EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
Pursuant to Item 601(b)(13)(ii) of Regulation S-K and SEC Rule 14a-3(c), the
Annual Report is not deemed to be "filed" with the Commission except for those
portions that are expressly incorporated by reference in this filing.
OLD KENT FINANCIAL CORPORATION
1999 ANNUAL REPORT
Old Kent Financial Corporation
1999 Annual Report
Contents Page
- ---------------------------------------------------------
Old Kent Financial Corporation S-2
A Message to our Shareholders S-2
Five-Year Summary of Selected Financial Data S-3
Financial Review S-4
Management's Responsibility for Financial Reporting S-32
Report of Independent Public Accountants S-33
Consolidated Financial Statements S-34
Notes to Consolidated Financial Statements S-38
Board of Directors and Senior Management S-68
S-1
Old Kent Financial Corporation
Old Kent Financial Corporation is a bank holding company. Its principal banking
subsidiary, Old Kent Bank, serves more than 100 communities in Michigan,
Illinois and Indiana with over 250 banking offices. Old Kent Bank engages in
commercial and retail banking and provides trust and other financial services.
Approximately 71% of the Corporation's deposits and 86% of the Corporation's
loans are associated with banking offices serving the lower peninsula of
Michigan. The balance of banking assets are associated with offices serving
northern Illinois and Indiana. Old Kent Mortgage Company operates 147 offices
located in 32 states.
A Message to Our Shareholders
This 1999 Annual Report contains audited financial statements and a detailed
financial review. This is Old Kent Financial Corporation's 1999 Annual Report
to Shareholders. Although attached to our proxy statement, this report is not
part of our proxy statement, is not deemed to be soliciting material, and is
not deemed to be filed with the Securities and Exchange Commission (the "SEC")
except to the extent that it is expressly incorporated by reference in a
document filed with the SEC.
The 1999 Report to Shareholders accompanies this proxy statement. That report
presents information concerning the business and financial results of Old Kent
Financial Corporation in a format and level of detail that we believe most of
our shareholders will find useful and informative. Shareholders who would like
to receive even more detailed information than that contained in this 1999
Annual Report are invited to request our Annual Report on Form 10-K.
Our Annual Report on Form 10-K, as filed with the SEC, will be provided to any
shareholder, without charge, upon written request to Old Kent Financial
Corporation, Attn: Corporate Secretary, 111 Lyon Street N.W., Grand Rapids,
Michigan 49503.
S-2
Five Year Summary of Selected Financial Data
December 31
---------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(dollars in thousands, except per share data)
For the Year
Net interest income $677,200 $646,368 $641,359 $601,933 $584,381
Provision for credit
losses 26,175 47,218 47,337 35,876 21,906
Net income 252,539 225,323 223,520 191,967 181,340
Cash dividends 97,509 96,048 80,791 72,975 67,535
Average for the Year
Assets $18,070,090 $17,723,199 $17,075,136 $15,783,105 $15,067,416
Deposits 13,937,864 13,621,784 13,384,456 12,715,220 12,200,283
Loans 11,020,230 10,179,364 10,305,318 9,430,956 8,608,575
Total interest-earning
assets 16,532,176 16,335,666 15,838,265 14,706,029 14,089,376
Long-term debt 200,000 200,000 191,781 100,000 12,603
Total shareholders'
equity 1,251,989 1,333,150 1,377,001 1,322,289 1,253,469
At Year-end
Assets $17,969,832 $18,613,625 $17,594,554 $16,435,017 $15,471,287
Deposits 13,695,012 14,413,439 13,338,191 13,207,120 12,259,933
Loans 12,067,061 10,220,078 10,413,973 9,967,228 8,887,002
Long-term debt 200,000 200,000 200,000 200,000 100,000
Total shareholders'
equity 1,226,873 1,320,754 1,408,588 1,343,492 1,331,458
Per Common Share (in
dollars)*
Basic earnings per share $2.13 $1.82 $1.73 $1.45 $1.35
Diluted earnings per
share 2.11 1.81 1.71 1.44 1.34
Cash dividends .800 .688 .610 .549 .503
Book value at year-end 10.43 10.95 11.04 10.42 9.93
Dividend payout ratio 37.9% 38.0% 35.7% 38.1% 37.5%
Performance Ratios
Return on average equity 20.17% 16.90% 16.23% 14.52% 14.47%
Return on average assets 1.40 1.27 1.31 1.22 1.20
Average equity to
average assets 6.93 7.52 8.06 8.38 8.32
Yield on average
interest-earning assets 7.86 7.96 8.15 8.14 8.20
Cost of average
interest-bearing
liabilities 4.19 4.53 4.67 4.65 4.63
Average net interest
spread 3.67 3.43 3.48 3.49 3.57
Average net interest
margin 4.20 4.04 4.13 4.18 4.25
Capital Ratios at Year-
end
Equity to assets 6.83% 7.10% 8.01% 8.17% 8.61%
Leverage ratio 7.17 6.97 7.70 7.54 7.97
Risk-based capital
ratio--Tier 1 9.14 9.71 10.88 10.74 11.92
Risk-based capital
ratio--Tiers 1 & 2 11.11 11.72 12.89 12.81 14.11
Credit Quality Ratios
Allowance for credit
losses to total loans 1.53% 1.76% 1.66% 1.82% 2.12%
Impaired loans to total
loans .48 .63 .61 .54 .57
Nonperforming assets to
total assets .36 .39 .41 .38 .41
Allowance to impaired
loans 321 279 273 337 370
Net charge-offs to
average loans .20 .40 .49 .47 .16
- --------
* Share data has been adjusted for stock dividends and a stock split.
S-3
Financial Review
This financial review presents management's discussion and analysis of
financial condition and results of operations. It should be read in conjunction
with the Consolidated Financial Statements beginning on page S-34 and the Five
Year Summary of Selected Financial Data on page S-3. As discussed in Note 2 to
the Financial Statements, Old Kent completed the mergers of CFSB Bancorp, Inc.,
on July 9, 1999, and Pinnacle Banc Group, Inc., on September 3, 1999. These
mergers were accounted for as poolings-of-interests and all financial
statements have been adjusted to reflect these business combinations.
Forward-Looking Statements
This discussion and analysis of financial condition and results of operations,
and other sections of the Annual Report, contain 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 itself. Words such as "anticipates," "believes,"
"estimates," "expects," "forecasts," "intends," "judgment," "is likely,"
"plans," "opinion," "projects," "will," 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. Forward-looking 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
actual outcome and a preceding forward-looking statement include, but are not
limited to, the ability to fully realize expected cost savings from mergers
within the expected time frame, changes in interest rates and interest rate
relationships or demand for products and services; the degree of competition by
traditional and non-traditional competitors; changes in banking or tax laws or
regulations; 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 and creditworthiness; and the general economic climate. Old Kent
undertakes no obligation to update, amend or clarify forward-looking
statements.
Overview
Net income was $252.5 million for 1999, the forty-first consecutive year of
increased per share earnings and dividends in Old Kent's history. This
represented a $27.2 million increase over net income of $225.3 million for
1998. Diluted net income per share was $2.11 for 1999, up by 16.6% over the
$1.81 of diluted net income per share for 1998. Diluted net income per common
share has increased at an annual compound rate of 10.2% over the past five
years.
During the third quarter of 1999, Old Kent recognized $17.6 million of after-
tax, merger-related charges which had the effect of reducing diluted earnings
per share by $.15. In addition, during the fourth quarter of 1998, Old Kent
recognized $19.7 million of after-tax, merger-related charges which had the
effect of reducing diluted earnings per share by $.15. Excluding these merger
charges for both years, diluted earnings per share was $2.26 for 1999, or 15.3%
better than the $1.96 of diluted per share earnings for 1998. For the year
ended December 31, 1999, operating net income was $270.1 million, 10.3% more
than operating net income of $245.0 million for 1998. Excluding a large one-
time gain on the sale of the Corporation's credit card portfolio included in
the 1997 results, the 1998 diluted earnings per share of $1.96 represents a
20.2% increase.
Effective with the fourth quarter of 1999, the quarterly cash dividend rate on
common stock was increased to $.22 per share. The new annualized rate of $.88
per share is 15.8% greater than the rate paid in the fourth quarter of 1998,
and includes the effect of a five percent stock dividend paid on July 19, 1999.
Old Kent has paid increased cash dividends each year since its formation as a
holding company in 1972. The compound annual growth rate for the Corporation's
per share dividend payment for the last five years is 11.7%. The dividend
payout ratio has averaged 37.4% over that same period.
S-4
Old Kent's corporate culture is geared toward maximizing shareholder value. The
information appearing on page 11 of the accompanying proxy statement compares
the performance of Old Kent Common Stock with the S&P 500 and the KBW 50
indexes. The total return, as shown, is measured using both stock price
appreciation and the effect of reinvestment of cash dividends paid. The S&P 500
index includes the performance of five hundred individual stocks selected by
Standard & Poor's Corporation to be a representative indicator of a broad base
of industries whose stocks are traded and available to the investing public.
The KBW 50 index is based upon the stock performance of 50 large financial
services companies selected by Keefe, Bruyette, and Woods, Inc., specialists in
the financial services industry. The total return of the KBW 50 index is
calculated in the same manner as the S&P 500 index. Old Kent is included in
both the S&P 500 and KBW 50 indexes. The table displays the December 31, 1999
value of an initial $100 investment in Old Kent Common Stock made one, five and
ten years prior to the year-end 1999 date (with dividends reinvested). The
table indicates that the total return on an investment in Old Kent Common Stock
surpassed that of the S&P 500 and KBW 50 for the ten year period, was
approximately the same as both indexes for the five year period, and was below
both indexes for the year 1999.
December 31, 1999 value of a Equivalent Compound
$100 investment made Annual Rate of Return
----------------------------- -----------------------
1 yr ago 5 yrs ago 10 yrs ago 1 year 5 year 10 year
-------- --------- ---------- ------ ------ -------
Old Kent Common Stock $ 81.4 $339.7 $664.8 (18.6)% 27.7% 20.9%
S&P 500 Index $121.1 $351.1 $532.8 21.1% 28.6% 18.2%
KBW 50 Index $ 96.5 $346.2 $502.2 (3.5)% 28.2% 17.5%
The Corporation's return on average total equity in 1999 was 20.2%, compared to
an equity return of 16.9% for 1998. Old Kent's return on equity has averaged
16.46% over the past five years. Old Kent's return on average assets was 1.40%
for 1999 compared to 1.27% for 1998, and has averaged 1.28% over the last five
years.
Steady annual earnings increases have been attributable to balance sheet growth
and to increases in non-interest income. Total average interest-earning assets
increased by $197 million, or 1.2%, in 1999 and by $497 million, or 3.1%, in
1998. Over the last five years, total average interest-earning assets have
increased at a compound annual growth rate of 4.7%. Interest-earning assets
primarily consist of securities (including those classified as available-for-
sale and those classified as held-to-maturity) and loans. Average securities
decreased by $521 million, or 12%, in 1999. This decrease was primarily the
result of Old Kent's liquidation of securities to fund growth in loans, which
averaged $11.0 billion in 1999 compared to $10.2 billion in 1998. This
represented an increase of $841 million, or 8.3% more than the average for
1998. During 1998, the Corporation took measures to reduce credit risk by
exiting certain marginal commercial relationships as well as by reducing
certain consumer loan portfolio components having higher credit risk, which
management believed would have negatively impacted the Corporation's future
profitability. These actions combined with continued stringent credit
underwriting policies, and a generally favorable economy had a positive impact
on 1999 performance.
