UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-6216
BRENTON BANKS, INC.
(Exact name of registrant as specified in its charter)
Incorporated in Iowa No. 42-0658989
(State or other jurisdiction of (I.R.S. Employer Identification)
incorporation or organization)
Suite 200, Capital Square, 400 Locust, Des Moines, Iowa 50309
(Address of principle executive offices) (zip code)
515-237-5100
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date,
November 2, 1999.
20,422,834 shares of Common Stock, $2.50 par value
PART 1 - Item 1. Financial Statements
Brenton Banks, Inc. and Subsidiaries
Consolidated Statements of Condition
(Unaudited)
September 30, December 31,
1999 1998
_________ ____________
Assets:
Cash and due from banks $ 76,335,562 76,460,049
Interest-bearing deposits with banks 2,228,224 2,167,288
Federal funds sold and securities purchased
under agreements to resell --- 6,000,000
Investment securities:
Available for sale 561,833,688 605,183,788
Held to maturity (approximate market value of
$32,861,000 and $44,011,000 at September 30, 1999,
and December 31, 1998, respectively) 32,549,403 43,027,501
_____________ _____________
Investment securities 594,383,091 648,211,289
_____________ _____________
Loans held for sale 43,782,940 98,147,391
Loans 1,160,907,136 1,033,554,556
Allowance for loan losses (14,603,263) (14,172,264)
_____________ _____________
Loans, net 1,146,303,873 1,019,382,292
_____________ _____________
Premises and equipment 37,404,749 32,523,113
Accrued interest receivable 17,828,961 16,458,066
Other assets 53,888,501 40,207,277
_____________ _____________
Total assets $1,972,155,901 1,939,556,765
============== =============
Liabilities and Stockholders' Equity:
Deposits:
Noninterest-bearing $ 204,749,659 190,625,140
Interest-bearing:
Demand 101,852,650 131,602,358
Savings 653,329,991 603,367,340
Time 542,413,039 571,080,293
_____________ _____________
Total deposits 1,502,345,339 1,496,675,131
_____________ _____________
Federal funds purchased and securities sold
under agreements to repurchase 164,396,744 155,847,300
Other short-term borrowings 127,973,584 87,050,000
Accrued expenses and other liabilities 17,142,873 18,315,348
Long-term borrowings 23,783,000 41,546,000
_____________ _____________
Total liabilities 1,835,641,540 1,799,433,779
_____________ _____________
Minority interest in consolidated subsidiaries 4,633,384 4,912,667
Redeemable preferred stock, $1 par; 500,000 shares
authorized; issuable in series, none issued --- ---
Common stockholders' equity:
Common stock, $2.50 par; 50,000,000 shares authorized;
20,432,674 and 18,752,381 shares issued and outstanding
at September 30, 1999 and December 31, 1998, respectively 51,081,685 46,880,953
Capital surplus --- ---
Retained earnings 84,882,391 85,010,569
Accumulated other comprehensive income (loss) --
unrealized gains (losses) on securities available for
sale, net (4,083,099) 3,318,797
_____________ _____________
Total common stockholders' equity 131,880,977 135,210,319
_____________ _____________
Total liabilities and stockholders' equity $1,972,155,901 1,939,556,765
============= =============
<FN>
See accompanying notes to consolidated financial statements.
PART 1 - Item 1. Financial Statements
Brenton Banks, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
1999 1998 1999 1998
____ ____ ____ ____
Interest Income
Interest and fees on loans $68,600,961 66,866,025 23,964,719 22,702,244
Interest and dividends on investments:
Available for sale -- taxable 19,113,212 17,530,400 6,210,273 5,839,805
Available for sale -- tax-exempt 5,300,349 4,149,085 1,761,522 1,503,639
Held to maturity -- taxable 85,198 240,744 24,459 40,801
Held to maturity -- tax-exempt 1,319,313 1,983,337 381,498 616,100
__________ __________ __________ __________
Total interest and dividends on investments 25,818,072 23,903,566 8,377,752 8,000,345
__________ __________ __________ __________
Interest on federal funds sold and securities
purchased under agreements to resell 67,971 1,281,330 6,768 452,502
Other interest income 720,554 151,884 161,501 34,869
__________ __________ __________ __________
Total interest income 95,207,558 92,202,805 32,510,740 31,189,960
__________ __________
Interest Expense
Interest on deposits 37,700,119 37,641,982 12,327,601 12,865,427
Interest on federal funds purchased and
securities sold under agreements
to repurchase 5,009,541 3,639,521 2,268,757 1,368,474
Interest on other short-term borrowings 4,711,678 2,862,511 1,900,244 872,957
Interest on long-term borrowings 1,604,914 2,270,159 415,203 823,029
__________ __________ __________ __________
Total interest expense 49,026,252 46,414,173 16,911,805 15,929,887
__________ __________ __________ __________
Net interest income 46,181,306 45,788,632 15,598,935 15,260,073
Provision for loan losses 3,150,000 3,150,000 1,050,000 1,050,000
__________ __________ __________ __________
Net interest income after provision for
loan losses 43,031,306 42,638,632 14,548,935 14,210,073
__________ __________ __________ __________
Noninterest Income
