<PAGE>
==============================================================================
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, 1999, 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: 0-14591
OLD KENT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-1986608
(State or 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 April 30, 1999 was 102,245,104 shares.
==============================================================================
<PAGE>
INDEX
OLD KENT FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998
Consolidated Statements of Income for the three
months ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998
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 Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
-2-
<PAGE>
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") itself.
Words such as "anticipates," "believes," "estimates," "expects,"
"forecasts," "intends," "is likely," "plans," "judgment," "projects,"
variations of such words and similar expressions are intended to identify
such forward-looking statements. Management judgments relating to, and
discussion of the provision and allowance for credit losses involve
judgments as to future events and are inherently forward looking
statements. Assessments that Old Kent is Year 2000 "compliant" are
necessarily statements of belief as to the outcome of future events, based
in part on information provided by vendors and others which Old Kent has
not independently verified. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions which
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, implied or forecasted in such forward-
looking statements. 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 behaviors as well as their ability to repay loans; the ability of
the companies on which Old Kent relies to make their computer systems Year
2000 compliant; the ability to locate and convert all relevant computer
codes and data; the vicissitudes of the national economy; the possibility
that expected cost savings from mergers might not be fully realized within
the expected time frame; and similar uncertainties. Old Kent undertakes no
obligation to update, amend or clarify forward-looking statements, whether
as a result of new information, future events, or otherwise.
-3-
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ---------------------------------------------------------------------------------------
<CAPTION>
MARCH 31, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 526,476 $ 615,845
Federal funds sold and resale agreements 13,740 9,230
----------- -----------
Total cash and cash equivalents 540,216 625,075
Interest-earning deposits 14,155 5,044
Trading account securities 988 349,090
Mortgages held-for-sale 1,436,097 2,262,696
Securities available-for-sale:
Collateralized mortgage obligations and other
mortgage-backed securities 1,922,846 1,819,122
Other securities 976,154 947,574
----------- -----------
Total securities available-for-sale (amortized cost of
$2,887,142 and $2,735,301, respectively) 2,899,000 2,766,696
Securities held-to-maturity:
Collateralized mortgage obligations and other
mortgage-backed securities 144,845 180,369
Other securities 630,307 623,376
----------- -----------
Total securities held-to-maturity (market values of
$789,840 and $823,610, respectively) 775,152 803,745
Loans 9,306,484 8,883,716
Allowance for credit losses (168,621) (167,665)
----------- -----------
Net loans 9,137,863 8,716,051
----------- -----------
Premises and equipment 221,826 220,981
Other assets 886,519 839,480
----------- -----------
TOTAL ASSETS $15,911,816 $16,588,858
=========== ===========
-4-
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Non-interest-bearing $ 1,862,138 $ 2,098,446
Interest-bearing 10,580,804 10,700,895
Foreign deposits -- interest-bearing 47,702 140,077
----------- -----------
Total deposits 12,490,644 12,939,418
Other borrowed funds 1,786,655 2,061,142
Other liabilities 335,521 253,188
Long term debt 200,000 200,000
----------- -----------
Total Liabilities 14,812,820 15,453,748
Shareholders' Equity:
Preferred stock: 25,000,000 shares authorized and unissued -- --
Common stock, $1 par value: 300,000,000 shares authorized;
103,208,097 and 104,498,649 shares issued and outstanding 103,208 104,499
Capital surplus 80,194 139,736
Retained earnings 908,242 870,468
Accumulated other comprehensive income 7,352 20,407
----------- -----------
Total Shareholders' Equity 1,098,996 1,135,110
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $15,911,816 $16,588,858
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
-5-
<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) 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Interest Income:
Interest and fees on loans $ 187,169 $ 201,768
Interest on mortgages held-for-sale 35,979 26,882
Interest on securities available-for-sale 43,953 36,589
Interest on securities held-to-maturity:
Taxable 7,660 23,362
Tax-exempt 5,852 4,588
Interest on deposits 180 175
Interest on federal funds sold and resale agreements 196 923
Interest on trading account securities 1,610 12
-------- ---------
Total interest income 282,599 294,299
-------- ---------
Interest Expense:
Interest on domestic deposits 107,975 110,963
Interest on foreign deposits 727 660
Interest on other borrowed funds 22,071 31,294
Interest on subordinated debt 3,208 3,366
-------- ---------
Total interest expense 133,981 146,283
-------- ---------
Net Interest Income 148,618 148,016
Provision for credit losses 6,866 15,381
-------- ---------
Net interest income after provision
for credit losses 141,752 132,635
-------- ---------
Other Income:
Mortgage banking revenues (net) 43,549 29,905
Investment management and trust revenues 17,520 14,217
Deposit account revenues 14,332 13,860
Insurance sales commissions 5,855 5,560
ATM revenues 1,802 1,602
Brokerage commissions 1,179 557
Securities gains 123 838
-6-
<PAGE>
Nonrecurring income/(expense) (30) 5,713
Other 11,552 10,376
-------- ---------
Total other income 95,882 82,628
-------- ---------
Other Expenses:
Salaries and employee benefits 79,059 74,457
Occupancy expense 11,413 10,209
Equipment expense 9,129 8,716
Amortization of goodwill and intangibles 3,548 3,578
Advertising and promotion 2,517 2,328
Other expenses 43,155 36,933
-------- ---------
Total other expenses 148,821 136,221
-------- ---------
Income Before Income Taxes 88,813 79,042
Income taxes 30,210 27,519
-------- ---------
Net Income $ 58,603 $ 51,523
======== =========
EARNINGS PER COMMON SHARE:
BASIC $ 0.56 $ 0.47
DILUTED $ 0.56 $ 0.47
DIVIDENDS PER COMMON SHARE $ 0.200 $ 0.171
