 15 to 40 years and are
included in other assets in the consolidated statements of condition.
Intangible assets totaled $3,395,000 and $3,795,000 at December 31, 1998, and
1997, 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 that the Company has the ability and intent 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 other comprehensive income
until realized. 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 is adjusted for
actual and projected prepayments.
Net realized 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.
Trading Account Securities Trading account securities are carried at market
value and include securities purchased with the intent to resell in a
relatively short period of time. Gains and losses on trading account
activities, including market value adjustments, are reported in noninterest
income in the consolidated statements of operations.
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, interest credited to income in the
current year is reversed and interest accrued in prior years is charged to the
allowance for loan losses.
Under the Company's credit policies, all nonaccrual and restructured
commercial, business, agricultural, commercial real estate and construction
loans are considered to be impaired loans. 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,
business, 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.
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 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. 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 5 to 40 years for
buildings and leasehold improvements, and 3 to 20 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 $389,000 and $341,000 at December 31,
1998, and 1997, respectively. Such property is carried at the lower of cost
or estimated fair value, less estimated selling costs. Periodic appraisals are
obtained to support carrying values. Net expense of
18
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 and federal funds sold and securities purchased under agreements to
resell.
Income Per Common Share Basic net income per common share amounts are
computed by dividing net income by the weighted average number of common
shares outstanding during the year. Diluted net income per common share
amounts are computed by dividing net income by the weighted average number of
common shares and all dilutive potential common shares outstanding during the
year. In January 1998, the Company declared a 2-for-1 stock split effective
February 10, 1998 and in June 1998, May 1997 and October 1996, the Company
declared 10 percent common stock dividends. The average number of common
shares and dilutive potential common shares have been restated for the stock
split and stock dividends.
The following information was used in the computation of net income per
common share on both a basic and diluted basis for the years ended December
31, 1998, 1997 and 1996:
(in thousands, except for EPS data) 1998 1997 1996
_____________________________________________________________________________
Basic EPS Computation
Numerator:
Net income $20,351 18,010 14,015
______ ______ ______
Denominator:
Average common shares
outstanding 18,957 19,255 19,901
______ ______ ______
Basic EPS $ 1.07 .94 .70
______ ______ ______
______ ______ ______
Diluted EPS Computation
Numerator:
Net income $20,351 18,010 14,015
______ ______ ______
Denominator:
Average common shares
outstanding 18,957 19,255 19,901
Average stock options 390 313 177
Average long-term stock
compensation plan --- 154 215
______ ______ ______
19,347 19,722 20,293
______ ______ ______
______ ______ ______
Diluted EPS $ 1.05 .91 .69
______ ______ ______
______ ______ ______
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.
Interest Rate Floor An interest rate floor requires the seller to pay the
purchaser, at specified dates, the amount, if any, by which the market
interest rate falls below the agreed-upon floor, applied to a notional
principal amount. Initial cash amounts paid on positions accounted for as
hedges are deferred and amortized over the
19
instrument's contractual life. Subsequent payments received are recognized
into earnings as an adjustment to interest on deposits.
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 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.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities Effective January 1, 1997, the Company adopted SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This statement requires that after a transfer
of financial assets, the Company must recognize the financial and servicing
assets controlled and liabilities incurred and derecognize financial assets
and liabilities in which control is surrendered or debt is extinguished. In
such a case, servicing assets are determined based upon estimated future
revenues from contractually specified servicing fees and other ancillary
revenues that are expected to compensate the Company for performing the
servicing. The adoption of SFAS No. 125 did not have a material effect on the
Company.
Earnings per Share Effective December 31, 1997, the Company adopted SFAS No.
128, "Earnings Per Share." This statement replaces the primary earnings per
share (EPS) disclosure with basic and diluted EPS disclosures to simplify the
calculation and improve international comparability. The adoption of SFAS No.
128 did not have a material effect on the Company.
Reporting Comprehensive Income Effective January 1, 1998, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income." This statement establishes
standards for reporting and display of comprehensive income and its components
(revenue, expenses, gains and losses) in a full set of financial staements.
The adoption of SFAS No. 130 did not have a material effect on the Company.
Segment Reporting Effective December 31, 1998, the Company adopted SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information."
This statement requires disclosure about operating segments that are
components of the Company that engage in business activities that generate
revenue and incur expenses. A segment is further defined as a component whose
operating results are reviewed by the chief operating decision-maker in the
determination of resource allocation and performance. The statement also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The adoption of SFAS No. 131 did not
have any impact on the Company's financial position other than additional
financial disclosures.
(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 $15,308,000 at December 31, 1998.
(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.
