===============================================================================
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, 1998 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 offices) (Zip Code)
Registrant's telephone number, including area code: (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, 1998, was 105,256,003 shares.
===============================================================================
INDEX
OLD KENT FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998,
and December 31, 1997
Consolidated Statements of Income for the three
and nine months ended September 30, 1998, and 1997
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998, and 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 5. Other Information
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", "predicts", "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 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. Future factors that could
-2-
cause a difference between an ultimate actual outcome and a preceding forward-
looking statement 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 regulations;
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; software failure,
errors or miscalculations; and the vicissitudes of the world and national
economy. Old Kent undertakes no obligations to update, amend or clarify
forward-looking statements, whether as a result of new information, future
events, or otherwise.
-3-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
- ------------------------------------------------------------------------------------------------
September 30, December 31,
(dollars in thousands) 1998 1997
- ------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks............................................ $ 495,794 $ 501,912
Federal funds sold and resale agreements........................... 18,015 48,330
----------- -----------
Total cash and cash equivalents.................................... 513,809 550,242
Interest-earning deposits.......................................... 2 2,152
Trading account securities......................................... - 986
Mortgages held-for-sale............................................ 1,519,171 1,271,784
Securities available-for-sale:
Collateralized mortgage obligations and other mortgage-backed
securities.................................................. 1,523,031 1,403,726
Other securities................................................ 631,926 633,141
----------- -----------
Total securities available-for-sale (amortized cost of
$2,124,842 and $2,034,435, respectively)...................... 2,154,957 2,036,867
Securities held-to-maturity:
Collateralized mortgage obligations and other mortgage-backed
securities.................................................. 468,615 666,978
Other securities................................................ 186,169 153,861
----------- -----------
Total securities held-to-maturity (market values of
$662,026 and $820,902, respectively).......................... 654,784 820,839
Loans.............................................................. 8,190,260 8,469,477
Allowance for credit losses........................................ (164,357) (157,417)
----------- -----------
Net loans.......................................................... 8,025,903 8,312,060
----------- -----------
Premises and equipment............................................. 186,825 184,738
Other assets....................................................... 647,898 593,854
----------- -----------
Total Assets....................................................... $13,703,349 $13,773,522
=========== ===========
-4-
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Non-interest bearing............................................ $ 1,719,133 $ 1,669,063
Interest-bearing................................................ 8,665,527 8,529,215
Foreign deposits -- interest-bearing............................ 38,912 30,012
----------- -----------
Total deposits................................................ 10,423,572 10,228,290
Other borrowed funds............................................... 1,868,087 2,074,791
Other liabilities.................................................. 240,601 242,988
Long term debt..................................................... 200,000 200,000
----------- -----------
Total Liabilities.................................................. 12,732,260 12,746,069
=========== ===========
Shareholders' Equity:
Preferred stock: 25,000,000 shares authorized and unissued......... --
Common stock, $1 par value: 300,000,000 shares authorized;
92,972,672 and 92,779,772 shares issued and outstanding ......... 92,973 92,780
Capital surplus.................................................... 197,488 204,788
Retained earnings.................................................. 661,054 728,304
Valuation adjustment of securities available-for-sale.............. 19,574 1,581
----------- -----------
Total Shareholders' Equity......................................... 971,089 1,027,453
----------- -----------
Total Liabilities and Shareholders' Equity......................... $13,703,349 $13,773,522
=========== ===========
See accompanying notes to consolidated financial statements
-5-
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) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------
Interest Income:
Interest and fees on loans.......................... $182,866 $191,078 $553,724 $570,284
Interest on mortgages held-for-sale................. 26,460 19,786 83,346 44,593
Interest on securities available-for-sale........... 30,981 32,281 100,092 93,980
Interest on securities held-to-maturity:
Taxable........................................... 9,325 12,812 31,943 38,711
Tax-exempt........................................ 2,083 2,038 5,894 6,327
Interest on deposits................................ 199 340 594 462
Interest on federal funds sold and resale agreements 210 574 687 3,907
Interest on trading account securities.............. 11 150 53 1,101
-------- -------- -------- --------
Total interest income............................... 252,135 259,059 776,333 759,365
-------- -------- -------- --------
Interest Expense:
Interest on domestic deposits....................... 94,549 98,482 283,079 294,448
Interest on foreign deposits........................ 439 542 1,602 1,604
Interest on other borrowed funds.................... 22,869 23,846 84,422 60,552
Interest on subordinated debt....................... 3,405 3,423 10,158 9,614
-------- -------- -------- --------
Total interest expense.............................. 121,262 126,293 379,261 366,218
-------- -------- -------- --------
Net Interest Income................................... 130,873 132,766 397,072 393,147
Provision for credit losses........................... 7,485 11,639 33,923 33,601
-------- -------- -------- --------
Net interest income after provision
for credit losses................................. 123,388 121,127 363,149 359,546
-------- -------- -------- --------
Other Income:
Mortgage banking revenue (net)...................... 39,315 25,260 106,087 68,887
Investment management and trust revenues............ 15,655 13,349 44,504 39,042
Deposit account revenues............................ 13,888 12,472 41,341 35,611
Insurance sales commissions......................... 5,103 3,355 15,447 10,129
ATM revenues........................................ 1,917 1,733 5,058 4,297