Average number of shares used to compute: (in thousands)
Basic earnings per share 103,848 109,347
Diluted earnings per share 104,822 110,266
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
-7-
<PAGE>
<TABLE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ----------------------------------------------------------------------------------------------------
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
(DOLLARS IN THOUSANDS) 1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 58,603 $ 51,523
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for credit losses 6,866 15,381
Depreciation, amortization and accretion 11,521 12,725
Net gains on sales of assets (55,017) (36,537)
Net change in trading account securities 348,166 (1,062)
Originations and acquisitions of mortgages held-for-sale (3,632,802) (3,009,976)
Proceeds from sales and prepayments of mortgages held-for-sale 4,442,342 2,540,568
Net change in other assets 19,642 (12,794)
Net change in other liabilities 88,832 11,989
----------- -----------
Net cash provided by (used for) operating activities 1,288,153 (428,183)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and prepayments of securities
available-for-sale 167,320 71,257
Proceeds from sales of securities available-for-sale 131,153 297,156
Purchases of securities available-for-sale (450,026) (600,847)
Proceeds from maturities and prepayments of securities
held-to-maturity 75,363 146,055
Purchases of securities held-to-maturity (46,181) (100,754)
Net change in interest-earning deposits (9,111) (8,819)
Proceeds from sale of loans 6,691 106,848
Net change in loans (435,137) 128,703
Purchases of leasehold improvements, premises and equipment, net (8,688) (4,286)
----------- -----------
Net cash provided by (used for) investing activities (568,616) 35,313
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in time deposits (253,384) (84,700)
Change in demand and savings deposits (195,406) 156,876
Change in other borrowed funds (274,486) 376,971
Repurchases of common stock (66,989) (58,074)
-8-
<PAGE>
Proceeds from common stock issuances 6,697 5,733
Dividends paid to shareholders (20,828) (24,623)
----------- -----------
Net cash (used for) provided by financing activities (804,396) 372,183
----------- -----------
Net change in cash and cash equivalents (84,859) (20,687)
Cash and cash equivalents at beginning of year 625,075 674,649
----------- -----------
Cash and cash equivalents at March 31 $ 540,216 $ 653,962
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid on deposits, other borrowed funds and
subordinated debt $ 126,726 $ 149,270
Income taxes paid 192 3,431
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
-9-
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1999
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, 1999 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1999. 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, 1998.
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, Treasury futures and options, and interest
rate caps and floors 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 interest rate swaps to hedge interest rate risk on interest
earning assets and interest bearing liabilities. Amounts receivable or
payable under these agreements are included in net interest income. There
is no recognition on the balance sheet for changes in the fair value of the
hedging instrument. Gains or losses on terminated interest rate swaps are
deferred and amortized to interest income or expense over the remaining
life of the hedged item.
Old Kent uses forward sale agreements and options on forward sale
agreements to protect the value of residential loan commitments, loans held
for sale and related mortgage backed securities held in the trading
account. The market value of the financial hedges associated with loan
origination commitments and loans held for sale are included in the
aggregate valuation of mortgages held for sale. Premiums paid for options
are deferred as a component of other assets and amortized against gains on
sale of loans over the contract term. Forward sale agreements associated
-10-
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
with mortgage backed securities held in the trading account are considered
when marking those securities to market, with the corresponding adjustment
recorded to gains on sale of loans.
Old Kent uses Treasury futures and options on Treasury futures to help
protect against market value changes in the mortgage servicing right
("MSR") portfolio. The fair value of the hedges are recorded as an
adjustment to the carrying amount of the MSR with a corresponding
adjustment to cash or other receivables or payables. If terminated, the
realized gain or loss on the hedge is included in MSR amortization over the
estimated life of the loan servicing that had been hedged. Option premiums
paid or received are deferred as a component of other assets and amortized
as MSR amortization over the contract term.
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.
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. 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).
-11-
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
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.
NOTE D: LOANS AND NONPERFORMING ASSETS
The following summarizes loans and nonperforming assets at the dates
indicated (in thousands of dollars):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C> <C>
LOANS:
Commercial $ 2,736,781 $ 2,727,892
Real estate - Commercial 1,947,824 1,920,107
Real estate - Construction 766,561 693,958
Real estate - Residential mortgages 1,023,480 1,012,510
Real estate - Consumer home equity 1,352,674 1,031,312
Consumer 1,309,777 1,334,374
Lease financing 169,387 163,563
------------ -------------
Total Loans $ 9,306,484 $ 8,883,716
============ =============
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- -----------
<S> <C> <C> <C>
NONPERFORMING ASSETS:
Nonaccrual loans $ 58,050 $ 57,120
Restructured loans 2,467 2,664
--------- --------
Impaired loans 60,517 59,784
Other real estate owned 5,468 6,872
--------- --------
Total nonperforming assets $ 65,985 $ 66,656
========= ========
Loans past due 90 days or more $ 8,472 $ 15,083
========= ========
</TABLE>
-12-
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
At March 31, 1999, the Corporation's management has identified loans
totaling approximately $20.9 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, 1999,
other circumstances caused management to seriously doubt the ability of the
borrowers to continue to remain in compliance with existing loan repayment
terms.