20
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1998 (in thousands) Cost Gains Losses Value
Investment securities available for sale:
Taxable investments:
U.S. Treasury securities $ 43,076 360 (144) 43,292
Securities of U.S. government agencies 139,372 1,293 (248) 140,417
Mortgage-backed and related securities 231,955 1,497 (397) 233,055
Other investments 26,948 61 (25) 26,984
Tax-exempt investments:
Obligations of states and political
subdivisions 158,283 3,344 (191) 161,436
_______ _____ _____ _______
$599,634 6,555 (1,005) 605,184
Investment securities held to maturity:
Taxable investments:
Mortgage-backed and related securities $ 1,529 12 --- 1,541
Other investments 450 11 --- 461
Tax-exempt investments:
Obligations of states and political
subdivisions 41,048 964 (3) 42,009
_______ _____ _____ ______
$ 43,027 987 (3) 44,011
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1997 (in thousands) Cost Gains Losses Value
Investment securities available for sale:
Taxable investments:
U.S. Treasury securities $ 38,502 288 --- 38,790
Securities of U.S. government agencies 86,185 490 (15) 86,660
Mortgage-backed and related securities 229,334 1,778 (179) 230,933
Other investments 20,925 36 (4) 20,957
Tax-exempt investments:
Obligations of states and political
subdivisions 106,804 2,522 (12) 109,314
_______ _____ _____ _______
$481,750 5,114 (210) 486,654
Investment securities held to maturity:
Taxable investments:
Securities of U.S. government agencies $ 5,025 --- (6) 5,019
Mortgage-backed and related securities 2,363 74 --- 2,437
Other investments 1,518 9 (1) 1,526
Tax-exempt investments:
Obligations of states and political
subdivisions 60,173 773 (76) 60,870
_______ _____ _____ ______
$ 69,079 856 (83) 69,852
21
Proceeds from the sale of available for sale securities were $89,996,000,
$119,402,000 and $67,548,000 in 1998, 1997, and 1996, respectively. Gross
gains of $667,000 in 1998, $874,000 in 1997 and $558,000 in 1996 and gross
losses of $2,000 in 1998, $380,000 in 1997 and $237,000 in 1996 were realized
on those sales.
Other investments at December 31, 1998, and 1997, consisted primarily of
corporate bonds and Federal Home Loan Bank stock. U.S. government agencies
originate or guarantee primarily all of the mortgage-backed and related
securities.
The scheduled maturities of investment securities at December 31, 1998
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 $108,758 109,192
Due after one year through
five years 378,352 381,202
Due after five years through
ten years 92,176 93,634
Due after ten years 20,348 21,156
$599,634 605,184
Investment securities held to
maturity:
Due in one year or less $ 16,518 16,613
Due after one year through
five years 17,008 17,288
Due after five years through
ten years 5,842 6,150
Due after ten years 3,659 3,960
$ 43,027 44,011
Investment securities carried at $265,405,000 and $314,865,000 at December 31,
1998, and 1997, respectively, were pledged to secure public and other funds on
deposit and for other purposes.
(4) Loans
______________________________________________________________________________
A summary of loans at December 31 follows:
(in thousands) 1998 1997
Real estate loans:
Commercial construction
and land development $ 54,941 30,007
Secured by 1-4 family
residential property 127,351 194,055
Home equity 175,380 148,079
Other 151,995 161,989
Loans to farmers 84,554 79,036
Commercial and industrial loans 179,414 160,428
Loans to individuals for personal
expenditures:
Direct 69,452 66,252
Indirect 182,184 151,153
All other loans 8,284 2,190
$1,033,555 993,189
The Company originates commercial, business, real estate, agricultural and
personal loans with clients throughout Iowa. The portfolio has unavoidable
geographic risk as a result.
Total nonperforming loans and assets at December 31 were:
(in thousands) 1998 1997
Impaired loans:
Nonaccrual $ 8,099 3,227
Restructured 289 513
Total impaired loans 8,388 3,740
Loans past due 90 days
or more 2,901 2,972
Total nonperforming loans 11,289 6,712
Other real estate owned 389 341
Total nonperforming assets $11,678 7,053
The average balances of impaired loans for the years ended December 31, 1998,
and 1997, were $5,901,000 and $3,076,000, respectively. The allowance for
loan losses related to impaired loans at December 31, 1998, and 1997, was
$2,506,000 and $1,187,000, respectively. Impaired loans of $311,000 and
$704,000 were not subject to a related allowance for loan losses at
December 31, 1998, and 1997, respectively, because of the net realizable value
of loan collateral, guarantees and other factors.
The effect of nonaccrual and restructured loans on interest income for each of
the three years ended December 31 was:
(in thousands) 1998 1997 1996
Interest income:
As originally contracted $827 402 363
As recognized 215 157 174
Reduction of interest income $612 245 189
Loan clients 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, 1997 $ 5,918
Additional loans 2,090
Loan payments (3,237)
Balance at December 31, 1998 $ 4,771
Mortgage Servicing Rights The fair market value of capitalized servicing
rights at December 31, 1998 was approximately $5,986,000. To determine the
fair value of the servicing rights, the Company used comparable market prices.