Brokerage commissions............................... 1,333 946 3,860 2,454
Securities gains / (losses)......................... 320 17 2,675 (1,394)
-6-
Nonrecurring and other real estate owned income..... 452 304 7,785 20,589
Other............................................... 10,584 11,399 31,996 31,693
-------- -------- -------- --------
Total other income.................................. 88,567 68,835 258,753 211,308
-------- -------- -------- --------
Other Expenses:
Salaries and employee benefits...................... 69,904 64,699 205,966 188,277
Occupancy expense................................... 9,669 9,046 27,831 26,088
Equipment expense................................... 8,153 7,739 24,214 21,373
Amortization of goodwill and intangibles............ 3,344 3,307 10,053 10,017
Advertising and promotion........................... 2,604 2,271 7,664 7,128
Nonrecurring and other real estate owned expense.... 1,206 433 1,789 2,738
Other expenses...................................... 41,901 36,293 122,028 107,041
-------- -------- -------- --------
Total other expenses................................ 136,781 123,788 399,545 362,662
-------- -------- -------- --------
Income Before Income Taxes............................ 75,174 66,174 222,357 208,192
Income taxes........................................ 25,438 22,699 76,491 70,902
-------- -------- -------- --------
Net Income............................................ $ 49,736 $ 43,475 $145,866 $137,290
======== ======== ======== ========
Earnings Per Common Share:
Basic............................................... $ 0.53 $ 0.44 $ 1.53 $ 1.37
Diluted............................................. $ 0.53 $ 0.43 $ 1.52 $ 1.36
Dividends Per Common Share............................ $ 0.180 $ 0.162 $ 0.522 $ 0.470
Average number of shares used to compute: (in thousands)
Basic earnings per share........................... 93,511 99,582 95,053 100,177
Diluted earnings per share......................... 94,350 100,380 95,933 100,953
See accompanying notes to consolidated financial statements.
-7-
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 1998 (dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................ $ 145,866 $ 137,290
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for credit losses....................................... 33,923 33,601
Depreciation, amortization and accretion.......................... 31,947 34,687
Net gains on sales of assets...................................... (124,129) (65,512)
Net change in trading account securities.......................... 1,123 47,886
Originations and acquisitions of mortgages held-for-sale.......... (9,193,558) (4,762,794)
Proceeds from sales and prepayments of mortgages held-for-sale.... 8,931,076 4,253,856
Net change in other assets........................................ 61,811 (65,532)
Net change in other liabilities................................... (10,332) (15,562)
----------- -----------
Net cash used for operating activities.................................... (122,273) (402,080)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and prepayments of securities available-for-sale. 188,648 137,275
Proceeds from sales of securities available-for-sale...................... 402,339 2,239,427
Purchases of securities available-for-sale................................ (678,030) (2,395,293)
Proceeds from maturities and prepayments of securities held-to-maturity... 224,814 154,027
Purchases of securities held-to-maturity.................................. (58,376) (112,847)
Net change in interest-earning deposits................................... 2,151 (22,404)
Proceeds from sale of loans............................................... 129,072 291,460
Net change in loans....................................................... 126,815 (515,333)
Purchases of leasehold improvements, premises and equipment, net.......... (18,124) (20,618)
Acquisition of business units (net of cash acquired)...................... - 17,204
Sale of business units (net of cash sold)................................. - 1,234
----------- -----------
Net cash provided by (used for) investing activities...................... 319,309 (225,868)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in time deposits................................................... (237,346) 80,153
Change in demand and savings deposits..................................... 432,592 (126,451)
Change in other borrowed funds............................................ (206,703) 681,668
Proceeds from issuance of capital securities.............................. - 100,000
Repurchases of common stock............................................... (189,207) (131,206)
Proceeds from common stock issuances...................................... 17,093 7,836
Dividends paid to shareholders............................................ (49,898) (47,127)
----------- -----------
Net cash (used for) provided by financing activities...................... (233,469) 564,873
----------- -----------
-8-
Net change in cash and cash equivalents................................... (36,433) (63,075)
Cash and cash equivalents at beginning of year............................ 550,242 637,797
----------- -----------
Cash and cash equivalents at September 30................................. $ 513,809 $ 574,722
=========== ===========
- ---------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest paid on deposits, other borrowed funds and
subordinated debt..................................................... $ 390,070 $ 369,340
Federal income taxes paid............................................... 55,000 55,400
Significant non-cash transactions:
Stock dividend issued................................................... 163,011 124,008
Stock issued to acquire businesses...................................... - 76,938
The accompanying notes to consolidated financial statements are an
integral part of these statements
-9-
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 1998
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, 1998, are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998. 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, 1997.
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,
including interest rate swaps, interest rate futures and options, interest
rate caps and floors and currency forwards in connection with risk management
activities. 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 futures 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
earned on or 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
-10-
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
September 30, 1998
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.
NOTE C: ADOPTION OF FASB 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or a liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
Statement 133 is effective beginning January 1, 2000. A company may also
implement the Statement as of the beginning of any fiscal quarter after
issuance (that is, fiscal quarters beginning June 16, 1998, and thereafter).
Statement 133 cannot be applied retroactively. Statement 133 must be applied
to (a) derivative instruments and (b) certain derivative instruments embedded
in hybrid contracts that were issued, acquired, or substantively modified
after December 31, 1997, (and, at Old Kent's election, those issued or
acquired before January 1, 1998).