Service charges on deposit accounts 6,884,262 5,738,903 2,429,966 2,046,248
Mortgage banking income 3,547,758 5,327,034 558,353 1,868,328
Investment brokerage commissions 3,233,899 4,098,108 1,025,740 1,275,256
Fiduciary income 2,784,211 2,471,855 845,827 813,607
Insurance commissions and fees 1,108,276 1,058,744 387,542 289,943
Other service charges, collection and
exchange charges, commissions and fees 3,644,329 3,486,222 1,182,941 1,167,726
Net realized gains from securities
available for sale 220,356 466,765 13,437 222,189
Other operating income 1,363,148 1,494,106 300,857 865,608
__________ __________ __________ __________
Total noninterest income 22,786,239 24,141,737 6,744,663 8,548,905
__________ __________ __________ __________
Noninterest Expense
Compensation 23,097,142 21,288,088 7,966,710 7,308,696
Employee benefits 4,341,695 3,793,292 1,265,519 1,124,012
Occupancy expense of premises, net 4,495,346 4,345,228 1,552,958 1,404,439
Furniture and equipment expense 3,700,443 3,151,141 1,433,312 1,110,644
Data processing expense 2,109,148 1,956,001 725,855 669,798
Marketing 1,314,190 1,101,570 378,401 364,398
Supplies 1,080,164 939,568 333,135 326,565
Other operating expense 8,812,367 8,658,680 2,921,721 2,863,404
__________ __________ __________ __________
Total noninterest expense 48,950,495 45,233,568 16,577,611 15,171,956
__________ __________ __________ __________
Income before income taxes and minority interest 16,867,050 21,546,801 4,715,987 7,587,022
Income taxes 4,081,089 6,001,631 1,061,835 2,101,221
__________ __________ __________ __________
Income before minority interest 12,785,961 15,545,170 3,654,152 5,485,801
Minority interest 476,699 534,874 152,358 190,045
__________ __________ __________ __________
Net income $12,309,262 15,010,296 3,501,794 5,295,756
========== ========== ========== ==========
Per common share:
Net income--basic $ 0.60 0.72 0.17 0.26
Net income--diluted 0.59 0.70 0.17 0.25
Cash dividends 0.259 0.231 0.087 0.082
<FN>
See accompanying notes to consolidated financial statements.
PART 1 - Item 1. Financial Statements
Brenton Banks, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the nine months ended September 30,
1999 1998
_____________ _______________
Operating Activities:
Net income $ 12,309,262 15,010,296
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 3,150,000 3,150,000
Depreciation and amortization 3,993,549 3,467,589
Net realized gains from securities available
for sale (220,356) (466,765)
Investment securities amortization and accretion 1,930,831 460,599
Net (increase) decrease in loans held for sale 54,364,451 (13,211,778)
Net increase in accrued interest
receivable and other assets (5,371,357) (5,939,281)
Net decrease in accrued expenses, other
liabilities and minority interest (1,167,350) (669,270)
____________ ____________
Net cash provided by operating activities 68,989,030 1,801,390
____________ ____________
Investing Activities:
Investment securities available for sale:
Purchases (102,637,521) (316,176,477)
Maturities 94,110,559 227,955,392
Sales 37,892,131 35,950,119
Investment securities held to maturity:
Purchases (954,576) (7,671,143)
Maturities 11,339,282 23,779,382
Net increase in loans (130,124,181) (32,316,168)
Cash used for acquisition (5,247,150) ---
Purchase of other assets for investment --- (5,000,000)
Purchases of premises and equipment (8,574,653) (6,619,501)
____________ ____________
Net cash used by investing activities (104,196,109) (80,098,396)
____________ ____________
Financing Activities:
Net increase in noninterest-bearing, interest-
bearing demand and savings deposits 34,337,462 35,368,111
Net increase (decrease) in time deposits (28,667,254) 4,853,090
Net increase in federal funds purchased and
securities sold under agreements to repurchase 8,549,444 24,095,111
Net increase (decrease) in other short-term borrowings 15,423,584 (20,700,000)
Proceeds of long-term borrowings 9,772,000 29,394,000
Repayment of long-term borrowings (2,035,000) (1,333,000)
Dividends on common stock (5,336,751) (4,834,838)
Proceeds from issuance of common stock under
the employee stock purchase plan 243,573 649,593
Proceeds from issuance of common stock under
the stock option plan 4,296 ---
Proceeds from issuance of common stock under
the long-term stock compensation plan --- 970,220
Payment for shares reacquired under common stock
repurchase plan (3,133,823) (8,961,094)
Payment for fractional shares resulting from
common stock dividend (14,003) (13,961)
____________ ____________
Net cash provided by financing activities 29,143,528 59,487,232
____________ ____________
Net decrease in cash and cash equivalents (6,063,551) (18,809,774)
Cash and cash equivalents at the beginning of the year 84,627,337 88,165,130
____________ ____________
Cash and cash equivalents at the end of the period $ 78,563,786 69,355,356
============ ============
Supplemental Cash Flow Information
(Unaudited)
Interest paid during the period $ 49,358,680 44,995,212
Income taxes paid during the period 3,599,296 5,683,252
=========== ==========
<FN>
See accompanying notes to consolidated financial statements.
