SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1996, 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 0-12216
OLD KENT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-1986608
(State of Incorporation) (I.R.S. Employer Identification Number)
One Vandenberg Center
Grand Rapids, Michigan 49503
(Address of principal executive (Zip Code)
Registrant's telephone number, including a(616) 771-5000
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
The number of shares outstanding of the registrant's Common stock, par
value $1, as of April 30, 1996 was 44,983,464 shares.
INDEX
OLD KENT FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 1996
and December 31, 1995
Consolidated Statements of Income for the three
months ended March 31, 1996 and 1995
Consolidated Statements of Cash Flows for the
three months ended March 31, 1996 and 1995
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of matters to a vote of securities holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)___________________________________________________________________________________________________
March 31, December 31,
(dollars in thousands) 1996 1995
ASSETS:
Cash and due from banks................................................................ $476,162 $527,611
Federal funds sold and resale agreements............................................... 16,458 49,445
Total cash and cash equivalents........................................................ 492,620 577,056
Interest-earning deposits.............................................................. 2,207 175,413
Trading account securities............................................................. 8,259 11,699
Mortgages held-for-sale................................................................ 379,227 270,126
Securities available-for-sale:
Collateralized mortgage obligations and other mortgage-backed
securities...................................................................... 809,542 874,291
Other securities.................................................................... 1,454,497 1,371,408
Total securities available-for-sale (amortized cost of
$2,279,281, and $2,240,517, respectively)......................................... 2,264,039 2,245,699
Securities held-to-maturity:
Collateralized mortgage obligations and other mortgage-backed
securities...................................................................... 816,915 680,330
Other securities.................................................................... 168,612 190,612
Total securities held-to-maturity (market values of
$983,129 and $876,291, respectively).............................................. 985,527 870,942
Loans.................................................................................. 7,623,074 7,430,552
Allowance for credit losses............................................................ (173,462) (174,248)
Net loans.............................................................................. 7,449,612 7,256,304
Premises and equipment................................................................. 170,714 173,903
Other assets........................................................................... 410,897 421,942
Total Assets...........................................................................$12,163,102 $12,003,084
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Non-interest bearing................................................................ $1,430,239 $1,506,149
Interest-bearing.................................................................... 8,186,465 7,769,672
Foreign deposits -- interest-bearing................................................ 77,347 81,545
Total deposits.................................................................... 9,694,051 9,357,366
Other borrowed funds................................................................... 1,119,024 1,307,617
Subordinated debt...................................................................... 100,000 100,000
Other liabilities...................................................................... 230,472 222,165
Total Liabilities...................................................................... 11,143,547 10,987,148
Shareholders' Equity:
Preferred stock: 25,000,000 shares authorized and unissued............................. -- --
Common stock, $1 par value: 150,000,000 shares authorized;
45,132,982 and 45,383,122 shares issued and outstanding ............................. 45,133 45,383
Capital surplus........................................................................ 192,574 200,101
Retained earnings...................................................................... 791,756 767,085
Valuation adjustment of securities available-for-sale.................................. (9,908) 3,367
Total Shareholders' Equity............................................................. 1,019,555 1,015,936
Total Liabilities and Shareholders' Equity............................................$12,163,102 $12,003,084
See accompanying notes to consolidated financial statements.
