SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 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 (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 April 30, 1998, was 90,877,102 shares.
<PAGE>
INDEX
OLD KENT FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997
Consolidated Statements of Income for the three
months ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows for the
three months ended March 31, 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 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Securities Holders
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 ("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 that could 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; and the vicissitudes of the world and national economy.
<PAGE>
Item 1. Financial Statements
<TABLE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)______________________________________________________
<CAPTION>
March 31, December 31,
(dollars in thousands) 1998 1997
<S> <C> <C>
ASSETS:
Cash and due from banks........................................... $ 527,882 $ 501,912
Federal funds sold and resale agreements.......................... 46,500 48,330
Total cash and cash equivalents................................... 574,382 550,242
Interest-earning deposits......................................... 10,972 2,152
Trading account securities........................................ 2,092 986
Mortgages held-for-sale........................................... 1,735,184 1,271,784
Securities available-for-sale:
Collateralized mortgage obligations and other mortgage-backed
securities................................................. 1,594,461 1,403,726
Other securities............................................... 655,287 633,141
Total securities available-for-sale (amortized cost of
$2,242,369, and $2,034,435, respectively).................... 2,249,748 2,036,867
Securities held-to-maturity:
Collateralized mortgage obligations and other mortgage-backed
securities................................................. 621,165 666,978
Other securities............................................... 152,633 153,861
Total securities held-to-maturity (market values of
$778,600 and $820,902, respectively)......................... 773,798 820,839
Loans............................................................. 8,214,299 8,469,477
Allowance for credit losses....................................... (162,206) (157,417)
Net loans......................................................... 8,052,093 8,312,060
Premises and equipment............................................ 185,671 184,738
Other assets...................................................... 636,082 593,854
Total Assets...................................................... $14,220,022 $13,773,522
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Non-interest bearing........................................... $ 1,727,916 $ 1,669,063
Interest-bearing............................................... 8,554,881 8,529,215
Foreign deposits -- interest-bearing........................... 16,566 30,012
Total deposits............................................... 10,299,363 10,228,290
Other borrowed funds.............................................. 2,450,976 2,074,791
Other liabilities................................................. 261,364 242,988
Subordinated debt................................................. 100,000 100,000
Total Liabilities................................................. 13,111,703 12,646,069
Guaranteed preferred beneficial interests in the Corporation's
junior subordinated debentures............................... 100,000 100,000
Shareholders' Equity:
Preferred stock: 25,000,000 shares authorized and unissued........ -- --
Common stock, $1 par value: 150,000,000 shares authorized;
91,548,315 and 92,779,772 shares issued and outstanding ........ 91,548 92,780
Capital surplus................................................... 154,111 204,788
Retained earnings................................................. 757,864 728,304
Valuation adjustment of securities available-for-sale............. 4,796 1,581
Total Shareholders' Equity........................................ 1,008,319 1,027,453
Total Liabilities and Shareholders' Equity....................... $14,220,022 $13,773,522
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)__________________________________
<CAPTION>
For the Three Months
Ended March 31,
(in thousands, except per share data) 1998 1997
<S> <C> <C>
Interest Income:
Interest and fees on loans.............................. $188,079 $187,572
Interest on mortgages held-for-sale..................... 26,882 10,100
Interest on securities available-for-sale............... 34,446 29,236
Interest on securities held-to-maturity:
Taxable............................................... 11,895 13,121
Tax-exempt............................................ 1,923 2,190
Interest on deposits.................................... 175 54
Interest on federal funds sold and resale agreements.... 254 2,147
Interest on trading account securities.................. 12 688
Total interest income................................... 263,666 245,108
Interest Expense:
Interest on domestic deposits........................... 94,245 97,089
Interest on foreign deposits............................ 660 409
Interest on other borrowed funds........................ 31,140 15,935
Interest on subordinated debt........................... 3,366 2,785
Total interest expense.................................. 129,411 116,218
Net Interest Income....................................... 134,255 128,890
Provision for credit losses............................... 15,081 10,221
Net interest income after provision
for credit losses..................................... 119,174 118,669
Other Income:
Mortgage banking revenue (net).......................... 29,905 18,810
Trust and investment management revenue................. 14,042 12,852
Service charges on deposit accounts..................... 13,512 11,431
Insurance sales commissions............................. 5,560 3,494
ATM fees................................................ 1,474 965
Brokerage commissions................................... 1,065 811
Securities gains/(losses)............................... 105 (637)
Nonrecurring and other real estate owned income......... 6,002 2,587
Other................................................... 10,874 9,675
Total other income...................................... 82,539 59,988
Other Expenses:
Salaries and employee benefits.......................... 69,218 61,524
Occupancy expense....................................... 9,062 8,617
Equipment expense....................................... 7,897 6,617
Advertising and promotion............................... 2,163 2,027
Amortization of goodwill and intangibles................ 3,368 3,370
Nonrecurring and other real estate owned expense........ 167 227
Other expenses.......................................... 39,047 34,631
Total other expenses.................................... 130,922 117,013
Income Before Income Taxes................................ 70,791 61,644
Income taxes............................................ 24,617 20,640
Net Income................................................ $ 46,174 $ 41,004
Earnings Per Common Share:
Basic................................................... $ 0.50 $ 0.43
Diluted................................................. $ 0.50 $ 0.42
Dividends Per Common Share................................ $ 0.180 $ 0.162
Average number of shares used to compute: (in thousands)
Basic earnings per share............................... 91,929 96,186
Diluted earnings per share............................. 92,804 96,833
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<CAPTION>
Three months ended March 31, 1998 (dollars in thousands) 1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 46,174 $ 41,004
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for credit losses...................................... 15,081 10,221
Depreciation, amortization and accretion......................... 10,859 18,061
Net gains on sales of assets..................................... (35,804) (13,500)
Net change in trading account securities......................... (1,062) 3,584
Originations and acquisitions of mortgages held-for-sale......... (3,009,976) (503,293)
Proceeds from sales and prepayments of mortgages held-for-sale... 2,540,568 451,010
Net change in other assets....................................... (11,690) (35,730)
Net change in other liabilities.................................. 16,565 55,872
Net cash (used for) provided by operating activities..................... (429,285) 27,229
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and prepayments of securities available-for-sale 71,257 26,886
Proceeds from sales of securities available-for-sale..................... 52,276 875,815
Purchases of securities available-for-sale............................... (330,826) (1,043,528)
Proceeds from maturities and prepayments of securities held-to-maturity.. 48,796 46,510
Purchases of securities held-to-maturity................................. (2,096) (2,736)
Net change in interest-earning deposits.................................. (8,819) 408
Proceeds from sale of loans.............................................. 106,848 -
Net change in loans...................................................... 140,781 (103,783)
Purchases of leasehold improvements, premises and equipment, net......... (3,159) (6,135)
Acquisition of business units (net of cash acquired)..................... - 14,284
Sale of business units (net of cash sold)................................ - 1,234
Net cash provided by (used for) investing activities..................... 75,058 (191,045)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in time deposits.................................................. (73,722) (47,527)
Change in demand and savings deposits.................................... 144,794 (41,662)
Change in other borrowed funds........................................... 376,186 161,739
Proceeds of guaranteed preferred beneficial interests in the
Corporation's junior subordinated debentures........................ - 100,000
Repurchases of common stock.............................................. (58,009) (79,865)
Proceeds from common stock issuances..................................... 5,733 2,988
Dividends paid to shareholders........................................... (16,615) (15,519)
Net cash provided by financing activities................................ 378,367 80,154
Net change in cash and cash equivalents.................................. 24,140 (83,662)
Cash and cash equivalents at beginning of year........................... 550,242 637,798
Cash and cash equivalents at March 31.................................... $ 574,382 $ 554,136
Supplemental disclosures of cash flow information:
Interest paid on deposits, other borrowed funds and
subordinated debt.................................................... $ 132,407 $ 125,691
Federal income taxes paid.............................................. 3,000 1,500
Significant non-cash transactions:
Stock issued to acquire businesses..................................... - 71,767
The accompanying notes to consolidated financial statements are an integral part of these statements
</TABLE>
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 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 three month
period ended March 31, 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
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.