In determining the fair market value and potential impairment at the end of
1998, the Company disaggregated the portfolio by its predominate risk factor,
interest rate. The fair value of the portfolio was determined by
22
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, included in other
assets, as of December 31 follows:
(in thousands) 1998 1997
Balance at beginning of year $2,274 1,026
Additions from originations 4,186 1,491
Amortization (685) (238)
Impairment --- (5)
Balance at end of year $5,775 2,274
(5) Allowance for Loan Losses
______________________________________________________________________________
A summary of activity in the allowance for loan losses follows:
(in thousands) 1998 1997 1996
Balance at beginning of year $12,732 11,328 11,070
Provision 4,200 3,900 2,900
Recoveries 1,647 1,733 1,419
Loans charged off (4,407) (4,229) (4,061)
Balance at end of year $14,172 12,732 11,328
(6) Premises and Equipment
_______________________________________________________________________________
A summary of premises and equipment as of December 31 follows:
(in thousands) 1998 1997
Land $ 3,338 2,919
Buildings and leasehold
improvements 33,881 31,511
Furniture and equipment 29,853 25,047
Construction in progress 324 145
67,396 59,622
Less accumulated depreciation 34,873 30,723
$32,523 28,899
Depreciation expense included in operating expenses amounted to $4,282,000,
$3,783,000 and $3,848,000 in 1998, 1997 and 1996, respectively.
(7) Deposits
_____________________________________________________________________________
Time deposits include deposits in denominations of $100,000 or more of
$97,665,000 and $80,896,000 at December 31, 1998, and 1997, respectively.
A summary of interest expense by deposit classification follows:
(in thousands) 1998 1997 1996
Demand $ 2,800 2,332 11,194
Savings 17,429 15,903 6,134
Time deposits
of $100,000 or more 4,835 4,833 3,935
Other time deposits 25,708 26,242 28,244
$50,772 49,310 49,507
The Company made cash interest payments of $61,964,000, $57,932,000 and
$55,455,000 on deposits and borrowings in 1998, 1997 and 1996, respectively.
At December 31, 1998, the scheduled maturities of time deposits are as
follows:
(in thousands)
1999 $363,579
2000 146,791
2001 30,402
2002 17,238
2003 and thereafter 13,070
$571,080
(8) Income Taxes
_____________________________________________________________________________
The current and deferred income tax provisions included in the consolidated
statements of operations follow:
1998 (in thousands) Current Deferred Total
Federal $5,301 1,512 6,813
State 1,385 (116) 1,269
$6,686 1,396 8,082
1997
Federal $6,562 (577) 5,985
State 1,411 (108) 1,303
$7,973 (685) 7,288
1996
Federal $3,754 894 4,648
State 1,067 56 1,123
$4,821 950 5,771
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
$6,000,000, $6,100,000 and $4,250,000 to the IRS, and $1,510,000, $1,568,000
and $435,000 to the state of Iowa in 1998, 1997 and 1996, 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.
23
The reasons for the difference between the amount computed by applying the
statutory federal income tax rate of 35 percent and income tax expense follow:
(in thousands) 1998 1997 1996
At statutory rate $ 10,204 9,114 7,136
Increase (reduction) due to:
Tax-exempt interest (3,169) (2,916) (2,556)
State taxes, net of
federal benefit 825 847 730
Nondeductible interest expense
to own tax-exempts 572 536 426
Other, net (350) (293) 35
$ 8,082 7,288 5,771
Accumulated deferred income tax assets are included in other assets in the
consolidated statements of condition. There was no valuation allowance at
December 31, 1998, or 1997. A summary of the temporary differences resulting
in deferred income taxes and the related tax effect on each follow:
(in thousands) 1998 1997
Allowance for loan losses $5,576 4,575
Unrealized gains on
securities available for sale (2,157) (2,006)
Deposit base intangibles (458) (489)
Premises and equipment (366) (468)
Stock compensation plan --- 1,077
Mortgage servicing rights (2,348) (852)
Real estate mortgage
loan points deferred (257) (283)
Other, net 333 316
$ 323 1,870
(9) Other Short-Term Borrowings
_____________________________________________________________________________
The Company had short-term borrowings with the Federal Home Loan Bank of Des
Moines (FHLB) totaling $87,050,000 and $73,700,000 at December 31, 1998, and
1997, respectively. The average rate on these borrowings at December 31, 1998
was 5.38 percent. These borrowings were secured by FHLB stock and residential
mortgage loans equal to 130 percent of the borrowings.
The Parent Company has arranged an unsecured line of credit of
$5,000,000, which was unused at December 31, 1998. 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 at December 31:
(in thousands) 1998 1997
Capital notes, 6.00% to 10.00%
Total Parent Company $ 9,046 10,112
Borrowings from FHLB, average rate
of 5.74% at December 31, 1998 32,500 26,550
$ 41,546 36,662
Borrowings from the FHLB were secured by FHLB stock and residential mortgage
loans equal to 130 percent of the borrowings and were direct obligations of
the individual subsidiaries.