Business of the Corporation
Old Kent is a financial services organization which operates as a bank holding
company. The services offered by Old Kent's subsidiaries cover a wide range of
banking, fiduciary and other financial services. These include commercial,
mortgage, and retail loans, business and personal checking accounts, savings
and retirement accounts, time deposit instruments, ATMs, debit cards and other
electronically accessed banking services, money transfer services, safe deposit
facilities, cash management, real estate and lease financing, international
banking services, investment management and trust services, personal investment
and related advisory services, brokerage and investment advisory services, and
access to insurance products.
The principal sources of revenues for Old Kent are interest and fees on loans,
principally originated by the Corporate Banking, Retail Banking, Community
Banking and Mortgage Banking lines of business. Interest and fees on loans
accounted for 54% of total revenues in 1999, 54% in 1998 and 58% in 1997.
Approximately 71% of deposits and 86% of total loans at December 31, 1999, were
associated with these business lines serving the
S-5
lower peninsula of the State of Michigan, excluding the Mortgage Banking line
of business which operates 147 offices in 32 states.
Interest on securities, attributable to the Treasury line of business, is also
a significant source of revenue, accounting for 14% of total revenues in 1999,
17% in 1998, and 18% in 1997.
Investment and Insurance Services generates revenues primarily from fees and
commissions on various investment products within investment management and
trust, brokerage and insurance activities. These accounted for 6.0%, 5.5%, and
4.4% of total revenues in 1999, 1998, and 1997 respectively. This business line
primarily services customers in the lower peninsula of the State of Michigan.
Old Kent has had no foreign loans or hedge fund investments at any time during
the last five years. The foreign activities of the Corporation primarily
involve time deposits with banks, and placements and exchange transactions for
domestic customers of the banks. These activities were not material to the
Corporation's financial condition or results of operations.
Line of Business Management Approach
Old Kent's primary business activities are administered under a "line of
business" management approach. Under this approach, key executives of the
Corporation are individually responsible for optimizing operating results in
each of their respective "lines." For the years 1999 and 1998, Old Kent has
identified these lines as follows:
Line Old Kent Executive Primary Business Activities
- -------------------------------------------------------------------------------------------
Corporate Banking Daniel W. Terpsma Credit, cash management, and international
services for corporate customers
Retail Banking David C. Schneider Retail deposits, retail delivery, consumer
lending, leasing and small business banking
Community Banking Michelle L. Van Dyke Loans, deposits and other services for all
customers and small businesses in smaller
communities
Investment and Insurance Kenneth C. Krei Asset management, employee benefit programs,
Services mutual funds, trust services, private
banking, brokerage services and insurance to
consumers, business owners, and corporations
Mortgage Banking Donald R. Britton Origination and acquisition, sale and
servicing of residential mortgages on a
nationwide basis
Treasury Ronald C. Mishler Investment portfolio, funds management, and
interest rate risk management
The following represents the percentage of net income provided by each line of
business in 1999, excluding the $17.6 million of after-tax, merger-related
charges associated with Old Kent's acquisition of CFSB Bancorp, Inc. and
Pinnacle Banc Group, Inc. on July 9, 1999, and September 3, 1999, respectively,
in pooling-of-interests transactions. Excluding these charges, Old Kent's
operating net income was $270.1 million for 1999.
Corporate Banking 26%
Retail Banking 25
Community Banking 23
Investment and Insurance Services 11
Mortgage Banking 8
Treasury 7
---
Total 100%
===
S-6
Disclosure about Old Kent's business segments required by Statement of
Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information", are included in Note 17 to the
Consolidated Financial Statements. Old Kent intends to combine its Community
Banking line of business with the Retail Banking line of business in 2000.
Mergers and Acquisitions
Old Kent's primary method of expansion into new markets has been through
acquisitions of other financial institutions. Further expansion into new
markets will likely continue in a similar fashion. The following is a summary
of Old Kent's significant merger and acquisition activity during the last three
years.
On September 3, 1999, Old Kent completed the acquisition of Pinnacle Banc
Group, Inc. ("Pinnacle"). The merger was accounted for as a pooling-of-
interests. Old Kent exchanged approximately 5.6 million shares of Old Kent
Common Stock for all of the outstanding shares of Pinnacle Common Stock.
Pinnacle was a bank holding company headquartered in the Chicago suburb of Oak
Brook, Illinois. When acquired, Pinnacle had assets of approximately $1.0
billion and consolidated deposits of approximately $861 million. Pinnacle was
the parent of Pinnacle Bank, which operated thirteen branches in the Chicago
metropolitan area and Pinnacle Bank of the Quad-Cities, which operated three
branches in western Illinois.
On July 9, 1999, Old Kent completed the acquisition of CFSB Bancorp, Inc.
("CFSB"). The merger was accounted for as a pooling-of-interests. Old Kent
exchanged approximately 5.5 million shares of Old Kent Common Stock for all of
the outstanding shares of CFSB Common Stock. CFSB was a holding company
headquartered in Lansing, Michigan. When acquired, CFSB had consolidated assets
of approximately $878 million and consolidated deposits of approximately $567
million. CFSB was the parent of Community First Bank. CFSB provided banking
services through sixteen offices in Ingham, Clinton, Eaton and Ionia Counties
in Michigan.
Old Kent completed the operational assimilation and systems conversion of the
banks acquired in 1999 on the dates of these mergers. This allowed the
corporation to begin realizing savings resulting from elimination of redundant
operations and staffing immediately. During 2000, the Corporation expects to
realize the full $19 million of savings projected.
On October 1, 1998, Old Kent completed the acquisition of First Evergreen
Corporation ("First Evergreen"). When acquired, First Evergreen had assets of
approximately $1.9 billion and deposits of approximately $1.7 billion. The
merger was accounted for as a pooling-of-interests. Old Kent exchanged
approximately 12.8 million shares of Old Kent Common Stock for all of the
outstanding shares of First Evergreen Common Stock. First Evergreen was a bank
holding company headquartered in Evergreen Park, Illinois. First Evergreen
provided banking services through eight offices in Cook County, Illinois.
On September 1, 1997, Old Kent Insurance Group, Inc. (a subsidiary of Old Kent
Bank), acquired Grand Rapids Holland Insurance Agency, Inc. ("GRH"), a provider
of commercial and personal insurance products through offices in western
Michigan. Old Kent issued approximately 86,000 shares of its common stock to
acquire all the outstanding common stock of GRH. When acquired, GRH had assets
of approximately $6.2 million.
On January 1, 1997, Old Kent acquired Seaway Financial Corporation ("Seaway"),
a bank holding company headquartered in St. Clair, Michigan. Seaway was the
parent of The Commercial and Savings Bank of St. Clair County (St. Clair,
Michigan) and The Algonac Savings Bank (Algonac, Michigan). When acquired,
Seaway had total assets and total deposits of approximately $345 million and
$302 million, respectively. Old Kent issued approximately 1.9 million shares of
Old Kent Common Stock in exchange for all of the outstanding common stock of
Seaway. These banks were merged into and with Old Kent Bank in 1997.
S-7
Pending Acquisitions as of December 31, 1999
During the first quarter of 2000, Old Kent expects to complete the acquisition
of Merchants Bancorp, Inc. ("Merchants"). The merger is intended to be
accounted for as a pooling-of-interests. Old Kent will exchange .83 shares of
Old Kent Common Stock for each outstanding share of Merchants Common Stock. The
issuance is expected to total approximately 4.5 million shares. Merchants is a
bank holding company headquartered in Aurora, Illinois, with consolidated
assets of approximately $979 million and consolidated deposits of approximately
$721 million at December 31, 1999. Merchants operates 12 suburban Chicago area
banking sites and two banking sites in DeKalb and Kendall Counties, Illinois.
On September 9, 1999, Old Kent entered into a definitive agreement for the
acquisition of Grand Premier Financial, Inc. ("Grand Premier"). The merger is
intended to be accounted for as a pooling-of-interests. Old Kent will exchange
.4231 shares of Old Kent Common Stock for each outstanding share of Grand
Premier Common Stock. Old Kent expects to issue approximately 10 million shares
related to this transaction. Grand Premier is a bank holding company
headquartered in Wauconda, Illinois, with assets of approximately $1.7 billion
and deposits of approximately $1.4 billion at December 31, 1999. Grand Premier
operates 23 banking offices in the Chicago area and northern Illinois. The
merger is subject to shareholder and regulatory approval and is expected to be
completed in the second quarter of 2000.
Summary of Operating Results
The following is a summary of the major components of the Corporation's
operating results for the last five years:
Proforma Proforma
1999 1998
Excluding Excluding
Merger Merger
Year ended December 31 Charges* 1999 Charges** 1998 1997 1996 1995
- ---------------------- --------- --------- --------- --------- --------- --------- --------
(in thousands)
Net interest income $677,200 $677,200 $646,368 $646,368 $641,359 $601,933 $584,381
Add: taxable-equivalent
adjustment 16,729 16,729 13,944 13,944 13,221 12,548 14,306
--------- --------- --------- --------- --------- --------- --------
Taxable-equivalent net
interest income 693,929 693,929 660,312 660,312 654,580 614,481 598,687
Provision for credit
losses (26,175) (26,175) (43,718) (47,218) (47,337) (35,876) (21,906)
Non-interest income 424,760 424,760 369,478 369,478 284,216 227,535 185,640
Non-interest expense (660,469) (686,469) (599,941) (624,934) (536,395) (506,503) (481,335)
Income taxes, including
taxable-equivalent
adjustment (161,906) (153,506) (141,130) (132,315) (131,544) (107,670) (99,746)
--------- --------- --------- --------- --------- --------- --------
Net income $270,139 $252,539 $245,001 $225,323 $223,520 $191,967 $181,340
========= ========= ========= ========= ========= ========= ========
- --------
* Proforma results for 1999 "excluding merger charges" have been adjusted to
exclude the effects of $17.6 million of one-time, after-tax merger charges
related to the July 9, 1999, and September 3, 1999, acquisitions of CFSB
Bancorp, Inc. and Pinnacle Banc Group, Inc. accounted for as poolings-of-
interests.
** Proforma results for 1998 "excluding merger charges" have been adjusted to
exclude the effects of $19.7 million of one-time, after-tax merger charges
related to the October 1, 1998, acquisition of First Evergreen Corporation,
accounted for as a pooling-of-interests.
S-8
Net Interest Income
In the summaries above, the taxable-equivalent adjustment increases tax-exempt
income to an amount equivalent to interest income subject to income taxes at
statutory rates. The federal income tax rate was 35% for all years presented.
During 1999, total average interest-earning assets increased by $196.5 million,
or 1.2%. In that same period, total average interest-bearing liabilities
increased by $345.2 million, or 2.4%.
The following table sets forth the changes in interest income and interest
expense as they relate to changes in volumes and changes in rates:
1999 Compared to 1998 1998 Compared to 1997
Increase (Decrease)* Increase (Decrease)*
-------------------------------- --------------------------------
Change in Due to Due to Change in Due to Due to
Fully taxable-equivalent Income/Expense Volume Rate Income/Expense Volume Rate
- ------------------------ -------------- ------- -------- -------------- ------- --------
(dollars in thousands)
Interest-Earning Assets:
Loans (including
mortgages held-for-
sale) $33,131 $57,372 $(24,241) $27,792 $61,256 $(33,464)
Taxable securities (43,610) (40,499) (3,111) (15,110) (10,601) (4,509)
Tax-exempt securities 7,552 10,104 (2,552) 1,746 3,074 (1,328)
Interest-earning
deposits (329) (382) 53 (105) (59) (46)
Federal funds sold and
resale agreements 1,186 1,208 (22) (4,571) (4,533) (38)
Trading account
securities 1,013 858 155 (603) (383) (220)
------- ------- -------- ------- ------- --------
Change in Interest
Income (1,057) 28,661 (29,718) 9,149 48,754 (39,605)
------- ------- -------- ------- ------- --------
Interest-Bearing
Liabilities:
Savings deposits 17,347 16,876 471 12,407 8,478 3,929
Time deposits:
Negotiable (2,002) 1,589 (3,591) (1,735) 279 (2,014)
Foreign 1,835 1,937 (102) (106) (75) (31)
Consumer (44,866) (19,702) (25,164) (28,443) (16,402) (12,041)
Federal funds purchased
and repurchase
agreements (5,754) (1,342) (4,412) 12,417 12,566 (149)
Other borrowed funds (904) 5,486 (6,390) 8,423 12,457 (4,034)
Long-term debt (329) -- (329) 454 548 (94)
------- ------- -------- ------- ------- --------
Change in Interest
Expense (34,673) 4,844 (39,517) 3,417 17,851 (14,434)
------- ------- -------- ------- ------- --------
Change in Net Interest
Income $33,616 $23,817 $9,799 $5,732 $30,903 $(25,171)
======= ======= ======== ======= ======= ========
- --------
* The change in interest due to both volume and rate has been allocated between
the factors in proportion to the relationship of the absolute amounts of the
change in each. Yields are calculated on a fully taxable basis, using a
federal tax rate of 35% for all years presented.