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
March 31, 1998
NOTE C: LOANS AND NONPERFORMING ASSETS
The following summarizes loans and nonperforming assets at the
dates indicated (dollars in thousands):
March 31, December 31,
Loans: 1998 1997
Commercial................................. $2,628,187 $2,576,008
Real estate - Commercial.................. 1,775,619 1,796,308
Real estate - Construction................ 564,243 557,007
Real estate - Residential mortgages....... 693,505 766,047
Real estate - Consumer home equity ....... 908,401 906,824
Consumer................................... 1,472,147 1,694,136
Credit card loans.......................... -- 1,694
Lease financing............................ 172,197 171,453
Total Loans................................ $8,214,299 $8,469,477
March 31, December 31,
Nonperforming assets: 1998 1997
Nonaccrual loans .......................... $ 65,324 $ 52,036
Restructured loans......................... 2,604 2,688
Impaired loans........................... 67,928 54,724
Other real estate owned.................... 8,013 7,619
Total nonperforming assets................. $ 75,941 $ 62,343
Loans past due 90 days or more............. $ 11,341 $ 13,523
At March 31, 1998, the Corporation's management has identified loans totaling
approximately $21.8 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 March 31, 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.
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
March 31, 1998
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):
<TABLE>
<CAPTION>
For the Three Months
ended March 31,
Allowance for Credit Losses 1998 1997
<S> <C> <C>
Balance at January 1,...................................................... $157,417 $165,928
Changes in allowance due to acquisitions / divestitures / sales............. (475) 3,184
Provision for credit losses................................................. 15,081 10,221
Gross loans charged-off..................................................... (13,937) (15,229)
Gross recoveries of loans previously charged-off............................ 4,120 4,219
Balance at end of period,................................................... $162,206 $168,323
For the Three Months
ended March 31,
Net Loan Charge-Offs 1998 1997
Commercial & Commercial Real Estate Loans................................... $ 3,803 ($1,515)
Consumer.................................................................... 5,558 5,475
Credit Card................................................................. 1 6,311
Residential Mortgages....................................................... 0 1
Leases...................................................................... 455 738
Total Net Charge-Offs....................................................... $ 9,817 $ 11,010
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
March 31, 1998: Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury and federal agency securities... $ 536,945 $ 2,951 $ 892 $ 539,004
Collateralized mortgage obligations:
U.S. Government issued................... 1,210,412 7,641 2,165 1,215,888
Privately issued......................... 255,524 1,211 1,849 254,886
Mortgage-backed pass-through securities....... 123,472 340 125 123,687
Other securities.............................. 116,016 267 ---- 116,283
Total securities available-for-sale........... $2,242,369 $12,410 $5,031 $2,249,748
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
</TABLE>
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
March 31, 1998
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):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
March 31, 1998: Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury and federal agency securities... $ 15,246 $ 49 $ 10 $ 15,285
Collateralized mortgage obligations:
U.S. Government issued................... 422,460 1,413 1,554 422,319
Privately issued......................... 113,021 417 662 112,776
Mortgage-backed pass-through securities....... 85,684 1,875 46 87,513
State and political subdivisions.............. 137,387 4,468 1,148 140,707
Total securities held-to-maturity............. $773,798 $8,222 $3,420 $778,600
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
</TABLE>
NOTE G: 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 $4.1 million on the sale.
NOTE H: 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. 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 March 31, 1998, approximately
4,421,000 shares of Old Kent Common Stock had been purchased under this
authorization.