PART 1 - Item 1. Financial Statements
Brenton Banks, Inc. and Subsidiaries
Consolidated Statements of Changes in Common Stockholders' Equity
(Unaudited)
For the nine months ended September 30,
1999 1998
_____________ _______________
Common Stock
Beginning of year balance $ 46,880,953 43,335,120
Ten percent common stock dividend 4,655,915 4,315,397
Issuance of shares of common stock
under the stock option plan 33,280 ---
Issuance of shares of common stock
under the long-term stock compensation plan --- 268,960
Issuance of common stock
under the employee stock purchase plan 33,647 78,980
Shares reacquired under the common
stock repurchase plan (522,110) (1,083,750)
____________ ___________
End of period balance 51,081,685 46,914,707
____________ ___________
Capital Surplus
Beginning of year balance --- ---
Ten percent common stock dividend --- (78,529)
Issuance of shares of common stock
under the stock option plan (28,984) ---
Issuance of shares of common stock
under the long-term stock compensation plan --- 842,685
Issuance of shares of common stock
under the employee stock purchase plan 209,926 570,692
Shares reacquired under the common
stock repurchase plan (180,942) (1,334,848)
____________ ___________
End of period balance --- ---
____________ ___________
Retained Earnings
Beginning of year balance 85,010,569 82,824,333
Net income 12,309,262 15,010,296
Dividends on common stock (5,336,751) (4,834,838)
Ten percent common stock dividend (4,655,915) (4,236,868)
Fractional shares resulting from common
stock dividend (14,003) (13,961)
Issuance of shares of common stock
under the long-term stock compensation plan --- (141,425)
Issuance of shares of common stock
under the employee stock purchase plan --- (79)
Shares reacquired under the common
stock repurchase plan (2,430,771) (6,542,496)
____________ ___________
End of period balance 84,882,391 82,064,962
____________ ___________
Accumulated Other Comprehensive Income
Beginning of year balance 3,318,797 3,219,846
Change in unrealized holding gains (losses)
on securities, net (7,401,896) 1,403,477
____________ ___________
End of period balance (4,083,099) 4,623,323
____________ ___________
Total Stockholders' Equity $ 131,880,977 133,602,992
============ ===========
<FN>
See accompanying notes to consolidated financial statements.
PART 1 - Item 1. Financial Statements
Brenton Banks, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
1999 1998 1999 1998
____ ____ ____ ____
Net Income $12,309,262 15,010,296 3,501,794 5,295,756
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 $899,779 and $4,414,964, respectively,
for the three and nine months ended
September 30, 1999, and $(1,306,509) and
$(1,017,123), respectively, for the three
and nine months ended September 30, 1998) (7,264,835) 1,695,205 (1,480,588) 2,177,515
Less: reclassification adjustment for net
realized gains included in net income (net
of tax expense of $5,079 and $83,295,
respectively, for the three and nine months
ended September 30, 1999, and $83,321 and
$175,037, respectively, for the three and nine
months ended September 30, 1998) (137,061) (291,728) (8,358) (138,868)
__________ __________ _________ _________
Other comprehensive income (loss), net of tax (7,401,896) 1,403,477 (1,488,946) 2,038,647
__________ __________ _________ _________
Comprehensive income $ 4,907,366 16,413,773 2,012,848 7,334,403
========== ========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
PART 1 -- ITEM 1. FINANCIAL STATEMENTS
BRENTON BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Adjustments and Reclassifications
The accompanying financial statements for the interim periods were
prepared without audit. In the opinion of management, all
adjustments which were necessary for a fair presentation of
financial position and results of operations have been made.
These adjustments were of a normal recurring nature.
2. Additional Footnote Information
In reviewing these financial statements, reference should be made
to the notes to consolidated financial statements contained in the
Appendix to the Proxy Statement for the year ended December 31,
1998.
3. Statements of Cash Flows
In the statements of cash flows, cash and cash equivalents include
cash and due from banks, interest-bearing deposits with banks and
federal funds sold and securities purchased under agreements to
resell.
4. Changes in Accounting Policies
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained
after the Securitization of Mortgage Loans Held for Sale by a
Mortgage Banking Enterprise," was issued in October 1998, and was
adopted by the Company effective January 1, 1999. This statement
requires that after the securitization of mortgage loans held for
sale, an entity engaged in mortgage banking activities classify
the resulting mortgage-backed securities or other retained
interests based on its ability and intent to sell or hold those
investments. The adoption of SFAS No. 134 did not have a material
effect on the Company.
5. Income Taxes
Federal income tax expense for the nine months ended September 30,
1999, and 1998, was computed using the consolidated effective
federal income tax rate.
For the first nine months of 1999 and 1998, the Company also
recognized income tax expense pertaining to state franchise taxes
payable individually by the subsidiary banks.
Part 1 -- Item 1
Page 2 of 3
6. Common Stock Transactions
On May 20, 1999, the Board of Directors declared a 10 percent
common stock dividend for stockholders of record on June 1, 1999.
The stock dividend certificates were distributed on June 18,
1999. Fractional shares resulting from this stock dividend were
paid in cash. All appropriate per-share data has been restated to
reflect the ten percent common stock dividends.
During the first nine months of 1999, options on 13,312 shares of
common stock were exercised under the Company's 1996 Stock Option
Plan. The exercise price on these options was the fair market
value of the Company's common stock at the date of grant.