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):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
1999 1998
---- ----
<S> <C> <C> <C>
ALLOWANCE FOR CREDIT LOSSES
Balance at January 1, $ 167,665 $ 160,952
Changes in allowance due to acquisitions / divestitures
/ sales 120 (475)
Provision for credit losses 6,866 15,381
Gross loans charged-off (10,185) (14,288)
Gross recoveries of loans previously charged-off 4,155 4,259
----------- ---------
Balance at end of period $ 168,621 $ 165,829
=========== =========
</TABLE>
-13-
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
1999 1998
---- ----
<S> <C> <C> <C>
NET LOAN CHARGE-OFFS
Commercial & Commercial Real Estate Loans $ 2,419 $ 3,947
Consumer 3,342 5,586
Residential Mortgages -- 41
Leases 269 455
----------- ---------
Total Net Charge-Offs $ 6,030 $ 10,029
=========== =========
</TABLE>
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-
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
<TABLE>
<CAPTION>
CARRYING
GROSS GROSS VALUE
AMORTIZED UNREALIZED UNREALIZED AT MARKET
MARCH 31, 1999: COST GAINS LOSSES VALUE
-------------- ---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and federal agency securities $ 799,658 $ 9,331 $ 837 $ 808,152
Collateralized mortgage obligations:
U.S. Government issued 1,355,027 1,424 -- 1,356,451
Privately issued 250,554 8,473 4,432 254,595
Mortgage-backed pass-through securities 215,810 357 1,497 214,670
Other securities 266,093 1,013 1,974 265,132
----------- -------- -------- -----------
Total securities available-for-sale $ 2,887,142 $ 20,598 $ 8,740 $ 2,899,000
=========== ======== ======== ===========
DECEMBER 31, 1998:
-----------------
U.S. Treasury and federal agency securities $ 726,839 $ 21,576 $ 42 $ 748,373
Collateralized mortgage obligations:
U.S. Government issued 1,301,667 8,661 1,817 1,308,511
Privately issued 365,343 2,055 902 366,496
Mortgage-backed pass-through securities 143,449 1,230 564 144,115
Other securities 198,003 1,659 461 199,201
----------- -------- -------- -----------
Total securities available-for-sale $ 2,735,301 $ 35,181 $ 3,786 $ 2,766,696
=========== ======== ======== ===========
</TABLE>
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-
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
MARCH 31, 1999: COST GAINS LOSSES VALUE
-------------- ---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and federal agency securities $ 145,555 $ 1,379 $ 35 $ 146,899
Collateralized mortgage obligations:
U.S. Government issued 65,413 1,013 174 66,252
Privately issued -- -- -- --
Mortgage-backed pass-through securities 79,432 1,855 144 81,143
State and political subdivisions 483,817 15,031 4,237 494,611
Other Securities 935 -- -- 935
----------- -------- ------ ---------
Total securities held-to-maturity $ 775,152 $ 19,278 $4,590 $ 789,840
=========== ======== ====== =========
DECEMBER 31, 1998:
U.S. Treasury and federal agency securities $ 182,364 $ 2,406 $ 33 $ 184,737
Collateralized mortgage obligations:
U.S. Government issued 65,647 77 240 65,484
Privately issued 26,210 -- 106 26,104
Mortgage-backed pass-through securities 88,512 1,974 93 90,393
State and political subdivisions 440,077 16,347 467 455,957
Other 935 -- -- 935
----------- -------- ------ ---------
Total securities held-to-maturity $ 803,745 $ 20,804 $ 939 $ 823,610
=========== ======== ====== =========
</TABLE>
NOTE H: SHAREHOLDERS' EQUITY
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
-16-
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
benefit plans, and other general corporate purposes. As of March 31,
1999, repurchases of Old Kent Common Stock under this authorization totaled
4.9 million shares.
NOTE I: REPORTABLE OPERATING SEGMENTS
Under the provisions of "SFAS No. 131," Old Kent has six reportable
operating segments: Corporate Banking, Retail Banking, Community Banking,
Investment and Insurance Services, Mortgage Banking and Treasury. Old
Kent's reportable segments are strategic business units that are managed
separately because each business requires different technology and
marketing strategies, and also differs in product emphasis.
