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 June 30, 1997, 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)
111 Lyon Street NW
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 July 31, 1997 was 47,589,657 shares.
INDEX
OLD KENT FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996
Consolidated Statements of Income for the three
and six months ended June 30, 1997 and 1996
Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)______________________________________________________________
June 30, December 31,
(dollars in thousands) 1997 1996
ASSETS:
Cash and due from banks................................................. $ 593,464 $ 530,444
Federal funds sold and resale agreements................................ 62,625 107,353
Total cash and cash equivalents......................................... 656,089 637,797
Interest-earning deposits............................................... 38,827 803
Trading account securities.............................................. 10,101 19,009
Mortgages held-for-sale................................................. 814,549 589,245
Securities available-for-sale:
Collateralized mortgage obligations and other mortgage-backed
securities....................................................... 1,143,312 673,722
Other securities..................................................... 899,470 1,221,476
Total securities available-for-sale (amortized cost of
$2,063,318, and $1,910,367, respectively).......................... 2,042,782 1,895,198
Securities held-to-maturity:
Collateralized mortgage obligations and other mortgage-backed
securities....................................................... 715,561 746,355
Other securities..................................................... 150,728 162,975
Total securities held-to-maturity (market values of
$867,652 and $911,592, respectively)............................... 866,289 909,330
Loans................................................................... 8,349,226 8,097,056
Allowance for credit losses............................................. (157,260) (165,928)
Net loans............................................................... 8,191,966 7,931,128
Premises and equipment.................................................. 181,784 173,916
Other assets............................................................ 558,451 490,402
Total Assets............................................................ $13,360,838 $12,646,828
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Non-interest bearing................................................. $ 1,638,000 $ 1,580,960
Interest-bearing..................................................... 8,578,229 8,474,754
Foreign deposits -- interest-bearing................................. 45,962 24,433
Total deposits..................................................... 10,262,191 10,080,147
Other borrowed funds.................................................... 1,626,298 1,235,867
Other liabilities....................................................... 224,413 237,057
Subordinated debt....................................................... 100,000 100,000
Total Liabilities....................................................... 12,212,902 11,653,071
Guaranteed preferred beneficial interests in the Corporation's
junior subordinated debentures..................................... 100,000 --
Shareholders' Equity:
Preferred stock: 25,000,000 shares authorized and unissued.............. -- --
Common stock, $1 par value: 150,000,000 shares authorized;
47,584,813 and 44,944,321 shares issued and outstanding .............. 47,585 44,944
Capital surplus......................................................... 289,968 175,842
Retained earnings....................................................... 722,897 782,830
Valuation adjustment of securities available-for-sale................... (12,514) (9,859)
Total Shareholders' Equity.............................................. 1,047,936 993,757
Total Liabilities and Shareholders' Equity............................. $13,360,838 $12,646,828
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)______________________________________________________________________
For the Three Months For the Six Months
Ended June 30, Ended June 30,
(in thousands, except per share data) 1997 1996 1997 1996
Interest Income:
Interest and fees on loans............................................$191,633 $177,821 $379,205 $347,612
Interest on mortgages held-for-sale................................... 14,707 6,951 24,807 12,949
Interest on securities available-for-sale............................. 32,462 32,621 61,698 68,463
Interest on securities held-to-maturity:
Taxable............................................................. 12,778 14,305 25,899 28,281
Tax-exempt.......................................................... 2,100 2,331 4,289 4,891
Interest on deposits.................................................. 68 31 123 287
Interest on federal funds sold and resale agreements.................. 1,187 1,455 3,333 2,095
Interest on trading account securities................................ 264 130 952 218
Total interest income................................................. 255,199 235,645 500,306 464,796
Interest Expense:
Interest on domestic deposits......................................... 98,878 93,857 195,966 185,181
Interest on foreign deposits.......................................... 654 668 1,063 1,908
Interest on other borrowed funds...................................... 20,773 14,475 36,708 31,210
Interest on subordinated debt......................................... 3,403 1,668 6,188 3,354
Total interest expense................................................ 123,708 110,668 239,925 221,653
Net Interest Income..................................................... 131,491 124,977 260,381 243,143
Provision for credit losses............................................. 11,741 9,723 21,962 15,975
Net interest income after provision
for credit losses................................................... 119,750 115,254 238,419 227,168
Other Income:
Mortgage banking revenue (net)........................................ 24,817 12,005 43,627 22,825
Trust income.......................................................... 12,841 11,260 25,693 22,328
Service charges on deposit accounts................................... 11,708 11,277 23,139 22,001