Old Kent has not yet quantified the impacts of adopting Statement 133 on the
consolidated financial statements and has not determined the timing of or
method of adoption of Statement 133. However, the Statement could increase
volatility in earnings and other comprehensive income.
-11-
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
September 30, 1998
NOTE D: LOANS AND NONPERFORMING ASSETS
The following summarizes loans and nonperforming assets at the dates indicated
(dollars in thousands):
September 30, December 31,
1998 1997
---- ----
Loans:
Commercial.............................. $2,618,232 $2,576,008
Real estate - Commercial................ 1,790,964 1,796,308
Real estate - Construction.............. 667,437 557,007
Real estate - Residential mortgages..... 603,856 766,047
Real estate - Consumer home equity ..... 973,999 906,824
Consumer................................ 1,365,102 1,694,136
Credit card loans....................... -- 1,694
Lease financing......................... 170,670 171,453
---------- ----------
Total Loans............................. $8,190,260 $8,469,477
========== ==========
September 30, December 31,
1998 1997
---- ----
Nonperforming assets:
Nonaccrual loans ....................... $ 50,147 $ 52,036
Restructured loans...................... 2,683 2,688
---------- ----------
Impaired loans........................ 52,830 54,724
Other real estate owned................. 7,145 7,619
---------- ----------
Total nonperforming assets.............. $ 59,975 $ 62,343
========== ==========
Loans past due 90 days or more.......... $ 14,921 $ 13,523
========== ==========
At September 30, 1998, the Corporation's management has identified loans
totaling approximately $25.1 million as potential problem loans. These loans
are not included as nonperforming assets in the table above. While these
-12-
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
September 30, 1998
loans were in compliance with repayment terms at September 30, 1998, other
circumstances caused management to seriously doubt the ability of the
borrowers to continue to remain in compliance with existing loan repayment
terms.
Old Kent sold approximately $56.7 million of student loans during the quarter
ended March 31, 1998. Old Kent recognized a gain of approximately $1.1
million on these sales. During the first quarter of 1998, Old Kent also sold
approximately $47 million of indirect auto loans and recognized a gain of
approximately $.2 million. During the quarter ended June 30, 1998, Old Kent
sold approximately $15.7 million of student loans. Old Kent recognized a gain
of approximately $.2 million on these sales. During the quarter ended
September 30, 1998, Old Kent sold approximately $5.6 million of student loans.
Old Kent recognized a gain of approximately $.1 million on these sales.
NOTE E: 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,
---------------------
1998 1997
---- ----
ALLOWANCE FOR CREDIT LOSSES
Balance at January 1,............................................. $157,417 $165,928
Changes in allowance due to acquisitions / divestitures / sales... (475) (4,816)
Provision for credit losses....................................... 33,923 33,601
Gross loans charged-off........................................... (38,767) (48,539)
Gross recoveries of loans previously charged-off.................. 12,259 11,410
-------- --------
Balance at end of period.......................................... $164,357 $157,584
======== ========
-13-
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
September 30, 1998
For the Nine Months
ended September 30,
---------------------
1998 1997
---- ----
NET LOAN CHARGE-OFFS
Commercial & Commercial Real Estate Loans......................... $ 12,715 $ 1,782
Consumer.......................................................... 11,488 19,988
Credit Card....................................................... - 12,971
Residential Mortgages............................................. 475 1
Leases............................................................ 1,829 2,387
-------- --------
Total Net Charge-Offs............................................. $ 26,507 $ 37,129
======== ========
NOTE F: 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):
-14-
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
September 30, 1998
Carrying
Gross Gross Value
Amortized Unrealized Unrealized at Market
Cost Gains Losses Value
---- ----- ------ -----
SEPTEMBER 30, 1998:
U.S. Treasury and federal agency securities...... $ 487,998 $18,224 $ 0 $ 506,222
Collateralized mortgage obligations:
U.S. Government issued...................... 1,039,546 9,386 1,118 1,047,814
Privately issued............................ 326,406 1,747 410 327,743
Mortgage-backed pass-through securities.......... 147,034 883 443 147,474
Other securities................................. 123,858 1,846 - 125,704
---------- ------- ------ ----------
Total securities available-for-sale.............. $2,124,842 $32,086 $1,971 $2,154,957
========== ======= ====== ==========
DECEMBER 31, 1997:
U.S. Treasury and federal agency securities...... $ 519,016 $ 2,186 $1,975 $ 519,227
Collateralized mortgage obligations:
U.S. Government issued...................... 1,030,220 5,830 2,337 1,033,713
Privately issued............................ 237,363 1,066 2,688 235,741
Mortgage-backed pass-through securities.......... 134,127 280 135 134,272
Other securities................................. 113,709 205 -- 113,914
---------- ------- ------ ----------
Total securities available-for-sale.............. $2,034,435 $ 9,567 $7,135 $2,036,867
========== ======= ====== ==========
NOTE G: 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):
-15-
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
September 30, 1998
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
SEPTEMBER 30, 1998:
U.S. Treasury and federal agency securities...... $ 11,243 $ 141 $ 0 $ 11,384
Collateralized mortgage obligations:
U.S. Government issued...................... 309,485 1,718 943 310,260
Privately issued............................ 90,709 849 452 91,106
Mortgage-backed pass-through securities.......... 68,421 1,640 37 70,024
State and political subdivisions................. 174,926 4,511 185 179,252
-------- ------ ------ --------
Total securities held-to-maturity................ $654,784 $8,859 $1,617 $662,026
======== ====== ====== ========
DECEMBER 31, 1997:
U.S. Treasury and federal agency securities...... $ 15,248 $ 48 $ 11 $ 15,285
Collateralized mortgage obligations:
U.S. Government issued...................... 453,556 682 4,377 449,861
Privately issued............................ 119,526 329 992 118,863
Mortgage-backed pass-through securities.......... 93,896 1,307 294 94,909
State and political subdivisions................. 138,613 4,517 1,146 141,984
-------- ------ ------ --------
Total securities held-to-maturity................ $820,839 $6,883 $6,820 $820,902
======== ====== ====== ========
NOTE H: SALE OF BRANCHES
During the first quarter of 1998, Old Kent sold three branches and related
deposits in its Big Rapids, Michigan market. When sold, the branches had
total deposits of approximately $41.6 million. Old Kent realized a gain of
approximately $4.6 million on the sale.