The following table summarizes information about reportable operating
segments' profit as of March 31, 1999 and 1998:
<TABLE>
<CAPTION>
NET INTEREST NON INTEREST NET
INCOME INCOME AND FEES INCOME
------ --------------- ------
<S> <C> <C> <C>
MARCH 31, 1999
- --------------
Corporate Banking $ 34,874 $ 3,773 $ 15,418
Retail Banking 60,360 13,792 13,484
Community Banking 37,560 8,002 13,061
Investment & Insurance Services 3,996 25,415 6,766
Mortgage Banking 12,379 44,218 6,535
Treasury (551) 682 3,339
--------- --------- ---------
Consolidated $ 148,618 $ 95,882 $ 58,603
========= ========= =========
MARCH 31, 1998
- --------------
Corporate Banking $ 35,430 $ 3,758 $ 14,530
Retail Banking 59,335 13,842 12,467
Community Banking 38,511 12,288 12,784
Investment & Insurance Services 3,380 21,295 3,944
Mortgage Banking 6,078 29,901 2,207
Treasury 5,282 1,544 5,591
--------- --------- ---------
Consolidated $ 148,016 $ 82,628 $ 51,523
========= ========= =========
</TABLE>
-17-
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
NOTE J: OTHER ASSETS
Other assets, as shown in the accompanying consolidated balance sheets,
include the following (net of amortization):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Goodwill $ 103,793 $ 102,538
Core Deposit Intangibles 18,398 19,452
--------- ----------
Total $ 122,191 $ 121,990
========= ==========
</TABLE>
Other assets, as shown in the accompanying consolidated balance sheets,
include mortgage servicing rights ("MSR's") as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
MSR's (net of amortization) $ 264,261 $227,625
Less servicing impairment reserve (9,129) (9,129)
--------- --------
Carrying value of MSR's $ 255,132 $218,496
========= ========
Estimated aggregate fair value of capitalized MSR's $ 296,000 $253,000
========= ========
</TABLE>
The following reflects changes in capitalized mortgage serving rights for
the time periods indicated:
-18-
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of period $ 218,496 $ 146,359
Additions 91,356 45,952
Sales (38,525) (9,867)
Amortization (16,195) (10,273)
Impairment provision -- (500)
--------- ---------
Balance at end of period $ 255,132 $ 171,671
========= =========
</TABLE>
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. Old Kent
Mortgage Company has entered into an agreement to sell mortgage serving
rights associated with $4.5 to $9.0 billion of mortgage loans during 1999.
This forward bulk servicing sale agreement provides for quarterly 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:
-19-
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------
1999 1998
---- ----
<S> <C> <C>
Numerators: Numerator for both basic and diluted $ 58,603,000 $51,523,000
earnings per share, net income ============ ===========
Denominators:
Denominator for basic earnings per share, average 103,848,000 109,347,000
outstanding common shares
Potential dilutive shares resulting from employee
stock plans 974,000 919,000
------------ -----------
Denominator for diluted earnings per share 104,822,000 110,266,000
============ ===========
Earnings per share:
Basic $0.56 $0.47
Diluted $0.56 $0.47
</TABLE>
NOTE L: COMPREHENSIVE INCOME
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 $46
million and $54 million for the quarters ended March 31, 1999 and 1998,
respectively.
NOTE M: 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, deposits of
approximately $1.7 billion and eight banking sites. 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 totaled approximately 12.8 million shares. First Evergreen was
the parent of First National Bank of Evergreen Park. Old Kent's unexpended
-20-
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
reserves for merger related charges were substantially utilized by March
31, 1999.
On February 24, 1999, Old Kent entered into a definitive agreement for the
merger of CFSB Bancorp, Inc.("CFSB") into Old Kent. The merger will be
accounted for as a pooling-of-interests. Old Kent will exchange .6222
shares of Old Kent Common Stock for each outstanding share of CFSB Common
Stock. Old Kent expects to issue approximately 5.4 million shares related
to this transaction. CFSB is a holding company headquartered in Lansing,
Michigan, with consolidated assets of approximately $889 million and
consolidated deposits of approximately $580 million at March 31, 1999.
CFSB is the parent of Community First Bank. CFSB provides banking services
through sixteen offices in Ingham, Clinton, Eaton and Ionia counties. The
merger is subject to shareholder and regulatory approval and is expected
to be completed in the third quarter of 1999.
On March 18, 1999, Old Kent entered into a definitive agreement for the
merger of Pinnacle Banc Group, Inc. ("Pinnacle") into Old Kent. The merger
will be accounted for as a pooling-of-interests. Old Kent will exchange
.717 shares of Old Kent Common Stock for each outstanding share of Pinnacle
Common Stock. Old Kent expects to issue approximately 5.4 million shares
related to this transaction. Pinnacle is a bank holding company
headquartered in the Chicago suburb of Oak Brook, Illinois, with
consolidated assets of approximately $1,045 million and consolidated
deposits of approximately $872 million at March 31, 1999. Pinnacle is the
parent of Pinnacle Bank which operates thirteen branches in the Chicago
metropolitan area and Pinnacle Bank of the Quad-Cities which operates three
branches in western Illinois. The merger is subject to shareholder and
regulatory approval and is expected to be completed in the third quarter
of 1999.
NOTE N: LONG TERM DEBT
Long term debt, as shown in the accompanying consolidated balance sheets,
consists of the following:
-21-
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
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
========= =========
</TABLE>
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.
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
-22-
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
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.
-23-
<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 $58.6 million for the first quarter of 1999
compared to $51.5 million for the same period in 1998. First quarter
diluted earnings per share was $.56, a 19.1% increase over $.47 for the
same period last year.