Insurance sales commissions........................................... 3,281 3,393 6,775 6,557
ATM fees.............................................................. 1,600 649 2,565 1,330
Brokerage commissions................................................. 697 340 1,508 705
Credit card transaction revenue - net................................. 354 2,337 1,016 4,104
Securities gains/(losses)............................................. (774) 335 (1,411) 1,189
Nonrecurring and other real estate owned income....................... 17,698 1,332 20,285 3,829
Other................................................................. 10,263 8,091 19,276 15,196
Total other income.................................................... 82,485 51,019 142,473 100,064
Other Expenses:
Salaries and employee benefits........................................ 62,054 50,507 123,578 101,701
Occupancy expense..................................................... 8,425 7,540 17,042 15,000
Equipment expense..................................................... 7,016 6,202 13,633 11,949
Advertising and promotion............................................. 2,830 12,646 4,857 16,894
Amortization of goodwill and intangibles.............................. 3,340 2,426 6,710 4,885
FDIC Insurance........................................................ 358 306 599 487
Nonrecurring and other real estate owned expense...................... 2,079 296 2,306 587
Other expenses........................................................ 35,760 30,051 70,150 59,817
Total other expenses.................................................. 121,862 109,974 238,875 211,320
Income Before Income Taxes.............................................. 80,373 56,299 142,017 115,912
Income taxes.......................................................... 27,562 18,738 48,202 39,117
Net Income..............................................................$ 52,811 $ 37,561 $ 93,815 $ 76,795
Per Common Share:
Net income............................................................$ 1.10 $ 0.75 $ 1.95 $ 1.53
Dividends.............................................................$ 0.324 $ 0.290 $ 0.648 $ 0.581
Number of Common Shares Used to Calculate
Net Income Per Share (in thousands)................................... 48,001 49,941 48,209 50,124
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 1997 (dollars in thousands) 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 93,815 $ 76,795
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for credit losses............................................. 21,962 15,975
Depreciation, amortization and accretion................................ 23,171 29,512
Net gains on sales of assets............................................ (48,530) (20,035)
Net change in trading account securities................................ 51,689 3,972
Originations and acquisitions of mortgages held-for-sale................ (2,065,799) (1,577,958)
Proceeds from sales and prepayments of mortgages held-for-sale.......... 1,869,220 1,528,492
Net change in other assets.............................................. (32,533) (12,474)
Net change in other liabilities......................................... (35,242) 8,562
Net cash (used for) provided by operating activities............................ (122,246) 52,841
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and prepayments of securities available-for-sale....... 113,550 261,036
Proceeds from sales of securities available-for-sale............................ 1,212,235 1,399,539
Purchases of securities available-for-sale...................................... (1,410,790) (1,526,434)
Proceeds from maturities and prepayments of securities held-to-maturity......... 144,591 63,118
Proceeds from sales of securities held-to-maturity.............................. 981 860
Purchases of securities held-to-maturity........................................ (103,260) (167,644)
Net change in interest-earning deposits......................................... (38,024) 174,238
Proceeds from sale of loans..................................................... 291,460 -
Net increase in loans........................................................... (333,271) (457,023)
Purchases of leasehold improvements, premises and equipment, net............. (12,251) (6,708)
Cash acquired in business acquisition........................................... 14,284 -
Sale of business units (net of cash sold)....................................... 1,234 7,123
Net cash used for investing activities.......................................... (119,261) (251,895)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in time deposits......................................................... (48,747) 687,895
Change in demand and savings deposits........................................... (71,015) (139,410)
Change in other borrowed funds.................................................. 390,431 (207,298)
Proceeds of guaranteed preferred beneficial interests in the
Corporation's junior subordinated debentures............................... 100,000 -
Repurchases of common stock..................................................... (85,775) (46,023)
Proceeds from common stock issuances............................................ 5,865 4,681
Dividends paid to shareholders.................................................. (30,959) (28,985)
Net cash provided by financing activities....................................... 259,800 270,860
Net change in cash and cash equivalents......................................... 18,293 71,806
Cash and cash equivalents at beginning of year.................................. 637,797 577,056
Cash and cash equivalents at June 30............................................ $ 656,090 $ 648,862
Supplemental disclosures of cash flow information:
Interest paid on deposits, other borrowed funds and
subordinate debt............................................................ $ 246,768 $ 225,283
Federal income taxes paid..................................................... 34,900 41,775
Significant non-cash transactions:
Stock dividend issued 122,474 84,013
Stock issued to acquire business.............................................. 71,767 8,431
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 1997
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 six month period
ended June 30, 1997, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997. 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,
1996.
