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, 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 October 31, 1997, was 47,043,219 shares.
INDEX
OLD KENT FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 1997,
and December 31, 1996
Consolidated Statements of Income for the three
and nine months ended September 30, 1997, and 1996
Consolidated Statements of Cash Flows for the
nine months ended September 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
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that are based on management's
beliefs, assumptions, current expectations, estimates and projections about the
financial services industry, the economy, and about Old Kent Financial
Corporation ("Old Kent" or the "Corporation"). Words such as "anticipates",
"believes", "estimates", "expects", "forecasts", "intends", "is likely",
"plans", "product", "projects", variations of such words and similar expressions
are intended to identify such forward-looking statements. These statements are
not guarantees of future performance and involve certain risks, uncertainties
and assumptions ("Future Factors") that are difficult to predict with regard to
timing, extent, likelihood and degree of occurrence. Therefore, actual results
and outcomes may materially differ from what may be expressed or forecasted in
such forward-looking statements. Old Kent undertakes no obligations to update,
amend or clarify forward-looking statements, whether as a result of new
information, future events, or otherwise.
Future Factors include changes in interest rates and interest rate
relationships: demand for products and services; the degree of competition by
traditional and non-traditional competitors; changes in banking regulation;
changes in tax laws; changes in prices, levies, and assessments; the impact of
technological advances; governmental and regulatory policy changes; the outcomes
of pending and future litigation and contingencies; trends in customer behavior
as well as their ability to repay loans; and the vicissitudes of the national
economy. These are representative of the Future Factors that could cause a
difference between an ultimate actual outcome and a preceding forward-looking
statement.
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)_______________________________________________________________
September 30, December 31,
(dollars in thousands) 1997 1996
ASSETS:
Cash and due from banks................................................. $ 551,947 $ 530,444
Federal funds sold and resale agreements................................ 22,775 107,353
Total cash and cash equivalents......................................... 574,722 637,797
Interest-earning deposits............................................... 23,207 803
Trading account securities.............................................. 14,356 19,009
Mortgages held-for-sale................................................. 1,143,105 589,245
Securities available-for-sale:
Collateralized mortgage obligations and other mortgage-backed
securities....................................................... 1,283,573 673,722
Other securities..................................................... 698,328 1,221,476
Total securities available-for-sale (amortized cost of
$1,996,830, and $1,910,367, respectively).......................... 1,985,901 1,895,198
Securities held-to-maturity:
Collateralized mortgage obligations and other mortgage-backed
securities....................................................... 711,098 746,355
Other securities..................................................... 156,727 162,975
Total securities held-to-maturity (market values of
$871,571 and $911,592, respectively)............................... 867,825 909,330
Loans................................................................... 8,519,974 8,097,056
Allowance for credit losses............................................. (157,584) (165,928)
Net loans............................................................... 8,362,390 7,931,128
Premises and equipment.................................................. 184,141 173,916
Other assets............................................................ 597,873 490,402
Total Assets............................................................ $13,753,520 $12,646,828
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Non-interest bearing................................................. $ 1,624,969 $ 1,580,960
Interest-bearing..................................................... 8,687,629 8,474,754
Foreign deposits -- interest-bearing................................. 23,057 24,433
Total deposits..................................................... 10,335,655 10,080,147
Other borrowed funds.................................................... 1,917,535 1,235,867
Other liabilities....................................................... 256,676 237,057
Subordinated debt....................................................... 100,000 100,000
Total Liabilities....................................................... 12,609,866 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;
47,151,282 and 44,944,321 shares issued and outstanding .............. 47,151 44,944