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)_________________________________
For the Three Months
Ended March 31,
(in thousands, except per share data) 1996 1995
Interest Income:
Interest and fees on loans........................... $169,791 $156,341
Interest on mortgages held-for-sale.................. 5,998 2,687
Interest on securities available-for-sale............ 35,842 22,833
Interest on securities held-to-maturity:
Taxable............................................ 13,976 30,550
Tax-exempt......................................... 2,560 3,272
Interest on deposits................................. 256 206
Interest on federal funds sold and resale agreements. 640 2,698
Interest on trading account securities............... 88 328
Total interest income................................ 229,151 218,915
Interest Expense:
Interest on domestic deposits........................ 91,324 79,696
Interest on foreign deposits......................... 1,240 5,145
Interest on short-term borrowed funds................ 16,709 16,232
Interest on long-term debt........................... 1,712 28
Total interest expense............................... 110,985 101,101
Net Interest Income.................................... 118,166 117,814
Provision for credit losses............................ 6,252 4,567
Net interest income after provision
for credit losses.................................. 111,914 113,247
Other Income:
Trust income......................................... 11,068 10,326
Service charges on deposit accounts.................. 10,724 9,148
Credit card transaction revenue (net)................ 1,767 2,483
Securities gains/(losses)............................ 854 (137)
Mortgage banking gains............................... 5,862 2,433
Mortgage servicing revenue........................... 6,203 3,856
Mortgage origination revenue (net)................... 3,011 991
Nonrecurring and other real estate owned income...... 2,497 49
Other................................................ 11,315 7,760
Total other income................................... 53,301 36,909
Other Expenses:
Salaries and employee benefits....................... 51,194 47,019
Occupancy expense.................................... 7,460 7,226
Equipment expense.................................... 5,747 5,996
FDIC Insurance....................................... 181 5,149
Nonrecurring and other real estate owned expense..... 291 --
Other expenses....................................... 40,729 33,053
Total other expenses................................. 105,602 98,443
Income Before Income Taxes............................. 59,613 51,713
Income taxes......................................... 20,379 17,010
Net Income............................................. $39,234 $34,703
Per Common Share:
Net income........................................... $0.86 $0.76
Dividends............................................ $0.320 $0.295
Number of Common Shares Used to Calculate
Net Income Per Share (in thousands).................. 45,631 45,598
See accompanying notes to consolidated financial statements.
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31 (in thousands) 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..............................................................$ 39,234 $ 34,703
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for credit losses..................................... 6,252 4,567
Depreciation, amortization and accretion........................ 14,175 9,367
Net (gains) losses on sales of assets........................... (9,170) (728)
Net decrease (increase) in trading account securities........... 4,025 (44,982)
Originations and acquisitions of mortgages held-for-sale........ (768,376) (318,728)
Proceeds from sales and prepayments of mortgages held-for-sale.. 665,137 368,892
Net change in other assets...................................... 8,916 (8,574)
Net change in other liabilities................................. 19,400 32,192
Net cash (used for) provided by operating activities.................... (20,407) 76,709
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities and prepayments of securities available-for-sale............. 123,770 17,345
Proceeds from sales of securities available-for-sale.................... 961,062 738,624
Purchases of securities available-for-sale.............................. (1,172,878) (267,845)
Proceeds from maturities and prepayments of securities held-to-maturity. 9,699 54,551
Proceeds from sales of securities held-to-maturity...................... 860 -
Purchases of securities held-to-maturity................................ (128,398) (22,910)
Net change in interest-earning deposits................................. 173,207 (10,534)
Net increase in loans................................................... (233,724) (350,046)
Purchases of leasehold improvements, premises and equipment, net........ (3,706) (6,871)
Sale of subsidiary (net of cash sold)................................... 7,123 -
Net cash (used for) provided by investing activities.................... (262,985) 152,314
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in time deposits............................................... 467,050 420,570
Change in demand and savings deposits................................... (47,663) (287,215)
(Decrease) increase in other borrowed funds and notes payable of
one year or more.................................................. (185,046) 151,632
Repurchases of common stock............................................. (23,164) (7,648)
Proceeds from common stock issuances.................................... 2,342 545
Dividends paid to shareholders.......................................... (14,563) (13,406)
Net cash provided by financing activities............................... 198,956 264,478
Net change in cash and cash equivalents................................. (84,436) 493,501
Cash and cash equivalents at beginning of year.......................... 577,056 515,008
Cash and cash equivalents at end of year................................$ 492,620 $ 1,008,509
Supplemental disclosures of cash flow information:
Interest paid on deposits, other borrowed funds and
subordinate.........................................................$ 110,756 $ 91,883
Federal income taxes paid............................................. 475 3,737
See accompanying notes to consolidated financial statements.
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 1996
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three
months ended March 31, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Corporation's annual report on Form 10-K for the year
ended December 31, 1995.
Prior period's amounts included in these financial statements have been
reclassified to place them on a basis comparable with the current periods'
financial statements.