Scheduled maturities of long-term borrowings at December 31, 1998 follow:
Parent
(in thousands) Company Consolidated
1999 $ 1,263 1,263
2000 803 19,303
2001 1,358 15,358
2002 757 757
2003 944 944
Thereafter 3,921 3,921
$ 9,046 41,546
24
(11) Fair Value of Financial Instruments
_____________________________________________________________________________
The estimated fair values of the Company's financial instruments were as
follows:
December 31, 1998 December 31, 1997
_________________ _________________
Recorded Fair Recorded Fair
(in thousands) Amount Value Amount Value
_______________________________________________________________________________________
Financial assets:
Cash and due from banks $ 76,460 76,460 $ 77,468 77,468
Interest-bearing deposits with
banks 2,167 2,167 1,320 1,320
Federal funds sold and securities
purchased under agreements to
resell 6,000 6,000 9,300 9,300
Trading account securities --- --- 77 77
Investment securities 648,211 649,195 555,733 556,506
Loans held for sale 98,147 98,147 19,303 19,303
Loans, net 1,019,382 1,029,536 980,457 981,664
Financial liabilities:
Deposits $ 1,496,675 1,504,006 $1,364,270 1,369,448
Federal funds purchased, securities
sold under agreements to repurchase
and other short-term borrowings 242,897 242,897 166,333 166,333
Long-term borrowings 41,546 42,912 36,662 37,156
Off-balance-sheet assets (liabilities):
Commitments to extend credit $ --- --- $ --- ---
Letters of credit --- (100) --- (111)
Interest rate swaps --- --- --- (34)
Interest rate floor 98 400 195 206
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 and trading account securities 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 and the interest rate floor
contract is the estimated amount that the Company would receive or pay to
terminate the swap and floor agreements at the reporting date.
25
(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, 1998, 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, 1998:
Total Capital
(to Risk Weighted Assets):
Consolidated $148,644 11.37% $104,548 > 8.0% N/A
_
Brenton Bank 136,371 11.04 98,842 > 8.0 $123,553 > 10.0%
_ _
Tier 1 Capital
(to Risk Weighted Assets):
Consolidated 134,446 10.29 52,274 > 4.0 N/A
_
Brenton Bank 123,087 9.96 49,421 > 4.0 74,132 > 6.0
_ _
Tier 1 Capital
(to Average Assets):
Consolidated 134,446 7.17 56,271 > 3.0 N/A
_
Brenton Bank 123,087 7.64 64,429 > 4.0 80,536 > 5.0
_ _
(13) Common Stock Transactions
_____________________________________________________________________________
In January 1998, the Company declared a 2-for-1 stock split for holders of
record as of February 10, 1998. As a result, the par value of the Company's
common stock was changed from $5.00 to $2.50 per share, the number of
outstanding shares doubled and authorized shares were increased to 50 million.
In June 1998, the Company declared a 10 percent common stock dividend. This
transaction resulted in the issuance of 1,726,159 shares of common stock and
the transfer of $4,236,869 from retained earnings to common stock. In May
1997, the Company declared a 10 percent common stock dividend. As a result of
this action, 1,586,762 shares of common stock were issued and $3,966,905 was
transferred from retained earnings to common stock. Fractional shares
resulting from both 10 percent common stock dividends were paid in cash. 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, the Board of
Directors authorized additional common stock repurchases of $10 million in
1998. For the years ended December 31, 1998, 1997 and 1996, the Company
repurchased 512,650, 805,904 and 915,365 shares (restated for the 2-for-1
stock split effective February 1998 and the 10 percent common stock dividends
effective in 1998, 1997 and 1996), respectively, at a total cost of
$10,000,900, $10,014,087 and $8,248,331.
(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. 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 that could be paid by the subsidiary banks
to the Parent Company at December 31, 1998, were approximately $6 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
26
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 1/2 percent of each
employee's eligible compensation. Retirement plan costs charged to operating
expenses in 1998, 1997 and 1996 amounted to $1,506,000, $1,290,000 and
$1,284,000, respectively. The Company offers no material post-retirement
benefits.
(16) Stock Plans
_____________________________________________________________________________
In 1996, the Company adopted the 1996 Stock Option Plan (the "Plan"), which
was approved by a vote of stockholders. The Plan authorizes the granting of
options on up to 1,331,000 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. As of December 31, 1998, 33
percent of the outstanding options vested.
For purposes of estimating the fair value of the Company's stock options
at the grant-date, the Company's option pricing model was used with the
following weighted average assumptions for 1998, 1997 and 1996, respectively:
expected dividend yields of 2.06, 2.05 and 2.15 percent; risk-free interest
rates of 5.55%, 6.52% and 6.85%; volatility factors of the expected market
price of the Company's common stock of 19.6%, 18.5% and 18.0%; and weighted
average expected life of the options of 6 years. The weighted average fair
value of options granted in 1998, 1997 and 1996, respectively, was $4.64,
$3.74 and $2.73.