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: FINANCIAL INSTRUMENT ACTING POLICIES
Old Kent uses certain off-balance sheet derivative financial instruments,
principally interest rate swaps, in connection with its asset/liability
management activities. Purchased interest rate options (including caps and
floors) and forwards are also used to manage interest rate risk and currency
risk. Provided these intruments meet specific criteria, they are considered
hedges and accounted for under the accrual or deferral methods, as more fully
discussed below.
Old Kent uses the accrual method for substantially all of its interest rate
swaps as well as for interest rate options. Amounts receivable or payable
under these agreements are recognized as an adjustment to the interest income
or expense of the hedged item. There is no recognition on the balance sheet
for changes in the fair value of the hedging instrument. Premiums paid for
interest rate options are deferred as a component of other assets and amortized
to interest income or expense over the contract term. Gains and losses
associated with forwards are deferred as an adjustment to the carrying value of
the related asset or liability and are recognized in the corresponding interest
income or expense accounts over the remaining life of the hedged item. Gains
and losses on terminated hedging instruments are also deferred and amortized to
interest income or expense over the remaining life of the hedged item.
Derivative financial instruments, such as caps and floors, that do not meet the
required criteria are carried on the balance sheet at fair value with realized
and unrealized changes in that value recognized in earnings. If the hedged item
is sold or its outstanding balance otherwise declines below that of the related
hedging instrument, the derivative product (or applicable excess portion
thereof) is marked-to-market and the resulting gain or loss is included in
earnings.
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
June 30, 1997
NOTE C: LOANS AND NONPERFORMING ASSETS
The following summarizes loans and nonperforming assets at the
dates indicated (dollars in thousands):
June 30, December 31,
Loans: 1997 1996
Commercial....................................$2,418,056 $2,205,837
Real estate - Commercial..................... 1,781,355 1,719,699
Real estate - Construction................... 478,221 428,001
Real estate - Residential mortgages.......... 914,631 859,318
Real estate - Consumer home equity .......... 840,190 728,530
Consumer...................................... 1,721,491 1,636,719
Credit card loans............................. 4,702 317,554
Lease financing............................... 190,580 201,398
Total Loans...................................$8,349,226 $8,097,056
June 30, December 31,
Nonperforming assets: 1997 1996
Nonaccrual loans .............................$ 43,030 $ 39,950
Restructured loans............................ 2,984 2,832
Impaired loans.............................. 46,014 42,782
Other real estate owned....................... 5,562 7,097
Total nonperforming assets....................$ 51,576 $ 49,879
Loans past due 90 days or more................$ 20,059 $ 36,817
At June 30, 1997, the Corporation's management has identified loans totalling
approximately $11.6 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 June 30, 1997, other circumstances caused
management to seriously doubt the ability of the borrowers to continue to
remain in compliance with existing loan repayment terms.