Net interest margin is calculated by dividing taxable-equivalent net interest
income by average interest-earning assets. Interest spread is the difference
between the average yield on earning assets and the average cost of interest-
bearing liabilities. The net interest margin was 4.20% in 1999 compared to
4.04% for 1998. The interest spread was 3.67% for 1999 and 3.43% for 1998. The
primary factors underlying the increases in net interest margin and interest
spread were an increase in loan balances and a decrease in cost of total
interest-bearing liabilities from 4.53% in 1998 to 4.19% in 1999.
The net interest margin was 4.04% in 1998 compared to 4.13% for 1997. The
interest spread was 3.43% for 1998 and 3.48% for 1997. The average yield on
interest-earning assets also decreased to 7.96% in 1998 from 8.15% in 1997. The
primary factor underlying the decreases in net interest margin, interest
spread, and yield on total interest-earning assets was a decline in yield on
mortgages held-for-sale to 6.91% in 1998 from 7.40% in 1997. This decrease in
yield, combined with the overall increase in the mortgages held-for-sale
average balance of $845 million from 1997 to 1998 compressed the margin. The
average cost of interest-bearing liabilities decreased to 4.53% in 1998 from
4.67% 1997, but was not enough to offset the impact of the decrease in yield on
total interest-earning assets.
S-9
Three Month U.S.
Prime Interest Treasury Bill
Rate Rate
Percentage 1999 1998 1997 1999 1998 1997
- ---------- ----- ----- ----- ----- ----- -----
Simple average during year 8.00% 8.35% 8.44% 4.78% 4.89% 5.19%
At December 31 8.50% 7.75% 8.50% 5.33% 4.45% 5.35%
As indicated above, interest rates over the past three years have fallen each
year, but increased in the second half of 1999. As shown in the preceding
"rate/volume" table, both increases in volume and increases in rate contributed
to the increase in interest income. In 1998, the increase in average total
earning assets, particularly mortgages held-for-sale, was the primary factor
for the increase in net interest income, more than offsetting decreases in
rate.
The interest rate environment is significantly impacted by the health of the
national economy and the monetary policies of the Federal Reserve. There are a
number of factors which affect net interest income, including the mix of
interest-earning assets, the mix of interest-bearing liabilities, and the
interest rate sensitivity of the various categories. As of December 31, 1999,
Old Kent's management believes that the Corporation's net interest income would
not be materially impacted by upward or downward movements in prevailing
interest rates within anticipated ranges, as discussed later in this report.
Analysis of Net Interest Income
The following table allocates net interest income and interest-earning assets
to show how much was attributable to each major funding source. The interest
spread on earning assets funded by interest-bearing liabilities is the
difference between the average yield on earning assets and the average cost of
interest-bearing liabilities. The interest spread on earning assets funded by
non-interest bearing liabilities and equity is the average yield on earning
assets.
1999 1998 1997
--------------------------- --------------------------- ---------------------------
Average Net Average Net Average Net
Fully taxable- Earning Interest Interest Earning Interest Interest Earning Interest Interest
equivalent Assets Spread Income Assets Spread Income Assets Spread Income
-------------- --------- -------- -------- --------- -------- -------- --------- -------- --------
(dollars in millions)
Source of Funding:
Interest-bearing
liabilities $14,453.2 3.67% $530.4 $14,108.0 3.43% $483.9 $13,613.2 3.48% $473.7
Non-interest-bearing
liabilities and equity 2,079.0 7.86% 163.5 2,227.7 7.96% 176.4 2,225.1 8.15% 180.9
--------- ------ --------- ------ --------- ------
Total $16,532.2 $693.9 $16,335.7 $660.3 $15,838.3 $654.6
========= ====== ========= ====== ========= ======
The following table shows the relative importance of changes in interest
spread, earning asset volumes and changes in funding sources:
1999 Over 1998 Over 1997 Over
(Under) (Under) (Under)
1998 1997 1996
-------------------------- ------------------------- --------------------------
Average Net Average Net Average Net
Fully taxable- Earning Interest Interest Earning Interest Interest Earning Interest Interest
equivalent Assets Spread Income Assets Spread Income Assets Spread Income
-------------- ------- -------- -------- ------- -------- -------- -------- -------- --------
(dollars in millions)
Source of Funding:
Interest-bearing
liabilities $345.2 .24% $46.5 $494.8 (.05)% $10.2 $1,081.6 (.01)% $36.3
Non-interest-bearing
liabilities and equity (148.7) (.10)% (12.9) 2.6 (.19)% (4.5) 50.7 .01% 3.8
------ ----- ------ ----- -------- -----
Total $196.5 $33.6 $497.4 $5.7 $1,132.3 $40.1
====== ===== ====== ===== ======== =====
S-10
Average Consolidated Balance Sheet
1999
------------------------------
Average Average
Balance Interest Rate
----------- --------- -------
Average Assets:
Loans(1)(2) $11,020,230 $930,488 8.44%
Taxable
investment
securities 3,311,221 208,349 6.29
Tax-exempt
investment
securities(2) 501,846 39,657 7.90
Mortgages held-
for-sale 1,592,083 114,838 7.21
Interest-earning
deposits:
Domestic 11,141 521 4.68
Foreign -- -- --
Federal funds
sold and resale
agreements 65,552 3,541 5.40
Trading account
securities(2) 30,103 1,609 5.35
----------- ---------
Total earning
assets 16,532,176 1,299,003 7.86
----------- ---------
Unrealized
gain/(losses) on
securities
available-for-
sale (20,510)
Allowance for
loan losses (182,760)
Cash and due from
banks 602,259
Other assets 1,138,925
-----------
Total Assets $18,070,090
===========
Average
Liabilities and
Shareholders'
Equity:
Savings deposits $5,227,457 $146,595 2.80%
Time deposits:
Negotiable 1,112,653 57,572 5.17
Foreign 75,232 3,842 5.11
Other time 5,450,700 266,175 4.88
----------- ---------
Total interest-
bearing deposits 11,866,042 474,184 4.00
Federal funds
purchased and
repurchase
agreements 973,603 42,513 4.37
Other borrowed
funds 1,413,550 75,225 5.32
Subordinated debt 100,000 6,745 6.75
Capital
securities 100,000 6,407 6.41
----------- ---------
Total interest-
bearing funds 14,453,195 605,074 4.19
----------- ---------
Demand deposits 2,071,822
Other liabilities 293,084
Shareholders'
equity:
Common stock,
capital surplus
and retained
earnings 1,264,907
Unrealized
gain/(losses) on
securities
available-for-
sale (12,918)
-----------
Total Liabilities
and Shareholders'
Equity $18,070,090
===========
Fully Taxable-
Equivalent Net
Interest Income $693,929 3.67%
=========
Net Interest
Income as a
Percentage of
Average Earning
Assets 4.20%
Percentage of
Total Assets:
Foreign Assets --
Foreign
Liabilities .42%
1998 1997 1996
------------------------------ ------------------------------ ------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------ --------- ------- ------------ --------- ------- ------------ --------- -------
Income and rates on fully taxable equivalent basis (dollars in thousands)
Average Assets:
Loans(1)(2) $10,179,364 $ 891,548 8.76% $10,305,318 $917,729 8.91% $9,430,956 $846,873 8.98%
Taxable
investment
securities 3,958,263 251,959 6.37 4,122,830 267,069 6.48 4,379,432 279,964 6.39
Tax-exempt
investment
securities(2) 375,873 32,104 8.54 340,481 30,358 8.92 347,026 31,645 9.12
Mortgages held-
for-sale 1,745,941 120,647 6.91 900,936 66,674 7.40 359,785 28,374 7.89
Interest-earning
deposits:
Domestic 19,382 850 4.39 20,693 955 4.62 37,688 1,616 4.29
Foreign -- -- -- -- -- -- 6,885 390 5.66
Federal funds
sold and resale
agreements 43,234 2,355 5.45 126,461 6,926 5.48 133,977 7,269 5.43
Trading account
securities(2) 13,609 596 4.38 21,546 1,199 5.56 10,280 527 5.13
------------ --------- ------------ --------- ------------ ---------
Total earning
assets 16,335,666 1,300,059 7.96 15,838,265 1,290,910 8.15 14,706,029 1,196,658 8.14
------------ --------- ------------ --------- ------------ ---------
Unrealized
gain/(losses) on
securities
available-for-
sale 12,793 (20,525) (19,262)
Allowance for
loan losses (179,640) (177,738) (187,511)
Cash and due from
banks 600,968 550,213 571,902
Other assets 953,412 884,921 711,947
------------ ------------ ------------
Total Assets $17,723,199 $17,075,136 $15,783,105
============ ============ ============
Average
Liabilities and
Shareholders'
Equity:
Savings deposits $4,632,882 $129,248 2.79% $4,322,004 $116,841 2.70% $4,146,572 $112,755 2.72%
Time deposits:
Negotiable 1,083,640 59,574 5.50 1,078,538 61,309 5.68 1,278,399 75,338 5.89
Foreign 37,384 2,007 5.37 38,792 2,113 5.45 46,841 2,685 5.73
Other time 5,836,520 311,043 5.33 6,138,957 339,486 5.53 5,575,417 307,218 5.51
------------ --------- ------------ --------- ------------ ---------
Total interest-
bearing deposits 11,590,426 501,872 4.33 11,578,291 519,749 4.49 11,047,229 497,996 4.51
Federal funds
purchased and
repurchase
agreements 1,002,060 48,267 4.82 739,981 35,850 4.84 534,903 24,870 4.65
Other borrowed
funds 1,315,516 76,127 5.79 1,103,151 67,704 6.14 849,460 52,551 6.19
Subordinated debt 100,000 6,745 6.75 100,000 6,745 6.75 100,000 6,760 6.76
Capital
securities 100,000 6,736 6.74 91,781 6,282 6.84 -- -- --
------------ --------- ------------ --------- ------------ ---------
Total interest-
bearing funds 14,108,002 639,747 4.53 13,613,204 636,330 4.67 12,531,592 582,177 4.65
------------ --------- ------------ --------- ------------ ---------
Demand deposits 2,031,358 1,806,165 1,667,991
Other liabilities 250,688 278,766 261,233
Shareholders'
equity:
Common stock,
capital surplus
and retained
earnings 1,323,602 1,388,492 1,336,054
Unrealized
gain/(losses) on
securities
available-for-
sale 9,549 (11,491) (13,765)
------------ ------------ ------------
Total Liabilities
and Shareholders'
Equity $17,723,199 $17,075,136 $15,783,105
============ ============ ============
Fully Taxable-
Equivalent Net
Interest Income $660,312 3.43% $654,580 3.48% $614,481 3.49%
========= ========= =========
Net Interest
Income as a
Percentage of
Average Earning
Assets 4.04% 4.13% 4.18%
Percentage of
Total Assets:
Foreign Assets -- -- .04%
Foreign
Liabilities .21% .23% .30%
1995
------------------------------
Average Average
Balance Interest Rate
------------ --------- -------
Income and rates on fully taxable
equivalent basis (dollars in thousands)
Average Assets:
Loans(1)(2) $8,608,575 $780,445 9.07%
Taxable
investment
securities 4,460,026 296,326 6.64
Tax-exempt
investment
securities(2) 392,358 35,932 9.16
Mortgages held-
for-sale 244,192 19,140 7.84
Interest-earning
deposits:
Domestic 47,682 2,504 5.25
Foreign 42,599 2,515 5.90
Federal funds
sold and resale
agreements 273,301 16,426 6.01
Trading account
securities(2) 20,643 1,197 5.80
------------ ---------
Total earning
assets 14,089,376 1,154,485 8.20
------------ ---------
Unrealized
gain/(losses) on
securities
available-for-
sale (19,002)
Allowance for
loan losses (188,131)
Cash and due from
banks 519,242
Other assets 665,931
------------
Total Assets $15,067,416
============
Average
Liabilities and
Shareholders'
Equity:
Savings deposits $4,344,947 $120,637 2.78%
Time deposits:
Negotiable 1,586,867 96,166 6.06
Foreign 225,964 14,137 6.26
Other time 4,466,249 242,316 5.43
------------ ---------
Total interest-
bearing deposits 10,624,027 473,256 4.45
Federal funds
purchased and
repurchase
agreements 440,547 22,572 5.12
Other borrowed
funds 933,086 59,093 6.33
Subordinated debt 12,603 877 6.96
Capital
securities -- -- --
------------ ---------
Total interest-
bearing funds 12,010,263 555,798 4.63
------------ ---------
Demand deposits 1,576,256
Other liabilities 227,428
Shareholders'
equity:
Common stock,
capital surplus
and retained
earnings 1,266,264
Unrealized
gain/(losses) on
securities
available-for-
sale (12,795)
------------
Total Liabilities
and Shareholders'
Equity $15,067,416
============
Fully Taxable-
Equivalent Net
Interest Income $598,687 3.57%
=========
Net Interest
Income as a
Percentage of
Average Earning
Assets 4.25%
Percentage of
Total Assets:
Foreign Assets .28%
Foreign
Liabilities 1.50%
- -----
(1) Loan fees are included in interest income and are used to calculate average
rates earned. Non-accrual loans are included in the average loan balances.
