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 September 30, 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 October 31, 1996 was 45,156,010 shares.
INDEX
OLD KENT FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995
Consolidated Statements of Income for the three
and nine months ended September 30, 1996 and 1995
Consolidated Statements of Cash Flows for the
nine months ended September 30, 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 6. Exhibits and Reports on Form 8-K
SIGNATURES
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)____________________________________________________________
September 30, December 31,
(dollars in thousands) 1996 1995
ASSETS:
Cash and due from banks.......................................... $ 541,047 $ 527,611
Federal funds sold and resale agreements......................... 24,111 49,445
Total cash and cash equivalents.................................. 565,158 577,056
Interest-earning deposits........................................ 589 175,413
Trading account securities....................................... 5,403 11,699
Mortgages held-for-sale.......................................... 393,096 270,126
Securities available-for-sale:
Collateralized mortgage obligations and other mortgage-backed
securities................................................ 748,512 874,291
Other securities.............................................. 1,324,644 1,371,408
Total securities available-for-sale (amortized cost of
$2,100,818, and $2,240,517, respectively)................... 2,073,156 2,245,699
Securities held-to-maturity:
Collateralized mortgage obligations and other mortgage-backed
securities................................................ 792,380 680,330
Other securities.............................................. 161,898 190,612
Total securities held-to-maturity (market values of
$957,636 and $876,291, respectively)........................ 954,278 870,942
Loans............................................................ 8,035,627 7,430,552
Allowance for credit losses...................................... (170,668) (174,248)
Net loans........................................................ 7,864,959 7,256,304
Premises and equipment........................................... 170,218 173,903
Other assets..................................................... 439,716 421,942
Total Assets..................................................... $12,466,573 $12,003,084
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Non-interest bearing.......................................... $ 1,474,947 $ 1,506,149
Interest-bearing.............................................. 8,466,819 7,769,672
Foreign deposits -- interest-bearing.......................... 33,663 81,545
Total deposits.............................................. 9,975,429 9,357,366
Other borrowed funds............................................. 1,185,429 1,307,617
Subordinated debt................................................ 100,000 100,000
Other liabilities................................................ 217,366 222,165
Total Liabilities................................................ $11,478,224 $10,987,148
Shareholders' Equity:
Preferred stock: 25,000,000 shares authorized and unissued....... -- --
Common stock, $1 par value: 150,000,000 shares authorized;
45,584,622 and 45,383,122 shares issued and outstanding ....... $ 45,585 $ 45,383
Capital surplus.................................................. 204,115 200,101
Retained earnings................................................ 756,629 767,085
Valuation adjustment of securities available-for-sale............ (17,980) 3,367
Total Shareholders' Equity....................................... 988,349 1,015,936
Total Liabilities and Shareholders' Equity...................... $12,466,573 $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 For the Nine Months
Ended September 30, Ended September 30,
(in thousands, except per share data) 1996 1995 1996 1995
Interest Income:
Interest and fees on loans............................$182,699 $170,586 $530,311 $496,379
Interest on mortgages held-for-sale................... 6,804 6,354 19,753 13,151
Interest on securities available-for-sale............. 32,375 16,166 100,838 55,270
Interest on securities held-to-maturity:
Taxable............................................. 14,436 30,391 42,717 90,049
Tax-exempt.......................................... 2,246 3,042 7,137 9,564
Interest on deposits.................................. 11 733 298 1,155
Interest on federal funds sold and resale agreements.. 1,758 3,510 3,853 12,444
Interest on trading account securities................ 138 126 356 1,074
Total interest income................................. 240,467 230,908 705,263 679,086
Interest Expense:
Interest on domestic deposits......................... 96,848 89,745 282,029 256,837
Interest on foreign deposits.......................... 351 2,637 2,259 12,687
Interest on other borrowed funds...................... 15,665 18,146 46,823 52,419
Interest on subordinated debt......................... 1,634 -- 5,040 --
Total interest expense................................ 114,498 110,528 336,151 321,943
Net Interest Income..................................... 125,969 120,380 369,112 357,143
Provision for credit losses............................. 9,168 6,073 25,143 16,631
Net interest income after provision
for credit losses................................... 116,801 114,307 343,969 340,512
Other Income:
Mortgage banking revenue (net)........................ 15,474 12,102 38,299 24,959
Service charges on deposit accounts................... 11,731 10,331 33,732 29,623