During June, 1997, Old Kent sold approximately $266 million of credit card
loans. This sale resulted from the Corporations's decision to discontinue
business activity as an underwriter of credit card loans. Old Kent will
continue to be an issuer, but will no longer carry credit card loans on its
balance sheet. After related costs (which included the use of estimates),
Old Kent recognized a pre-tax gain of $16.6 million on this sale, or
approximately $.22 per common share, after taxes. At June 30, 1997, Old Kent
had approximately $4.7 million of remaining credit card loans which were not
included in this transaction and are subject to possible disposal in the
foreseeable future.
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
June 30, 1997
NOTE D: 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 Six Months
ended June 30,
Allowance for Credit Losses 1997 1996
Balance at January 1,.................................... $165,928 $174,248
Changes in allowance due to acquisitions / divestitures... 3,184 (1,140)
Changes in allowance due to loans sold.................... (8,000) --
Provision for credit losses............................... 21,962 15,975
Gross loans charged-off................................... (33,226) (22,759)
Gross recoveries of loans previously charged-off.......... 7,412 6,163
Balance at end of period,................................. $157,260 $172,487
For the Six Months
ended June 30,
Net Loan Charge-Offs 1997 1996
Commercial Loans & Commercial Real Estate................. ($783) ($2,406)
Consumer.................................................. 12,052 5,006
Credit Card............................................... 12,913 7,971
Residential Mortgages..................................... 1 57
Leases.................................................... 1,631 5,968
Total Net Charge-Offs..................................... $ 25,814 $ 16,596
NOTE E: 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
June 30, 1997: Cost Gains Losses Value
U.S. Treasury and federal agency securities.... $ 831,859 $ 545 $12,466 $ 819,938
Collateralized mortgage obligations:
U.S. Government issued.................... 818,784 754 5,587 813,591
Privately issued.......................... 223,261 576 3,568 220,269
Mortgage-backed pass-through securities........ 121,804 103 893 121,014
Other securities............................... 67,610 - - 67,610
Total securities available-for-sale............ $2,063,318 $1,978 $22,514 $2,042,782
December 31, 1996:
U.S. Treasury and federal agency securities.... $1,167,775 $ 298 $ 7,891 $1,160,182
Collateralized mortgage obligations:
U.S. Government issued.................... 419,499 433 3,064 416,868
Privately issued.......................... 189,347 465 4,277 185,535
Mortgage-backed pass-through securities........ 72,452 46 1,179 71,319
Other securities............................... 61,294 - - 61,294
Total securities available-for-sale............ $1,910,367 $1,242 $16,411 $1,895,198
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
June 30, 1997
NOTE F: 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
June 30, 1997: Cost Gains Losses Value
U.S. Treasury and federal agency securities.... $ 6,175 $ 5 $ 0 $ 6,180
Collateralized mortgage obligations:
U.S. Government issued.................... 455,152 726 3,335 452,543
Privately issued.......................... 150,598 80 1,337 149,341
Mortgage-backed pass-through securities........ 109,811 1,906 236 111,481
State and political subdivisions............... 144,553 4,642 1,088 148,107
Total securities held-to-maturity.............. $866,289 $7,359 $5,996 $867,652
December 31, 1996:
U.S. Treasury and federal agency securities.... $ 6,116 $ 9 $ 1 $ 6,124
Collateralized mortgage obligations:
U.S. Government issued.................... 462,778 1,878 3,444 461,212
Privately issued.......................... 160,699 - 1,885 158,814
Mortgage-backed pass-through securities........ 122,878 2,320 247 124,951
Other Securities............................... 156,859 4,730 1,098 160,491
Total securities held-to-maturity.............. $909,330 $8,937 $6,675 $911,592
NOTE G: BUSINESS COMBINATIONS
On January 1, 1997, Old Kent acquired Seaway Financial Corporation ("Seaway"),
a bank holding company, and its subsidiaries, The Commercial and Savings Bank
of St. Clair County and The Algonac Savings Bank. The acquisition was effected
by a merger of Seaway with and into Old Kent. This transaction was accounted
for as a purchase for accounting purposes. At the effective date, Seaway had,
on a consolidated basis, assets totaling approximately $345 million and
deposits of approximately $302 million. Seaway stockholders received
approximately 1.9 million shares of common stock of Old Kent. The principal
market for the financial services offered by Seaway was St. Clair County,
Michigan, and the communities within St. Clair County.