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
March 31, 1998
NOTE I: MORTGAGE BANKING REVENUE (NET)
The following summarizes net mortgage banking revenues as shown in the
accompanying consolidated statements of income:
<TABLE>
<CAPTION>
For the Three Months
Net mortgage banking revenue: ended March 31,
1998 1997
<S> <C> <C>
Gross mortgage servicing revenue............................................... $ 11,150 $ 10,870
Less: amortization of mortgage servicing rights & direct costs............... (11,574) (6,516)
Net mortgage servicing revenue................................................. (424) 4,354
Mortgage banking gains (net)................................................... 29,659 11,014
Mortgage origination and processing fees (net)................................. 670 3,442
Total net mortgage banking revenue........................................... $ 29,905 $ 18,810
NOTE J: OTHER ASSETS
Other assets, as shown in the accompanying consolidated balance sheets, included the following:
March 31, December 31,
1998 1997
Mortgage Servicing Rights (net of amortization)................................ $137,136 $150,988
Less servicing impairment reserve.............................................. ($5,129) ($4,629)
Carrying value of Mortgage Servicing Rights.................................... $132,007 $146,359
Goodwill....................................................................... 106,770 108,813
Core Deposit Intangibles....................................................... 22,041 23,130
</TABLE>
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 K: EARNINGS PER SHARE
The following table reconciles the numerators and denominators used in the
calculations of basic and diluted earnings per share:
<TABLE>
<CAPTION>
For the Three Months
ended March 31,
1998 1997
<S> <C> <C>
Numerators:
Numerator for both basic and diluted earnings per share, net income 46,174,000 41,004,000
Denominators:
Denominator for basic earnings per share, average outstanding 91,929,000 96,186,000
common shares
Potential dilutive shares resulting from employee stock plans 875,000 647,000
Denominator for diluted earnings per share 92,804,000 96,833,000
Earnings per share:
Basic $0.50 $0.43
Diluted $0.50 $0.42
</TABLE>
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (Unaudited)
March 31, 1998
NOTE L: 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 securitites. Comprehensive income was approximately
$49,389 and $28,338 for the quarters ended March 31, 1998 and 1997,
respectively.
NOTE M: SUBSEQUENT EVENTS
On April 21, 1998, Old Kent signed a definitive agreement for the merger of
First Evergreen Corporation ("First Evergreen") into Old Kent. The merger
will be structured as a pooling-of-interest. Old Kent will exchange 30.5059
shares of Old Kent Common stock for each share of First Evergreen Stock.
Old Kent expects to issue approximately 12.2 million shares related to this
transaction. First Evergreen is a bank holding company headquartered in
Evergreen Park, Illinois, with assets of approximately $1.9 billion and
deposits of approximately $1.7 billion as of March 31, 1998. It is the parent
of First National Bank of Evergreen Park. First Evergreen provides banking
services through eight offices in Cook County, Illinois. The merger is
subject to shareholder and regulatory approval and is expected to be completed
in the fourth quarter of 1998.
<PAGE>
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.
RESULTS OF OPERATIONS
Old Kent's net income was $46.2 million for the first quarter of 1998 compared
to $41.0 million for the same period in 1997. First quarter diluted earnings
per share was $.50, a 19.0% increase over last year's $.42.
Total assets were $14.2 billion at quarter-end compared to $13.8 billion at
December 31, 1997. Return on average equity for the first quarter of 1998 was
18.35% compared to 16.14% for the first quarter of 1997. Return on average
assets was 1.33% for the first quarter of 1998 compared to 1.28% for the first
quarter of 1997.
Old Kent's net interest income for the first quarter of 1998 was $134.3
million, a 4.2% increase over the $128.9 million recorded in the same period
of 1997. For the first quarter of 1998, the net interest margin was 4.26%
compared to 4.44% a year ago. The decrease in the net interest margin was
primarily due to increased funding costs, repurchases of common stock, and the
June 1997, sale of Old Kent's higher yielding credit card portfolio.
The provision for credit losses was $15.1 million in the first quarter of 1998
and $10.2 million in the first quarter of 1997. The increase in the provision
reflected a decline in consumer credit quality. Net credit losses were $9.8
million or .47% of average loans for the first quarter of 1998 compared to
$11.0 million or .53% of average loans for the same period a year ago. The
allowance for credit losses as a percent of loans and leases outstanding was
1.97% at March 31, 1998, and 1.86% at December 31, 1997. Impaired loans as a
percent of total loans was .83% at March 31, 1998, and .65% at December 31,
1997.