NOTE B: LOANS AND NONPERFORMING ASSETS
The following summarizes loans and nonperforming assets at the
dates indicated (dollars in thousands):
March 31, December 31,
Loans: 1996 1995
Commercial..............................$2,150,410 $2,008,582
Real estate - Commercial............... 1,603,480 1,627,154
Real estate - Construction............. 313,816 267,363
Real estate - Residential mortgages.... 826,251 832,214
Real estate - Consumer home equity .... 638,852 623,659
Consumer................................ 1,549,567 1,551,828
Credit card loans....................... 336,242 323,592
Lease financing......................... 204,456 196,160
Total Loans.............................$7,623,074 $7,430,552
March 31, December 31,
Nonperforming assets (dollars in thousands): 1996 1995
Nonaccrual loans ....................... $44,376 $40,173
Restructured loans...................... 2,797 3,075
Impaired loans........................ 47,173 43,248
Other real estate owned................. 8,884 11,287
Total nonperforming assets.............. $56,057 $54,535
NOTE C: ALLOWANCE FOR CREDIT LOSSES
The following summarizes the changes in the allowance for credit losses
(in thousands of dollars):
For the Three Months
ended March 31,
Allowance for Credit Losses 1996 1995
Balance at January 1,.................. $174,248 $167,253
Changes in allowance due to (sold)
purchased loans....................... (1,179) 198
Provision for credit losses............. 6,252 4,567
Gross loans charged-off................. (8,095) (4,433)
Gross recoveries of loans previously
charged-off........................... 2,236 3,609
Balance at end of period,............... $173,462 $171,194
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
March 31, 1996
NOTE D: SECURITIES AVAILABLE-FOR-SALE
The following summarizes amortized costs and estimated market values of securities
available-for-sale at the dates indicated (in thousands of dollars):
Carrying
Gross Gross Value
Amortized Unrealized Unrealized at Market
March 31, 1996: Cost Gains Losses Value
U.S. Treasury and federal agencies..........$1,406,795 $7,043 $17,865 $1,395,973
Collateralized mortgage obligations and
other mortgage-backed securities.......... 813,428 1,670 5,556 809,542
Other securities............................ 59,058 21 555 58,524
Total securities available-for-sale.........$2,279,281 $8,734 $23,976 $2,264,039
December 31, 1995:
U.S. Treasury and federal agencies..........$1,304,855 $10,503 $2,930 $1,312,428
Collateralized mortgage obligations and
other mortgage-backed securities.......... 877,288 6,990 9,987 874,291
Other securities............................ 58,374 606 0 58,980
Total securities available-for-sale.........$2,240,517 $18,099 $12,917 $2,245,699
NOTE E: SECURITIES HELD-TO-MATURITY
The following summarizes amortized costs and estimated market values of securities
held-to-maturity at the dates indicated (in thousands of dollars):
<CAPITON>
Gross Gross
Amortized Unrealized Unrealized Market
March 31, 1996: Cost Gains Losses Value
U.S. Treasury and federal agencies......... $4,004 $1 $0 $4,005
Collateralized mortgage obligations and
other mortgage-backed securities......... 816,915 2,927 9,615 810,227
State and political subdivision securities. 164,608 5,222 933 168,897
Total securities held-to-maturity..........$985,527 $8,150 $10,548 $983,129
As reflected in the consolidated statements of cash flows, during the first quarter of 1996, the
Registrant sold $860 thousand of securities held-to-maturity. The decision to sell these securities
was based on deterioration in the quality of the asset.
<CAPITON>
December 31, 1995:
Collateralized mortgage obligations and
other mortgage-backed securities.........$680,330 $6,129 $5,932 $680,527
State and political subdivision securities. 190,612 6,031 879 195,764
Total securities held-to-maturity..........$870,942 $12,160 $6,811 $876,291
NOTE F: BUSINESS COMBINATIONS
On January 22, 1996, Old Kent acquired Republic Mortgage Corp. ("Republic"),
headquartered in Salt Lake City, Utah, with 19 other offices. The acquisition
was treated as a purchase for accounting purposes and, accordingly, results of
operations of Republic are included in Old Kent's consolidated results of
operations from the date of acquisition. Republic's shareholders were issued
Old Kent common stock in exchange for all the outstanding shares of republic.
At December 31, 1995, Republic had assets of $39 million and serviced $127
million of residential mortgages for third parties.