Total assets were $15.9 billion at quarter-end compared to $16.6 billion at
December 31, 1998. The decrease was primarily a result of a reduction in
mortgages-held-for-sale. Return on average equity for the first quarter of
1999 was 21.11% compared to 17.54% for the first quarter of 1998. Return
on average assets was 1.44% for the first quarter of 1999 compared to 1.30%
for the first quarter of 1998.
Old Kent's net interest income for the first quarter of 1999 was $148.6
million, a .4% increase from the $148.0 million recorded in the same period
of 1998. For the first quarter of 1999, the net interest margin was 4.12%
compared to 4.14% a year ago. The decrease in the net interest margin was
primarily due to reduced equity balances resulting from repurchases of
common stock.
The provision for credit losses was $6.9 million in the first quarter of
1999 and $15.4 million in the first quarter of 1998. Net credit losses
were $6.0 million or .27% of average loans for the first quarter of 1999
compared to $10.0 million or .45% of average loans for the same period a
year ago. The decrease was primarily due to lower net charge offs in the
consumer and commercial portfolios. This improvement was directly
attributable to strong credit quality policies as well as emphasis in
reducing loan balances with undesirable credit risk through sale
transactions or through thoughtful exits of the credit relationship. The
allowance for credit losses as a percent of loans and leases outstanding
was 1.81% at March 31, 1999 and 1.89% at December 31, 1998. Impaired loans
as a percent of total loans was .65% at March 31, 1999 and .67% at December
31, 1998.
Total other operating income, (other income, excluding securities
transactions and other nonrecurring income) increased 25.9% or $19.7
million during the first quarter of 1999 over the same period a year ago.
The mortgage banking business contributed $13.6 million of this increase,
primarily as a result of growth and expansion of Old Kent Mortgage Company,
along with a generally favorable economy and continued low interest rates.
-24-
<PAGE>
Investment management and trust revenues increased 23.2% or $3.3 million as
a result of focused sales initiatives and business development efforts.
Service charges on deposits increased 3.4% or $.5 million. All other
service charges and fees increased $2.3 million over the same period a
year ago.
Old Kent sold approximately $4.3 billion of residential mortgage loans
during the quarter. Old Kent's residential third party mortgage servicing
portfolio was $14.7 billion at March 31, 1999, and $14.0 billion at
December 31, 1998.
Total net securities gains for the first quarter of 1999 were $123,000,
compared to gains of $838,000 for the same period of 1998.
Total operating expenses for the first quarter of 1999 increased $12.6
million, or 9.3%, over the same period in 1998. These increases are
primarily attributable to the growth in Mortgage Banking. Old Kent
Mortgage Company operated 160 branches in 32 states as of March 31, 1999
compared to 114 branches in 27 states as of March 31, 1998.
Salaries, wages and employee benefits increased $4.6 million or 6.2% for
the first quarter of 1999 over the first quarter of 1998 largely as a
result of increased staffing in the Mortgage Company. The number of full-
time equivalent employees for the Corporation increased by 566 over a year
ago, to 7,605 at March 31, 1999.
<TABLE>
<CAPTION>
MARCH 31,
------------
1999 1998 CHANGE
---- ---- ------
<S> <C> <C> <C>
FULL-TIME EQUIVALENT STAFF:
Banking units 4,540 4,881 (341)
Mortgage banking 2,760 1,840 920
Insurance, leasing & brokerage 305 318 (13)
----- ----- ----
Total 7,605 7,039 566
===== ===== ====
</TABLE>
During the first quarter of 1999 compared to the same period a year ago,
occupancy expenses increased 11.8%, and equipment expenses increased 4.7%.
Other operating expenses increased by 14.9% or $6.4 million over the prior
year.
-25-
<PAGE>
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 to process
significant transaction volumes and because of 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 vendor supplied software packages for its "mission
critical" applications. All "mission critical" systems were Year 2000 ready
with the current releases installed and tested for all applications and
were in production on 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 event level
testing environment.
In a worst case scenario, testing of the remediated systems could yield a
failure when processing data beyond December 31, 1999. 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 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 $16 million, over the four years ended
December 31, 1999. As of March 31, 1999, approximately $13.2 million of
these expenditures have been recognized as incurred by Old Kent since 1995.
As of March 31, 1999, Old Kent was fully compliant on all "mission
critical" computer systems and 85% compliant on non-critical applications.
Management expects to be fully compliant on non-critical applications by
mid-1999 and expects to expend the remaining $2.8 million during 1999.
-26-
<PAGE>
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' failure 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 in a timely manner, the Year
2000 issue could have an adverse impact on the operations of the
Corporation. The Corporation's Year 2000 contingency plans for each line of
business will address alternative processing methods for all critical
functions including lending, transaction processing, liquidity and service
delivery methods.
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 management believes this information to be
accurate, it has not in each case independently verified such information.
BALANCE SHEET CHANGES
Total interest-earning assets decreased 4.1% or $615 million from December
31, 1998. Loans increased $423 million or 4.8% since year end 1998. Total
securities increased $123 million since year-end 1998. Mortgages held-
for-sale decreased 36.5% or $827 million. Other interest-earning assets,
primarily representing securitized mortgages classified as trading account
securities, decreased $334 million since year end 1998.