Total other operating income, excluding securities transactions and other
nonrecurring income, increased 31.7% or $18.4 million during the first quarter
of 1998 over the same period a year ago. The mortgage banking business
contributed $11.1 million of this increase, primarily as a result of growth
and expansion of Old Kent Mortgage Company. Trust and Investment Management
income increased 9.3% or $1.2 million and service charges on deposits
increased 18.2% or 2.1 million. All other service charges and fees increased
$4.0 million over the same period a year ago.
<PAGE>
Nonrecurring and other real-estate owned income totaled $6,002,000 for the
quarter ended March 31, 1998, and consisted of:
Gain on sale of loans 1,259,000
Gain on sale of branches and other
buildings 4,726,000
Gain on sale of Other Real Estate 17,000
Total 6,002,000
Old Kent sold approximately $2.5 billion of residential mortgage loans during
the quarter. Old Kent's residential third party mortgage servicing portfolio
increased 14.5% to $12.6 billion at March 31, 1998, from $11.0 billion at
March 31, 1997, primarily due to geographic expansion. The residential third
party mortgage servicing portfolio was $13.0 billion at December 31, 1997.
Total net securities gains for the first quarter of 1998 were $105,000,
compared to losses of $637,000 for the same period of 1997.
Total operating expenses for the first quarter of 1998 increased $13.9
million, or 11.9%, 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 $7.7 million or 12.5% for the first quarter of 1998 over
the first quarter of 1997. The number of full-time equivalent employees
increased by 480 over a year ago, to 6,456 at March 31, 1998. The following
table shows the change in employees:
March 31,
1998 1997 Change
Full-time equivalent staff:
Banking units 4,298 4,539 (241)
Mortgage banking 1,840 1,222 618
Insurance, leasing & brokerage 318 215 103
Total 6,456 5,976 480
Occupancy and equipment expenses increased 11.3% during the first quarter of
1998 compared to the same period a year ago.
Nonrecurring expenses of $.2 million were primarily attributable to losses on
sales of other real-estate owned. All other operating expenses increased by
11.4% or $4.6 million over the prior year quarter.
YEAR 2000
Old Kent has completed an analysis of its needs for its mainframe and
centrally controlled systems to be able to deal with the advent of the year
2000. Diagnosis, reprogramming and other remedies are expected to result in
expenditures of approximately $12 million, over the two years ended
December 31, 1999. As of March 31, 1998, Old Kent's Management believes that
renovation is more than 50% complete.
<PAGE>
BALANCE SHEET CHANGES
Total interest-earning assets increased 3.0% or $377 million from December 31,
1997. Total securities increased $166 million since year-end 1997. Mortgages
held-for-sale increased 36.4% or $463 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 increased $9.9
million since year end 1997.
Total deposits increased $71 million or .7% from year-end 1997: noninterest
bearing deposits increased 3.5% or $59 million and interest-bearing deposits
increased .1% or $12 million. Other borrowed funds increased $376 million or
18.1% 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
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.
At March 31, 1998, shareholders' equity was $1,008 million compared to $1,002
million at March 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 $11.07
Net income for the three months ended
March 31, 1998 46.2 .50
Cash dividends paid (16.6) (.18)
Net change in valuation adjustment of securities
available-for-sale 3.2 .04
Stock repurchases (net of stock issued)
(52.0) (.42)
Balance, March 31, 1998 $1,008.3 $11.01
<PAGE>
As shown in the table below, the Corporation repurchased approximately 1.5
million shares of its common stock during the three months ended March 31,
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 March 31, 1998.
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 12/31/97 3,189,543 1,920,000 1,269,543 --
Shares repurchased 1,479,009 1,150,000 244,234 84,775
Shares reissued (247,552) 0 (243,777) (3,775)
Shares reserved at 3/31/98 4,421,000 3,070,000 1,270,000 81,000
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 March 31, 1998, Old Kent held 4,421,000 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 6 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 4.6 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 1.4 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.
Total equity at March 31, 1998, was increased by an after-tax unrealized gain
of $3.2 million on securities available-for-sale. Shareholders' equity as a
percentage of total assets as of March 31, 1998, was 7.09%.