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:
1998 1997 1996
Net income (in thousands):
As reported $20,351 18,010 14,015
Pro forma 19,732 17,735 13,769
Basic earnings per share:
As reported $1.07 .94 .70
Pro forma 1.04 .92 .69
Diluted earnings per share:
As reported $1.05 .91 .69
Pro forma 1.03 .90 .68
Pro forma net income reflects only options granted in 1998, 1997 and 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 vesting period.
Changes in options outstanding during 1998, 1997 and 1996 were as follows
(restated for the 2-for-1 stock split effective February 1998 and the 10
percent common stock dividends effective in 1998, 1997 and 1996):
Exercisable Outstanding Option Price
Options Options Per Share
December 31, 1995 --- --- $ ---
Granted - 1996 --- 1,139,336 9.16-9.76
December 31, 1996 --- 1,139,336 9.16-9.76
Granted - 1997 --- 95,898 11.36-15.23
Forfeited - 1997 --- (39,930) 9.16
December 31, 1997 --- 1,195,304 9.16-15.23
Granted - 1998 --- 131,400 16.69-20.69
Forfeited - 1998 --- (25,234) 9.16-18.33
Vested - 1998 429,467 --- 9.16-20.69
December 31, 1998
(29,530 shares available
for grant) 429,467 1,301,470 $ 9.16-20.69
A total of 930,504 shares were granted 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 covered a three-year
performance period, 35 percent of which vested upon completion of employment
for the performance period and 65 percent of which vested 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 $0, $1,731,000, and $1,302,000 for 1998, 1997 and 1996, respectively.
Changes in outstanding grant shares during 1998, 1997 and 1996 were as follows
(restated for the 2-for-1 stock split effective February 1998 and the 10
percent common stock dividends effective in 1998, 1997 and 1996):
Performance 1993 to 1994 to 1995 to
Period 1995 1996 1997
December 31, 1995 181,754 204,730 219,605
Forfeited - 1996 --- (23,048) (25,093)
Expired - 1996 (118,142) --- ---
Vested and Issued - 1996 (63,612) --- ---
December 31, 1996 --- 181,682 194,512
Forfeited - 1997 --- --- (26,084)
Expired - 1997 --- (118,088) ---
Vested and Issued - 1997 --- (63,594) ---
December 31, 1997 --- --- 168,428
Vested and Issued - 1998 --- --- (168,428)
______________________________________________________________________________
Outstanding grant shares
At December 31, 1998 --- --- ---
The Company's 1987 nonqualified stock option plan permitted the Board of
Directors to grant options on up to 798,600 shares of the Company's common
stock to officers of the Company. Under provisions of the plan, no further
grants can be made and no grants were made in 1998. The price at which
options were exercisable
27
was not less than the fair market value of the shares at the date the options
were granted. The options were subject to certain vesting requirements and
maximum exercise periods, as established by the Board of Directors.
Changes in options outstanding and exercisable during 1998, 1997 and 1996
were as follows (restated for the 2-for-1 stock split effective February 1998
and the 10 percent common stock dividends effective in 1998, 1997 and 1996):
Exercisable Outstanding Option Price
Options Options Per Share
December 31, 1995 329,289 329,289 $1.66-3.55
Exercised - 1996 (64,856) (64,856) 1.66
December 31, 1996 264,433 264,433 1.66-3.55
Exercised - 1997 (224,503) (224,503) 1.66-3.55
December 31, 1997 39,930 39,930 2.41
Exercised - 1998 (39,930) (39,930) 2.41
December 31, 1998 --- --- $ ---
The Company's Employee Stock Purchase Plan allows qualifying 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 1998, 1997 and 1996,
39,986, 42,768 and 43,502 shares (restated for the 2-for-1 stock split
effective February 1998 and the 10 percent common stock dividends effective in
1998, 1997 and 1996), respectively, of common stock were purchased by
employees under this plan.
(17) Lease Commitments
_____________________________________________________________________________
Rental expense included in the consolidated statements of operations amounted
to $1,849,000, $1,963,000 and $1,919,000 in 1998, 1997 and 1996, respectively.
Future minimum rental commitments for all noncancelable leases with terms of
one year or more total approximately $1,030,000 per year through 2000,
$545,000 per year through 2003, $420,000 per year through 2008 and $40,000 per
year through 2013, with a total commitment of $5,980,000.
(18) Commitments and Contingencies
_____________________________________________________________________________
In the normal course of business, the Company is party to financial
instruments necessary to meet the financial needs of clients, which are not
reflected on the consolidated statements of condition. These financial
instruments include commitments to extend credit, standby letters of credit,
commercial letters of credit, commitments to sell residential real estate
mortgage loans 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 is
also a party to an interest rate floor contract, which is designated as a
hedge of certain client deposit accounts with contracted minimum interest
rates. The notional amount for an interest rate floor does not represent the
amount at risk because the notional amount will not be exchanged. The Company
uses the same credit policies in making commitments as it does in making
loans. A summary of commitments outstanding at December 31 follows:
(in thousands) 1998 1997
_____________________________________________________________________________
Commitments to extend credit $ 274,945 245,356
Standby letters of credit 19,956 22,150
Commercial letters of credit 1,751 1,748
Commitments to sell residential
real estate mortgage loans 70,690 15,397
Commitments to extend credit are legally binding agreements to lend to
clients. Commitments generally have fixed expiration dates and may require
payment of a fee. Based upon management's credit assessment of the client,
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.