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
June 30, 1997
NOTE H: CAPITAL INCOME SECURITIES
On January 31, 1997, Old Kent Capital Trust I, a Delaware business trust
controlled by the Corporation, issued $100 million of Floating Rate
Subordinated Capital Income Securities ("preferred securities".) The
Corporation unconditionally guarantees all of the obligations of Old Kent
Capital Trust I. The holders of the preferred securities are entitled to
receive cumulative cash distributions accruing from the date of original
issuance and payable quarterly in arrears on the 1st day of February, May,
August and November of each year commencing May 1, 1997, at a variable rate
equal to the three month LIBOR (London Interbank Offering Rate) plus .80%,
determined quarterly for the ensuing period two London business days prior to
the commencement of each period. In determining the amount of each quarterly
distribution, the previously described distribution rate is applied to the
liquidation amount of each preferred security computed on a basis of the actual
number of days elapsed in a year of twelve 30-day months. The stated maturity
of the preferred securities is February 1, 2027, but the securities may be
redeemed, in whole or in part, beginning on February 1, 2007 (or earlier due
to the occurrence of a Special Event as provided for in the instruments.)
The proceeds of the preferred security issuance were entirely invested by
Old Kent Capital Trust I in a similarly featured Junior Subordinated Debenture
issued by Old Kent Financial Corporation. The proceeds of the debenture
issuance by the Corporation will be used for general corporate purposes, which
may include the repurchase of its common shares.
The preferred securities qualify as Tier 1 capital, subject to certain
limitations, for regulatory capital purposes. The issuance of these securities
had the effect of increasing the Corporation's regulatory capital.
NOTE I: SHAREHOLDERS' EQUITY
In June, 1996, the Board of Directors authorized the repurchase of up to
4.5 million shares of Old Kent Common Stock which would be reserved for later
reissue in connection with business acquisitions, future stock dividends,
employee benefit plans and other corporate purposes. As of June 30, 1997,
approximately 4.3 million shares of Old Kent Common Stock had been purchased
under this authorization. In January, 1997, approximately 1.9 million of these
shares were issued to acquire Seaway Financial Corporation as described in
Note G.
In June, 1997, the Board of Directors of Old Kent Financial Corporation
declared a 5% stock dividend payable July 28, 1997, to shareholders of record
on June 27, 1997. All per share amounts included in this report have been
adjusted to reflect this dividend.
At that same meeting, Old Kent's directors authorized management, at its
discretion, to purchase up to 3.0 million shares of the Corporation's common
stock. It is anticipated that these shares will be purchased by the
Corporation in a systematic program of open market, or privately negotiated
purchases and they will be reserved for later reissue in connection with
potential future stock dividends, dividend reinvestment plan, employee benefit
plans, and other general corporate purposes. As of June 30, 1997, no shares
had been purchased under this authorization.
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
June 30, 1997
NOTE J: MORTGAGE BANKING REVENUE (NET)
The following summarizes net mortgage banking revenues:
For the Six Months
Net mortgage banking revenue: ended June 30,
1997 1996
Gross mortgage servicing revenue.................................... $19,444 $12,597
Less: amortization of mortgage servicing rights & direct costs.... (12,889) (9,804)
Net mortgage servicing revenue...................................... 6,555 2,793
Mortgage banking gains (net)........................................ 28,724 13,174
Mortgage originations and processing fees (net)..................... 8,348 6,858
Total net mortgage banking revenue................................ $43,627 $22,825
NOTE K: EARNINGS PER SHARE
During February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). Old Kent is required to adopt the provisions of this statement
for the annual period ending December 31, 1997. SFAS 128 specifies
computational methods for determining basic and diluted earnings per share
which, for Old Kent, will cause different, but immaterial, results for earnings
per share than as currently calculated.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. It requires the restatement of all prior period earnings per share
data presented. The table below compares net income per common share, as
currently reported, with proforma basic amounts as calculated under the
provisions of SFAS 128.