In January 1999, as part of the Company's ongoing stock repurchase
plan, the Board of Directors approved the repurchase of up to $4
million of the Company's common stock during 1999. Through
September 30, 1999, 222,244 common shares (restated for the ten
percent common stock dividend) had been repurchased at a cost of
$3,133,823.
The Company's Employee Stock Purchase Plan allows employees to
purchase the Company's common stock at 85 percent of the current
market price on four defined purchase dates during the year. The
Company issued 14,804 shares of common stock (restated for the ten
percent common stock dividend) under this plan during the first
nine months of 1999. This transaction added $243,573 to the
equity of the Company.
7. Income Per Share
Basic net income per common share amounts are computed by dividing
net income by the weighted average number of common shares
outstanding during the period. The weighted average number of
common shares outstanding for the three and nine months ended
September 30, 1999, was 20,462,200 and 20,530,231, respectively,
and 20,818,340 and 20,918,778, respectively, for the three and
nine months ended September 30, 1998.
Diluted net income per common share amounts are computed by
dividing net income by the weighted average number of common
shares and all dilutive potential common shares outstanding during
the period. The weighted average number of common shares and all
dilutive potential common shares outstanding for the three and
nine months ended September 30, 1999, was 20,788,333 and
20,856,364, respectively, and 21,285,356 and 21,385,794,
respectively, for the three and nine months ended September 30,
1998.
Part 1 -- Item 1
Page 3 of 3
8. Segment Information
The Company has one reportable operating segment: banking. The
banking segment generates revenues through personal, business,
commercial and agricultural lending, providing deposit account
services and trust services, and management of the investment
securities portfolio. The Company evaluates the banking
segment's performance on the basis of profit.
Included in "all other" in the table below are mortgage banking,
investment brokerage, insurance sales and real estate brokerage.
All operations are concentrated in the state of Iowa.
The following table presents a summary of the Company's operating
segments for the nine months ended September 30, 1999, and 1998
(in thousands):
All Parent Intersegment Reported
Banking Other Company Eliminations Balances
_______________________________________________________________
1999
____________________________
Net interest income $ 45,300 1,257 (376) --- 46,181
Noninterest income from
Nonaffiliates 14,180 8,537 69 --- 22,786
Noninterest income from
Affiliates 129 --- 12,634 (12,763) ---
Income before income taxes
and minority interest 17,404 596 11,497 (12,630) 16,867
1998
____________________________
Net interest income $ 45,699 575 (485) --- 45,789
Noninterest income from
Nonaffiliates 12,698 11,369 75 --- 24,142
Noninterest income from
Affiliates 224 --- 12,656 (12,880) ---
Income before income taxes
and minority interest 19,422 3,359 11,418 (12,652) 21,547
Part 1 -- Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The following presentation describes Brenton Banks, Inc. and
Subsidiaries ("Brenton" or the "Company") results of operations
for the three and nine month periods ended September 30, 1999, and
1998, capital resources, market risk management, asset/liability
management, liquidity management, Year 2000 efforts, the impact of
recently issued accounting standards and a look towards the
future. This discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and the notes
thereto, which are included elsewhere in this report.
Forward-Looking Information
Forward-looking information relating to the financial results or
strategies of the Company is referenced throughout Management's
Discussion and Analysis. The following paragraphs identify
forward-looking statements and the risks that need to be
considered when reading those statements.
Forward-looking statements include such words as believe, expect,
anticipate, target, goal, objective or other words with similar
meaning. The Company is under no obligation to update such
forward-looking information statements.
The risks involved in the operations and strategies of the Company
include competition from other financial institutions and other
financial service providers, changes in interest rates, changes in
economic or market conditions and changes in regulations from
federal and state regulators. These risks, which are not all
inclusive, cannot be estimated.
Results of Operations
The nine months ended September 30, 1999, compared to the nine
months ended September 30, 1998.
Net Income
For the nine months ended September 30, 1999, Brenton recorded net
income of $12,309,262, which declined 18.0 percent from net income
of $15,010,296 for the first nine months of 1998. Lower mortgage
banking revenues and investment brokerage commissions, along with
normal expense growth including costs associated with the
Company's growth initiatives (see Looking Ahead on page 12)
contributed to the reduction. Net interest income grew only
slightly due to continued compression of the net interest margin.
Year-to-date diluted earnings per common share were $.59,
compared to $.70 for the first nine months of 1998.
Part 1 -- Item 2
Page 2 of 12
The Company's annualized return on average equity (ROE) was 12.21
percent, compared to 15.21 percent one year ago; the annualized
return on average assets (ROA) was .89 percent, compared to 1.19
percent for the same period in 1998.
Net Interest Income
During the first nine months of 1999, net interest income grew .9
percent to $46,181,306, compared to $45,788,632 for the same
period a year ago as favorable volume variances were tempered by
tighter interest spreads. Net interest margin declined 33 basis
points from 4.02 percent for the first nine months of 1998 to 3.69
percent for the same period in 1999 as the yield on interest-
earning assets declined more than the rate on interest-bearing
liabilities. The growth of net interest income was limited by
this compression of the net interest margin, which was caused by
Iowa's highly competitive banking environment and the Federal
Reserve's rate reductions in 1998. Year-to-date 1999 average
interest-earning assets increased 10.1 percent, while average
interest-bearing liabilities rose 10.4 percent compared to the
first three quarters of 1998.