NOTE I: SHAREHOLDERS' EQUITY
During 1997, Old Kent's directors authorized management, at its discretion,
to purchase up to 6.0 million shares of the Corporation's common stock. These
shares were purchased by the Corporation in a systematic program of open
market or privately negotiated purchases. The shares were 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 June 30, 1998, repurchase of Old Kent Common Stock under this
authorization was complete.
-16-
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
September 30, 1998
In June 1998, the Board of Directors of Old Kent Financial Corporation
declared a 5% stock dividend payable July 17, 1998, to shareholders of record
on June 26, 1998. 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 6.0 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. They 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,
1998, repurchases of Old Kent Common Stock under this authorization totaled
1.9 million shares.
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
ended September 30,
---------------------
1998 1997
---- ----
NET MORTGAGE BANKING REVENUE:
Gross mortgage servicing revenue.................................. $ 38,339 $ 31,418
Less: amortization of mortgage servicing rights & direct costs.. (48,241) (20,996)
-------- --------
Net mortgage servicing revenue.................................... (9,902) 10,422
Mortgage banking gains (net)...................................... 114,783 44,922
Mortgage origination and processing fees (net).................... 1,206 13,543
-------- --------
Total net mortgage banking revenue.............................. $106,087 $ 68,887
======== ========
NOTE K: OTHER ASSETS
Other assets, as shown in the accompanying consolidated balance sheets, include
the following (net of amortization):
-17-
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
September 30, 1998
September 30, December 31,
1998 1997
---- ----
Goodwill.......................................................... $102,228 $108,813
Core Deposit Intangibles.......................................... 20,509 23,130
Total............................................................. $122,737 $131,943
Other assets, as shown in the accompanying consolidated balance sheets,
include mortgage servicing rights ("MSR's") as follows:
September 30, December 31,
1998 1997
---- ----
MSR's (net of amortization)....................................... $196,874 $150,988
Less servicing impairment reserve................................. (9,129) (4,629)
-------- --------
Carrying value of MSR's........................................... 187,745 146,359
======== ========
Estimated aggregate fair value of capitalized MSR's............... 212,000 150,000
Estimated aggregate fair value of MSR's originated prior to 1995.. 10,000 16,000
Total............................................................. $222,000 $166,000
The following reflects changes in capitalized mortgage serving rights for the
time periods indicated:
For the Nine Months
ended September 30,
-------------------
1998 1997
---- ----
Balance at beginning of period.................................... $150,988 $100,425
Additions......................................................... 149,241 74,293
Sales............................................................. (55,577) (12,539)
Amortization...................................................... (37,020) (20,644)
Other............................................................. (10,758) 0
Servicing impairment reserve...................................... (9,129) (2,830)
Balance at end of Period.......................................... $187,745 $138,705
-18-
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
September 30, 1998
Old Kent Mortgage Company actively manages prepayment risks associated with
mortgage servicing rights through its significant loan origination and
replenishment capacity, customer retention initiatives, recurring bulk sales
of mortgage servicing rights, and use of financial hedges. During the third
quarter of 1998, Old Kent Mortgage Company entered into an agreement to sell
mortgage serving rights associated with $2.5 to $6.0 billion of mortgage loans
during the period September 1998 to August 1999. This forward bulk servicing
sale agreement provides for quarterly sales of newly originated conventional
mortgage servicing rights.
NOTE L: EARNINGS PER SHARE
The following table reconciles the numerators and denominators used in the
calculations of basic and diluted earnings per share:
For the Three Months For the Nine Months
ended September 30, ended September 30,
--------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
Numerators: Numerator for both basic and diluted $49,736,000 $ 43,475,000 $145,866,000 $137,290,000
earnings per share, net income =========== ============ ============ ============
Denominators:
Denominator for basic earnings per share, average 93,510,675 99,581,612 95,053,138 100,176,537
outstanding common shares
Potential dilutive shares resulting from employee stock plans 839,400 798,000 879,695 776,013
----------- ------------ ------------ ------------
Denominator for diluted earnings per share 94,350,075 100,379,612 95,932,833 100,952,550
=========== ============ ============ ============
Earnings per share:
Basic $ 0.53 $ 0.44 $ 1.53 $ 1.37
----------- ------------ ------------ ------------
Diluted $ 0.53 $ 0.43 $ 1.52 $ 1.36
=========== ============ ============ ============
Options to purchase 902,716 shares of common stock at $35.88 to $38.27 per
share were outstanding during the nine months ended September 30, 1998, but
were not included in the computation of diluted EPS because the options'
exercise price was greater than the average market price of the common shares.