Trust income.......................................... 11,408 11,185 33,736 32,149
Credit card transaction revenue - net................. 3,107 2,547 7,211 7,392
Securities gains/(losses)............................. (391) 28 798 (139)
Nonrecurring and other real estate owned income....... 236 0 4,065 2,202
Other................................................. 10,996 7,564 34,784 23,143
Total other income.................................... 52,561 43,757 152,625 119,329
Other Expenses:
Salaries and employee benefits........................ 53,372 47,361 155,073 139,997
Occupancy expense..................................... 7,295 7,334 22,295 21,129
Equipment expense..................................... 6,154 6,106 18,103 18,145
Advertising and promotion............................. 5,749 2,182 22,643 7,396
Amortization of goodwill and intangibles.............. 2,497 2,966 7,382 8,892
FDIC Insurance........................................ 1,867 (256) 2,354 10,043
Restructuring charges................................. -- 4,972 -- 6,247
Nonrecurring and other real estate owned expense...... 153 44 740 146
Other expenses........................................ 31,877 29,575 91,694 81,728
Total other expenses.................................. 108,964 100,284 320,284 293,723
Income Before Income Taxes.............................. 60,398 57,780 176,310 166,118
Income taxes.......................................... 20,101 19,464 59,218 55,706
Net Income..............................................$ 40,297 $ 38,316 $117,092 $110,412
Per Common Share:
Net income............................................ $0.87 $0.80 $2.48 $2.30
Dividends............................................. $0.320 $0.295 $0.930 $0.857
Number of Common Shares Used to Calculate
Net Income Per Share (in thousands)................... 46,325 47,954 47,267 47,904
See accompanying notes to consolidated financial statements.
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30 (in thousands) 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................. $ 117,092 $ 110,412
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for credit losses..................................... 25,143 16,631
Depreciation, amortization and accretion........................ 44,131 32,075
Net gains on sales of assets.................................... (29,513) 1,878
Net decrease in trading account securities...................... 7,994 6,172
Originations and acquisitions of mortgages held-for-sale........ (2,282,154) (1,489,953)
Proceeds from sales and prepayments of mortgages held-for-sale.. 2,293,533 1,341,311
Net change in other assets...................................... 3,091 (45,285)
Net change in other liabilities................................. (2,153) 47,877
Net cash provided by operating activities............................... 177,164 21,118
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities and prepayments of securities available-for-sale............. 318,155 298,559
Proceeds from sales of securities available-for-sale.................... 2,317,064 1,240,313
Purchases of securities available-for-sale.............................. (2,546,535) (1,159,293)
Proceeds from maturities and prepayments of securities held-to-maturity. 117,751 243,860
Proceeds from sales of securities held-to-maturity...................... 860 -
Purchases of securities held-to-maturity................................ (206,256) (329,386)
Net change in interest-earning deposits................................. 174,824 (30,771)
Net proceeds from sale of loans......................................... - 242,127
Net increase in loans................................................... (668,001) (551,014)
Purchases of leasehold improvements, premises and equipment, net........ (14,298) (21,399)
Purchase of business (net of cash acquired)............................. (23,598) -
Sale of subsidiary (net of cash sold)................................... 7,123 -
Net cash used for investing activities.................................. (522,911) (67,004)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in time deposits............................................... 818,883 28,674
Change in demand and savings deposits................................... (118,118) (115,114)
Change in other borrowed funds.......................................... (228,537) 234,897
Repurchases of common stock............................................. (102,992) (12,500)
Proceeds from common stock issuances.................................... 8,326 4,941
Dividends paid to shareholders.......................................... (43,713) (40,851)
Net cash provided by financing activities............................... 333,849 100,047
Net change in cash and cash equivalents................................. (11,898) 54,161
Cash and cash equivalents at beginning of year.......................... 577,056 515,008
Cash and cash equivalents at September 30............................... $ 565,158 $ 569,169
Supplemental disclosures of cash flow information:
Interest paid on deposits, other borrowed funds and
subordinate debt.................................................... $ 336,974 $ 313,204
Federal income taxes paid............................................. 61,658 52,016
Significant non-cash transactions:
Stock dividends issued................................................ 83,834 71,651
Stock issued to acquire business...................................... 8,431 -
See accompanying notes to consolidated financial statements.
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 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 and nine month periods ended
September 30, 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.