On February 2, 1996, Old Kent sold its wholly owned subsidiary First National
Bank of Lockport to Heritage Financial Services, Inc. The Cash sale price was
$16,750,000. At the time of the sale, the bank had total assets of $102
million, total deposits of $81 million, and operated from one office in
Lockport, Illinois. First National Bank of Lockport was among a group of
banks acquired by Old Kent in its 1994 acquisition of EdgeMark Financial
Corporation. The sale was consistent with Old Kent's strategic focus on
business development and retail banking in the metropolitan Chicago area.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected the Registrant's financial
condition and results of operations during the periods included in the
consolidated financial statements included in this filing.
RESULTS OF OPERATIONS
The Registrant's net income was $39,234,000 for the first quarter of 1996
compared to $34,703,000 for the same period in 1995. First quarter
earnings per share was $.86, a 13.2% increase over last year's $.76.
Total assets were $12.2 billion at quarter-end compared to $12.0 billion
at December 31, 1995. Return on average equity for the first quarter of
1996 was 15.35% compared to 15.28% for the first quarter of 1995. Return
on assets was 1.31% for the first quarter of 1996 compared to 1.21% for
the first quarter of 1995.
The Registrant's net interest income for the first quarter of 1996 was
$118.2 million, a .3% increase over the $117.8 million recorded in the
same period of 1995. The increase in net income was due to earning asset
growth which offset the impact of a lower net interest margin. For the
first quarter of 1996, the net interest margin was 4.34% compared to 4.51%
a year ago. The decrease in the net interest margin is primarily due to
increased borrowing costs, as the interest costs for paying liabilities
rose to a greater extent than the yields of earning assets.
The provision for credit losses was $6.3 million in the first quarter of
1996 and $4.6 million in the first quarter of 1995. The increase in the
provision reflected a higher level of credit risk in the Registrant's
credit card portfolio. The allowance for credit losses as a percent of
loans and leases outstanding was 2.28% at March 31, 1996 and 2.35% at
December 31, 1995. Nonperforming loans as a percent of total loans was
.62% at March 31, 1996 and .58% at December 31, 1995. Net credit losses
were $5.9 million or .31% of average loans for the first quarter of 1996
compared to $0.8 million or .05% of average loans for the same period a
year ago.
Total other operating income, excluding securities transactions and other
nonrecurring income, increased 35% or $13.0 million during the first
quarter of 1996 over the same period a year ago. This includes $7.8
million related to our mortgage business. Mortgage banking gains
increased $3.4 million, or 141%; mortgage servicing revenue increased
$2.3 million, or 61%; and net mortgage origination revenue increased $2.0
million, or 204%. The increase in mortgage originations includes the
impact of the Registrant's January acquisition of Republic Mortgage
Corporation. Service charges on deposits increased 17.2% or $1.6 million,
trust income increased $.7 million or 7.2%. All other service charges and
fees increased $3.6 million over the same period a year ago. This
increase includes insurance commissions of $2.1 million associated with
Guyot, Hicks, Anderson and Associates, an insurance agency acquired in
December 1995.
Nonrecurring and other real-estate owned income of $2.5 million is mainly
comprised of gains on sales of other real-estate owned.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Registrant sold approximately $628.4 million of residential mortgage
loans during the quarter. The Registrant's residential third party
mortgage servicing portfolio increased nearly 60% to $7.2 billion at March
31, 1996, from $4.5 billion a year-ago. The residential third party
mortgage servicing portfolio was $6.9 billion at December 31, 1995.
Total net securities gains for the first quarter of 1996 were $854,000
compared to losses of $137,000 for the same period of 1995.
Total operating expenses for the first quarter of 1996 increased 7.3% over
the same period of 1995. Salaries, wages and employee benefits increased
8.9% for the first quarter of 1996 over the first quarter of 1995. The
increase was primarily the result of business acquisitions. The number of
full-time equivalent employees increased by 133 (2.5%) over a year-ago to
5,379 at March 31, 1996. During the first quarter of 1996 compared to the
same period a year ago, equipment expenses decreased 4.2%, and occupancy
expenses increased 3.2%. FDIC expenses decreased 96.5%, due to decreases
in the rate assessment by the FDIC. Other operating expenses increased
$7.7 million, which includes $2.8 million of increased amortization of our
mortgage servicing rights and $2.0 million in additional advertising
expense. The increase in other operating expense also includes increases
resulting from the recent acquisitions of Republic Mortgage Company in
February of 1996 and Guyot, Hicks, Anderson and Associates, an insurance
agency, in December of 1995.