-19-
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
September 30, 1998
NOTE M: COMPREHENSIVE INCOME
Effective January 1, 1998, Old Kent adopted Statement of Financial Accounting
Standard No. 130: "Reporting Comprehensive Income". This statement
establishes standards for reporting and display of comprehensive income and
its components. Comprehensive income reflects the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. For Old Kent, comprehensive income
represents net income adjusted for the change in unrealized gains and losses
on available-for-sale securities. Comprehensive income was approximately
$63,247 and $49,270 for the quarters ended September 30, 1998, and 1997,
respectively, and approximately $163,858 and $140,881 for the nine month
period ended September 30, 1998, and 1997, respectively.
NOTE N: BUSINESS COMBINATIONS
On October 1, 1998, Old Kent completed the merger of First Evergreen
Corporation ("First Evergreen") into Old Kent. When acquired, First Evergreen
had assets of approximately $1.9 billion and deposits of approximately $1.7
billion. The merger was accounted for as a pooling-of-interests. Old Kent
exchanged 32.0312 shares of Old Kent common stock for each share of First
Evergreen stock. The issuance totalled approximately 12.8 million shares.
First Evergreen is a bank holding company headquartered in Evergreen Park,
Illinois. It is the parent of First National Bank of Evergreen Park. First
Evergreen provides banking services through eight offices in Cook County,
Illinois. The following details the proforma effects of the merger as if it
had been completed as of September 30, 1998.
For the Three Months For the Nine Months
ended September 30, 1998 ended September 30, 1998
------------------------ ------------------------
Old Kent Proforma Old Kent Proforma
-------- -------- -------- --------
Net Income....................................... $ 49,736 $ 54,579 $145,865 $160,936
Basic E.P.S...................................... $ 0.53 $ 0.53 $ 1.53 $ 1.49
Diluted E.P.S.................................... 0.53 0.51 1.52 1.48
Number of shares used to calculate basic E.P.S... 93,511 106,332 95,053 107,874
Number of shares used to calculate diluted E.P.S. 94,350 107,171 95,933 108,754
-20-
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
September 30, 1998
For the Three Months For the Nine Months
ended September 30, 1997 ended September 30, 1997
------------------------ ------------------------
Old Kent Proforma Old Kent Proforma
-------- -------- -------- --------
Net Income....................................... $ 43,475 $ 48,126 $137,290 $151,089
Diluted E.P.S.................................... $ 0.44 $ 0.43 $ 1.37 $ 1.34
Basic E.P.S...................................... 0.43 0.43 1.36 1.33
Number of shares used to calculate basic E.P.S... 99,582 112,413 100,177 113,028
Number of shares used to calculate diluted E.P.S. 100,380 113,211 100,953 113,804
NOTE O: LONG TERM DEBT
Long term debt, as shown in the accompanying consolidated balance sheets,
consists of the following:
September 30, December 31,
1998 1997
---- ----
Subordinated notes, 6 5/8% due November 15, 2005.. $100,000 $100,000
Capital securities, as described below............ 100,000 100,000
-------- --------
Total long term debt.............................. $200,000 $200,000
======== ========
On January 31, 1997, Old Kent issued a floating rate junior subordinated
debenture (the "Debenture") having a principal amount of $103,092,784 to
Old Kent Capital Trust I (the "Trust"). Cumulative interest on the principal
sum of the Debenture accrues from January 31, 1997, and it is payable
quarterly in arrears on the first day of February, May, August and November of
each year at a variable rate per annum equal to LIBOR (London Interbank
Offering Rate) plus .80% until paid. Interest is computed on the actual
number of days elapsed in a year of twelve 30 day months. The Debentures rank
subordinate and junior in right of payment to all Indebtedness (as defined) of
Old Kent. The Debenture matures on February 1, 2027, but may be redeemed in
whole or in part beginning on February 1, 2007, or earlier upon the occurrence
of certain special events defined in the Indenture governing the Debenture.
-21-
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
September 30, 1998
On January 31, 1997, the Trust sold Floating Rate Subordinated Capital Income
Securities ("Preferred Securities") having an aggregate liquidation amount of
$100 million to investors and issued Common Capital Securities ("Common
Securities") having an aggregate liquidation amount of $3,092,784 to Old Kent.
All of the proceeds from sale of Preferred Securities and Common Securities
were invested in the Debenture. Preferred Securities and Common Securities
represent undivided beneficial interests in the Debenture, which is the sole
asset of the Trust. Holders of Preferred Securities and Common Securities are
entitled to receive distributions from the Trust on terms which correspond to
the interest and principal payments due on the Debenture. Payment of
distributions by the Trust and payments on liquidation of the Trust or
redemption of Preferred Securities are guaranteed by Old Kent to the extent
the Trust has funds available (the "Guarantee"). Old Kent's obligations under
the Guarantee, taken together with its obligations under the Debenture, the
Indenture, the applicable Declaration of Trust and Old Kent's agreement to pay
all fees and expenses related to the trust and all ongoing costs, expenses and
liabilities of the Trust for so long as the trust holds the Debenture,
constitute a full and unconditional guarantee of all of the Trust's
obligations under the Preferred Securities issued by the Trust. Because the
Common Securities held by Old Kent represent all of the outstanding voting
securities of the Trust (in the absence of a default or other specified
event), the Trust is considered to be a wholly owned subsidiary of Old Kent
for reporting purposes and its accounts are reflected in the consolidated
financial statements of Old Kent.