(2) Yields are computed on a fully taxable-equivalent basis using a federal tax
rate of 35% in all years presented.
S-11
Loan Portfolio
As a financial intermediary, the acceptance and management of credit risk is an
integral part of Old Kent's business activities. The Corporation has
established strict credit underwriting standards. Except for certain loans,
these standards include a policy of granting loans only within Old Kent's
defined target market areas (primarily midwestern states) and prohibition of
foreign loans. Lending standards are codified in a comprehensive lending policy
which is uniform throughout the organization. Old Kent's lending staff is
highly skilled and experienced. The Corporation's conservative lending
philosophy is implemented through strong administrative and reporting
requirements. Old Kent maintains a centralized, independent loan review
function which monitors asset quality at its subsidiary banks. The Corporation
also employs a centralized group of specialists which assists the subsidiaries
in resolving troubled loans.
Percent
of
Composition of total loans at December 31, 1999: total
------------------------------------------------ -------
Commercial, financial, agricultural loans and leases 28%
Real estate loans--commercial and construction 29
---
Total commercial loans 57
Real estate loans--residential mortgages 14
Consumer home equity loans 17
Consumer loans (primarily automobile loans) 12
---
Total Loans 100%
===
One of Old Kent's strengths is its diversified loan portfolio. Approximately
43% of Old Kent's loan assets are comprised of credits granted to consumers in
the form of residential mortgages and a variety of other consumer credit
products, such as automobile loans, home equity loans, educational loans and
other consumer financings.
Loans to commercial borrowers represent approximately 57% of Old Kent's loan
portfolio. These loans are grouped by their nature and industry
diversification, and as non-real estate related and as real estate related.
Real Estate
Related
------------------ Non-Real
Commercial loan mix at Owner Non-owner Estate
December 31, 1999: Total Occupied Occupied Related
---------------------- -------- -------- --------- --------
(dollars in millions)
Contractors & Property Managers $2,127.3 $416.6 $1,270.7 $440.0
Services 1,239.1 355.5 277.0 606.6
Manufacturing 910.0 102.7 18.9 788.4
Retail 566.8 118.5 38.2 410.1
Wholesale 382.2 40.6 14.5 327.1
Finance 453.2 135.5 168.7 149.0
Transportation 150.4 27.2 23.3 99.9
Agriculture 55.0 9.9 5.4 39.7
Other 775.1 313.7 152.7 308.7
Leasing 262.3 -- -- 262.3
-------- -------- -------- --------
Total $6,921.4 $1,520.2 $1,969.4 $3,431.8
======== ======== ======== ========
At December 31, 1999, Old Kent's commercial loan and lease portfolio, excluding
real estate related loans, approximated $3.4 billion, or about 28% of total
loans. Loans to manufacturers represented the largest component at 23% of total
non-real estate commercial loans. These loans are diversified among a large
number of borrowers who produce a wide variety of durable and non-durable
goods.
Commercial real estate and construction loans at December 31, 1999, totaled
approximately $3.5 billion, or 29% of total loans. These loans have been
grouped as owner-occupied (borrowers who occupy and utilize the
S-12
loan related property in their respective businesses) and as non-owner-occupied
(borrowers whose principal purpose of ownership lies in the production of
rental receipts from the related property). As indicated, loans to the various
categories of owner-occupied properties were 44% of commercial real estate and
construction loans, and loans for non-owner-occupied properties were 56% of
that total. Non-owner-occupied loans totaled $2.0 billion, or 17% of total
loans and are distributed over a diverse base of borrowers. The largest segment
within non-owner-occupied loans was housing related loans at 20% of total
commercial real estate and construction loans.
At December 31, 1999, home equity loans secured by residential real estate
represented 60%, and automobile loans were 28% of total consumer loans. During
1999, consumer loans increased by 40%, to $3.5 billion. This increase was the
result of specific strategies intended to improve profitability through a
higher yielding mix of total interest-earning assets. The strategies included
both higher levels of loan originations by Old Kent's sales personnel along
with the purchase of loans as discussed below. Based on the Corporation's
ongoing development of its cultural orientation towards sales, Old Kent
produced approximately $1.4 billion of consumer loans through its sales staff.
During the same time, the credit quality of the Corporation's consumer loan
portfolio has improved. At December 31, 1999, only 1.2% of total consumer loans
were past due by 30 days or more, compared to 1.9% one year earlier.
Beginning in late 1998, as a means of better leveraging its balance sheet to
enhance profitability, Old Kent began developing relationships to acquire
consumer loans originated primarily through flow arrangements with third party
originators. These loans, which largely consisted of home equity loans secured
by residential real estate, aggregated approximately $822 million in 1999 and
$39 million in 1998. The Corporation's underwriting criteria for these loan
originations closely parallel those for loans originated under Old Kent's
internal underwriting standards and include a reasonable expectation of
appropriate returns based upon prudent assessments of risk, giving
consideration to collateral values and expected duration in relation to the
proposed transaction terms, and also included satisfactory completion of "due
diligence" by qualified Old Kent staff. The due diligence procedures followed
by the Corporation included an examination of the proposed loans; a review of
the historical performance of similar loans originated by the counterparty; and
consideration of the counterparty's reputation, history and its financial
viability. In those instances where the loans are serviced by the counterparty,
Old Kent also conducts on-site inspections of the servicer on a periodic,
ongoing basis.
At December 31, 1999, these purchased loans had a carrying value of $790
million, with an associated delinquency ratio of 1.2%. These purchases also
served to further geographically diversify the Corporation's credit risk, as
they generally consist of loans originated outside of Old Kent's primary
banking markets of Michigan, Illinois and Indiana. The credit risk of these
purchased consumer loan portfolios as a group is geographically diversified. As
of December 31, 1999, each of these purchased loan portfolios had performed in
accordance with, or better than, Old Kent's initial expectation at the time of
purchase. The Corporation expects to continue this strategy during 2000, by
acquiring similar loan packages from time to time based on "flow" arrangements
with select counterparties, provided that such portfolios, and the originators,
continue to meet Old Kent's standards.
Old Kent has no foreign loans. Old Kent's policy is to be highly restrictive in
granting credit to borrowers in businesses which are highly cyclical, such as
agriculture and petroleum production. The Corporation is extremely selective in
participating in loan syndications.
S-13
The following table summarizes the components of the Corporation's total loans
at December 31 for each of the last five years:
December 31
-----------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- -------- --------
(dollars in millions)
Commercial, financial and
agricultural loans $3,169.5 $2,818.6 $2,739.2 $2,411.3 $2,162.8
Real estate loans--commercial 2,397.7 2,093.0 2,074.1 1,927.3 1,813.8
Real estate loans--
construction 1,091.9 742.8 622.1 500.9 310.6
Real estate loans--residential
mortgages 1,647.1 1,895.9 2,031.1 2,084.8 1,758.7
Consumer home equity loans 2,081.9 1,125.1 1,012.7 805.3 684.8
Consumer loans--other 1,416.7 1,378.3 1,758.2 1,710.8 1,625.6
Credit card loans -- -- 1.7 317.6 323.6
Lease financing 262.3 166.4 174.8 209.2 207.1
--------- --------- --------- -------- --------
Total loans $12,067.1 $10,220.1 $10,413.9 $9,967.2 $8,887.0
========= ========= ========= ======== ========
Provision for Credit Losses
The provision for credit losses is the amount added to the allowance for credit
losses to absorb probable credit losses. The amount of the credit loss
provision is determined by management, in its judgment, after reviewing the
risk characteristics of the loan portfolio, historical credit loss experience
and economic conditions. These determinations are reviewed by Old Kent's
centralized, independent loan review function which monitors the credit quality
of the Corporation's loan portfolio through its uniform procedures, credit
grading and reporting systems.
The following table summarizes the credit loss provisions, net credit losses
and the allowance for credit losses for the last five years:
Year ended December 31
--------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(dollars in thousands)
Provision for credit losses $26,175 $47,218 $47,337 $35,876 $21,906
Net credit losses 21,613 40,339 50,641 44,251 13,616
Allowance for credit losses at
year-end 184,287 179,605 173,203 181,898 188,430
Allowance as a percentage of:
Year-end loans 1.53% 1.76% 1.66% 1.82% 2.12%
Year-end loans, excluding loans
secured by residential first
and second mortgages 2.21% 2.49% 2.35% 2.57% 2.92%
Impaired loans 321% 279% 273% 337% 370%
Ratio of net charge-offs to
average loans outstanding during
the year .20% .40% .49% .47% .16%
Credit loss recoveries as a
percentage of prior year
charge-offs 36% 25% 29% 54% 50%
The provision for credit losses was $26.2 million in 1999, down from a
provision of $43.7 million in 1998, excluding a special merger-related credit
loss provision of $3.5 million to conform First Evergreen's credit review
process and reserves with those of Old Kent. Favorable credit quality combined
with the reduction in net credit losses justified a reduction of the provision
from that of 1998. Impaired loans at December 31, 1999, totaled $57.4 million,
a decrease of $7 million over $64.4 million at year-end 1998. At December 31,
1999, the ratio of the allowance to impaired loans was 321%. Over the past five
years, the Corporation's actual loss experience on residential real estate
loans has been negligible. At December 31, 1999, the ratio of the allowance to
total loans exclusive of residential mortgages was 2.21%.