Loan Quality
At September 30, 1999, total loans had grown 13.4 percent to
$1,160.9 million from $1,023.8 million a year earlier. Increases
of $47.6 million (29.5 percent) in average indirect consumer
loans, $21.5 million (9.4 percent) in average direct consumer
loans and $23.5 million (5.6 percent) in average
commercial/business/agricultural loans led the growth. Average
residential real estate loans declined $31.3 million (21.1
percent) primarily due to refinancings and normal paydowns.
Refinanced loans are generally sold in the secondary market to
reduce the risk of holding long-term, fixed-rate loans in the
portfolio.
Nonperforming loans were $11,694,000, or 1.01 percent of total
loans, at September 30, 1999, compared to $11,289,000, or 1.09
percent of total loans, at the end of the prior year and
$10,525,000, or 1.03 percent of total loans, at September 30,
1998. Nonperforming loans include loans on nonaccrual status,
loans that have been renegotiated to below market interest rates
or terms and loans past due 90 days or more. The allowance for
loan losses, which totaled $14.6 million, represented 124.88
percent of nonperforming loans and 1.26 percent of total loans at
September 30, 1999. At September 30, 1998, the same ratios were
135.13 percent and 1.39 percent, respectively.
Part 1 -- Item 2
Page 3 of 12
The provision for loan losses totaled $3,150,000 for the nine
months ended September 30, 1999, and 1998. Annualized year-to-
date net charge-offs were .34 percent of average loans for the
first nine months of 1999, compared with .22 percent for the same
period last year and .28 percent for all of 1998.
The Company has a formal structure for reviewing and approving
loans. Loan quality control and risk management is carefully
balanced with goals for loan growth. Management believes the
allowance for loan losses at September 30, 1999, is sufficient to
absorb probable loan losses within the portfolio.
Noninterest Income
Noninterest income for the nine months ended September 30, 1999,
was $22,565,883 (excluding securities gains and losses), a 4.7
percent decline from $23,674,972 one year ago. Growth in service
charges on deposit accounts, fiduciary income, and other
traditional service charges and fees were exceeded by declines in
mortgage banking income and investment brokerage commissions.
Service charges on deposits rose $1,145,359, or 20.0 percent,
compared to the first nine months of 1998. This growth was the
result of increased account analysis charges on commercial and
business deposit accounts by virtue of a higher number of clients
and revised fee schedules for deposit products.
Fiduciary income grew 12.6 percent to $2,784,211 as a result of
increased assets from existing trust accounts.
Other service charges, collection and exchange charges,
commissions and fees increased $158,107 from the prior year. The
gain was caused by improvements in merchant credit card fees,
ATM/debit card fees, official check commissions and international
fees exceeding declines in real estate sales commissions and
purchased receivable fees.
Mortgage banking income declined 33.4 percent to total $3,547,758
for the first nine months of 1999. Rising mortgage interest rates
during 1999 led to higher than anticipated losses on sales of
originated loans. Residential real estate loan closings for the
first nine months of 1999 totaled $354 million, up slightly
compared to $335 million for the same period last year.
A reduction of $864,209, or 21.1 percent, in investment brokerage
commissions was due to lower transaction volume.
Investment securities gains totaled $220,356 compared to gains of
$466,765 for the same period in 1998.
Part 1 -- Item 2
Page 4 of 12
Noninterest Expense
Noninterest expense totaled $48,950,495 at September 30, 1999, an
8.2 percent increase from the first nine months of 1998.
Compensation, the largest component of noninterest expense,
increased 8.5 percent over the prior year as a result of normal
annual salary adjustments and an increase in the number of
employees due to the Company's growth initiatives. The number of
full-time equivalent employees increased by 2.7 percent over
September 30, 1998, to 751.1. The cost of benefit expenses
increased 14.5 percent on account of growth in compensation
expense, higher medical insurance premiums and an award of Brenton
stock to employees during the first quarter of 1999.
Furniture and equipment expense increased $549,302 for the first
nine months of 1999 due to depreciation on computer upgrades and
higher costs for software maintenance agreements.
Marketing expense rose $212,620 to $1,314,190 in the first nine
months of 1999 because of expanded marketing efforts for various
lines of business and costs related to revising the Company's
deposit products.
Supplies expense increased 15.0 percent to $1,080,164 from
$939,568 in the prior year. The increase was primarily due to a
higher volume of debit cards issued and a higher volume of client
provided checks and deposit slips as a result of new accounts
opened, including the acquisition of deposit accounts in Pella and
Knoxville, and changes in deposit products.
While the Company's growth initiatives have caused and will
continue to cause some components of expense to increase, the
Company continues to carefully focus on cost management and
evaluates all major expense items in an effort to control the
growth rate of all noninterest expense categories.
The Company's net noninterest margin, which measures operating
efficiency, was (1.83) percent, compared to (1.65) percent one
year ago. Another ratio the Company utilizes to measure
productivity is the efficiency ratio. This ratio divides
noninterest expense by the sum of tax-equivalent net interest
income plus noninterest income (excluding gains and losses on the
sale of securities and loans). At September 30, 1999, the
Company's efficiency ratio was 68.32 percent, compared with 62.59
percent one year ago.