Capital surplus......................................................... 254,101 175,842
Retained earnings....................................................... 748,670 782,830
Valuation adjustment of securities available-for-sale................... (6,269) (9,859)
Total Shareholders' Equity.............................................. 1,043,654 993,757
Total Liabilities and Shareholders' Equity............................. $13,753,520 $12,646,828
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) 1997 1996 1997 1996
Interest Income:
Interest and fees on loans.........................................$191,078 $182,699 $570,284 $530,311
Interest on mortgages held-for-sale................................ 19,786 6,804 44,593 19,753
Interest on securities available-for-sale.......................... 32,281 32,375 93,980 100,838
Interest on securities held-to-maturity:
Taxable.......................................................... 12,812 14,436 38,711 42,717
Tax-exempt....................................................... 2,038 2,246 6,327 7,137
Interest on deposits............................................... 340 11 462 298
Interest on federal funds sold and resale agreements............... 574 1,758 3,907 3,853
Interest on trading account securities............................. 150 138 1,101 356
Total interest income.............................................. 259,059 240,467 759,365 705,263
Interest Expense:
Interest on domestic deposits...................................... 98,482 96,848 294,448 282,029
Interest on foreign deposits....................................... 542 351 1,604 2,259
Interest on other borrowed funds................................... 23,826 15,588 60,490 46,746
Interest on subordinated debt...................................... 3,443 1,711 9,676 5,117
Total interest expense............................................. 126,293 114,498 366,218 336,151
Net Interest Income.................................................. 132,766 125,969 393,147 369,112
Provision for credit losses.......................................... 11,639 9,168 33,601 25,143
Net interest income after provision
for credit losses................................................ 121,127 116,801 359,546 343,969
Other Income:
Mortgage banking revenue (net)..................................... 25,260 15,474 68,887 38,299
Trust and investment management revenue............................ 13,349 11,408 39,042 33,736
Service charges on deposit accounts................................ 12,472 11,731 35,611 33,732
Insurance sales commissions........................................ 3,355 3,004 10,129 9,561
ATM fees........................................................... 1,733 682 4,297 2,012
Brokerage commissions.............................................. 946 303 2,454 1,008
Credit card transaction revenue - net.............................. 214 3,107 1,230 7,211
Securities gains/(losses).......................................... 17 (391) (1,394) 798
Nonrecurring and other real estate owned income.................... 304 236 20,589 4,065
Other.............................................................. 11,185 7,007 30,463 22,203
Total other income................................................. 68,835 52,561 211,308 152,625
Other Expenses:
Salaries and employee benefits..................................... 64,699 53,372 188,277 155,073
Occupancy expense.................................................. 9,046 7,295 26,088 22,295
Equipment expense.................................................. 7,739 6,154 21,373 18,103
Advertising and promotion.......................................... 2,271 5,749 7,128 22,643
Amortization of goodwill and intangibles........................... 3,307 2,497 10,017 7,382
FDIC Insurance..................................................... 352 1,867 950 2,354
Nonrecurring and other real estate owned expense................... 433 153 2,738 740
Other expenses..................................................... 35,941 31,877 106,091 91,694
Total other expenses............................................... 123,788 108,964 362,662 320,284
Income Before Income Taxes........................................... 66,174 60,398 208,192 176,310
Income taxes....................................................... 22,699 20,101 70,902 59,218
Net Income...........................................................$ 43,475 $ 40,297 $137,290 $117,092
Per Common Share:
Net income.........................................................$ 0.91 $ 0.83 $ 2.86 $ 2.36
Dividends..........................................................$ 0.340 $ 0.305 $ 0.988 $ 0.886
Number of Common Shares Used to Calculate
Net Income Per Share (in thousands)................................ 47,800 48,641 48,073 49,630
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 1997 (dollars in thousands) 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 137,290 $ 117,092
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for credit losses............................................. 33,601 25,143
Depreciation, amortization and accretion................................ 34,687 44,131
Net gains on sales of assets............................................ (65,512) (29,513)