S-14
The following table summarizes loan balances at the end of each period and the
daily averages; changes in the allowance for credit losses arising from loans
charged-off and recoveries on loans previously charged-off, by loan
classification; and additions to the allowance which have been charged to
expense:
Year ended December 31
-----------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ---------- ----------
(dollars in thousands)
Loans outstanding at end
of year $12,067,061 $10,220,078 $10,413,973 $9,967,228 $8,887,002
=========== =========== =========== ========== ==========
Daily average of loans
outstanding for year $11,020,230 $10,179,364 $10,305,318 $9,430,956 $8,608,575
=========== =========== =========== ========== ==========
Balance of allowance for
credit losses at
beginning of year $179,605 $173,203 $181,898 $188,430 $179,458
Net change in allowance
due to loans (sold) and
purchased 120 (477) (5,391) 1,843 682
Provision for credit
losses 26,175 47,218 47,337 35,876 21,906
Loans charged-off:
Commercial, financial
and agricultural loans 13,948 22,784 12,713 5,018 5,657
Real estate loans--
commercial 2,517 3,533 1,449 3,451 2,805
Real estate loans--
construction 549 160 911 67 29
Real estate loans--
residential mortgages 621 698 708 336 338
Consumer loans
(including home equity
loans) 21,794 25,507 33,036 19,065 11,167
Credit card loans -- 2 13,551 20,855 5,626
Lease financing 3,016 4,703 5,021 9,845 1,148
----------- ----------- ----------- ---------- ----------
Total charged-off 42,445 57,387 67,389 58,637 26,770
----------- ----------- ----------- ---------- ----------
Recoveries of loans
previously charged-off:
Commercial, financial
and agricultural loans 6,251 3,401 4,459 3,370 3,004
Real estate loans--
commercial 1,833 1,166 3,260 4,703 5,779
Real estate loans--
construction 31 58 73 1,359 469
Real estate loans--
residential mortgages -- 27 411 85 63
Consumer loans
(including home equity
loans) 10,949 10,838 6,473 3,131 3,052
Credit card loans -- 1 579 929 600
Lease financing 1,768 1,557 1,493 809 187
----------- ----------- ----------- ---------- ----------
Total recovered 20,832 17,048 16,748 14,386 13,154
----------- ----------- ----------- ---------- ----------
Balance of allowance for
credit losses at end of
year $184,287 $179,605 $173,203 $181,898 $188,430
=========== =========== =========== ========== ==========
The following tables summarize net credit losses (total loans charged-off less
total loans recovered) and their relationship to the daily average balances for
each loan type listed for the last five years:
Net credit losses (recoveries) for the
year ended December 31
-------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(dollars in thousands)
Commercial, financial and
agricultural loans $7,697 $19,383 $8,254 $1,648 $2,653
Real estate loans--commercial 684 2,367 (1,811) (1,252) (2,974)
Real estate loans--construction 518 102 838 (1,292) (440)
Real estate loans--residential
mortgages 621 671 297 251 275
Consumer loans (including home
equity loans) 10,845 14,669 26,563 15,934 8,115
Credit card loans -- 1 12,972 19,926 5,026
Lease financing 1,248 3,146 3,528 9,036 961
------- ------- ------- ------- -------
Total net credit losses $21,613 $40,339 $50,641 $44,251 $13,616
======= ======= ======= ======= =======
Net credit losses as a percentage
of daily average
total loans .20% .40% .49% .47% .16%
======= ======= ======= ======= =======
S-15
Old Kent's reserve for credit losses ("reserve") is general in nature and
available to absorb credit losses of any loan segment. For analytical purposes
in the table below, Old Kent has allocated its reserve among all loan segments
at December 31, 1999. For the dates preceding 1999, the Corporation did not
allocate the reserve in its entirety.
Allocation of allowance for credit losses at December 31
-----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of of of of of
loans loans loans loans loans
to to to to to
total total total total total
Allowance loans Allowance loans Allowance loans Allowance loans Allowance loans
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
(dollars in thousands)
Commercial, financial
and agricultural $80,159 26.3% $72,000 27.6% $69,500 26.3% $58,500 24.2% $62,500 24.4%
Real estate--commercial 39,515 19.9 36,000 20.5 28,000 19.9 27,800 19.3 37,200 20.4
Real estate--
construction 11,290 9.0 11,000 7.3 3,900 6.0 3,900 5.0 4,600 3.5
Real estate--residential 7,309 13.6 4,300 18.5 4,900 19.5 5,000 21.0 5,300 19.8
Consumer loans
(including home equity
loans) 39,948 29.0 31,600 24.5 43,000 26.6 41,300 25.2 36,000 26.0
Credit card loans -- -- -- -- -- -- 16,000 3.2 8,000 3.6
Leases 6,066 2.2 6,000 1.6 8,000 1.7 11,000 2.1 3,000 2.3
Not allocated -- -- 18,705 -- 15,903 -- 18,398 -- 31,830 --
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total allowance for
credit losses $184,287 100.0% $179,605 100.0% $173,203 100.0% $181,898 100.0% $188,430 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Net credit losses as a percent of daily
average balance for the year
-------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Commercial, financial and
agricultural loans .07% .19% .08% .02% .03%
Real estate loans--commercial .01 .02 (.02) (.01) (.03)
Real estate loans--construction -- -- .01 (.01) --
Real estate loans--residential
mortgages .01 .01 -- .01 --
Consumer loans (including home
equity loans) .10 .15 .26 .17 .09
Credit card loans -- -- .13 .20 .06
Leases .01 .03 .03 .09 .01
------- ------- ------- ------- -------
Total .20% .40% .49% .47% .16%
======= ======= ======= ======= =======
The decrease of 20 basis points in 1999 from 1998 is primarily the result of
continued conservative underwriting standards as well as a generally favorable
economy. As a result of the sale of the Corporation's credit card portfolio in
1997, net credit losses in this category were significantly reduced in 1998.
Net credit losses for 1998 included approximately $3 million, or .03% of
average total loans, attributable to Old Kent's application of its credit
evaluation policies and practices to First Evergreen's loan portfolio at the
time of the merger.
Nonperforming Assets
The following is a summary of nonperforming assets for the last five years:
December 31
-------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(dollars in thousands)
Impaired loans:
Nonaccrual loans $55,491 $61,238 $59,610 $49,866 $46,932
Restructured loans 1,878 3,147 3,911 4,162 4,006
------- ------- ------- ------- -------
Total impaired loans 57,369 64,385 63,521 54,028 50,938
Other real estate owned 8,151 8,106 8,213 8,424 12,040
------- ------- ------- ------- -------
Total nonperforming assets $65,520 $72,491 $71,734 $62,452 $62,978
======= ======= ======= ======= =======
Impaired loans as a percentage of
total loans .48% .63% .61% .54% .57%
S-16
At December 31, 1999, commercial loans represented 51% of loans on nonaccrual
status, down from 85% one year earlier. The offsetting increase was in
residential mortgage loans which represented 45% at year-end 1999 compared to
13% at year-end 1998. Old Kent has historically experienced negligible losses
on loans secured by residential real estate. Old Kent's practice is to place
residential mortgages on nonaccrual status at the point payments become 90 days
past due, without regard to collateral valuations, affording operational
efficiencies. Since these loans tend to be smaller and homogenous in nature,
the Corporation's management believes that the overall credit risk associated
with loans on nonaccrual status improved during 1999.
Loans past due 90 days or more, but for which interest income continues to be
recognized, are not included in the Corporation's nonperforming assets. The
following table summarizes such loans for the last five years:
December 31
-------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(dollars in thousands)
Loans past due ninety days or
more $14,168 $16,858 $17,875 $40,796 $33,741
Loans past due ninety days or
more, as a percentage of total
loans .12% .17% .17% .41% .38%
The loan portfolio has been reviewed and analyzed for the purpose of estimating
probable credit losses. The management of Old Kent believes that the allowance
for credit losses at December 31, 1999, is adequate to absorb probable credit
losses inherent in the loan portfolio. The Corporation's policy dictates that
specifically identified credit losses be recognized immediately by a charge to
the allowance for credit losses. This determination is made for each loan at
the time of transfer into impaired status after giving consideration to
collateral value and the borrowers' ability to repay loan principal. Since Old
Kent immediately recognizes losses on its impaired loans, it has not become
necessary to separately record a valuation allowance on these assets. Because
the ultimate collection of interest on impaired loans is in doubt, any interest
income recognized on these assets is generally limited to cash collections of
interest.
Other Income
Total non-interest income (excluding security transactions) increased 18.2%, or
$64.2 million, in 1999 compared to 28.4%, or $77.9 million, in 1998. Non-
interest income has become a proportionally greater component of Old Kent's
total revenues. In 1999, non-interest income was 37.5% of total revenues
compared to 34.8% for 1998, and 30.7% for 1997. This favorable change in
revenue mix is a direct result of Old Kent's goal to diversify its revenue
streams. A discussion of non-interest income components follows.
The following table summarizes the major categories of other income for the
last three years:
Year ended December 31
--------------------------
1999 1998 1997
-------- -------- --------
(dollars in thousands)
Mortgage banking revenues--net $188,335 $147,155 $95,786
Investment management and trust revenues 73,835 66,250 56,801
Deposit account revenue 69,673 64,304 56,594
Transaction processing revenue 22,529 21,594 14,760
Insurance sales commissions 23,340 20,434 14,577
Securities transactions 7,948 16,899 9,543
Other 39,100 32,842 36,155
-------- -------- --------
Total other income $424,760 $369,478 $284,216
======== ======== ========
Mortgage Banking Revenues
The Corporation's mortgage banking activities are conducted through its wholly-
owned subsidiary, Old Kent Mortgage Company ("OKMC"). OKMC is a full service
mortgage company, originating loans on a nationwide
S-17
basis. OKMC is primarily engaged in the origination, sale and servicing of
single family mortgage loans. OKMC also purchases and sells mortgage servicing
portfolios. Revenues for the mortgage banking line of business represented
16.8%, 14.3% and 10.2% of the Corporation's fully taxable-equivalent net
interest income plus non-interest income for the years 1999, 1998, and 1997,
respectively.
OKMC's profitability is impacted by the absolute level of interest rates as
well as their volatility. For example, loan origination volumes, including the
level of loan originations associated with loan refinancings, are highly
dependent upon interest rates for mortgage loans. Also, loan origination
commitments, loans held-for-sale and mortgage servicing rights are valued based
on Treasury and mortgage interest rates. Volatility in the Treasury and
mortgage interest rates can impact the recorded values of these assets.
Furthermore, policy setting decisions of government sponsored enterprises, such
as FNMA, FHLMC and GNMA, can also impact OKMC's business activities.
As discussed below, increases in interest rates during the latter part of 1999
had the effect of reducing demand for residential mortgages, especially
refinancings. Based on interest rate levels in effect at December 31, 1999, the
Corporation expects that the proportional contribution to net income for 2000
by its Mortgage Banking line of business may be less than that of 1999.
The following summarizes the mortgage banking activity and revenue for the past
three years:
Year ended December 31
-----------------------------------
1999 1998 1997
----------- ----------- ----------
(dollars in thousands)
Originations and acquisitions of mortgages
held-for-sale $12,212,473 $13,612,911 $6,899,161
=========== =========== ==========
Proceeds from sales and prepayments of
mortgages held-for-sale $13,514,366 $12,598,182 $6,284,392
=========== =========== ==========
Mortgage banking revenue (net), consisted
of:
Mortgage banking gains $162,039 $162,466 $70,275
Mortgage origination fees (net of direct
costs) 13,601 (1,941) 14,859
Mortgage loan servicing revenues (net of
direct costs) 12,695 (13,370) 10,652
----------- ----------- ----------
Total mortgage banking revenue (net) $188,335 $147,155 $95,786
=========== =========== ==========
December 31
-----------------------------------
1999 1998 1997
----------- ----------- ----------
(dollars in millions)
Mortgages serviced for third parties $14,726 $14,248 $11,985
Mortgages held-for-sale 900 2,263 1,278
Mortgage loans serviced by Old Kent for
its own portfolio 1,593 1,555 1,735
----------- ----------- ----------
Total mortgages serviced $17,219 $18,066 $14,998
=========== =========== ==========
The following table summarizes location and origination volume for the past
three years:
December 31
-----------------------------------
1999 1998 1997
----------- ----------- ----------
(dollars in billions)
States/Offices 32/147 32/143 25/104
Originations $12.2 $13.6 $6.9
Loan origination volumes declined slightly from 1998 to 1999. Higher interest
rates during the latter part of 1999 reduced the level of loan origination
volumes, particularly refinancings. In contrast, refinancing activity during
1998 contributed to the high level of loan origination volume during that year.