Standby and commercial letters of credit are conditional commitments
issued by the Company guaranteeing the financial performance of a client to a
third party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans. The Company does
not anticipate losses as a result of issuing commitments to extend credit,
standby letters of credit or commercial letters of credit.
The Company enters into forward contracts for future delivery of
residential mortgage loans at specified yields to reduce the interest rate
risk associated with fixed-rate residential mortgages held for sale and
commitments to sell residential mortgages. Credit risk arises from the
possible inability of the other parties to comply with the contract terms.
The majority of the Company's contracts are with government-sponsored agencies
(FNMA, FHLMC).
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 $0 and $11,690,000 at December 31,
1998, and 1997, 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.
In December 1997, the Company entered into an interest rate floor
agreement to manage interest-rate risk. The notional value of this agreement
was $100,000,000 and expires on December 31, 1999. The interest rate floor
agreement requires the counterparty to pay the Company, at specified dates,
the amount, if any, by which the market interest rate falls below the agreed-
upon floor, applied to the notional principal amount. The credit worthiness
of the counterparty was evaluated by the Company's loan committee prior to
entering into the agreement.
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.
28
The Company maintains a data processing agreement with ALLTEL Information
Services, Inc. (ALLTEL), whereby ALLTEL manages and operates the Company's
data processing facility. The contract involves fixed payments of $2,298,000
in 1999, $2,190,000 through 2001 and $1,095,000 in 2002. These fixed payments
will be adjusted for inflation and volume fluctuations.
On December 31, 1998, the Company entered into an agreement to purchase a
parcel of land for $2.1 million. The land will be utilized for a new
operations and sales support center.
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) Brenton Banks, Inc. (Parent Company) Condensed Financial Information
_____________________________________________________________________________
Statements of Condition
December 31 (in thousands) 1998 1997
Assets
Interest-bearing deposits with banks $ 1,088 3,596
Investments in:
Bank subsidiaries 136,687 132,008
Excess cost over net assets 1,679 1,753
Premises and equipment 503 563
Other assets 4,722 5,103
________ _______
$ 144,679 143,023
Liabilities and Stockholders' Equity
Accrued expenses payable
and other liabilities $ 423 3,532
Long-term borrowings 9,046 10,112
Common stockholders' equity 135,210 129,379
_______ _______
$ 144,679 143,023
Statements of Operations
Years Ended December 31 (in thousands) 1998 1997 1996
Income
Dividends from subsidiaries $ 16,869 14,850 10,766
Interest income 93 213 341
Other operating income 103 119 43
________ ______ ______
17,065 15,182 11,150
Expense
Compensation and benefits 439 2,331 1,884
Interest on borrowings 735 849 970
Other operating expense 613 584 655
________ ______ ______
1,787 3,764 3,509
Income before income taxes and
equity in undistributed earnings
of subsidiaries 15,278 11,418 7,641
Income taxes (519) (1,155) (1,040)
Income before equity in undistributed
earnings of subsidiaries 15,797 12,573 8,681
Equity in undistributed earnings of subsidiaries 4,554 5,437 5,334
________ ______ ______
Net income $ 20,351 18,010 14,015
29
(19) Brenton Banks, Inc. (Parent Company) Condensed Financial Information
_____________________________________________________________________________
Statements of Cash Flows
Years Ended December 31 (in thousands) 1998 1997 1996
Operating Activities
Net income $ 20,351 18,010 14,015
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiaries (4,554) (5,437) (5,334)
Depreciation and amortization 161 163 163
Net (increase) decrease in other assets 354 (1,962) 18
Net increase (decrease) in accrued expenses
payable and other liabilities (3,109) 1,056 871
________ ______ ______
Net cash provided by operating activities 13,203 11,830 9,733
Investing Activities
Decrease in short-term investments --- --- 7,500
Purchase of subsidiary equity, net (26) --- (7)
Principal collected from subsidiaries --- --- 115
Purchase of premises and equipment, net --- (8) 669
________ ______ ______
Net cash provided (used) by investing activities (26) (8) 8,277
Financing Activities
Net repayment of long-term borrowings (1,066) (1,136) (1,187)
Proceeds from issuance of common stock under the
long-term stock compensation plan 970 247 335
Proceeds from issuance of common stock under the
stock option plan 290 1,286 291
Proceeds from issuance of common stock under the
employee stock purchase plan 758 551 72
Payment for shares reacquired under common stock
repurchase plan (10,001) (10,014) (8,248)
Payment for fractional shares from common stock (14) (16) (14)
dividends
Dividends on common stock (6,622) (4,782) (3,749)
________ ______ ______
Net cash used by financing activities (15,685) (13,864) (12,500)
Net increase (decrease) in cash and interest-
bearing deposits (2,508) (2,042) 5,510
Cash and interest-bearing deposits at the
beginning of the year 3,596 5,638 128
Cash and interest-bearing deposits at the end
of the year $ 1,088 3,596 5,638
30
(20) Segment Information
______________________________________________________________________________
The Company has one reportable operating segment: banking. The banking segment
generates revenues through personal, business, agricultural and commercial
lending, management of the investment securities portfolio, providing deposit
account services and providing trust services. The Company evaluates the
banking segment's performance on the basis of profit.