Part 1 -- Item 2
Page 5 of 12
Income Taxes
The Company's income tax strategies include reducing income taxes
by purchasing securities and originating loans that produce tax-
exempt income. The goal is to maintain an optimum level of tax-
exempt assets in order to benefit the Company both on 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 24.2 percent for the first nine
months of 1999 compared to 27.9 percent for 1998.
Results of Operations
The three months ended September 30, 1999, compared to the three
months ended September 30, 1998.
Net Income
For the three months ended September 30, 1999, net income totaled
$3,501,794, compared to $5,295,756 for the third quarter of 1998,
a decline of 33.9 percent. Diluted earnings per common share was
$.17 for the third quarter of 1999, compared to $.25 for the third
quarter of 1998.
Net Interest Income
Net interest income for the quarter totaled $15,598,935, an
increase of $338,862, or 2.2 percent, over the same period in
1998. The net interest margin for the third quarter of 1999 was
3.68 percent, compared to 3.96 percent for the third quarter of
1998. Similar to the nine-month comparison, competitive factors
have compressed the net interest margin, thus limiting net
interest income growth. Quarter-to-date average earning assets
increased $158,999,000, or 9.7 percent, over the third quarter of
1998.
Provision for Loan Losses
The provision for loan losses for the third quarters of both 1999
and 1998 totaled $1,050,000. Annualized net charge-offs as a
percent of average loans were .27 percent for the third quarter of
1999, compared to .30 percent for the same period of 1998.
Noninterest Income
Noninterest income (excluding securities gains) declined by
$1,595,490, or 19.2 percent, from the third quarter of 1998 to the
third quarter of 1999.
Part 1 -- Item 2
Page 6 of 12
Service charges on deposit accounts increased 18.8 percent to
$2,429,966 over the prior year due to growth in account analysis
charges on commercial and business deposit accounts and deposit
products revisions.
Insurance commissions and fees rose $97,599 from the prior year as
a result of an increase of $190,939 in credit-related insurance
commissions. This increase was offset by a $93,340, decline in
insurance agency commissions.
Mortgage banking income declined $1,309,975, due to losses on
sales of originated loans into the marketplace, as previously
discussed.
Investment brokerage commissions declined 19.6 percent to
$1,025,740 due to lower transaction volume.
Other operating income declined to $300,857. Several
miscellaneous non-recurring items were recorded in 1998.
Net gains from securities transactions totaled $13,437 for the
third quarter of 1999, versus net gains of $222,189 in the third
quarter of 1998.
Noninterest Expense
Noninterest expense increased by 9.3 percent when comparing the
third quarter of 1999 with the third quarter of 1998. The
Company's net noninterest margin was (2.00) percent for the third
quarter of 1999, compared to (1.54) percent for the third quarter
of 1998. Quarter-to-quarter, the largest noninterest expense
changes were in the categories of compensation and benefits,
occupancy and furniture and equipment expense.
Compensation and related benefit costs increased by a combined 9.5
percent over the third quarter of 1998. As a result of Brenton's
growth initiatives, standard salaries increased by 16.1 percent,
while variable compensation and bonus accruals declined slightly
due to lower revenues and lower net income, respectively.
Occupancy costs increased $148,519 to $1,552,958 because of higher
depreciation expense and a net increase in rental costs.
Like the year-to-date comparison, furniture and equipment expense
increased by $322,668 to $1,433,312 due to depreciation on
computer technology upgrades and higher repairs and maintenance
expense.
Part 1 -- Item 2
Page 7 of 12
Capital Resources
Common stockholders' equity totaled $131.9 million as of September
30, 1999, a 2.5 percent decline from December 31, 1998. Excluding
the change in accumulated other comprehensive income (loss),
realized stockholders' equity increased 3.1 percent compared to
year-end 1998. The Company continues to monitor its capital
position to balance the goals of maximizing return on average
equity, while maintaining adequate capital levels for business
risk and regulatory purposes. The Company's risk-based core
capital ratio at September 30, 1999, was 9.13 percent and the
total risk-based capital ratio was 10.14 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 6.82
percent at September 30, 1999, exceeding the regulatory minimum
requirement for well-capitalized institutions of 5.0 percent.
As part of the Company's ongoing stock repurchase plan, 222,244
shares of common stock have been repurchased during the first
three quarters of 1999 at a cost of $3,133,823. The Board of
Directors has approved the repurchase of $4 million of Company
stock during 1999. Since the inception of the plan in 1994, the
Company has repurchased 3,566,603 shares (restated for all stock
splits/dividends) at a total cost of $37,078,201.
In May 1999, the Board of Directors declared a 10 percent common
stock dividend. As a result of this action, each shareholder
received one additional share of Brenton Banks, Inc. common stock
for every 10 shares they owned. Fractional shares were paid in
cash.
The Company paid dividends of $.259 per common share in the first
nine months of 1999. This was an increase of 12.1 percent
compared to $.231 per common share for the same period of 1998.