For the Six Months
ended June 30,
Net Income Per Common Share: 1997 1996
As Reported....................................... $1.95 1.53
Proforma, basic, as calculated under SFAS 128..... 1.96 1.54
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 Old Kent's financial
condition and results of operations during the periods included
in the consolidated financial statements included in this filing.
Old Kent's form 10-Q for the quarterly period ended March 31,
1997, is here incorporated by reference.
RESULTS OF OPERATIONS
Old Kent's net income was $52.8 million for the second quarter of
1997 compared to $37.6 million for the same period in 1996.
Second quarter earnings per share was $1.10 a 46.7% increase over
last year's $.75. For the six month period ended June 30, 1997,
net income was $93.8 million compared to $76.8 million a year ago
and earnings per share was $1.95, a 27.5% increase over last
year's $1.53.
Total assets were $13.4 billion at quarter-end compared to $12.6
billion at December 31, 1996. Return on average equity for the
second quarter of 1997 was 20.85% compared to 14.91% for the
second quarter of 1996. Return on average assets was 1.60% for the
second quarter of 1997 compared to 1.24% for the second quarter
of 1996.
Old Kent's net interest income for the second quarter of 1997 was
$131.5 million, a 5.2% increase over the $125.0 million recorded
in the same period of 1996. The increase in net interest income
was due to the January 1, acquisition of Seaway Financial
Corporation ("Seaway") and a shift in the earning asset mix from
lower yielding securities to higher yielding loans. For the
second quarter of 1997, the net interest margin was 4.37%
compared to 4.48% a year ago. The decrease in the net interest
margin was primarily due to increased funding costs and
repurchases of common stock.
The provision for credit losses was $11.7 million in the second
quarter of 1997 and $9.7 million in the second quarter of 1996.
The increase in the provision reflected a decline in consumer
credit quality. Net credit losses were $14.8 million or .71% of
average loans for the second quarter of 1997 compared to $10.7
million or .55% of average loans for the same period a year ago.
The allowance for credit losses as a percent of loans and leases
outstanding was 1.88% at June 30, 1997 and 2.05% at December 31,
1996. Impaired loans as a percent of total loans was .55% at
June 30, 1997 and .53% at December 31, 1996.
Total other operating income, excluding securities transactions
and other nonrecurring income, increased 33% or $16.2 million
during the second quarter of 1997 over the same period a year
ago. The aforementioned Seaway acquisition accounted for
approximately $2.0 million of this increase and another $12.8
million was attributable to our mortgage banking business,
primarily a result of growth and expansion of Old Kent Mortgage
Company. Trust income increased 14.0% or $1.6 million and
service charges on deposits increased 3.8% or $.4 million. All
other service charges and fees increased $1.4 million over the
same period a year ago.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Nonrecurring and other real-estate owned income totalled $17.7
million for the quarter ended June 30, 1997. This included a
gain of $16.7 million from the sale of credit card loans as
discussed in note C to the consolidated financial statements.
Old Kent sold approximately $1.3 billion of residential mortgage
loans during the quarter. Old Kent's residential third party
mortgage servicing portfolio increased 44% to $10.9 billion at
June 30, 1997, from $7.6 billion at June 30, 1996, primarily due
to acquisitions. The residential third party mortgage servicing
portfolio was $9.9 billion at December 31, 1996.
Total net securities gains (losses) for the second quarter of
1997 were ($774,000), compared to gains of $335,000 for the same
period of 1996.
Total operating expenses for the second quarter of 1997 increased
$11.9 million, or 10.8%, over the same period in 1996.