<PAGE>
The following table represents the Registrant's consolidated regulatory
capital position as of March 31, 1998:
Regulatory capital at March 31, 1998
(in millions) Tier 1 Total
Leverage Risk-Based Risk-Based
Ratio Capital Capital
Actual capital $979.5 $979.5 $1,213.5
Required minimum regulatory capital 413.5 427.6 855.3
Capital in excess of requirements $566.0 $551.9 $ 358.2
Actual ratio 7.11% 9.16% 11.35%
Regulatory Minimum Ratio 3.00% 4.00% 8.00%
Ratio considered "well capitalized"
by regulatory agencies 5.00% 6.00% 10.00%
<PAGE>
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 quarter 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 it vulnerability
to interest rate risk. Prevailing interest rates and interest 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.
<PAGE>
PART II OTHER INFORMATION
Item 2. Changes in Securitites and use of proceeds
On February 27, 1998, Old Kent issued 3,781 shares of its
common stock to former shareholders of Republic Mortgage Corp.
("Republic") pursuant to an Agreement and Plan of Merger dated
as of October 12, 1995, as deferred consideration for all of
the issued and outstanding common stock of Republic which was
acquired in a merger which was effective on January 23, 1996,
among Republic, the former shareholders of Republic, Old Kent
Subsidiary Corporation and Old Kent. The issuance of Old Kent
common stock was exempt from registration under Section 4(2)
of the Securities Act of 1993 and Regulation D. Based on the
information provided by the former Republic shareholders, and
to the reasonable belief of Old Kent, each of the 14 former
Republic shareholders was an "accredited investor". Old Kent
did not employ an underwriter in this transaction.
Item 4. Submission of Matters to a Vote of Security Holders.
The registrant's annual meeting of shareholders was held on
April 20, 1998. The election of directors and procedural
matters were voted upon. All nominees for director were
elected by the following votes:
Election of Directors
For Withheld
Mr. John D. Boyles 76,445,440 424,655
Mr. Richard M. DeVos 76,411,473 458,223
Mr. Kevin T. Kabat 76,398,692 471,014
Mr. John P. Keller 76,458,449 411,247
Mr. David J. Wagner 76,404,387 465,309
Ms. Margaret S. Walker 76,322,806 546,890
Mr. Robert H. Warrington 76,441,261 428,434
The terms for the office of the following directors continued
after the meeting:
Mr. Richard L . Antonini Mr. Michael J. Jandernoa
Mr. William P. Crawford Mr. Fred P. Keller
Mr. William G. Gonzalez Mr. Hendrik G. Meijer
Mr. James P. Hackett Mr. Percy A. Pierre, Ph.D.
Ms. Erina Hanka Ms. Marilyn J Schlack
Mr. Earl D. Holton Mr. Peter F. Secchia
The proposal below was approved by the following votes:
For Against Abstain
Proposal to increase the
amount of authorized
common shares 73,014,516 3,854,680 564,147
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
Number Exhibit
2.1 Agreement and Plan of Merger between Old Kent and First
Evergreen Corporation. Previously filed as Exhibit 2.1 to
Old Kent's Form 8-K filed April 24, 1998. Here incorporated
by reference.
2.2 Stock Option Agreement between Old Kent and First Evergreen
Corporation. Previously filed as Exhibit 2.2 to Old Kent's
Form 8-K filed April 24, 1998. Here incorporated by
reference.
3.1 Restated Articles of Incorporation. Previously filed as
Exhibit 3(a) to Old Kent's Form 10-Q Quarterly Report for the
fiscal quarter ended March 31, 1993. Here incorporated by
reference.
3.2 Bylaws. Previously filed as Exhibit 3(b) to Old Kent's Form
10-Q Quarterly Report filed for the fiscal quarter ended
June 30, 1997. Here incorporated by reference.
4.1 Rights Agreement. Previously filed as an exhibit to
Old Kent's Form 8-A Registration Statement filed January 21,
1997. Here incorporated by reference.
4.2 Certificate of Designation, Preferences, and Rights of
Series C Preferred Stock. Previously filed as Exhibit 4.3 to
Old Kent's Form 8-K filed March 5, 1997. Here incorporated by
reference.