The Preferred Securities qualify as Tier I capital for regulatory capital
purposes. Issuance of the Preferred Securities by the Trust had the effect
of increasing Old Kent's regulatory capital. Proceeds from the sale of the
Debenture to the Trust were available for general corporate purposes,
including repurchase of shares.
-22-
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, 1998, is here incorporated by reference.
RESULTS OF OPERATIONS
Old Kent's net income was $49.7 million for the third quarter of 1998 compared
to $43.5 million for the same period in 1997. Third quarter diluted earnings
per share was $.53, a 23.3% increase over last years $.43. For the nine month
period ended September 30, 1998, net income was $145.9 million compared to
$137.3 million a year ago and diluted earnings per share was $1.52, an 11.8%
increase over last year's $1.36.
Total assets were $13.7 billion at quarter-end compared to $13.8 billion at
December 31, 1997. Return on average equity for the third quarter of 1998 was
20.72% compared to 16.62% for the third quarter of 1997. Return on average
assets was 1.45% for the third quarter of 1998 compared to 1.29% for the third
quarter of 1997.
Old Kent's net interest income for the third quarter of 1998 was $130.9
million, a 1.4% decrease from the $132.8 million recorded in the same period
of 1997. For the third quarter of 1998, the net interest margin was 4.20%
compared to 4.31% a year ago. The decrease in the net interest margin was
primarily due to a decrease in total loans, a generally lower interest
rate environment and repurchases of common stock.
The provision for credit losses was $7.5 million in the third quarter of 1998
and $11.6 million in the third quarter of 1997. Net credit losses were $7.1
million or .35% of average loans for the third quarter of 1998 compared to
$11.3 million or .54% of average loans for the same period a year ago. The
decrease was primarily due to lower net charge offs in the consumer lending
portfolio, which includes the effect of the June 1997, sale of the $266
million credit card portfolio. The allowance for credit losses as a percent
of loans and leases outstanding was 2.01% at September 30, 1998, and 1.86% at
December 31, 1997. Impaired loans as a percent of total loans was .65% at
September 30, 1998, and .65% at December 31, 1997.
Total other operating income, excluding securities transactions and other
nonrecurring income, increased 28.1% or $19.3 million during the third quarter
of 1998 over the same period a year ago. The mortgage banking business
contributed $14.1 million of this increase, primarily as a result of growth
and expansion of Old Kent Mortgage Company, along with a generally favorable
economy and lower interest rates. Amortization of mortgage servicing rights
and direct costs exceeded gross mortgage servicing revenue by $9.9 million for
-23-
the year to date 1998 period primarily due to higher amortization resulting
from increased mortgage loan prepayments associated with the low interest rate
environment. Investment management and trust revenues increased 17.3% or $2.3
million and service charges on deposits increased 11.4% or $1.4 million. All
other service charges and fees increased $1.5 million over the same period a
year ago.
Old Kent sold approximately $3.1 billion of residential mortgage loans during
the quarter. Old Kent's residential third party mortgage servicing portfolio
was $13.7 billion at September 30, 1998, and $11.8 billion at December 31,
1997.
Total net securities gains for the third quarter of 1998 were $320,000,
compared to gains of $17,000 for the same period of 1997.
As discussed in Note M to the accompanying consolidated financial statements,
Old Kent has completed its acquisition of First Evergreen Corporation as of
October 1, 1998. During the fourth quarter 1998, the Corporation expects to
recognize, as other expense, one-time restructuring, credit loss provision and
other merger related costs of approximately $28.5 million, on a pre-tax basis.
Total operating expenses for the third quarter of 1998 increased $13.0
million, or 10.5%, over the same period in 1997. This reflects the impact of
increased staffing, as shown in the table below. Salaries, wages and employee
benefits increased $5.2 million or 8.0% for the third quarter of 1998 over the
third quarter of 1997. The number of full-time equivalent employees increased
by 452 over a year ago, to 6,722 at September 30, 1998.
September 30,
----------------
1998 1997 Change
---- ---- ------
Full-time equivalent staff:
Banking units 4,167 4,499 (332)
Mortgage banking 2,227 1,509 718
Insurance, leasing & brokerage 328 262 66
----- ----- ---
Total 6,722 6,270 452
===== ===== ===
During the third quarter of 1998 compared to the same period a year ago,
occupancy expenses increased 6.9%, and equipment expenses increased 5.3%.
Other operating expenses increased by 14.3% or $6.0 million over the prior
year.
-24-
YEAR 2000 READINESS DISCLOSURE
The Corporation is currently in the process of addressing a significant issue
facing all users of automated information systems. The problem is that many
computer systems that process transactions based on two digits representing
the year of transaction may recognize a date using "00" as the year 1900
rather than the year 2000. The problem could affect a wide variety of
automated information systems, such as mainframe applications, personal
computers and communication systems, in the form of software failure, errors
or miscalculations. By nature, the banking and financial services industries
are highly dependent upon computer systems because of significant transaction
volumes and a date dependency for interest measurements on financial
instruments such as loans and deposits.