Certain reclassifications have been made to prior periods' financial statements
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):
September 30, December 31,
Loans: 1996 1995
Commercial........................................ $2,285,073 $2,008,582
Real estate - Commercial......................... 1,617,388 1,627,154
Real estate - Construction....................... 381,417 267,363
Real estate - Residential mortgages.............. 865,492 832,214
Real estate - Consumer home equity .............. 712,105 623,659
Consumer.......................................... 1,614,059 1,551,828
Credit card loans................................. 358,081 323,592
Lease financing................................... 202,012 196,160
Total Loans....................................... $8,035,627 $7,430,552
September 30, December 31,
Nonperforming assets: 1996 1995
Nonaccrual loans ................................. $42,272 $40,173
Restructured loans................................ 785 3,075
Impaired loans.................................. 43,057 43,248
Other real estate owned........................... 6,163 11,287
Total nonperforming assets........................ $49,220 $54,535
Loans past due 90 days or more.................... $35,336 $21,606
Additionally, at September 30, 1996, the Corporation's managment has identified
loans totalling approximately $12 million as potential problem loans. These
loans are not included as nonperforming assets in the table above. While these
loans were in compliance with repayment terms at September 30, 1996, other
circumstances caused management to seriously doubt the ability of the borrowers
to continue to remain in compliance with existing loan repayment terms.
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
September 30, 1996
NOTE C: ALLOWANCE FOR CREDIT LOSSES AND NET CHARGE-OFFS
The following summarizes the changes in the allowance for credit losses, and net
charge-offs (in thousands of dollars):
For the Nine Months
ended September 30,
Allowance for Credit Losses 1996 1995
Balance at January 1,.............................. $174,248 $167,253
Changes in allowance due to (sold) purchased loans. (1,141) (1,504)
Provision for credit losses........................ 25,143 16,631
Gross loans charged-off............................ (36,005) (15,693)
Gross recoveries of loans previously charged-off... 8,423 9,124
Balance at end of period,.......................... $170,668 $175,811
For the Nine Months
ended September 30,
Net Loan Charge-Offs 1996 1995
Commercial Loans & Commercial Real Estate.......... ($359) ($1,430)
Consumer........................................... 8,252 5,027
Credit Card........................................ 12,244 2,297
Residential Mortgages.............................. (3) 53
Leases............................................. 7,448 622
Total Net Charge-Offs.............................. $27,582 $6,569
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
September 30, 1996: Cost Gains Losses Value
U.S. Treasury and federal agency securities. $1,285,887 $ 172 $22,733 $1,263,326
Collateralized mortgage obligations:
U.S. Government issued................. 468,689 833 4,341 465,181
Privately issued....................... 193,095 127 67 193,155
Mortgage-backed pass-through securities..... 91,829 114 1,767 90,176
Other securities............................ 61,318 0 0 61,318
Total securities available-for-sale......... $2,100,818 $ 1,246 $28,908 $2,073,156
December 31, 1995:
U.S. Treasury and federal agency securities. $1,304,855 $10,503 $ 2,930 $1,312,428
Collateralized mortgage obligations:
U.S. Government issued................. 710,255 5,252 9,678 705,829
Privately issued....................... 4,539 29 40 4,528
Mortgage-backed pass-through securities..... 162,494 1,709 269 163,934
Other securities............................ 58,374 606 0 58,980
Total securities available-for-sale......... $2,240,517 $18,099 $12,917 $2,245,699
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
September 30, 1996
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):
Gross Gross
Amortized Unrealized Unrealized Market
September 30, 1996: Cost Gains Losses Value
U.S. Treasury and federal agency securities. $ 6,085 $ 1 $ 22 $ 6,064
Collateralized mortgage obligations:
U.S. Government issued................. 493,021 3,105 4,364 491,762
Privately issued....................... 165,883 37 240 165,680
Mortgage-backed pass-through securities..... 133,476 2,029 604 134,901
State and political subdivisions............ 155,813 4,214 798 159,229
Total securities held-to-maturity........... $954,278 $ 9,386 $6,028 $957,636
December 31, 1995:
Collateralized mortgage obligations:
U.S. Government issued................. $456,758 $ 2,963 $5,306 $454,415
Privately issued....................... 95,843 227 390 95,680
Mortgage-backed pass-through securities..... 127,729 2,939 236 130,432
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
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. These securities were acquired in a business combination
and sold due to a post-combination determination that they did not conform
to Old Kent investment policy.
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.