4.3 Form of Old Kent Capital Trust I Floating Rate Subordinated
Capital Income Securities (Liquidation Amount of $1,000 per
Capital Security). Previously filed as Exhibit 4.7 to
Old Kent's Form S-4 Registration Statement filed July 10,
1997. Here incorporated by reference.
4.4 Form of Old Kent Financial Corporation Floating Rate Junior
Subordinated Debenture due 2027. Previously filed as
Exhibit 4.5 to Old Kent's Form S-4 Registration Statement filed
July 10, 1997. Here incorporated by reference.
4.5 Amended and Restated Declaration of Trust, dated as of
January 31, 1997, among Old Kent; Albert T. Potas, Thomas E.
Powell, and Mary E. Tuuk, as "Regular Trustees" (as defined
therein); Bankers Trust Company; and Bankers Trust (Delaware).
Previously filed as Exhibit 4.6 to Old Kent's Form 8-K filed
March 5, 1997. Here incorporated by reference.
4.6 Guarantee Agreement, dated as of August 21, 1997, between
Old Kent and Bankers Trust Company. Previously filed as
Exhibit 4.7 to Old Kent's Form 8-K filed March 4, 1998. Here
incorporated by reference.
4.7 Indenture, dated as of January 31, 1997, between Old Kent and
Bankers Trust Company. Previously filed as Exhibit 4.8 to
Old Kent's Form 8-K filed March 5, 1997. Here incorporated by
reference.
10.1 Amendment to Old Kent Directors' Deferred Compensation Plan.*
Previously filed as Exhibit 10.15 to Old Kent's Form 8-K filed
March 4, 1998. Here incorporated by reference.
27 Financial Data Schedule
(b) The following reports on Form 8-K were filed during the first
quarter of 1998:
Date of Event Item Financial Statements
Reported Reported Filed
January 29, 1998 5 and 7 none
March 4, 1998 7 none
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OLD KENT FINANCIAL CORPORATION
Date: May 15, 1998 David J. Wagner
Chairman of the Board, President and
Chief Executive Officer
Date: May 15, 1998 Robert H. Warrington
Vice Chairman of the Board and
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
27 Financial Data Schedule
<PAGE>
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> This schedule contains summary financial information extracted from
SEC Form 10-Q and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<PERIOD-END> MAR-31-1998
<FISCAL-YEAR-END> DEC-31-1998
<CASH> 527,882
<INT-BEARING-DEPOSITS> 10,972
<FED-FUNDS-SOLD> 46,500
<TRADING-ASSETS> 2,092
<INVESTMENTS-HELD-FOR-SALE> 2,249,747
<INVESTMENTS-CARRYING> 773,798
<INVESTMENTS-MARKET> 778,600
<LOANS> 9,949,483
<ALLOWANCE> 162,206
<TOTAL-ASSETS> 14,220,022
<DEPOSITS> 10,299,363
<SHORT-TERM> 2,450,200
<LIABILITIES-OTHER> 261,364
<LONG-TERM> 200,776
<COMMON> 91,548
0
0
<OTHER-SE> 916,771
<TOTAL-LIABILITIES-AND-EQUITY> 14,220,022
<INTEREST-LOAN> 214,961
<INTEREST-INVEST> 48,264
<INTEREST-OTHER> 266
<INTEREST-TOTAL> 263,666
<INTEREST-DEPOSIT> 175
<INTEREST-EXPENSE> 129,411
<INTEREST-INCOME-NET> 134,255
<LOAN-LOSSES> 15,081
<SECURITIES-GAINS> 105
<EXPENSE-OTHER> 130,922
<INCOME-PRETAX> 70,791
<INCOME-PRE-EXTRAORDINARY> 70,791
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,174
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.50
<YIELD-ACTUAL> 4.26
<LOANS-NON> 65,324
<LOANS-PAST> 11,341
<LOANS-TROUBLED> 2,604
<LOANS-PROBLEM> 67,928
<ALLOWANCE-OPEN> 157,417
<CHARGE-OFFS> 13,937
<RECOVERIES> 4,120
<ALLOWANCE-CLOSE> 162,206
<ALLOWANCE-DOMESTIC> 162,206
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