The Corporation initiated its Year 2000 analysis in early 1995. The
assessment included an inventory of software applications, communications with
third party vendors and suppliers, and certification of compliance from third
party providers. The Corporation has a comprehensive written plan which is
regularly updated and monitored by technical and non-technical management and
personnel. Plan status is regularly reviewed by management of the Corporation
and reported upon to the Board of Directors.
The Corporation utilizes host vendor supplied software packages for its
mission critical applications. All mainframe vendor systems have been
certified as being Year 2000 compliant with the current releases to be
installed and tested for all applications completed by December 31, 1998. In
addition, the Corporation has acquired testing tools to be used during a
second phase of testing. During this phase, which will occur during the first
half of 1999, system dates will be reset and validation will take place in an
integrated testing environment.
In a worst case scenario, testing of the remediated systems could yield a
failure when processing data beyond 12/31/99. However, management believes
this to be a remote possibility since initial testing has yielded no issues of
significant consequence. In addition, the second phase of testing is expected
to allow adequate time to address any issues which are identified. The
Corporation is also updating its business resumption plans to include
contingency actions for any year 2000 issues. With these measures in place,
the Corporation expects no materially adverse failures in its data processing
systems as a result of the century change.
Diagnosis, reprogramming and other remedies are expected to result in
expenditures of approximately $12 million, over the two years ended
December 31, 1999. For the nine months ended September 30, 1998,
approximately $7.2 million of these expenses were expensed as incurred by
Old Kent. As of September 30, 1998, Old Kent's management believes that
renovation is more than 75% complete; that all "critical" software components
expected to be needed to accommodate the year 2000 conversion had been
acquired, but that installation and testing will still be required.
-25-
In addition to reviewing its own computer operating systems and applications,
the Corporation has initiated formal communications with its significant
suppliers (operating risk) and large customers (credit risk) to determine the
extent to which Old Kent is vulnerable to those third parties' failures to
resolve their own Year 2000 issues. There is no assurance that the systems of
other companies on which the Corporation's systems rely will be timely
converted. If such modifications and conversions are not made, or are not
completed timely, the Year 2000 issue could have an adverse impact on the
operations of the Corporation. Contingency plans for each line of business
are being developed.
This Year 2000 Readiness Disclosure is based upon and partially repeats
information provided by Old Kent's outside consultants, vendors and others
regarding the Year 2000 readiness of Old Kent and its customers, vendors and
other parties. Although the company believes this information to be accurate,
it has not in each case independently verified such information.
The Year 2000 statement contained in this report and in other reports,
registration statements and materials filed with the Securities and Exchange
Commission by Old Kent are "Year 2000 Readiness Disclosures" under the Year
2000 Information and Readiness Disclosure Act. The Year 2000 disclosures
contained in or incorporated by reference in each of the following previous
filings of Old Kent are filed as exhibits to this report and here incorporated
by reference: 1997 Annual Report; Form 10-K for the year ended December 31,
1997; Form 10-Q quarterly reports for quarters ended September 30, 1997,
March 31, 1998, and June 30, 1998. Each of those Year 2000 Readiness
Disclosures is updated by the discussion in this report.
BALANCE SHEET CHANGES
Total interest-earning assets decreased 1.1% or $141 million from December 31,
1997. Total securities decreased $75 million since year-end 1997. Mortgages
held-for-sale increased 19.4% or $247 million. This increase was largely due
to a favorable refinancing environment coupled with growth and expansion of
Old Kent Mortgage Company. Other interest earning assets decreased $33
million since year end 1997.
Loans decreased $279 million since year end 1997. This decrease was the
result of residential mortgage loan runoff and the implementation of
strategies aimed at improving profitability by exiting or altering certain
consumer lending activities.
Total deposits increased $196 million or 1.9% from year-end 1997; noninterest
bearing deposits increased 3.0% or $50 million and interest-bearing deposits
increased 1.7% or $146 million. Other borrowed funds decreased $206 million
or 9.9% from December 31, 1997.
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
-26-
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.
During the third quarter, 1998, Old Kent filed a $250 million shelf
registration to issue common stock, preferred stock, depositary shares, debt
securities and warrants. In addition, Old Kent filed a shelf registration to
issue an additional $200 million of trust preferred securities. The proceeds
of any issuance will be for general corporate purposes, which include reducing
short-term debt and repurchasing common stock.
At September 30, 1998, shareholders' equity was $971 million compared to
$1,027 million at December 31, 1997. 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, 1997 $1,027.5 $10.54
Net income for the nine months ended
September 30, 1998 145.9 1.52
Cash dividends paid (49.9) (.52)
Net change in valuation adjustment of
securities available-for-sale 18.0 .19
Stock repurchases (net of stock issued) (172.2) (1.31)
Other 1.8 .02
-------- ------
Balance, September 30, 1998 $ 971.1 10.44
======== ======
As shown in the table below, the Corporation repurchased approximately 1.3
million shares of its common stock during the three months ended September 30,
1998. 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 month period ended September 30, 1998.
During June 1998, Old Kent completed a 6.0 million share stock repurchase
program pursuant to a June 1997 authorization.