On August 21, 1996, Old Kent signed an agreement to acquire Seaway Financial
Corporation (Seaway), a bank holding company with assets of approximately $350
million headquartered in Saint Clair, Michigan. Seaway is the parent company
of The Commercial and Savings Bank of Saint Clair County, and The Algonac
Savings Bank. Seaway provides banking services through fourteen offices in
Saint Clair County. The merger is subject to shareholder and regulatory
approval and is expected to be completed during the fourth quarter of 1996, or
the first quarter of 1997.
On August 1, 1996, Old Kent acquired National Pacific Mortgage Corporation
("NPMC"), a mortgage company headquartered in Anaheim, California, with 17
branch offices in California and Oregon, for approximately $29 million in cash
and other consideration. When acquired, NPMC had assets of approximately
$150 million and a servicing portfolio of approximately $1.8 billion. The
acquisition was treated as a purchase for accounting purposes and, accordingly,
results of operations of NPMC are included in Old Kent's consolidated results
of operations from the date of acquisition.
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
September 30, 1996
NOTE G: SHAREHOLDERS' EQUITY
On June 17, 1996, the Board of Directors of Old Kent Financial Corporation
declared a 5% stock dividend, which was paid on July 25, 1996, to shareholders
of record on June 25, 1996. All per share amounts included in this report have
been retroactively adjusted to reflect this dividend.
At the same meeting, the Board of Directors authorized the repurchase of up to
2.5 million shares of Old Kent Common Stock which would be reserved for later
reissue in connection with future stock dividends, employee benefit plans and
other corporate purposes. The directors also authorized the purchase of
Old Kent Common Stock intended for use in the acquisition of Seaway Financial
Corporation. As of September 30, 1996, approximately 2.2 million shares of
Old Kent Common Stock had been purchased and reserved under these
authorizations.
NOTE H: MORTGAGE BANKING REVENUE (NET)
The following summarizes net mortgage banking revenues:
For the Nine Months
Net mortgage banking revenue: ended September 30,
1996 1995
Gross mortgage servicing revenue................................... $18,819 $10,241
Less: amortization of mortgage servicing rights & direct costs... (12,690) (4,493)
Net mortgage servicing revenue..................................... 6,129 5,748
Mortgage banking gains (net)....................................... 21,685 14,218
Mortgage originations and processing fees (net).................... 10,485 4,993
Total net mortgage banking revenue............................... $38,299 $24,959
NOTE I: RESTRUCTURING RESERVES
In 1995, the Corporation established certain reserves related to a restructuring
program undertaken during that period. The primary components of the reserves
consisted of estimated severance costs and costs related to the abandonment of
physical facilities. The table below summarizes activity in these reserve
accounts since December 31, 1995.
Reserve For:
--------------------------------
Employee Facilities Other
(Dollars in thousands) Severance Abandonment Costs
Balance, December 31, 1995 $6,094 $4,572 $586
Amounts charged to the reserve pursuant to
the restructuring plans for the nine months ended
September 30, 1996 (3,512) (169) (586)
Balance, September 30, 1996 $2,582 $4,403 $ 0
Old Kent's management regularly assesses the implementation progress of the
restructuring plans and believes they will be substantially complete by
December 31, 1996. Management has estimated that the plans completed through
September 30, 1996, resulted in a financial benefit of at least $5 million for
the three month period ended September 30, 1996 and approximately $10 million
for the nine month period ended on that same date. These estimated benefits
have primarily resulted from staffing reductions in the subsidiary banks.
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 covered by the consolidated financial
statements included in this filing. The Registrant's form 10-Q for the
quarterly periods ended March 31 and June 30, 1996, are incorporated by
reference.
RESULTS OF OPERATIONS
The Registrant's net income was $40,297,000 for the third quarter of 1996
compared to $38,316,000 for the same period in 1995. Third quarter net income
per share for 1996 was $.87, an 8.8% increase over last year's $.80. For the
nine month period ended September 30, 1996, net income was $117,092,000
compared to $110,412,000 a year ago and net income per share was $2.48, a 7.8%
increase over last year's $2.30.
Total assets were $12.5 billion at quarter-end compared to total assets of
$11.8 billion at September 30, 1995. Return on average equity for the third
quarter of 1996 was 16.32% compared to 15.53% for the third quarter of 1995.
Return on assets was 1.30% for the third quarter of 1996 compared to 1.31% for
the third quarter of 1995.