Net change in trading account securities................................ 47,886 7,994
Originations and acquisitions of mortgages held-for-sale................ (4,762,794) (2,282,154)
Proceeds from sales and prepayments of mortgages held-for-sale.......... 4,253,856 2,293,533
Net change in other assets.............................................. (65,532) 3,091
Net change in other liabilities......................................... (15,562) (2,153)
Net cash (used for) provided by operating activities............................ (402,080) 177,164
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and prepayments of securities available-for-sale....... 137,275 318,155
Proceeds from sales of securities available-for-sale............................ 2,239,427 2,317,064
Purchases of securities available-for-sale...................................... (2,395,293) (2,546,535)
Proceeds from maturities and prepayments of securities held-to-maturity......... 154,027 117,751
Proceeds from sales of securities held-to-maturity.............................. - 860
Purchases of securities held-to-maturity........................................ (112,847) (206,256)
Net change in interest-earning deposits......................................... (22,404) 174,824
Proceeds from sale of loans..................................................... 291,460 -
Net increase in loans........................................................... (515,333) (668,001)
Purchases of leasehold improvements, premises and equipment, net............. (20,618) (14,298)
Purchases of business unit (net of cash acquired)............................... 17,204 (23,598)
Sale of business units (net of cash sold)....................................... 1,234 7,123
Net cash used for investing activities.......................................... (225,868) (522,911)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in time deposits......................................................... 80,153 818,883
Change in demand and savings deposits........................................... (126,451) (118,118)
Change in other borrowed funds.................................................. 681,668 (228,537)
Proceeds of guaranteed preferred beneficial interests in the
Corporation's junior subordinated debentures............................... 100,000 -
Repurchases of common stock..................................................... (131,206) (102,992)
Proceeds from common stock issuances............................................ 7,836 8,326
Dividends paid to shareholders.................................................. (47,127) (43,713)
Net cash provided by financing activities....................................... 564,873 333,849
Net change in cash and cash equivalents......................................... (63,075) (11,898)
Cash and cash equivalents at beginning of year.................................. 637,797 577,056
Cash and cash equivalents at September 30....................................... $ 574,722 $ 565,158
Supplemental disclosures of cash flow information:
Interest paid on deposits, other borrowed funds and
subordinate debt............................................................ $ 369,340 $ 336,974
Federal income taxes paid..................................................... 55,400 61,658
Significant non-cash transactions:
Stock dividend issued......................................................... 124,008 83,834
Stock issued to acquire business.............................................. 76,938 8,431
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 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 nine month period
ended September 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 ACCOUNTING 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 instruments 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)
September 30, 1997
NOTE C: LOANS AND NONPERFORMING ASSETS
The following summarizes loans and nonperforming assets at the
dates indicated (dollars in thousands):
September 30, December 31,
Loans: 1997 1996
Commercial.................................... $2,473,298 $2,205,837
Real estate - Commercial..................... 1,796,134 1,719,699
Real estate - Construction................... 535,623 428,001
Real estate - Residential mortgages.......... 861,643 859,318
Real estate - Consumer home equity .......... 879,912 728,530
Consumer...................................... 1,788,651 1,636,719
Credit card loans............................. 2,035 317,554
Lease financing............................... 182,678 201,398
Total Loans................................... $8,519,974 $8,097,056
September 30, December 31,
Nonperforming assets: 1997 1996
Nonaccrual loans ............................. $ 39,510 $ 39,950
Restructured loans............................ 3,382 2,832
Impaired loans.............................. 42,892 42,782
Other real estate owned....................... 7,734 7,097
Total nonperforming assets.................... $ 50,626 $ 49,879
Loans past due 90 days or more................ $ 19,431 $ 36,817
At September 30, 1997, the Corporation's management has identified loans
totalling approximately $11.5 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, 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.