Gain on sale of loans and mortgage origination fees remained high despite the
slowdown in mortgage production volume in 1999 compared to 1998. The
origination of government and specialty loans and an increase in the loan
volume generated from the retail production franchise contributed to the strong
level of fee income and gains on sales of loans.
S-18
OKMC is an active seller of mortgage servicing portfolios. The Company views
these sales as an opportunity to maximize the value of the mortgage servicing
rights retained on the balance sheet while simultaneously limiting the exposure
of the Company to changes in the value of mortgage servicing rights. At
December 31, 1999, OKMC had commitments to sell mortgage servicing rights
associated with between $2.5 and $5.0 billion of newly originated conventional
mortgage loans. The Company expects to fulfill its commitment during the first
three quarters of 2000.
Mortgage servicing revenue increased significantly during 1999. Higher mortgage
interest rates contributed to slowing prepayment speeds and increased the value
of existing servicing rights. As a result, the rate of servicing rights
amortization was reduced and the servicing valuation reserve decreased by $9.1
million. In contrast, mortgage servicing revenues in 1998 were adversely
impacted by lower mortgage interest rates and higher mortgage refinancing
activity and prepayments. Therefore, the rate of servicing rights amortization
increased and the servicing valuation reserve rose by $4.5 million.
For the past three years, net mortgage servicing revenue was comprised of:
Year ended December 31
-----------------------------
1999 1998 1997
--------- -------- --------
(dollars in thousands)
Mortgage servicing revenues $67,074 $52,632 $42,088
Amortization of servicing rights and other
direct servicing costs (63,508) (61,502) (31,289)
Change in servicing valuation reserve 9,129 (4,500) (147)
--------- -------- --------
Mortgage loan servicing revenues (net of direct
costs) $12,695 $(13,370) $10,652
========= ======== ========
The following reflects changes in the carrying value of mortgage servicing
rights:
Year ended December 31
-----------------------------
1999 1998 1997
--------- -------- --------
(dollars in thousands)
Balance at beginning of period $219,543 $146,761 $96,297
Additions 257,720 202,695 111,539
Sales (155,840) (73,740) (30,457)
Amortization (55,656) (51,673) (30,471)
Change in servicing valuation reserve 9,129 (4,500) (147)
--------- -------- --------
Balance at end of period $274,896 $219,543 $146,761
========= ======== ========
Estimated fair value of mortgage servicing
rights $323,000 $255,000 $166,000
========= ======== ========
Investment Management and Trust Revenues
Investment management and trust activities also generate a significant amount
of revenue for Old Kent. Trust revenues increased to $73.8 million in 1999, up
$7.6 million, or 11.5%, over 1998. This compares to a $9.5 million increase, or
16.6%, in 1998. These increases reflect the Corporation's commitment to growth
and optimization of its fee-based businesses, and resulted from successful,
aggressive sales and new business development efforts.
The table below summarizes assets managed in a fiduciary capacity as of the
dates indicated:
December 31
--------------
1999 1998 1997
---- ---- ----
(dollars in
billions)
The Kent Funds $6.4 $6.1 $5.1
Individually managed portfolios 3.2 3.3 3.1
Other managed assets 1.5 2.2 1.5
S-19
Deposit Account Revenues
Service charges on deposit accounts increased to $69.7 million in 1999, an
increase of $5.4 million, or 8.4%. This compares to an increase of $7.7
million, or 13.6%, in 1998. These increases were due both to an increase in the
customer base and to Old Kent's continuing focus on improving non-interest
revenues.
Transaction Processing Fees
Transaction processing fees include items such as fees and commissions on money
orders and travelers checks, foreign exchange fees, debit card interchange
income, check cashing and collection charges. These revenues totaled $22.5
million in 1999 and $21.6 million in 1998.
Insurance Sales Commissions
The increase in insurance sales commissions to $23.3 million in 1999, $20.4
million in 1998 and $14.6 million in 1997 is due to the Corporation's emphasis
on fee-based revenues and new business development efforts. At December 31,
1999, Old Kent Insurance Group is the largest bank-owned insurance agency in
the State of Michigan.
Other Expenses
The following table summarizes the major categories of other expenses for the
last three years:
Year ended December 31
--------------------------
1999 1998 1997
-------- -------- --------
(dollars in thousands)
Salaries $292,908 $269,270 $243,295
Employee benefits 47,524 53,038 52,671
Occupancy 51,472 46,677 43,636
Equipment 43,283 39,510 35,563
Professional services 44,469 29,783 22,701
Telephone and telecommunications 23,534 18,699 15,339
Postage and courier charges 17,161 16,461 14,848
Amortization of goodwill and core deposit
intangibles 16,722 16,656 16,648
Merger related charges 26,000 24,993 --
Other 123,396 109,847 91,694
-------- -------- --------
Total other expenses $686,469 $624,934 $536,395
======== ======== ========
Salaries and Employee Benefits
Salaries and employee benefits represent the largest category of non-interest
expense. These personnel costs increased by $18.1 million in 1999 and $26.3
million in 1998 primarily due to growth and expansion of OKMC, and increased
staffing of the Investment and Insurance Services line of business. In
addition, during 1999, Old Kent shifted a greater portion of its compensation
to a "pay for performance" sales incentive based structure. This shift had a
favorable influence on total revenues as discussed above. Old Kent measures its
staff size in terms of full-time equivalent ("FTE") employees. Full-time
equivalency expresses staff size by translating the efforts of part-time
employees and over-time hours into the equivalent efforts of full-time
employees.
S-20
The following summarizes FTE staff sizes as of the dates indicated:
Full-time Equivalent Staff
--------------------------------------------
FTE change
Dec. 31, 1999
vs. Dec. 31, 1998 12/31/99 12/31/98 12/31/97
----------------- -------- -------- --------
Banking (296) 4,911 5,207 5,586
Mortgage banking 200 2,778 2,578 1,624
Insurance, leasing and brokerage 24 329 305 318
---- ----- ----- -----
Total FTE (72) 8,018 8,090 7,528
==== ===== ===== =====
The table displays a 200 FTE increase in the staff size of OKMC from year-end
1998 to 1999. This increase is primarily attributable to geographic expansion
of Old Kent's mortgage banking business. Based upon decreased demand levels for
mortgage loans as previously discussed, in mid-1999, OKMC began to decrease its
capacity. At December 31, 1999, OKMC had 20 fewer offices and 236 less staff
than at June 30, 1999, when OKMC was at its peak capacity. Old Kent Mortgage
Company's management anticipates further capacity reductions during 2000. The
296 FTE decrease from year-end 1998 to 1999 for Old Kent's core banking groups
is a result of efforts to improve efficiency and eliminate redundant staffing,
primarily as a result of mergers.
Occupancy and Equipment Expense
Occupancy expense increased by $4.8 million, or 10.3%, in 1999 due primarily to
the geographic expansion of OKMC. Occupancy expense increased by $3.0 million,
or 7.0%, in 1998 due to the effect of OKMC business acquisitions. The table
below summarizes occupancy expense for the years indicated:
Occupancy expense for the year
---------------------------------
1999 over
1998 1999 1998 1997
--------- ------- ------- -------
(dollars in thousands)
Banking $842 $37,640 $36,798 $36,629
Mortgage banking 4,046 12,574 8,528 6,076
Insurance, leasing and brokerage (93) 1,258 1,351 931
------ ------- ------- -------
Total occupancy expense $4,795 $51,472 $46,677 $43,636
====== ======= ======= =======
Equipment expense increased by approximately $3.8 million in 1999 as compared
to the prior year. This increase includes the effects of expansion by OKMC. It
also reflects the effects of changes in Old Kent's retail delivery system. Old
Kent increased its use of ATMs and other technology based delivery mechanisms
(such as telecommunications based services) as a means of improving and
expanding retail service access; at December 31, 1999, Old Kent had 568 ATMs in
operation compared to 511 ATMs one year earlier.
Professional Services
Expenses related to professional services increased to $44.5 million, or 49.3%,
from 1998 to 1999. The increase was primarily related to outside support in the
origination and servicing of mortgage loans, a decision to outsource
maintenance and processing of the Corporation's trust system and technology
support related to the Corporation's year 2000 remediation.
S-21
Amortization of Intangibles
Amortization of goodwill and core deposit intangibles totaled $16.7 million,
$16.7 million, and $16.6 million in 1999, 1998, and 1997, respectively. This
amortization represents non-cash charges to operations. The table below
illustrates the proforma effect on earnings per share as if the effect of these
charges were excluded from net income, sometimes referred to as "cash" earnings
per share.
Year ended
December 31
-----------------
1999 1998 1997
----- ----- -----
Basic earnings per share (as reported) $2.13 $1.82 $1.73
Proforma "basic cash earnings per share" 2.26 1.95 1.84
Diluted earnings per share (as reported) 2.11 1.81 1.71
Proforma "diluted cash earnings per share" 2.24 1.93 1.83
Merger-Related Charges
During the third quarter of 1999, Old Kent recognized $17.6 million of after-
tax, merger-related charges which had the effect of reducing diluted earnings
per share by $.15. On a pre-tax basis, the charges consisted of: transaction
costs of $2.0 million; employment charges of $11.8 million, primarily related
to reduction of redundant staffing; and $12.2 million mainly associated with
contract cancellation costs and asset obsolescence for duplicate operations.
During the fourth quarter of 1998, Old Kent recognized $19.7 million of after-
tax, merger related charges which had the effect of reducing diluted earnings
per share by $.15. On a pre-tax basis, the charges consisted of: transaction
costs of $6.0 million; employment charges of $9.4 million, primarily related to
reduction of redundant staffing; $9.6 million mainly associated with contract
cancellation costs and asset obsolescence for duplicate operations; and a $3.5
million special loan loss provision to conform First Evergreen's credit review
process and reserves to Old Kent's.
Year 2000 Readiness Disclosure
The Old Kent corporate compliance program was developed in 1995 and was a three
phased project plan managed through a central Year 2000 project office. All
three phases of the project have been successfully completed as scheduled. Old
Kent has been operating successfully in the 2000 environment since December 31,
1999, with no material issues encountered.
Although considered unlikely, Old Kent could experience unanticipated problems
in its business processes. This includes compliance problems associated with
customers and third party vendors, or disruptions to the general economy.
Management will continue to monitor all business processes, including
interaction with the Corporation's customers and third party vendors,
throughout 2000 to address any issues.
Diagnosis, reprogramming, and other remedies were projected to result in
expenditures of approximately $16 million over the four years ended December
31, 1999. Cumulative expenditures totaled $15.9 million for the four year
period ended December 31, 1999.
S-22
Income Taxes
The income tax provision was $136.8 million in 1999, $118.4 million in 1998,
and $118.3 million in 1997. Income tax expense as a percentage of pre-tax
income was 35.1% in 1999, 34.4% in 1998, and 34.6% in 1997.
Old Kent Common Stock
Old Kent Common Stock is traded on the New York Stock Exchange under the symbol
OK. The following table sets forth the range of prices for Old Kent Common
Stock for the periods indicated. Prices for periods prior to December 2, 1998,
represent bid quotations on the NASDAQ Stock Market, which reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
reflect actual transactions. Prices have been adjusted to reflect 5% stock
dividends distributed in both 1999 and 1998.