Approximately $5.9 million of this increase relates to the Seaway
acquisition. Excluding Seaway; salaries, wages and employee
benefits increased $9.2 million or 18.1% for the second quarter
of 1997 over the second quarter of 1996. The number of full-time
equivalent employees increased by 865 over a year ago, to 6,175
at June 30, 1997, which includes the acquisition of 232 Seaway
employees and 363 National Pacific Mortgage Co. employees. The
following table shows the change in employees:
June 30,
1997 1996 Change
Full-time equivalent staff:
Banking units 4,575 4,390 185
Mortgage banking 1,365 735 630
Insurance, leasing & brokerage 235 185 50
Total 6,175 5,310 865
During the second quarter of 1997 compared to the same period a
year ago, occupancy expenses excluding Seaway, increased 10.0%,
and equipment expenses increased 9.2%. Advertising and promotion
decreased 77.6% or $9.8 million from the prior year quarter,
largely attributable to the discontinuance of Old Kent's credit
card "CardMiles" promotional program, which was canceled in late
1996.
Old Kent maintains a reserve associated with its CardMiles
program which is included in other liabilities in the
consolidated balance sheets. Old Kent's process for recording
the allowance for redemption reserve is based on estimates.
Factors affecting these estimates include, among others, current
and cumulative redemption experience, rates for air travel, and
economic conditions. The Corporation determines its allowance
for redemption reserve using a historical "lag" analysis based
upon monthly certificate redemptions, correlated with the months
in which the certificates were actually earned by eligible
cardholders. The allowance for redemption reserve is summarized
below:
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Six Months Ended
(Dollars in thousands) June 30,
CardMiles allowance for redemption reserve 1997
Allowance at beginning of period $10,823
Additions to redemption reserve 500
Redemptions during period (4,807)
Allowance at end of period $6,516
Amortization of goodwill and intangibles increased 38% or $.9
million. Nonrecurring expenses of $2.1 million was primarily
attributable to writedowns on certain obsolete software. Other
operating expenses increased by 19.0% or $5.7 million over the
prior year quarter, which includes the impact of recent
acquisitions of National Pacific Mortgage Corporation in August
1996, and Seaway Financial Corporation in January 1997.
Old Kent has completed an analysis to assure that its mainframe
and centrally controlled systems are able to deal with the advent
of the year 2000. Diagnosis and reprogramming in this area are
expected to result in expense estimated at $8-12 million, over
the three years ended December 31, 1999.
BALANCE SHEET CHANGES
Total interest-earning assets (at amortized cost), excluding the
Seaway acquisition increased 2.2% or $252 million from December
31, 1996. For the six months ended June 30, 1997, excluding the
Seaway acquisition, commercial loans grew at an annualized rate
of 10.7% or $238 million, and consumer loans grew at an
annualized rate of 13.6% or $161 million. The growth in
commercial loans is primarily a result of increased efforts in
the Registrant's eastern Michigan, and Illinois markets.
Excluding the Seaway acquisition, total securities (at amortized
cost) increased $13 million since year-end 1996. Mortgages
held-for-sale increased 38.2% or $225 million. Other interest
earning assets decreased 11.8% or $15 million, since year end
1996.
Total deposits, excluding the Seaway acquisition, decreased $130
million or 1.3% from year-end 1996: noninterest bearing deposits
increased 1.3% or $20 million and interest-bearing deposits
decreased 1.8% or $150 million. Short-term borrowed funds
increased $389 million or 31.4% from December 31, 1996.
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 June 30, 1997, shareholders' equity was $1,048 million
compared to $1,006 million at June 30, 1996. In June, 1997, the
Corporation was authorized to repurchase up to 3.0 million shares
of Old Kent Common Stock. As of June 30, 1997, no shares had
been repurchased under this authorization. In June, 1996, the
Corporation was authorized to repurchase up to 4.5 million shares
of Old Kent Common Stock. As described in the notes to the
consolidated financial statements, through June 30, 1997,
approximately 4.3 million shares had been repurchased and
approximately 1.9 million shares were issued to acquire Seaway.
The following table lists the number of shares repurchased and
reserved at June 30, 1997 with the intent of future reissuance
under the authorized programs.