Total deposits decreased $448 million or 3.5% from year-end 1998;
noninterest-bearing deposits decreased 11.3% or $236 million and interest-
bearing deposits decreased 2.0% or $212 million. Other borrowed funds
decreased $275 million or 13.3% from December 31, 1998.
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.
Old Kent has filed a shelf registration to issue $250 million of common
stock, preferred stock, depositary shares, debt securities and warrants and
a shelf registration to issue an additional $200 million of trust
preferred securities. Sales of securities under these registration
statements could also be used as a source of liquidity and capital if and
as needed.
-27-
<PAGE>
At March 31, 1999, shareholders' equity was $1,099 million compared to
$1,135 million at December 31, 1998. The changes in total shareholders'
equity and book value per common share are summarized in the tables below.
<TABLE>
<CAPTION>
TOTAL SHARE-
HOLDERS' EQUITY BOOK VALUE PER
(IN MILLIONS) COMMON SHARE
--------------- --------------
<S> <C> <C>
Balance, December 31, 1998 $ 1,135.1 $ 10.86
Net income for the three months ended 58.6 .56
March 31, 1999
Cash dividends paid (20.8) (.20)
Change in other comprehensive income (13.1) (.13)
Stock repurchases (net of stock issued) (60.8) (.44)
--------- ------
Balance, March 31, 1999 $ 1,099.0 10.65
========= ======
</TABLE>
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,
1999. 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, 1999.
OLD KENT COMMON STOCK REPURCHASED AND RESERVED FOR FUTURE REISSUANCE IN
CONNECTION WITH:
<TABLE>
<CAPTION>
DIVIDEND
REINVESTMENT
STOCK AND EMPLOYEE
TOTAL DIVIDENDS STOCK PLANS
----- --------- ------------
<S> <C> <C> <C>
SHARES RESERVED AT 12/31/98 3,801,670 2,600,000 1,201,670
Shares repurchased 1,504,968 1,300,000 204,968
Shares reissued (214,416) 0 (214,416)
--------- --------- ---------
SHARES RESERVED AT 3/31/99 5,092,222 3,900,000 1,192,222
========= ========= =========
</TABLE>
For a number of years, Old Kent has been authorized by its board of
directors to repurchase shares in connection with the Corporation's
-28-
<PAGE>
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, 1999, Old Kent held 5,092,222 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
anticipates that this number of shares will have been repurchased prior to
July, 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 March 31, 1999, was increased by an after-tax unrealized
gain of $7.3 million on securities available-for-sale. Shareholders'
equity as a percentage of total assets as of March 31, 1999, was 6.91%.
The following table represents the Registrant's consolidated regulatory
capital position as of March 31, 1999:
<TABLE>
<CAPTION>
REGULATORY CAPITAL AT MARCH 31, 1999
(IN MILLIONS) TIER 1 TOTAL
LEVERAGE RISK-BASED RISK-BASED
RATIO CAPITAL CAPITAL
----- ------- -------
<S> <C> <C> <C>
Actual capital $ 1073.1 $1073.1 $ 1,318.8
Required minimum regulatory capital 484.3 464.9 929.8
-------- ------- ---------
Capital in excess of requirements $ 588.8 $ 608.2 $ 389.0
======== ======= =========
Actual ratio 6.65% 9.23% 11.35%
Regulatory Minimum Ratio 3.00% 4.00% 8.00%
Ratio considered "well capitalized"
by regulatory agencies 5.00% 6.00% 10.00%
</TABLE>
-29-
<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, 1998, 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 three months of 1999, 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 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-
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The board of directors of the Corporation amended and restated
the bylaws of the corporation on February 15, 1999. This amendment and
restatement of the bylaws was a general updating of the bylaws and, among
other things, reflected changes in applicable laws and regulations.
Changes to the bylaws which may affect the rights of holders of
the Corporation's Common Stock, $1 par value, include:
ELECTRONIC VOTING. A Shareholder may authorize another person or
persons to act for the shareholder as proxy by transmitting or
authorizing the transmission of a telegram, cablegram or other
means of electronic transmission to the person who will hold the
proxy or to that proxy's agent. Any such electronic transmission
must either set forth or be submitted with information from which
it can be determined if the electronic transmission was
authorized by the shareholder. A copy, facsimile communication,
or other reliable reproduction of the writing or transmission
authorizing a person to serve as proxy may be accepted in lieu of
the original writing if it is a complete reproduction of the
original writing or transmission.
NOTICE PROVISION FOR SHAREHOLDER PROPOSALS. A Shareholder
seeking to present a proposal for action at a meeting of the
shareholders must present the proposal in the manner provided by
Article II, Section 10 of the bylaws as amended and restated and
any other applicable requirements. For a matter to be properly
presented by a shareholder for action at a meeting of
shareholders, the shareholder must be a shareholder of record and
must have given timely notice of the shareholder's intention to
present the matter for action at the meeting. To be timely, the
notice must be delivered to or mailed and received at the office
of the Secretary of the Corporation not less than 120 calendar
days prior to the date corresponding to the date on which the
Corporation's proxy statement and notice of meeting was first
released to shareholders in connection with the last preceding
annual meeting of shareholders, in the case of an annual meeting
(unless the meeting date is changed by more than 30 days) or not
more than seven days after the earlier of the date of notice of
the meeting or public disclosure of the date of the meeting, in
the case of the special meeting. The notice must include a brief
description of the matter to be presented, the name and record
address of the shareholder proposing the matter, the class and
number of shares of stock beneficially owned by the shareholder,
-31-
<PAGE>
any material interest of the shareholder in the proposal, and the
text of the resolution proposed to be presented.