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
September 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 Nine Months
ended September 30,
Allowance for Credit Losses 1997 1996
Balance at January 1,.................................... $165,928 $174,248
Changes in allowance due to acquisitions / divestitures... 3,184 (1,141)
Changes in allowance due to loans sold.................... (8,000) --
Provision for credit losses............................... 33,601 25,143
Gross loans charged-off................................... (48,539) (36,005)
Gross recoveries of loans previously charged-off.......... 11,410 8,423
Balance at end of period,................................. $157,584 $170,668
For the Nine Months
ended September 30,
Net Loan Charge-Offs 1997 1996
Commercial Loans & Commercial Real Estate................. $ 1,782 $ (359)
Consumer.................................................. 19,988 8,252
Credit Card............................................... 12,971 12,244
Residential Mortgages..................................... 1 (3)
Leases.................................................... 2,387 7,448
Total Net Charge-Offs..................................... $37,129 $27,582
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
September 30, 1997: Cost Gains Losses Value
U.S. Treasury and federal agency securities... $ 589,106 $2,073 $ 5,786 $ 585,393
Collateralized mortgage obligations:
U.S. Government issued................... 963,418 2,102 7,142 958,378
Privately issued......................... 217,030 863 2,713 215,180
Mortgage-backed pass-through securities....... 114,344 138 467 114,015
Other securities.............................. 112,932 3 -- 112,935
Total securities available-for-sale........... $1,996,830 $5,179 $16,108 $1,985,901
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)
September 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
September 30, 1997: Cost Gains Losses Value
U.S. Treasury and federal agency securities... $ 12,211 $ 26 $ 11 $ 12,226
Collateralized mortgage obligations:
U.S. Government issued................... 466,154 1,461 2,256 465,359
Privately issued......................... 142,179 161 1,009 141,331
Mortgage-backed pass-through securities....... 102,766 1,887 85 104,568
State and political subdivisions.............. 144,515 4,676 1,104 148,087
Total securities held-to-maturity............. $867,825 $8,211 $4,465 $871,571
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
State and political subdivisions.............. 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 totalling 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.
On September 1, 1997, GHA / Old Kent Insurance Services (a subsidiary of
Old Kent Bank), acquired Grand Rapids Holland Insurance Agency, Inc., a
provider of commercial and personal insurance products through offices in
Grand Rapids, Michigan and Holland, Michigan. This transaction was accounted
for as a purchase. At the effective date Grand Rapids Holland Insurance
Agency, Inc. had assets of approximately $6.2 million.
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
September 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 are used for general corporate purposes, including
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
September 30, 1997, approximately 4.4 million shares of Old Kent Common Stock
had been repurchased and reissued 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 intended that these shares will be purchased by the Corporation
in a systematic program of open market, or privately negotiated purchases. The
shares will be reserved for later reissue in connection with potential future
stock dividends, the dividend reinvestment plan, employee benefit plans, and
other general corporate purposes. As of September 30, 1997, approximately
644,000 shares of Old Kent Common Stock had been purchased under this
authorization.
In October 1997, the Board of Directors of Old Kent Financial Corporation
declared a two for one stock split, to be effected as a 100% stock dividend,
payable December 15, 1997, to shareholders of record November 14, 1997. At
that same meeting Old Kent's directors adjusted it's June 1997 authorization
for the repurchase of up to 3.0 million shares of Old Kent Common Stock. The
updated authorization now allows management, at its discretion, to repurchase
twice the shares remaining under the original authorization.
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
September 30, 1997
NOTE J: MORTGAGE BANKING REVENUE (NET)
The following summarizes net mortgage banking revenues as shown in the
accompanying consolidated statements of income:
For the Nine Months
Net mortgage banking revenue: ended September 30,
1997 1996
Gross mortgage servicing revenue.................................. $ 31,418 $18,819
Less: amortization of mortgage servicing rights & direct costs.. (20,996) (12,690)
Net mortgage servicing revenue.................................... 10,422 6,129
Mortgage banking gains (net)...................................... 44,922 21,685
Mortgage origination and processing fees (net).................... 13,543 10,485
Total net mortgage banking revenue.............................. $ 68,887 $38,299
NOTE K: OTHER ASSETS
Other assets, as shown in the accompanying consolidated balance sheets, included the following:
September 30, December 31,
1997 1996
Mortgage Servicing Rights (net of amortization)................... $138,705 $96,105
Goodwill.......................................................... 110,336 84,318
Core Deposit Intangibles.......................................... 24,337 14,557
Old Kent Mortgage Company actively manages interest rate prepayment risk
inherent in its business by selling mortgage servicing rights. During the
third quarter of 1997, Old Kent Mortgage Company entered into an agreement to
sell between $1.8 to $3.6 billion of mortgage servicing rights during the
period September 1997 to August 1998. This forward bulk servicing sale
agreement provides for monthly sales of newly originated conventional mortgage
servicing rights.