1999 1998
------------- -------------
Quarter Low High Low High
------- ------ ------ ------ ------
1st $39.52 $45.00 $32.66 $37.19
2nd 40.00 46.85 33.95 37.58
3rd 36.63 44.75 27.50 37.86
4th 33.56 42.25 27.74 44.29
As of February 18, 2000 there were 121,912,301 shares of Old Kent Financial
Corporation Common Stock issued and outstanding, held by approximately 19,221
holders of record.
Cash Dividends
The Corporation has paid regular cash dividends every quarter since it was
organized as a bank holding company in 1972. Including the history of Old Kent
Bank and Trust Company prior to organization of its holding company, Old Kent
has increased its cash dividends per share in each of the last 41 years. The
following table summarizes the quarterly cash dividends paid to common
shareholders over the past five years, adjusted for five percent stock
dividends paid during the third quarter in each of the past five years, and for
a two-for-one stock split paid in December, 1997.
Quarter 1999 1998 1997 1996 1995
------- ----- ----- ----- ----- -----
1st $.190 $.163 $.147 $.131 $.122
2nd .190 .163 .147 .131 .122
3rd .200 .172 .153 .140 .128
4th .220 .190 .163 .147 .131
----- ----- ----- ----- -----
Total $.800 $.688 $.610 $.549 $.503
===== ===== ===== ===== =====
The earnings of Old Kent's subsidiary banks are the principal source of funds
to pay cash dividends. Consequently, cash dividends are dependent upon the
earnings, capital needs, regulatory constraints and other factors affecting
each individual bank. Based on projected earnings and liquidity, management
expects the Corporation to declare and pay regular quarterly cash dividends on
its common shares in 2000.
Capital
At December 31, 1999, the Corporation's total equity was $1.2 billion, or 7.1%,
less than the preceding year-end total. As shown in the accompanying
Consolidated Financial Statements and described in Note 13 to the Consolidated
Financial Statements, Old Kent repurchased stock in each of the last three
years under authorizations which included reacquiring shares to reissue in
connection with future stock dividends, employee stock plans, and certain other
corporate purposes. These repurchases have favorably influenced earnings per
share and return on average equity. The Corporation expects to continue to
repurchase its common stock in 2000, under the June, 1999, authorization cited
in Note 13 to the Consolidated Financial Statements.
S-23
Statement of Financial Accounting Standard ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"), requires that
the "after-tax" unrealized gain or loss on securities available-for-sale be
carried as a separate component of comprehensive income. At December 31, 1999
this after-tax loss was $103.4 million compared to a gain of $14.5 million on
December 31, 1998. Market values of securities, particularly those that are of
longer terms, and which have fixed rates of interest, are subject to price
volatility depending upon changes in interest rates. Under SFAS 115, total
shareholders' equity will be subject to favorable or unfavorable influences of
the financial markets on the fair values of securities available-for-sale.
Under the risk-based capital regulations presently in effect for banks and bank
holding companies, minimum capital levels are based on the perceived risk of
various asset categories, and certain off-balance sheet instruments, such as
loan commitments and letters of credit. Banks and bank holding companies are
required to maintain certain minimum ratios. As shown in Note 23 to the
Consolidated Financial Statements, at December 31, 1999, ratios of Old Kent and
its subsidiary banks exceeded the regulatory guidelines to be considered "well
capitalized" for regulatory purposes. At December 31, 1999, the ratio of total
shareholders' equity to total assets was 6.8% compared to 7.1% one year
earlier.
Book value per common share is calculated by dividing total shareholders'
equity by the number of shares outstanding as of a given date.
The following is a reconciliation of book value per share:
Per share
amount
---------
Book value per common share at December 31, 1998 $10.95
For the year ended December 31, 1999:
Basic earnings per share 2.13
Dividends per common share (0.80)
Effect of stock repurchases (net of stock issuances) (1.24)
Change in unrealized loss on securities available-for-sale and
other changes (0.61)
------
Book value per common share at December 31, 1999 $10.43
======
The Corporation has generally financed its growth through the retention of
earnings and the issuance of long-term debt. It is expected that future growth
can be financed through internal earnings retention, additional long-term debt
offerings, or the issuance of additional common or preferred stock or other
capital instruments.
S-24
Liquidity and Market Risk Management
Liquidity
Old Kent manages its liquidity to ensure that funds are available to each of
its banks to satisfy the cash flow requirements of depositors and borrowers and
to ensure that the Corporation's own cash requirements are met. Old Kent
maintains liquidity by obtaining funds from several sources.
Old Kent's most readily available source of liquidity is its investment
portfolio. Old Kent's securities available-for-sale, which totaled $2.7 billion
at December 31, 1999, represent a highly accessible source of liquidity. The
Corporation's portfolio of securities held-to-maturity, which totaled $609
million at December 31, 1999, provides liquidity from maturities and
amortization payments. The Corporation's mortgages held-for-sale provide
additional liquidity. These loans represent recently funded home mortgage loans
that are being prepared for delivery to investors, which generally occurs
within thirty to ninety days after the loan has been funded.
Depositors within Old Kent's defined markets are another source of liquidity.
Core deposits (demand, savings, money market, and consumer time deposits)
totaled $12.6 billion at December 31, 1999. These same markets offer additional
liquidity in the form of large deposit instruments and other equivalent non-
deposit products. Additionally, Old Kent Bank may access the federal funds
markets or utilize collateralized borrowings.
The national capital markets represent a further source of liquidity to Old
Kent. Old Kent filed three shelf registrations, which are intended to permit
Old Kent to raise capital through sales of additional securities with a
relatively short lead time. A $250 million shelf registration registers common
stock, preferred stock, depository shares, debt securities, and warrants for
future sale. A second shelf registration registers an additional $200 million
of trust preferred securities for future sale. The proceeds of any issuance
will be for general corporate purposes, which may include reducing debt and
repurchasing common stock. The third shelf registration registers 2.5 million
shares of common stock to use in future small, stock based acquisitions.
Old Kent Bank has implemented a bank note program which permits it to issue up
to $2.0 billion of short-term and medium-term notes. This program is intended
to enhance liquidity by enabling Old Kent Bank to sell its debt instruments in
the public markets in the future without the delays which would otherwise be
incurred. As shown in Note 10 to the Consolidated Financial Statements, there
were $500 million of bank notes outstanding at December 31, 1999.
Credit ratings at December 31, Thomson Standard
1999 BankWatch Moody's & Poor's
------------------------------ --------- ------- --------
Old Kent Financial Corporation:
Issuer A/B -- --
Short-term TBW-1 -- --
Long-term senior debt -- A2 --
Long-term subordinated debt A+ A3 A-
Old Kent Bank:
Short-term TBW-1 P-1 A-1
Long-term senior debt AA- A1 A
Old Kent Capital Trust I: -- "a2" BBB+
Federal and state banking laws place certain restrictions on the amount of
dividends and loans which a bank may make to its parent company. Such
restrictions have not had, and are not expected to have, any material effect on
the Corporation's ability to meet its cash obligations.
S-25
Market Risk Management
Old Kent faces market risk to the extent that the fair values of its financial
instruments are affected by changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices, or other market factors. The
Corporation's market risk exposure is mainly comprised of its sensitivity to
interest rate risk. The Corporation is sensitive, in various categories of
assets, liabilities and off-balance sheet positions, to changes in prevailing
rates in the U.S. for the prime rate, mortgage rates, U.S. Treasury rates and
various money market indexes. The asset/liability management discipline as
applied at Old Kent seeks to limit the volatility of both earnings and the
value of capital that can result from changes in market interest rates. This is
accomplished by matching asset and liability principal balances that reprice
and mature, estimating how administered rates adjust, simulating business
results under varying interest rate scenarios, and estimating the change in the
net present value of the Corporation's assets, liabilities, and off-balance
sheet instruments due to interest rate changes. Principal maturities and
repricing profiles are monitored through static gap analysis, business results
are simulated, and the net present value of the Corporation's financial
instruments is estimated through computer modeling. These different measurement
techniques offer complementary information to assist management to better
understand and mitigate the possible negative impact that interest rate changes
can have on the Corporation.
Virtually all of the Corporation's financial instruments have been entered into
for non-trading purposes. The Corporation held no securities in its trading
account as of December 31, 1999, and only occasionally warehouses securities in
this account for resale to customers or for liquidation. Accordingly, the
Corporation does not consider the market risk of its trading portfolio to be
material. The Corporation's foreign exchange activities are primarily limited
to fixing forward currency settlements for customers and then offsetting those
positions with approved counterparties. Since the customer forward settlements
are fully offset with counterparty contracts, the Corporation does not consider
the market risk of its foreign exchange activities to be material.
Static Gap Analysis: The management of interest rate sensitivity includes
monitoring the maturities and repricing opportunities of interest-earning
assets and interest-bearing liabilities. The following table summarizes the
interest rate repricing gaps for selected maturity periods as of December 31,
1999:
0-30 31-90 91-180 181-365 1-5 Over 5
Days Days Days Days Years Years Total
------ ------- ------- ------- ------ ------ ------
(dollars in millions)
Non-loan interest-
earning assets $76 $92 $156 $221 $1,557 $1,245 $3,347
Loans 4,710 874 468 978 4,470 1,443 12,943
------ ------- ------- ------- ------ ------ ------
Total interest-earning
assets 4,786 966 624 1,199 6,027 2,688 16,290
------ ------- ------- ------- ------ ------ ------
Savings & money market
accounts* 1,117 1,166 -- -- -- 3,023 5,306
Domestic time deposits 908 1,313 1,532 1,558 911 17 6,239
Foreign time deposits 105 -- -- 5 -- -- 110
Purchased funds and
long-term debt 2,023 225 4 23 177 299 2,751
------ ------- ------- ------- ------ ------ ------
Total interest-bearing
liabilities 4,153 2,704 1,536 1,586 1,088 3,339 14,406
------ ------- ------- ------- ------ ------ ------
Interest-earning assets
less interest-bearing
liabilities 633 (1,738) (912) (387) 4,939 (651) 1,884
Impact of interest rate
swaps (425) (195) 200 200 220 -- --
------ ------- ------- ------- ------ ------ ------
Asset (liability) gap $208 $(1,933) $(712) $(187) $5,159 $(651) $1,884
Cumulative asset gap $208 $(1,725) $(2,437) $(2,624) $2,535 $1,884
Cumulative gap as a
percentage of
cumulative earning
assets 4.4% (30.0)% (38.2)% (34.6)% 18.6% 11.6%
- --------
* (The placement of indeterminate maturity deposits on the gap analysis
represents an allocation of 21% of the balances to the 0-30 Days period, 22%
to the 31-90 Days period, and 57% to the Over 5 Years period even though
these deposits are payable on demand. This distribution is based on
historical analyses of the amount by which the rates paid on these deposits
changed as alternative market rates changed, and on the estimated sensitivity
of balances to changes in such alternative market rates.)
Total interest-earning assets exceeded interest-bearing liabilities by $1.9
billion at December 31, 1999. This difference was funded through non-interest-
bearing liabilities and shareholders' equity. The above table shows that total
liabilities maturing or repricing within one year exceed assets maturing or
repricing within one year by $2.6 billion. However, the repricing and cash
flows of certain categories of assets and liabilities are subject
S-26
to competitive and other influences that are beyond the control of Old Kent. As
a result, certain assets and liabilities indicated as maturing or repricing
within a stated period may, in fact, mature or reprice in other periods or at
different volumes.