Dividends totaled $5,336,751 for the first nine months of 1999 and
the dividend payout ratio was 43.9 percent of diluted earnings per
common share. In October 1999, the Board of Directors declared a
regular quarterly cash dividend of $.087 per common share, which
was equal to the third quarter dividend.
The debt-to-equity ratio of Brenton Banks, Inc. (the "Parent
Company") was 5.5 percent at September 30, 1999. This percentage
has declined from the December 31, 1998, ratio of 6.7 percent.
Long-term borrowings of the Parent Company at September 30, 1999,
consisted entirely of capital notes totaling $7,283,000. In
addition, the Parent Company has a $5 million line of credit with
a regional bank that was unused at the end of September 1999.
Part 1 -- Item 2
Page 8 of 12
Brenton Banks, Inc. common stock closed on September 30, 1999, at
$13.91 per share, compared to $17.10 a year earlier. The closing
price at September 30, 1999, was 215.7 percent of the book value
per share of $6.45. This closing stock price represented a price-
to-trailing-12-months-diluted-earnings multiple of 16.56 times.
Brenton Banks, Inc. continues to pursue acquisition and expansion
opportunities that fit the Company's strategic business and
financial plans. On September 24, 1999, the Company closed the
previously announced acquisition of two U.S. Bank offices in Pella
and Knoxville, with deposits totaling approximately $53 million.
There are currently no other pending acquisitions that would
require Brenton Banks, Inc. to secure capital from public or
private markets.
Market Risk Management
Market risk is the risk of earnings volatility that results from
adverse changes in interest rates and market prices. The
Company's market risk is comprised primarily of interest rate risk
arising from its core banking activities of lending and deposit
taking. Interest rate risk is the risk that changes in market
interest rates may adversely affect the Company's net interest
income. Management continually develops and applies strategies to
mitigate this risk. Management does not believe that the
Company's primary market risk exposures and how those exposures
have been managed to-date in 1999 changed significantly when
compared to 1998.
Asset/Liability Management
The Company has a fully integrated asset/liability management
system to assist in managing the balance sheet. The process,
which is used to project the results of alternative investment
decisions, includes the development of simulations that reflect
the effects of various interest rate scenarios on net interest
income. Management analyzes the simulations to manage interest
rate risk, the net interest margin and levels of net interest
income.
The goal is to structure the balance sheet so that net interest
margin fluctuates in a narrow range during periods of changing
interest rates. The Company currently believes that net interest
income would fall by less than 5 percent if interest rates
increased or decreased by 300 basis points over a one-year time
horizon. This is within the Company's policy limits.
Part 1 -- Item 2
Page 9 of 12
The slope of the yield curve is also a major determinant in the
net interest income of the Company. Generally, the steeper the
intermediate treasury to the one-week LIBOR rate, the better the
prospects for net interest income improvement. Recently, the
yield curve has started to exhibit a more normal slope, although
it is not yet back to historical norms.
To improve net interest income and lessen interest rate risk,
management continues its strategy of de-emphasizing fixed-rate
portfolio residential real estate loans with long repricing
periods. When appropriate for interest rate management purposes,
the Company securitizes residential real estate loans. The
Company continues to focus on reducing interest rate risk by
emphasizing growth in variable-rate consumer and commercial loans.
Other actions include the use of fixed-rate Federal Home Loan Bank
(FHLB) advances as alternatives to certificates of deposit, active
management of the available for sale investment securities
portfolio to provide for cash flows that will facilitate interest
rate risk management and, in selected cases, the use of interest
rate swaps and interest rate floor contracts.
The highly competitive banking environment in Iowa also greatly
impacts the Company's net interest margin. The effect of
competition on net interest income is difficult to predict.
Liquidity
The Company actively monitors and manages its liquidity position
with the objective of maintaining sufficient cash flows to fund
operations, meet customer commitments, take advantage of market
opportunities and provide a margin against unforeseeable liquidity
needs. Federal funds sold, trading account securities, loans held
for sale and investment securities available for sale are readily
marketable assets. Maturities of all investment securities are
managed to meet the Company's normal liquidity needs. Investment
securities available for sale may be sold prior to maturity to
meet liquidity needs, to respond to market changes or to adjust
the Company's interest rate risk position. Readily marketable
assets, as defined above, comprised 30.7 percent of the Company's
total assets at September 30, 1999.
The Company has historically maintained a stable deposit base and
a relatively low level of large deposits, which result in a low
dependence on volatile liabilities. As of September 30, 1999, the
Company had borrowings of $144,474,000 from the Federal Home Loan
Bank ("FHLB") of Des Moines, of which $62,200,000 represents a
variable-rate line of credit used to fund mortgage lending
operations. The remaining balance was used as a means of
providing both long- and short-term, fixed-rate funding for
certain assets and managing interest rate risk.
Part 1 -- Item 2
Page 10 of 12
The combination of high levels of potentially liquid assets,
strong cash flows from operations, low dependence on volatile
liabilities and additional borrowing capacity provided sufficient
liquidity for the Company at September 30, 1999.
The Company has entered into agreements for the construction of an
operations and sales support facility with an estimated total cost
of $12.5 million. Groundbreaking occurred in October and
completion is expected in the fourth quarter of 2000. The
building will replace existing leased space and will also allow
for additional growth.