NOTE L: 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.
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 Nine Months
ended September 30,
Net Income Per Common Share: 1997 1996
As Reported....................................... $2.86 $2.36
Proforma, basic, as calculated under SFAS 128..... 2.88 2.38
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
June 30, 1997, is here incorporated by reference.
RESULTS OF OPERATIONS
Old Kent's net income was $43.5 million for the third quarter of 1997 compared
to $40.3 million for the same period in 1996. Third quarter earnings per share
was $.91 a 9.6% increase over last year's $.83. For the nine month period
ended September 30, 1997, net income was $137.3 million compared to $117.1
million a year ago and earnings per share was $2.86, a 21.2% increase over last
year's $2.36.
Total assets were $13.8 billion at quarter-end compared to $12.6 billion at
December 31, 1996. Return on average equity for the third quarter of 1997 was
16.62% compared to 16.32% for the third quarter of 1996. Return on average
assets was 1.29% for the third quarter of 1997 compared to 1.30% for the third
quarter of 1996.
Old Kent's net interest income for the third quarter of 1997 was $132.8
million, a 5.4% increase over the $126.0 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 due to loan growth.
For the third quarter of 1997, the net interest margin was 4.31% compared to
4.41% a year ago. The decrease in the net interest margin was primarily due to
increased funding costs and repurchases of common stock, and the June 1997 sale
of Old Kent's higher yielding credit card portfolio.
The provision for credit losses was $11.6 million in the third quarter of 1997
and $9.2 million in the third quarter of 1996. The increase in the provision
reflected a decline in consumer credit quality. Net credit losses were $11.3
million or .54% of average loans for the third quarter of 1997 compared to
$11.0 million or .56% of average loans for the same period a year ago. The
allowance for credit losses as a percent of loans and leases outstanding was
1.85% at September 30, 1997, and 2.05% at December 31, 1996. Impaired loans
as a percent of total loans was .50% at September 30, 1997, and .53% at
December 31, 1996.
Total other operating income, excluding securities transactions and other
nonrecurring income, increased 30% or $15.8 million during the third quarter
of 1997 over the same period a year ago. The mortgage banking business
contributed $9.8 million of this increase, primarily as a result of growth and
expansion of Old Kent Mortgage Company. Trust and Investment Management income
increased 17.0% or $1.9 million and service charges on deposits increased 6.3%
or $.7 million. All other service charges and fees increased $3.3 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 $304,000 for the
quarter ended September 30, 1997.
Old Kent sold approximately $1.7 billion of residential mortgage loans during
the quarter. Old Kent's residential third party mortgage servicing portfolio
increased 22% to $11.7 billion at September 30, 1997, from $9.6 billion at
September 30, 1996, primarily due to acquisitions and geographic expansion.
The residential third party mortgage servicing portfolio was $9.9 billion at
December 31, 1996.
Total net securities gains for the third quarter of 1997 were $17,000, compared
to losses of $391,000 for the same period of 1996.