Old Kent Common Stock repurchased and reserved for Number of
future reissuance at June 30, 1997: shares
(In thousands)
Reserved for possible future stock dividends
and other corporate purposes 1,991
Reserved for future reissuance for dividend
reinvestment and employee stock plans 460
Total 2,451
Shares reserved, as shown above, include approximately 112
thousand shares which were acquired by the Corporation during the
quarter ended June 30, 1997. The repurchase of these shares had
a beneficial effect on earnings per common share and return on
average equity for that period.
Total equity at June 30, 1997, was reduced by an after-tax
unrealized loss of $13 million on securities available-for-sale.
Shareholders' equity as a percentage of total assets as of June
30, 1997, was 7.84%.
The following table represents the Registrant's consolidated
regulatory capital position as of June 30, 1997:
Regulatory capital at June 30, 1997
(in millions) Tier 1 Total
Leverage Risk-Based Risk-Based
Ratio Capital Capital
Actual capital $1,036.0 $1,036.0 $1,259.0
Required regulatory minimum capital 391.2 392.3 784.6
Capital in excess of requirements $ 644.8 $ 643.7 $ 474.4
Actual ratio 7.94% 10.56% 12.84%
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)
As described in note H, in January, 1997, the Corporation issued
$100 million of capital income securities. These "Trust
Preferred Capital Securities" are eligible for Tier 1 capital
treatment.
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, 1996 $ 993.8 $21.06
Net income for the six months ended
June 30, 1997 93.8 1.95
Cash dividends paid (31.0) (.65)
Net change in valuation adjustment of
securities available-for-sale (2.7) (.06)
Stock repurchases (net of stock issued,
excluding shares issued to acquire Seaway) (77.8) (1.79)
Acquisition of Seaway 71.8 1.51
Balance, June 30, 1997 $1,047.9 $22.02
PART II OTHER INFORMATION
Item 2 Changes in Securities
On June 16, 1997, the Corporation issued 55,070 shares of common
stock to officers and key employees of the Corporation and its
subsidiaries pursuant to the Corporation's Restricted Stock Plan of
1987. On June 16, 1997, the Corporation issued 27,342 shares of
common stock to senior executive officers on expiration of the
deferral period associated with awards of deferred shares made by
the Corporation in 1992, pursuant to its Deferred Stock Compensation
Plan. Neither the Restricted Stock Plan of 1987 nor the Deferred
Stock Compensation Plan is registered under the Securities Act of
1933. Awards of shares or deferred shares under these plans were
made to officers and key employees of the Corporation and its
subsidiaries in consideration of their employment, do not involve
any investment decision or election by the recipient, and do not
constitute an "offer" or a "sale" under the Securities Act of 1933.
These transactions are reported in order to assure full disclosure.
Reporting these transaction under this item shall not constitute an
admission by the Corporation that such transactions constitute sales
of securities.
Item 6 Exhibits and reports on Form 8-K.
A. The following exhibits are filed as part of this report:
1. Exhibit 3 - Bylaws (as amended 04/21/97)
2. Exhibit 10 - Material Contracts
a. Executive Incentive Bonus Plan
Previously filed in registrant's definitive proxy
statement dated March 1, 1997. Here incorporated
by reference.
b. Executive Stock Incentive Plan of 1997
Previously filed in registrant's definitive proxy
statement dated March 1, 1997. Here incorporated
by reference.
c. Form of Indemnification Agreement.
d. Amendment of Executive Stock Incentive Plan of 1997
and Stock Option Incentive Plan of 1992.
3. Exhibit 11 - Statement Re: Computation of Earnings Per
Share
4. 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
April 30, 1997 5
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: August 14, 1997 David J. Wagner
Chairman of the Board, President and
Chief Executive Officer
Date: August 14, 1997 B. P. Sherwood, III
Vice-Chairman and Treasurer
EXHIBIT INDEX
3 Bylaws (as amended 4/21/97)
10 Material Contracts
11 Statement of Earnings per Share
27 Financial Data Schedule