The Registrant's net interest income for the third quarter of 1996 was $126.0
million, a 4.6% increase over the $120.4 million recorded in the same period of
1995. The increase was primarily the result of higher earning assets for the
third quarter of 1996 as compared to the third quarter of 1995. The net
interest margin was 4.41% for the three months ended September 30, 1996,
compared to 4.47% for the year ago quarter. The decrease in the net interest
margin primarily reflects a shift in the Registrant's deposit mix from lower
costing savings deposits to higher yielding consumer time deposits.
The provision for credit losses was $9.2 million for the third quarter of 1996
and $6.1 million for the third quarter of 1995. The allowance for credit
losses as a percent of loans and leases outstanding was 2.12% at September 30,
1996 and 2.46% at September 30, 1995. Impaired loans as a percent of total
loans was .54% at September 30, 1996, and .55% at September 30, 1995. Net
credit losses were $11.0 million or .56% of average loans for the third quarter
of 1996 compared to $3.9 million or .21% of average loans for the same period
a year ago. The increase credit loss provision was related to higher loss
experience within the Registrant's credit card, consumer loan and lease
portfolios.
Total other operating income, excluding security transactions and nonrecurring
items, increased 20.6% to $52.7 million during the third quarter of 1996 over
the same period a year ago. Mortgage banking revenue increased $3.4 million
or 27.9% during the third quarter of 1996 over the same period a year ago.
This increase includes the effect of Republic Mortgage Corp., which was
acquired in January, 1996, and National Pacific Mortgage Corporation, acquired
in August, 1996. Service charges on deposits increased 13.6% or $1.4 million,
trust income increased 2.0% and all other income increased $3.8 million or
37.6% over the year ago quarter. The increase in other income includes
insurance commissions of $1.8 million associated with Guyot, Hicks, Anderson
and Associates, an insurance agency acquired in December 1995.
Non-recurring income of $236 thousand in the third quarter of 1996 was
attributable to gains on sale of other real estate owned.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Total net securities gains/(losses) for the third quarter of 1996 were
($391,000) compared to net gains of $28,000 for the same period of 1995.
Total operating expenses (excluding restructuring and nonrecurring items) for
the third quarter of 1996 increased 14.2% over the same period of 1995.
Salaries, wages and employee benefits increased 12.7% for the third quarter of
1996 over the third quarter of 1995. The increase was primarily the result
of business acquisitions. The number of full-time equivalent employees
increased by 587 over a year-ago to 5,693 at September 30, 1996, as shown
below:
September 30,
1996 1995 Change
Full-time equivalent staff:
Banking units 4,348 4,599 (251)
Mortgage banking 1,130 416 714
Insurance, leasing & brokerage 215 91 124
Total 5,693 5,106 587
During the third quarter, advertising and promotion expenses increased $3.6
million compared to the same period a year ago. Advertising and promotional
expense, as shown in the consolidated statements of income, includes
promotional costs related to the Corporation's "CardMile" program. Also,
other liabilities, in the consolidated balance sheets, includes an allowance
for redemption reserve which reflects the Corporation's estimated liability
related to its issuances of certificates redeemable for airfare. Certificates
were issued under this program to eligible credit card customers based on
their usage of the credit card to purchase goods and services.
Old Kent's process for recording the allowance for redemption reserve for this
program is based on estimates. Accordingly, the Corporation periodically
reviews and analyzes its CardMiles certificate redemption estimates, and
factors affecting those estimates. Factors affecting these estimates, among
others, include current and cumulative redemption experience, rates for air
travel, and economic conditions which may influence the redemption rates.
Adjustments to the allowance for redemption reserve are recognized in the
financial statements in the period in which they become known.
In October, 1996, subsequent to the date of the accompanying consolidated
financial statements, Old Kent notified its customers which participated in the
CardMiles program, that this program would be terminated during the fourth
quarter of 1996. Management expects that the discontinuation of this program
will have a beneficial impact on the results of operations beginning in 1997.
The following summarizes the activity in the CardMiles allowance for redemption
reserve:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 1996 1995 1996 1995
Allowance at beginning of period $9,392 $389 $320 -
Redemptions during period (1,773) (32) (3,951) ($73)
Expense recognized for period 3,300 (30) 14,550 400
Allowance at end of period $10,919 $327 $10,919 $327
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
During the third quarter of 1996 compared to the same period a year ago,
occupancy expense decreased .5% and equipment expense increased .8%. The
Registrant recorded a special, one-time $1.7 million (pre-tax) charge on
September 30, 1996, which reflected a special assessment by the FDIC to the
Registrant and many other financial institutions. This assessment was
intended to recapitalize the FDIC's Savings Association Insurance Fund.