Total operating expenses for the third quarter of 1997 increased $14.5 million,
or 13.4%, over the same period in 1996. This reflects the impact of recent
acquisitions of National Pacific Mortgage Corporation in August 1996, Seaway
Financial Corporation in January 1997, and Grand Rapids Holland Insurance
Agency, Inc., in September 1997. Salaries, wages and employee benefits
increased $11.3 million or 21.2% for the third quarter of 1997 over the third
quarter of 1996. The number of full-time equivalent employees increased by 577
over a year ago, to 6,270 at September 30, 1997. The following table shows the
change in employees:
September 30,
1997 1996 Change
Full-time equivalent staff:
Banking units 4,499 4,366 133
Mortgage banking 1,509 1,130 379
Insurance, leasing & brokerage 262 197 65
Total 6,270 5,693 577
Occupancy and equipment expenses increased 24.8% during the third quarter of
1997 compared to the same period a year ago, primarily due to the effect of
purchase acquisitions. Advertising and promotion decreased 60.5% or $3.5
million from the prior year quarter, largely attributable to the
discontinuation 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)
Nine Months Ended
(Dollars in thousands) September 30,
CardMiles allowance for redemption reserve 1997
Allowance at beginning of period $10,823
Additions to redemption reserve 500
Redemptions during period (6,531)
Allowance at end of period $ 4,792
Amortization of goodwill and intangibles increased 32.4% or $.8 million.
Nonrecurring expenses of $.4 million were primarily attributable to losses on
sales of other real-estate owned. Other operating expenses increased by 7.6%
or $2.5 million over the prior year quarter.
YEAR 2000
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, reprogramming and other remedies are expected to result in
expenditures of $6-12 million, over the three years ended December 31, 1999.
BALANCE SHEET CHANGES
Total interest-earning assets (at amortized cost), excluding the Seaway
acquisition, increased 5.5% or $641 million from December 31, 1996. For the
nine months ended September 30, 1997, excluding the Seaway acquisition,
commercial and consumer loans grew at an annualized rate of 12.1% or $628
million. Loan growth was primarily a result of increased efforts in the
Registrant's eastern Michigan and Illinois markets. Total securities (at
amortized cost) increased $45 million since year-end 1996. Mortgages
held-for-sale increased 94.1% or $554 million. Other interest earning assets
decreased 52.8% or $67 million, since year end 1996.
Total deposits, excluding the Seaway acquisition, decreased $51 million or .5%
from year-end 1996: noninterest bearing deposits increased .5% or $8 million
and interest-bearing deposits decreased .7% or $59 million. Short-term
borrowed funds increased $682 million or 55.1% 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. Old Kent Bank's 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 September 30, 1997, shareholders' equity was $1,044 million compared to
$988 million at September 30, 1996. 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 nine months ended
September 30, 1997 137.3 2.86
Cash dividends paid (47.1) (.99)
Net change in valuation adjustment of securities
available-for-sale 3.6 .08
Stock repurchases (net of stock issued,
excluding shares issued for business
combinations) (120.8) (2.51)
Acquisition of Seaway and GRH insurance 76.9 1.63
Balance, September 30, 1997 $1,043.7 $22.13
As shown in the table below, the Corporation repurchased approximately 2.5
million shares of its common stock during the nine months ended September 30,
1997. These shares were repurchased pursuant to previously announced
authorizations by Old Kent's board of directors. The repurchase of these
shares had a beneficial effect on earnings per common share and return on
average equity for the three and nine month period ended September 30, 1997.
Old Kent Common Stock repurchased and reserved for future reissuance in
connection with:
Dividend
Reinvestment Acquisitions
Stock and Employee Accounted for
Total Dividends Stock Plans as Purchases
Shares reserved at 12/31/96 2,821,758 1,370,000 450,000 1,001,758
Shares repurchased 2,498,337 995,814 493,858 1,008,665
Shares reissued (4,483,382) (2,075,814) (397,145) (2,010,423)
Shares reserved at 9/30/97 836,713 290,000 546,713 0
On July 28, 1997, Old Kent issued nearly 2.1 million shares of its common stock
in a 5% stock dividend declared in June 1997. This stock dividend was the
third consecutive annual 5% stock dividend. The shares issued had been
systematically repurchased (as discussed below) by the Corporation under the
June 1996, 4.5 million share authorization by the board of directors.
Repurchases under that authorization ended with the payment of the stock
dividend.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For a number of years, Old Kent has been authorized by its board of directors
to repurchase shares in connection with the Corporation's Dividend Reinvestment
and Employee Stock Plans, and on a quarterly basis has systematically
maintained a level of shares equivalent to permissible needs.