Other changes affected by the amendment and restatement of the
bylaws are essentially procedural, and are not believed by the Corporation
to be material to shareholders. The narrative text presented in response
to this Item 2 is a summary. The full text of the bylaws, which are
incorporated by reference as Exhibit 3.2 to this Form 10-Q Quarterly
Report, is incorporated by reference in response to this Item 2.
Shareholders are referred to the full text of the bylaws for a complete and
accurate statement of the rights of shareholders under the bylaws.
-32-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The registrant's annual meeting of shareholders was held on April
19, 1999. All nominees for director were elected by the following
votes:
<TABLE>
<CAPTION>
ELECTION OF DIRECTORS VOTES CAST
--------------------- --------------------
FOR WITHHELD
--- --------
<S> <C> <C> <C>
Mr. Richard L. Antonini 87,747,166 173,115
Mr. William G. Gonzalez 87,723,760 148,925
Mr. Hendrik G. Meijer 87,830,611 99,117
Mr. Percy A. Pierre 87,808,433 133,451
Ms. Marilyn J. Schlack 87,796,679 121,342
Mr. Peter F. Secchia 87,593,277 248,461
</TABLE>
The terms of office of the following directors continued after
the meeting:
<TABLE>
<CAPTION>
<S> <C> <C>
Mr. John D. Boyles Mr. Kevin T. Kabat
Mr. William P. Crawford Mr. Fred P. Keller
Mr. Dick DeVos Mr. John P. Keller
Mr. James P. Hackett Mr. David J. Wagner
Ms. Erina Hanka Ms. Margaret Sellers Walker
Mr. Michael J. Jandernoa Mr. Robert H. Warrington
</TABLE>
The proposals below were approved by the following votes:
<TABLE>
<CAPTION>
ABSTAIN AND
FOR AGAINST BROKER NON VOTES
--- ------- ----------------
<S> <C> <C> <C>
Stock Incentive Plan of 1999 59,167,494 14,774,446 14,546,685
Employee Stock Purchase Plan of 1999 71,472,228 2,648,296 14,368,052
</TABLE>
-33-
<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 CFSB Bancorp, Inc., Old
Kent Financial Corporation and OKFC Acquisition Corporation.
Previously filed as Exhibit 2 to Old Kent's Form S-4
Registration Statement (Registration No. 333-75653) filed
April 27, 1999. Here incorporated by reference.
2.2 Agreement and Plan of Merger between Pinnacle Banc Group, Inc.
and Old Kent Financial Corporation. Previously filed as
Exhibit 2.1 to Old Kent's Form 8-K Current Report dated March
18, 1999. Here incorporated by reference.
3.1 Restated Articles of Incorporation. Previously filed as
Exhibit 3.1 to Old Kent's Form S-4 Registration Statement
(Registration No. 333-56209) filed June 5, 1998. Here
incorporated by reference.
3.2 Bylaws. Previously filed as Exhibit 3.2 to Old Kent's Form
8-K Current Report dated March 15, 1999. Here incorporated by
reference.
4.1 Rights Agreement. Previously filed as an exhibit to Old
Kent's Form 8-A/A Registration Statement filed December 30,
1998. 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,
-34-
<PAGE>
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.
4.8 Long-Term Debt. Old Kent has outstanding long-term debt that,
at the time of this report, does not exceed 10% of Old Kent's
total consolidated assets. Old Kent agrees to furnish copies
of the agreements defining the rights of holders of such
long-term indebtedness to the Securities and Exchange
Commission upon request.
12 Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) The following reports on Form 8-K were filed during the first
quarter of 1999:
<TABLE>
<CAPTION>
DATE OF EVENT ITEM FINANCIAL STATEMENTS
REPORTED REPORTED FILED
-------- -------- -----
<S> <C> <C> <C>
February 25, 1999 5, 7 na
March 15, 1999 7 na
March 18, 1999 5, 7 na
</TABLE>
-35-
<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 14, 1999 By /S/ DAVID J. WAGNER
David J. Wagner
Chairman of the Board, President and
Chief Executive Officer
Date: May 14, 1999 By /S/ ROBERT H. WARRINGTON
Robert H. Warrington
Vice Chairman of the Board and
Chief Financial Officer
-36-
<PAGE>
EXHIBIT INDEX
NUMBER EXHIBIT
------ -------
2.1 Agreement and Plan of Merger between CFSB Bancorp, Inc., Old
Kent Financial Corporation and OKFC Acquisition Corporation.
Previously filed as Exhibit 2 to Old Kent's Form S-4
Registration Statement (Registration No. 333-75653) filed
April 27, 1999. Here incorporated by reference.
2.2 Agreement and Plan of Merger between Pinnacle Banc Group, Inc.
and Old Kent Financial Corporation. Previously filed as
Exhibit 2.1 to Old Kent's Form 8-K Current Report dated March
18, 1999. Here incorporated by reference.