Included in all other in the table below are mortgage banking, investment
brokerage, insurance sales and real estate brokerage. All operations are
concentrated in the state of Iowa.
The Company accounts for intercompany sales and transactions as if they
were to third parties and attempts to set fees consistent with those that
would apply in an arm's length transaction with a nonaffiliate. There can be
no assurance the rates charged reflect those that would have been agreed upon
following an arm's length transaction.
The following table presents a summary of the Company's operating
segments for the three years ended December 31, 1998:
All Parent Intersegment Reported
Banking Other Company Eliminations Balances
(in thousands)
_________________________________________________________________________________________
1998
_________________________________________________________________________________________
Net income income $ 61,112 917 (642) --- 61,387
Noninterest income from
nonaffiliates 17,649 15,621 103 (15) 33,358
Noninterest income from
affiliates 296 --- 16,869 (17,165) ---
Income before income taxes
and minority interest 26,227 4,517 15,278 (16,869) 29,153
Income taxes 7,030 1,571 (519) --- 8,082
Depreciation & amortization 4,274 254 161 (6) 4,683
Capital expenditures 7,311 601 --- --- 7,912
Segment assets 1,885,617 117,268 144,679 (208,007) 1,939,557
1997
_________________________________________________________________________________________
Net income income $ 60,333 437 (636) --- 60,134
Noninterest income from
nonaffiliates 15,864 11,560 119 (37) 27,506
Noninterest income from
affiliates 286 67 14,850 (15,203) ---
Income before income taxes
and minority interest 26,534 2,939 11,418 (14,850) 26,041
Income taxes 7,420 1,023 (1,155) --- 7,288
Depreciation & amortization 3,803 255 163 (4) 4,217
Capital expenditures 2,407 112 8 --- 2,527
Segment assets 1,701,495 24,933 143,023 (150,967) 1,718,484
1996
_________________________________________________________________________________________
Net income income $ 56,314 367 (629) --- 56,052
Noninterest income from
nonaffiliates 14,239 9,391 43 (346) 23,327
Noninterest income from
affiliates 359 49 10,766 (11,174) ---
Income before income taxes
and minority interest 22,217 1,296 7,641 (10,765) 20,389
Income taxes 6,358 453 (1,040) --- 5,771
Depreciation & amortization 3,912 232 163 (5) 4,302
Capital expenditures 2,409 282 43 --- 2,734
Segment assets 1,622,678 12,407 135,678 (138,668) 1,632,095
__________________________________________________________________________________________
The following table shows the detail of intersegement eliminations for segment
assets shown in the previous table:
1998 1997 1996
_____________________________________________________
(in thousands)
Investment in subsidiaries $138,539 133,860 126,893
Other consolidating adjustments 69,468 17,107 11,775
_______ _______ _______
$208,007 150,967 138,668
31
(21) Unaudited Quarterly Financial Information
_____________________________________________________________________________
The following is a summary of unaudited quarterly financial information (in
thousands, except per common share data):
1998
Three months ended March 31 June 30 Sept. 30 Dec. 31
Interest income $ 30,320 30,693 31,190 31,823
Interest expense 15,056 15,428 15,930 16,225
_______ ______ ______ ______
Net interest income 15,264 15,265 15,260 15,598
Provision for loan losses 1,050 1,050 1,050 1,050
_______ ______ ______ ______
Net interest income after
provision for loan losses 14,214 14,215 14,210 14,548
Noninterest income 7,487 8,106 8,549 9,216
Noninterest expense 14,908 15,154 15,172 16,158
_______ ______ ______ ______
Income before income taxes
and minority interest 6,793 7,167 7,587 7,606
Income taxes 1,907 1,994 2,101 2,080
Minority interest 167 178 190 185
_______ ______ ______ ______
Net income $ 4,719 4,995 5,296 5,341
Per common share:
Net income-basic $ .25 .26 .28 .28
Net income-diluted .24 .26 .27 .28
1997
Three months ended March 31 June 30 Sept. 30 Dec. 31
Interest income $ 28,473 29,182 30,168 30,416
Interest expense 13,855 14,448 14,631 15,171
_______ ______ ______ ______
Net interest income 14,618 14,734 15,537 15,245
Provision for loan losses 900 900 1,100 1,000
_______ ______ ______ ______
Net interest income after
provision for loan losses 13,718 13,834 14,437 14,245
Noninterest income 6,449 6,239 7,839 6,979
Noninterest expense 14,036 13,674 14,881 15,108
_______ ______ ______ ______
Income before income taxes
and minority interest 6,131 6,399 7,395 6,116
Income taxes 1,754 1,809 2,176 1,549
Minority interest 176 183 209 175
_______ ______ ______ ______
Net income $ 4,201 4,407 5,010 4,392
Per common share:
Net income-basic $ .22 .23 .26 .23
Net income-diluted .21 .22 .26 .22
32
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 and Chief Executive Officer
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, 1998, and 1997, and the
related consolidated statements of operations, comprehensive income, changes in
common stockholders' equity and cash flows for each of the years in the three-
year period ended December 31, 1998. 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, 1998, and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Des Moines, Iowa
January 29, 1999
33
STOCK INFORMATION
Brenton Banks, Inc. common stock is traded on the NASDAQ National Market and
quotations are furnished by the NASDAQ System. There were 1,704 common
stockholders of record on December 31, 1998.