During the third quarter of 1995, the Registrant recorded a special
restructuring charge of $5.0 million. Other operating expenses increased
12.3%, which includes the impact of recent acquisitions of National Pacific
Mortgage Corporation in August of 1996, Republic Mortgage Company in January
1996, and Guyot, Hicks, Anderson and Associates, an insurance agency, in
December of 1995.
BALANCE SHEET CHANGES
Total interest-earning assets (at amortized cost) increased 4.2% or $465
million from December 31, 1995. For the nine months ended September 30, 1996,
total loans grew at an annualized rate of 10.9% or $605 million, and
commercial loans grew at an annualized rate of 12.6% or $387 million. The
growth in commercial loans is primarily a result of increased efforts in the
Registrant's eastern Michigan, and Illinois markets. Total securities (at
amortized cost) decreased $56 million since year-end 1995. This decrease
reflected the use of liquidity in the securities portfolio to fund loan growth.
Mortgages held-for-sale increased 45.6% or $123 million. This growth is
largely due to the aforementioned acquisitions of mortgage banking businesses.
Other interest earning assets decreased 87.3% or $207 million, since year end
1995.
Total deposits increased $618 million or 6.6% from year-end 1995. Since
December 31, 1995, non-interest bearing deposits decreased 2.1% or $31 million
and interest-bearing deposits increased 8.3% or $649 million, primarily due to
growth in consumer time deposits. Short-term borrowed funds decreased $122
million or 9.3% 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.
At September 30, 1996, shareholders' equity was $988 million, compared to $999
million at September 30, 1995. In June, 1996, the Corporation was authorized
to repurchase up to 4.5 million shares of Old Kent Common Stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The following table lists the number of shares repurchased and reserved at
September 30, 1996 with the intent of future reissuance under the authorized
programs.
Old Kent Common Stock repurchased and reserved for Number of shares
future reissuance at September 30 1996: (In thousands)
Reserved for possible future stock dividends and
other corporate purposes 850
Reserved for use in connection with future
purchase business acquisitions 882
Reserved for future reissuance for dividend
reinvestment and employee stock plans 450
Total 2,182
Shares reserved, as shown above, include approximately 1,446 thousand shares
which were acquired by the Corporation during the quarter ended September 30,
1996. The repurchase of these shares had a beneficial effect on earnings per
common share and return on average equity for that period. The repurchases
also had the effects of reducing book value per common share and of decreasing
the regulatory capital ratios included in this report.
Total equity at September 30, 1996, was reduced by an after-tax unrealized
loss of $18 million on securities available-for-sale. Shareholders' equity as
a percentage of total assets as of September 30, 1996, was 7.93%. The
following table represents the Registrant's consolidated regulatory capital
position as of September 30, 1996.
Regulatory capital at September 30, 1996
(in millions) Tier 1 Total
Leverage Risk-Based Risk-Based
Ratio Capital Capital
Actual capital $912.1 $910.9 $1,129.4
Required regulatory minimum capital 371.1 377.1 754.2
Capital in excess of requirements $541.0 $533.8 $ 375.2
Actual ratio 7.36% 9.66% 11.98%
Regulatory Minimum Ratio 3.00% 4.00% 8.00%
Ratio considered "well capitalized"
by regulatory agencies 5.00% 6.00% 10.00%
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The changes in total shareholders' equity and book value per common share are
summarized in the tables below.
Total Share-
holders' Equity Book Value Per
(in millions) Common Share
Balance, December 31, 1995 $1,015.9 $21.32
Net income for the nine months ended
September 30, 1996 117.1 2.48
Cash dividends paid (43.7) (.93)
Net change in valuation adjustment of
securities available-for-sale (21.3) (.45)
Stock repurchases (net of stock issued) (83.1) (.81)
Other changes 3.4 .07
Balance, September 30, 1996 $ 988.3 $21.68
PART II OTHER INFORMATION
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.) No reports on Form 8-K were filed during the quarter for
which this report is filed.
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: November 12, 1996 David J. Wagner
Chairman of the Board, President and
Chief Executive Officer
Date: November 12, 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