GRAND RAPIDS, Mich. -- Boasting consistently high profitability, clean credit quality, and 213 branches, Old Kent Financial Corp. has for years been an enticing target among banking companies in the Midwest.

The $9.5 billion-asset company is all the more alluring because of its digestible size and market dominance in western Michigan.

But chairman, president, and chief executive John Canepa has a message for aspiring acquirers and stock speculators: "I'd be disappointed if we weren't on the list of attractive [takeover] candidates, but we are not positioning the business to sell."

Change in Direction

Mr. Canepa, 63, readily admits there's much work to be done in reorienting Old Kent toward consumer banking, fee-based businesses, and acquisitions -- all needed steps if the banking company is to sustain the growth and profitability it once derived largely from commercial lending operations.

Golden parachutes lie at the ready: Mr. Canepa and other Old Kent executives are promised lump-sum payments equal to three years' salary and bonus if they lose their jobs within three years after a change in control.

Mr. Canepa, however, contends he can make the needed cuts as well as any of the acquisitive superregionals prowling in his neck of the woods.

The key to autonomy, the former naval officer says, is willpower. "You've got to have the will to do the things that need to be done to create value for your shareholder," he says.

Mr. Canepa's stance speaks volumes for those guiding the dwindling population of banks with less than $15 billion in assets.

The common wisdom about such institutions is that they lack the economies of scale and product development resources to compete with giant banks and nonbanks. Overlooked in such arguments, as Old Kent illustrates, are the enviable fundamentals of some relatively smaller banks.

For example, Old Kent for years has outpaced its midwestern peer group in efficiency, according to Keefe, Bruyette & Woods Inc. That's a major contributor to solid results such as those of the third quarter, when Old Kent earned $33.9 million, for an annualized return on assets of 1.45%.

Strong Points

Layer in robust capitalization and strong credit quality, and you've got a bank well positioned to tackle new assignments.

And that's just what Mr. Canepa is doing.

The executive has fingered retail banking as Old Kent's brightest growth opportunity, and he has made an overhaul of branching operations a priority.

Emphasizing an "aggressive" sales culture as a key to success, Mr. Canepa recently donned Texas-style cowboy attire and hosted a "Loan Stars" rally, handing out hats to branch managers.

Mr. Canepa recruited former Banc One Corp. executive David Kerstein to spearhead the branch overhaul at Old Kent. Mr. Kerstein had embarked on a round of computerization, aiming for improved product delivery and performance information.

Installment Loans Up

Old Kent boosted its consumer installment loans by 12.9% to $910.7 million during the 12 months ended June 30, according to Sheshunoff Information Services Inc. "We can do something more than tinker," said Mr. Kerstein.

On another front, Mr. Canepa has beefed up Old Kent's mortgage production operations. His strategy is to book mortgages through branches and brokers, sell the loans, and keep the servicing rights.

Old Kent's servicing portfolio nearly doubled to $3.1 billion in the 18 months ended Sept. 30. And favorable rate trends have provided a string of lucrative gains on sales of newly originated mortgages.

Nine months' pretax gains of $17.9 million in 1993 were up from $10.9 million during the same period a year ago.

Widening the Conduit

Robert Warrington, head of mortgage banking at Old Kent, said the company would seek to widen its mortgage conduit through acquisitions and through expanded broker alliances.

Just this week, Old Kent agreed to by Princeton Financial Corp., Orlando, which operates 13 Florida branches and holds $400 million in servicing rights.

While declaring that Old Kent has "ambitious plans" for mortgage banking, Mr. Canepa predicted the operation would boil down to an efficiency play once the refinancing wave ends.

"A lot of banks have targeted that business, and there's pressure in Washington to get banks to pay interest on mortgage accounts," said Mr. Canepa, who holds an undergraduate degree from Harvard University and an MBA from New York University.

Stubborn Problems

Willpower apparently can't overcome all competitive disparities.

For example, Mr. Canepa expects to sell roughly $120 million of mutual fund products this year, but he's wondering how much harder to push.

"We know we've got to be in that business, and with more than a defensive posture," he said. "But to be a mass deliverer of mutual funds requires a lot of image building, entailing sizable advertising expenses."

Similarly, Mr. Canepa says credit cards will "never" be a profitable line of business at Old Kent. Outstanding shrank during the 12 months ended June 30, and Mr. Canepa says, "I don't see us allocating a lot of resources to that area, trying to compete with Bank America Corp. or First Chicago Corp."

Limits on acquisitions

Even the acquisitions arena poses competitive disparities, with Mr. Canepa openly acknowledging he can't go head to head in bidding contests with institutions up to eight times the size of Old Kent.

He nevertheless is buoyant about Old Kent's acquisition prospects. Mr. Canepa is focusing on institutions with less than $2 billion of assets, and he says the vast Chicago market offers further expansion opportunities.

Old Kent in October agreed to buy the $534 million-asset EdgeMark Financial Corp., Chicago, in a stock swap deal valued at $62 million, or a steep 15.3 times annualized earnings of the first nine months. the deal will boost the company's chicago presence to 28 offices and $2.1 billion of assets.

Mr. Canepa, whose 1992 salary and bonus totaled $927,500, said old Kent wants to double its Chicago presence. And analysts support that aspiration, despite the high prices he is paying.

Expenses in Check

A strong factor in analysts' endorsement is Old Kent's reputation for efficiency. Indeed, Mr. Canepa says controlling expenses is central to most of his endeavors.

The executive makes a point of flying coach, and he recounts how for years no hiring decisions could be made without his approval. On new ventures, the executive uses what he terms a "modular" approach, incurring no more expenses than necessary to get ventures going, then adding capacity as they grow.

"We don't want to lay in a lot of overhead and cross our fingers and say, we've developed the capacity, let's hope we get the business," said Mr. Canepa.

That does not mean, however, that he is anxious to dismantle well-oiled operations that are somewhat underutilized.

Middle-Market Strategy

Skilled commercial and realty lending put Old Kent on the map, and Mr. Canepa wants to boost middle-market lending in western Michigan, a region rife with the sorts of small businesses that are dependent on bank credit.

To be sure, Mr. Canepa's resolve and demonstrated skills are no guarantee of independence. A topic of perennial concern at Old Kent is the president tendency of the company's stock to trade at lesser multiples than those of larger rivals.

But Mr. Canepa says he is up to the challenges that lie ahead. "The toughest thing, the toughest part about leadership, is change, but I can tell you that our management team is hungry for change," said Mr. Canepa. "With change, there is opportunity, and we don't see any reason why we can't continue to create value."

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