MARKET AND DIVIDEND INFORMATION
1998 High Low Dividends
1st quarter $20.00 16.36 .077
2nd quarter 21.00 18.41 .087
3rd quarter 24.25 18.25 .090
4th quarter 19.13 15.75 .095
1997 High Low Dividends
1st quarter $11.78 11.26 .054
2nd quarter 12.50 11.42 .058
3rd quarter 15.00 12.33 .063
4th quarter 18.53 13.69 .073
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
February 1998 2-for-1 stock split and June 1998 and May 1997 10 percent
common stock dividends.
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: BrentB
Market Makers
ABN AMRO Incorporated
Herzog, Heine, Geduld, Inc.
Howe, Barnes Investments, Inc.
Keefe, Bruyette & Woods, Inc.
Sandler, O'Neill & Partners, L.P.
Stifel, Nicolaus & Co., 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. IT IS ALSO
AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S INTERNET WEB SITE AT
HTTP://WWW.SEC.GOV/CGI-BIN/SRCH-EDGAR.
STOCKHOLDER INFORMATION
Corporate Headquarters
Suite 200, Capital Square
400 Locust Street
Des Moines, Iowa 50309
Telephone 800/627-3686
Annual Shareholders' Meeting
Wednesday, May 19, 1999, 5:00 p.m.
West Des Moines Marriott Hotel
1250 74th Street
West Des Moines, Iowa 50266
Transfer Agent/Registrar/
Dividend Disbursing Agent
Harris Trust and Savings Bank
311 West Monroe Street
Chicago, Illinois 60606
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
34
CORPORATE STRUCTURE
BRENTON BANKS, INC.
BOARD OF DIRECTORS
C. Robert Brenton
Chairman of the Board
Brenton Banks, Inc.
William H. Brenton
Past Chairman and President
Brenton Banks, Inc.
J.C. Brenton
Past President
Brenton Banks, Inc.
Robert C. Carr
Vice President
Amoco Corporation
Gary M. Christensen
President & CEO
Pella Corporation
Robert J. Currey
President
21st Century Telecom Group, Inc.
Robert L. DeMeulenaere
President and Chief Executive Officer
Brenton Banks, Inc.
BRENTON BANKS, INC.
EXECUTIVE OFFICERS
C. Robert Brenton
Chairman of the Board
Robert L. DeMeulenaere
President and Chief Executive Officer
Steven T. Schuler
Chief Financial Officer/Treasurer/
Secretary
BRENTON BANK
SENIOR MANAGEMENT TEAM
Robert L. DeMeulenaere
Chairman and Chief Executive Officer
Larry A. Mindrup
President
Phillip L. Risley
Executive Vice President and
Operations & Technology Center
President
Steven T. Schuler
Chief Financial Officer/Treasurer/
Secretary
Perry C. Atwood
Chief Sales Officer
Elizabeth M. Piper/Bach
Chief Financial Services Officer
SALES SUPPORT MANAGERS
Judy S. Bohrofen
Human Resources Director
Gregory M. Cole
Loan Development Center Director
W. Bradley Cunningham
Investment/ALCO Director
Marsha A. Findlay
Retail Manager
Douglas R. Gulling
Corporate Controller/Cashier
Monica L. Haun
Operations and Technology Manager
Catherine I. Reed
Marketing Director
Norman D. Schuneman
Chief Credit Officer
LINE OF BUSINESS MANAGERS
AND REGIONAL BANK
PRESIDENTS
Woodward G. Brenton
Commercial Banking
Chief Commercial Banking Officer
Mark J. Hoffschneider
Mortgage Banking
Division President
Douglas F. Lenehan
Diversified Commercial Services
Division President
David W. Mackaman
Commercial Banking
Division Manager
Larry A. Mindrup
Retail Banking
President
Elizabeth M. Piper/Bach
Financial Services
Chief Financial Services Officer
Allen W. Shafer
Business Banking
Division President
Thomas J. Vincent
Agricultural Banking
Division President
Charles N. Funk
Central Region President
Dennis H. Hanson
East Central Region President
Ronald D. Larson
East Region President
Marc J. Meyer
West Region President