BALANCE SHEET CHANGES
Total loans increased 2.6% or $193 million from year-end 1995. During the
first quarter of 1996, commercial loans grew at annualized rate of 17%, a
result of continued loan demand in the Registrant's eastern Michigan and
Illinois markets. Total securities (excluding securities available-for-
sale valuation adjustment) increased $154 million since year-end 1995.
Mortgages held-for-sale increased 40% or $109 million and other interest-
earning assets decreased 89% or $210 million, since year-end 1995. Total
interest-earning assets (excluding securities available-for-sale valuation
adjustment) increased 2.2% or $245 million from December 31, 1995.
Total deposits increased 3.6% or $337 million from year-end 1995. Non-
interest bearing deposits decreased 5% or $76 million and interest-bearing
deposits increased 5.3% or $413 million. Short-term borrowed funds
decreased 14.4% or $189 million from December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The maintenance of an adequate level of liquidity is necessary to ensure
that sufficient funds are available to meet customers' loan demand and
deposit withdrawals. The banking subsidiaries' liquidity sources consist
of securities available-for-sale, maturing loans and securities held-to-
maturity, and other short-term investments. Liquidity has also been
obtained through liabilities such as customer-related core deposits, funds
borrowed, certificates of deposit and public funds deposits.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
At March 31, 1996, shareholders' equity was $1,020 million, compared to
$937 million at March 31, 1995. Total equity at March 31, 1996 is reduced
by an after-tax unrealized loss of $10 million on securities available-
for-sale. Shareholders' equity as a percentage of total assets as of
March 31, 1995 was 8.38%. The following table represents the Registrant's
regulatory capital position as of March 31, 1996.
Regulatory capital at March 31, 1996
(in millions) Tier 1 Total
Leverage Risk-Based Risk-Based
Ratio Capital Capital
Actual capital $941.6 $933.6 $1,146.5
Required regulatory minimum capital 362.1 358.8 717.6
Capital in excess of requirements $579.5 $574.8 $ 428.9
Actual ratio 7.79% 10.41% 12.78%
Regulatory minimum ratio 3.00% 4.00% 8.00%
Ratio considered "well capitalized"
by regulatory agencies 5.00% 6.00% 10.00%
The changes in book value per common share are shown in the table below.
Book value per common share, December 31, 1995 $22.39
Net income per common share for the three months
ended March 31, 1996 .86
Dividends per common share (.32)
Net change in valuation adjustment of securities
available-for-sale (.29)
Other changes (.05)
Book value per common share, March 31, 1996 $22.59
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The registrant's annual meeting of shareholders was held on
April 15, 1996. The election of directors and procedural matters
were voted upon. All nominees for director were elected by the
following votes.
Election of Directors Votes Cast
For Withheld
Mr. John M. Bissell 38,340,983 172,841
Mr. William U. Parfet 37,256,081 1,257,653
Mr. Percy A. Pierre 38,281,946 231,878
Mr Peter F. Secchia 38,230,525 283,299
The terms of the office of the following directors continued after
the meeting:
Mr. John D. Boyles Mr. Michael J. Jandernoa
Mr. Dick DeVos Mr. John Keller
Mr. James Hackett Mr. Robert L. Sadler
Ms. Erina Hanka Mr. B.P. Sherwood
Mr. Earl D. Holton Mr. David J. Wagner
Item 6. Exhibits and Reports on Form 8-K.
a.) The following exhibits are filed as part of this report:
Exhibit 11 - Statement Re: Computation of Earnings Per
Share
Exhibit 27 - Financial Data Schedules
b.) The following reports on Form 8-K were filed during the
quarter:
Date of event Item Financial Statements
reported Reported Filed
December 31, 1995 5 Consolidated Condensed
Statements of Income
February 23, 1996 6
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.
OLD KENT FINANCIAL CORPORATION
Date: May 10, 1996 David J. Wagner
Chairman of the Board, President and
Chief Executive Officer
Date: May 10, 1996 B. P. Sherwood, III
Vice-Chairman and Treasurer
EXHIBIT INDEX
Exhibit Page Number
11 Statement of Earnings per 15
27 Financial Data Schedule 16