Year 2000
The "Year 2000" issue has been and continues to be a top priority
for the Company. Brenton's critical core loan and deposit
applications are ALLTEL Information Services, Inc. ("ALLTEL")
software programs and Brenton outsources the data processing
function to ALLTEL. Brenton and ALLTEL have been working in
partnership to resolve the Year 2000 issues of the critical core
application programs as well as all other computer software
programs used in the Company. Also considered has been the
readiness of vendors and other third parties with which the
Company does business, and an assessment of significant clients
has been performed.
The Company has taken this issue so seriously because it could be
faced with severe consequences if Year 2000 issues are not
identified and resolved in a timely manner by the Company and
significant third parties, which include public utilities, various
governmental agencies and clients. 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. If clients were to experience significant Year 2000
issues, loan delinquency ratios could increase and the clients'
ability to repay loans could be impaired. The Company has
surveyed its larger clients and believes there should be no
material adverse effect on the Company.
The Company has had a Year 2000 Committee and a formal plan in
place since August 1997 and has been executing on that plan. The
Company completed substantially all Year 2000 work associated with
its critical core application systems in 1998 and testing has now
been successfully completed. The Committee is also finalizing
contingency plans for unforeseen difficulties related to the Year
2000 issue. As a result of modifications and upgrades to existing
systems, management believes the Year 2000 issue will not be a
significant operational matter for the Company.
Part 1 -- Item 2
Page 11 of 12
The Company has also contracted with an outside consultant to
review the Year 2000 formal plan and monitor the progress of Year
2000 efforts. Management regularly reports on the status of the
Year 2000 project to the Board of Directors and its Audit
Committee. The Company is also subject to review by various
banking regulatory agencies. These agencies prescribe very strict
guidelines that must be adhered to by financial institutions.
The incremental expense associated with becoming Year 2000
compliant is not anticipated to be material. However, there is an
opportunity cost associated with this project in that the people
involved are regular Brenton and ALLTEL employees who would
normally be spending their time on other projects. The
incremental direct costs associated with this project were
approximately $350,000 in 1998. It is estimated these costs will
approach $500,000 in 1999. There are additional benefits that
result from this project, because in addition to becoming Year
2000 compliant, systems have been enhanced.
The Company will incur an additional opportunity cost in the
fourth quarter of 1999 when additional cash reserves are
maintained to meet possible client requests for extra cash. The
Company has finalized its plan for additional cash reserves. The
additional cash reserves will result in lower interest income due
to the need to convert an interest-earning asset to noninterest-
earning cash. It is estimated that the planned additional cash
reserves could result in a slight reduction to interest income for
the fourth quarter of this year.
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 assessment results, higher
than anticipated costs to update software and hardware, and the
inability of vendors, significant customers and other third
parties to effectively address the Year 2000 issue.
Part 1 -- Item 2
Page 12 of 12
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities",
which originally was scheduled to be effective for the year
beginning January 1, 2000. The effective date has been postponed
until January 1, 2001. This statement requires recognition of
all derivative instruments as either assets or liabilities in the
statement of financial position measured at fair value. This
statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges
allows gains and losses from derivatives to offset related
results on the hedged item in the income statement, and requires
a company to formally document, designate and assess the
effectiveness of transactions for which hedge accounting is
applied. Management is evaluating the impact the adoption of
SFAS No. 133 will have on the Company's financial statements. The
Company expects to adopt SFAS No. 133 when required.
Looking Ahead
The Company began a new growth initiative called "Defining Our
Destiny" in late 1998. The objective is to grow our client base
at a rate significantly above Iowa's population and economic
growth rates. The initiative is designed to further evolve the
Company's growing sales culture by increasing the sales staff
over the next three years, by creating opportunities for
additional sales from the existing sales staff and by
strengthening partnerships with the sales support staff. Defining
Our Destiny relies on the partnerships between Brenton associates
to deliver the entire Company to meet clients' financial needs.
In addition to the Company's purchase of two U.S. Bank offices in
September 1999, two new Brenton office locations are being planned
to expand our market presence. In November 1999, a new full-
service banking office was opened in Coralville. This new office
will complement our existing grocery store facility in Iowa City.
In the first half of 2000, the Company, which currently has four
full-service offices in the Quad Cities, plans to expand into
Moline, Illinois. It will mark the first time Brenton has crossed
into another state with a full-service banking office.
The Company's substantial investment and commitment to these
initiatives demonstrate Brenton's resolve to be an even stronger,
more dynamic competitor and to continue building on the successes
of the past several years.
Part 1 -- Item 3. Quantitative and Qualitative Disclosures About
Market Risk.
The information appearing on page 8 of Item 2 under the heading
"Market Risk Management" is incorporated herein by reference.
Part 2 -- Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K -- There were no reports on Form 8-K filed
for the three months ended September 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
BRENTON BANKS, INC.
- -----------------------------------
(Registrant)
November 8, 1999 /s/ Robert L. DeMeulenaere
- ----------------------------------------------------------------
Dated Robert L. DeMeulenaere
President and Chief Executive
Officer
November 8, 1999 /s/ Steven T. Schuler
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Dated Steven T. Schuler
Chief Financial Officer/
Treasurer/Secretary and
Chief Accounting Officer