The table also shows that Old Kent issued approximately 2.0 million shares in
connection with business combinations accounted for as purchases. In
January 1997, approximately 1.9 million shares were issued to acquire Seaway
Financial Corporation. These shares had been specifically reacquired for this
purpose under a separate June 1996 authorization by the board of directors.
Effective September 1, 1997, Old Kent issued approximately 0.1 million shares
of its common stock to acquire an insurance business; these shares had been
reacquired as part of the June 1997 board authorization.
At September 30, 1997, Old Kent held 836,713 shares of its common stock
reserved for reissuance as detailed in the table above. These shares were
repurchased under a June 1997 board of directors authorization allowing
management to repurchase up to 3 million shares of Old Kent Common Stock
intended for future reissuance in connection with stock dividends, dividend
reinvestment and employee stock plans, and other corporate purposes. Stock to
be repurchased under this authorization for anticipated future stock dividends
is expected to account for approximately 2.3 million shares. Management
intends that this number of shares would be repurchased prior to August 1998
in a systematic pattern (on a quarterly ratable basis) of open market and
privately negotiated transactions. The remaining 0.7 million shares of the
authorization are intended for reissue in connection with the Corporation's
dividend reinvestment and employee stock plans, as well as other non-specific
corporate purposes such as business acquisitions accounted for as purchases.
On October 20, 1997, subsequent to the "as of" date of this report, Old Kent
declared a two-for-one stock split, to be effected as a 100% stock dividend,
payable December 15, 1997, to shareholders of record as of November 14, 1997.
This declaration also updated the June 1997 stock repurchase authorization,
allowing that the remaining number of unrepurchased shares as of the stock split
payment date be doubled to accommodate the effect of the two-for-one stock
split.
Total equity at September 30, 1997, was reduced by an after-tax unrealized loss
of $6.3 million on securities available-for-sale. Shareholders' equity as a
percentage of total assets as of September 30, 1997, was 7.59%.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table represents the Registrant's consolidated regulatory capital
position as of September 30, 1997:
Regulatory capital at September 30, 1997
(in millions) Tier 1 Total
Leverage Risk-Based Risk-Based
Ratio Capital Capital
Actual capital $1,020.8 $1,020.8 $1,251.4
Required minimum regulatory capital 400.0 417.0 834.0
Capital in excess of requirements $ 620.8 $ 603.8 $ 417.4
Actual ratio 7.66% 9.79% 12.00%
Regulatory Minimum Ratio 3.00% 4.00% 8.00%
Ratio considered "well capitalized"
by regulatory agencies 5.00% 6.00% 10.00%
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.
PART II OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds.
Old Kent acquired Grand Rapids Holland Insurance Agency, Inc.
("GRH") in a merger which was effective September 1, 1997. In that
transaction, a total of 114,471 shares of Old Kent Common Stock, $1
par value, were issued to former shareholders of GRH in
consideration for all of GRH's outstanding shares. The shares
issued in this transaction were issued in compliance with the
Securities and Exchange Commission Regulation D and were not
registered under the Securities Act of 1933.
During the quarter ended September 30, 1997, the Corporation issued
10,000 share of common stock to an executive officer of the
Corporation pursuant to the Corporation's Restricted Stock Plan of
1987. The Restricted Stock Plan of 1987 is not registered under the
Securities Act of 1933. Awards of shares under this plan are 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.
Reporting this transaction under this item shall not constitute an
admission by the Corporation that such transaction constitutes sale
of securities.
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
August 26, 1997 5 and 7
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 13, 1997 David J. Wagner
Chairman of the Board, President and
Chief Executive Officer
Date: November 13, 1997 William L. Sanders,
Senior Executive Vice President and
Chief Financial Officer
EXHIBIT INDEX
11 Statement of Earnings per Share
27 Financial Data Schedule