-27-
Old Kent Common Stock repurchased and reserved for future reissuance in
connection with:
Dividend
Reinvestment General
Stock and Employee Corporate
Total Dividends Stock Plans Purposes
--------- --------- ------------ ---------
SHARES RESERVED AT 6/30/98 1,812,743 250,000 1,300,000 262,743
Shares repurchased 1,269,833 1,005,556 37,477 226,800
Shares reissued (93,033) 44,444 (137,477) 0
--------- --------- --------- -------
SHARES RESERVED AT 9/30/98 2,989,543 1,300,000 1,200,000 489,543
========= ========= ========= =======
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.
At September 30, 1998, Old Kent held 2,989,543 shares of its common stock
reserved for reissuance as detailed in the table above. These shares were
repurchased under June 1998 and 1997 board of directors authorizations
allowing management to repurchase up to 6 million shares (under each
authorization) of Old Kent Common Stock intended for future reissuance in
connection with stock dividends, dividend reinvestment and employee stock
plans, and other corporate purposes. Under the most recent (June 1998)
authorization, approximately 5.2 million of the total 6.0 million shares
authorized are intended for anticipated future stock dividends. Management
intends that this number of shares would be repurchased prior to August 1999
in a systematic pattern (on a quarterly ratable basis) of open market and
privately negotiated transactions. The remaining .8 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 unspecified
corporate purposes such as business acquisitions accounted for as purchases.
Total equity at September 30, 1998, was increased by an after-tax unrealized
gain of $19.6 million on securities available-for-sale. Shareholders' equity
as a percentage of total assets as of September 30, 1998, was 7.09%.
The following table represents the Registrant's consolidated regulatory
capital position as of September 30, 1998:
-28-
Regulatory capital at September 30, 1998
(in millions) Tier 1 Total
Leverage Risk-Based Risk-Based
Ratio Capital Capital
-------- ---------- ----------
Actual capital $931.9 $931.9 $1,162.8
Required minimum regulatory capital 406.5 419.5 839.1
Capital in excess of requirements $525.4 $512.4 $ 323.7
Actual ratio 6.88% 8.89% 11.09%
Regulatory Minimum Ratio 3.00% 4.00% 8.00%
Ratio considered "well capitalized"
by regulatory agencies 5.00% 6.00% 10.00%
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information concerning quantitative and qualitative disclosures about
market risk contained and incorporated by reference in Item 7A of the
Corporation's Form 10-K Annual Report for its fiscal year ended December 31,
1997, is here incorporated by reference.
Old Kent faces market risk to the extent that both earnings and the fair
values of its financial instruments are affected by changes in interest rates.
The Corporation manages this risk with three tools: static GAP analysis,
simulation modeling, and economic value of equity estimation. Throughout the
first nine months of 1998, the results of these three measurement techniques
were within the Corporation's policy guidelines. The Corporation does not
believe that there has been a material change in the Corporation's primary
market risk exposures, including the categories of market risk to which the
Corporation is exposed and the particular markets that present the primary
risk of loss to the Corporation. As of the date of this Form 10-Q Quarterly
Report, the Corporation does not know of or expect there to be any material
change in the general nature of its primary market risk exposure in the near
term.
The methods by which the Corporation manages its primary market risk
exposures, as described in the sections of its Form 10-K Annual Report
incorporated by reference in response to this item, have not changed
materially during the current year. As of the date of this Form 10-Q
Quarterly Report, the Corporation does not expect to change those methods in
the near term. However, the Corporation may change those methods in the
future to adapt to changes in circumstances or to implement new techniques.
The Corporation's market risk exposure is mainly comprised of its
vulnerability to interest rate risk. Prevailing interest rates and interest
-29-
rate relationships are primarily determined by market factors which are
outside of Old Kent's control. All information provided in response to this
item consists of forward looking statements. Reference is made to the section
captioned "Forward-Looking Statements" at the beginning of this Form 10-Q
Quarterly Report for a discussion of the limitations on Old Kent's
responsibility for such statements. In this discussion, "near term" means a
period of one year following the date of the most recent balance sheet
contained in this report.
-30-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Old Kent's subsidiaries are parties, as plaintiff or defendant, to a number of
legal proceedings. Except as described below, all of these proceedings are
considered to be ordinary routine litigation incidental to their business, and
none is considered to be a material pending legal proceeding.
Old Kent has previously reported that Old Kent Bank was named, among other
defendants, in a lawsuit filed by Grow Group, Inc. in 1994 pending in the
United States District Court for the Western District of Michigan. The case
against Old Kent Bank was voluntarily dismissed on October 8, 1998.
Item 5. Other Information
On November 2, 1998, Old Kent announced that it had applied for listing of its
Common Stock for trading on the New York Stock Exchange. Old Kent's press
release dated November 2, 1998, is filed as Exhibit 99 to this report, and is
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
NUMBER EXHIBIT
12 Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
99.1 Press Release
99.2 Prior Year 2000 Disclosures
(b) The following reports on Form 8-K were filed during the third
quarter of 1998:
DATE OF EVENT ITEM FINANCIAL STATEMENTS
REPORTED REPORTED FILED
July 16, 1998 5, 7 na
-31-
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, 1998 /s/David J. Wagner
David J. Wagner
Chairman of the Board, President and
Chief Executive Officer
Date: November 13, 1998 /s/Robert H. Warrington
Robert H. Warrington
Vice Chairman of the Board and
Chief Financial Officer
-32-
EXHIBIT INDEX
12 Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
99.1 Press Release
99.2 Prior Year 2000 Disclosures