3.1 Restated Articles of Incorporation. Previously filed as
Exhibit 3.1 to Old Kent's Form S-4 Registration Statement
(Registration No. 333-56209) filed June 5, 1998. Here
incorporated by reference.
3.2 Bylaws. Previously filed as Exhibit 3.2 to Old Kent's Form
8-K Current Report dated March 15, 1999. Here incorporated by
reference.
4.1 Rights Agreement. Previously filed as an exhibit to Old
Kent's Form 8-A/A Registration Statement filed December 30,
1998. 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);
<PAGE>
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.
4.8 Long-Term Debt. Old Kent has outstanding long-term debt that,
at the time of this report, does not exceed 10% of Old Kent's
total consolidated assets. Old Kent agrees to furnish copies
of the agreements defining the rights of holders of such
long-term indebtedness to the Securities and Exchange
Commission upon request.
12 Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
<PAGE>
EXHIBIT 12
OLD KENT FINANCIAL CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 YEARS ENDED DECEMBER 31
------------------ --------------------------------------------------
(dollar amounts in thousands)
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes $ 88,813 $ 79,042 $ 304,748 $ 304,273 $ 270,030 $241,416 $ 233,551
Fixed charges 25,279 34,660 123,260 100,254 71,047 71,161 38,730
-------- -------- --------- --------- --------- -------- ----------
$114,092 $113,702 $ 428,008 $ 404,527 $ 341,077 $312,577 $ 272,281
======== ======== ========= ========= ========= ======== ==========
Fixed charges:
Interest expense
(other than interest on deposits) $ 25,279 $ 34,660 $ 123,260 $ 100,254 $ 71,047 $ 71,161 $ 38,730
Interest factor in rent expense -- -- -- -- -- -- --
-------- -------- --------- --------- --------- -------- ----------
$ 25,279 $ 34,660 $ 123,260 $ 100,254 $ 71,047 $ 71,161 $ 38,730
======== ======== ========= ========= ========= ======== ==========
Ratio of earnings to fixed charges,
excluding interest on deposits 4.51 3.28 3.47 4.04 4.80 4.39 7.03
INCLUDING INTEREST ON DEPOSITS
Earnings:
Income before income taxes $ 88,813 $ 79,042 $ 304,748 $ 304,273 $ 270,030 $241,416 $ 233,551
Fixed charges 133,982 146,283 568,548 563,838 518,561 496,870 357,750
-------- -------- --------- --------- --------- -------- ----------
$222,795 $225,325 $ 873,296 $ 868,111 $ 788,591 $738,286 $ 591,301
======== ======== ========= ========= ========= ======== ==========
<PAGE>
Fixed charges:
Interest expense $133,982 $146,283 $ 568,548 $ 563,838 $ 518,561 $496,870 $ 357,750
Interest factor in rent expense -- -- -- -- -- -- --
-------- -------- --------- --------- --------- -------- ----------
$133,982 $146,283 $ 568,548 $ 563,838 $ 518,561 $496,870 $ 357,750
======== ======== ========= ========= ========= ======== ==========
Ratio of earnings to fixed charges,
including interest on deposits 1.66 1.54 1.54 1.54 1.52 1.49 1.65
</TABLE>
The Corporation had no preferred stock outstanding during any period presented.
Accordingly, its ratio of earnings to combined fixed charges and preferred
stock dividends in the same as its ratio of earnings to fixed charges.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE SEC FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 526,476
<INT-BEARING-DEPOSITS> 14,155
<FED-FUNDS-SOLD> 13,740
<TRADING-ASSETS> 988
<INVESTMENTS-HELD-FOR-SALE> 2,899,000
<INVESTMENTS-CARRYING> 775,152
<INVESTMENTS-MARKET> 789,840
<LOANS> 10,742,581
<ALLOWANCE> 168,621
<TOTAL-ASSETS> 15,911,816
<DEPOSITS> 12,490,645
<SHORT-TERM> 1,786,655
<LIABILITIES-OTHER> 335,521
<LONG-TERM> 200,000
<COMMON> 103,208
0
0
<OTHER-SE> 995,788
<TOTAL-LIABILITIES-AND-EQUITY> 15,911,816
<INTEREST-LOAN> 223,148
<INTEREST-INVEST> 57,465
<INTEREST-OTHER> 1,986
<INTEREST-TOTAL> 282,599
<INTEREST-DEPOSIT> 108,702
<INTEREST-EXPENSE> 133,981
<INTEREST-INCOME-NET> 148,618
<LOAN-LOSSES> 6,866
<SECURITIES-GAINS> 123
<EXPENSE-OTHER> 148,821
<INCOME-PRETAX> 88,813
<INCOME-PRE-EXTRAORDINARY> 88,813
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58,603
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.56
<YIELD-ACTUAL> 4.12
<LOANS-NON> 58,050
<LOANS-PAST> 8,472
<LOANS-TROUBLED> 2,467
<LOANS-PROBLEM> 60,517
<ALLOWANCE-OPEN> 167,665
<CHARGE-OFFS> 10,185
<RECOVERIES> 4,155
<ALLOWANCE-CLOSE> 168,621
<ALLOWANCE-DOMESTIC> 168,621
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