Simulation: Old Kent recognizes the limitations of static gap analysis as a
tool for managing its interest rate risk. Old Kent also uses a computer-based
earnings simulation model to estimate the effects of various interest rate
environments on the balance sheet structure and net interest income. These
simulation techniques involve changes in interest rate relationships, asset and
liability mixes, and prepayment options inherent in financial instruments, as
well as interest rate levels in order to quantify risk. The Corporation's
sensitivity is estimated by first forecasting the next twelve months of net
interest income under an assumed environment of constant market interest rates.
Next, immediate parallel interest rate shocks are constructed in the model.
These rate shocks reflect changes of equal magnitude to all market interest
rates. The Corporation's next twelve months of net interest income are then
forecast under each of the rate shock scenarios. The resulting change in net
interest income is an indication of the sensitivity of the Corporation's
earnings to directional changes in market interest rates. This model is based
solely on parallel changes in market rates and does not reflect the levels of
interest rate risk that may arise from other factors such as changes in the
spreads between key market rates or in the shape of the Treasury yield curve.
The net interest income simulation model includes both on-balance sheet loan,
investment, deposit, and debt instruments as well as off-balance sheet interest
rate swaps.
The Corporation's forecasted net interest income sensitivity is monitored by
the corporate Asset/Liability Committee which has established limits in the
interest rate risk limit policy. Throughout 1999, the forecasted exposure was
within the Corporation's established policy limits.
Net Interest Income Sensitivity: Change vs. Projected Results under Constant
Rates
Year-End 1999 12 Month Projection
ALCO
Rate Shock Amount: (2.00)% (1.00)% 0.00% 1.00% 2.00% Policy
- ------------------ ------- ------- ----- ------ ------ --------
Percent change in net interest 1.3% 1.0% -- (1.7)% (3.3)% (10.00)%
income vs. constant rates
Year-End 1998 12 Month Projection
ALCO
Rate Shock Amount: (2.00)% (1.00)% 0.00% 1.00% 2.00% Policy
- ------------------ ------- ------- ----- ------ ------ --------
Percent change in net interest (.5)% .1% -- (.8)% (1.8)% (10.00)%
income vs. constant rates
An important component of Old Kent's management of interest rate risk is the
Corporation's use of interest rate swaps. At December 31, 1999, the total
notional amount (the amount used to calculate interest) of outstanding interest
rate swap agreements used to manage interest rate risk was $1.4 billion. For
1999 and 1998, Old Kent's interest rate swaps increased net interest income by
approximately $6.8 million and $5.1 million respectively. This improved the
Corporation's net interest margin by .04% in 1999 and by .03% in 1998. The
following table presents information regarding swap activity during 1999:
Swap Activity
12/31/98 Matured or New Swap 12/31/99
Notional Called Cancelled Notional Notional
-------- ------- ---------- -------- --------
(dollars In millions)
Receive fixed/pay floating $819.9 $(100.0) $(200.0) $500.0 $1,019.9
Receive floating/pay fixed 50.0 0.0 (50.0) 400.0 400.0
------ ------- ------- ------ --------
$869.9 $(100.0) $(250.0) $900.0 $1,419.9
====== ======= ======= ====== ========
S-27
Swap Maturity Profile
Notional amounts of swaps are scheduled to mature as follows:
2000 2001 2002 2003 2004+ Total
------ ------ ------ ------ ----- --------
(dollars in millions)
Receive fixed/pay floating $400.0 $194.9 $425.0 $ -- $ -- $1,019.9
Receive floating/pay fixed -- 200.0 100.0 100.0 -- 400.0
--------
$1,419.9
========
The weighted average interest rates for the above swap portfolio are summarized
as follows:
At December At December
31, 1999 31, 1998
------------- -------------
Receive Pay Receive Pay
Rate Rate Rate Rate
------- ----- ------- -----
Receive fixed/pay floating 6.70% 6.69% 6.34% 5.30%
Receive floating/pay fixed 5.47% 5.99% 5.34% 5.48%
Economic Value of Equity: As part of the Corporation's asset/liability
management process, quarterly estimations are conducted that measure the net
present value of Old Kent's current financial instruments, which are also
referred to as the economic value of equity. The process involves estimating
the principal and interest cash flows for all financial instruments and then
discounting those cash flows back to their present value using discount rates
for products of similar duration and credit quality. The economic value of
equity is defined as the Corporation's book equity plus the net present value
of the asset, liability, and off-balance sheet instruments. The measurement is
first conducted under an assumed environment of unchanged market interest
rates. Next, net present value measurements are conducted under various levels
of parallel market interest rate shocks. The resulting change in economic value
of equity under rate shocks is an indication of the fair value variability of
the Corporation's financial instruments as of the reporting date.
The economic value of equity model includes both on-balance sheet loan,
investment, mortgage servicing rights, deposit, and debt instruments as well as
off-balance sheet interest rate swaps, Treasury futures and options, mortgage
forward sales contracts, and mortgage options. The cash flows for instruments
containing options are adjusted to reflect expected results under each rate
shock scenario. Those adjustments are made by considering both the specific
terms of certain instruments (e.g. callable bonds) and market consensus
forecasts about specific asset classes (e.g. mortgage-backed securities). This
measure does not reflect the impact of new financial instruments or of changes
in loan production volume that would be expected to occur as interest rates
change. For example, management believes that lower market interest rates would
significantly increase mortgage production volume and income, more than
offsetting any decrease in the value of mortgage servicing rights that is
reflected in the economic value of equity measure below.
The magnitude of the change in the economic value of equity is monitored by the
corporate Asset/Liability Committee which has established limits in the
interest rate risk limit policy. Throughout 1999, the estimated variability of
the economic value of equity was within the Corporation's established policy
limits.
S-28
Economic Value of Equity Sensitivity Change vs. Results under Constant Rates
Year-End 1999 Economic Value of Equity Profile
ALCO
Rate Shock Amount: (2.00)% 0.00% 2.00% Policy
- ------------------ ------- ----- ------ -------
Static Economic Value of Equity Change (.8)% -- (9.1)% (16.0)%
Year-End 1998 Economic Value of Equity Profile
ALCO
Rate Shock Amount: (2.00)% 0.00% 2.00% Policy
- ------------------ ------- ----- ------ -------
Static Economic Value of Equity Change (9.4)% -- (1.9)% (16.0)%
Note: The Year-End 1998 Economic Value of Equity Profile has not been restated
to include CFSB Bancorp and Pinnacle Banc Group. The required data was not
available and it was impracticable to re-create the analysis for those
entities.
The Corporation's projected net interest income sensitivity and economic value
of equity sensitivity both indicate a slightly greater exposure to an upward
2.00% rate shock at December 31, 1999 than at December 31, 1998. This is
primarily due to three factors that developed throughout 1999. First, most of
the Corporation's loan growth occurred in fixed rate products. Second,
customers shifted a larger portion of their deposit dollars into accounts that
are more sensitive to changes in interest rates. Third, the forecasted
prepayment speeds for the Corporation's mortgage-related assets were lowered as
market rates rose and refinance activity slowed. These three factors combined
to lengthen the maturity and repricing sensitivity of assets and to shorten the
repricing sensitivity of liabilities. Management partially offset this trend by
cancelling existing pay floating swaps, entering new pay fixed swaps, and
increasing its medium-term fixed rate borrowings from the Federal Home Loan
Bank.
Despite the above change in the Corporation's interest rate risk profile, the
estimated sensitivity as of December 31, 1999 is well within approved policy
limits and is not believed to represent a material exposure to interest rate
risk.
Securities Held-to-maturity
Securities held-to-maturity are purchased with the intent and ability to hold
for long-term investment for the purpose of generating interest income over the
lives of the investments. Thus, they are carried on the books at cost, adjusted
for amortization of premium and accretion of discount.
Securities Available-for-sale
Securities available-for-sale include those securities which might be sold as
part of Old Kent's management of interest risk, in response to changes in
interest rates, prepayment or credit risk, or due to a desire to increase
capital measures or liquidity. These assets are carried on the balance sheet at
their estimated fair values, with corresponding (after-tax) valuation
adjustments included as a component of shareholders' equity. Premiums and
discounts are amortized over the estimated lives of the related securities.
In 1999, net gains on the sale of securities were $7.9 million. This compares
to net gains of $16.9 million in 1998 and $9.5 million in 1997. The primary
sources of these gains were the activities of merged affiliates. As previously
noted, the mergers were accounted for as poolings-of-interests transactions and
all periods have been restated to reflect these business combinations.
S-29
Sources and Uses of Funds Trends
As shown on the accompanying Consolidated Balance Sheet, total assets at
December 31, 1999, were $18 billion, down by $644 million, or 3.5%, from the
preceding year-end. In general, Old Kent's management relies more on the use of
daily average balances, than on balances at a period end, to analyze trends.
Old Kent's Average Consolidated Balance Sheet for the last five years appear on
page S-11 of this report. Information contained in that statement was the basis
for the summarized trends in sources and uses of funds appearing below.
1999 1998
------------------------- --------------------------
Increases Increases
(Decreases) (Decreases)
Average --------------- Average ----------------
Balance Amount Percent Balance Amount Percent
--------- ------ ------- --------- ------- -------
(dollars in millions)
Funding Uses:
Loans $11,020.2 $840.8 8.3% $10,179.4 $(126.0) (1.2)%
Mortgages held-for-sale 1,592.1 (153.8) (8.8) 1,745.9 845.0 93.8
Taxable securities 3,311.2 (647.1) (16.3) 3,958.3 (164.6) (4.0)
Tax-exempt securities 501.9 126.0 33.5 375.9 35.4 10.4
Interest-earning
deposits 11.1 (8.3) (42.8) 19.4 (1.3) (6.3)
Federal funds sold and
resale agreements 65.6 22.4 51.9 43.2 (83.2) (65.8)
Trading account
securities 30.1 16.5 121.3 13.6 (7.9) (36.7)
--------- ------ --------- -------
Total Uses $16,532.2 $196.5 1.2% $16,335.7 $497.4 3.1%
========= ====== ========= =======
Funding Sources:
Demand deposits $2,071.8 $40.4 2.0% $2,031.4 $225.2 12.5%
Savings deposits 5,227.5 594.6 12.8 4,632.9 310.9 7.2
Time deposits:
Negotiable 1,112.7 29.1 2.7 1,083.6 5.1 .5
Foreign 75.2 37.8 101.1 37.4 (1.4) (3.6)
Consumer 5,450.7 (385.8) (6.6) 5,836.5 (302.4) (4.9)
Federal funds purchased
and repurchase
agreements 973.6 (28.5) (2.8) 1,002.1 262.1 35.4
Other borrowed funds 1,413.5 98.0 7.4 1,315.5 212.4 19.3
Long-term debt 200.0 -- -- 200.0 8.2 4.3
Other 7.2 (189.1) (96.3) 196.3 (222.7) (53.2)
--------- ------ --------- -------
Total Sources $16,532.2 $196.5 1.2% $16,335.7 $497.4 3.1%
========= ====== ========= =======
During 1999, loans averaged $11 billion, an increase of 8.3% over 1998. The
primary funding source to accommodate this growth was a reduction of securities
balances as well as higher demand and savings deposit balances.
Lower interest rates over the years preceding 1995 had an effect on the
relative mix in Old Kent's core deposits. During these periods of lower rates,
consumer time deposits grew to become a proportionally greater component of
average core deposits as shown in the table below. However, since 1997, higher
yielding rates were paid on our savings products as rates on consumer time
deposits fell. This had the effect of increasing the percentage of savings
deposits while the proportion of consumer time products fell.
Based on Annual Averages
----------------------------
Relative Core Deposit
Mix 1999 1998 1997 1996 1995
- --------------------- ---- ---- ---- ---- ----
Demand deposits 16.3% 16.3% 14.7% 13.1% 12.9%
Savings deposits 41.0 37.0 35.3 32.6 35.6
Consumer time deposits 42.7 46.7 50.0 54.3 51.5
---- ---- ---- ---- ----
Total core deposits 100% 100% 100% 100% 100%
==== ==== ==== ==== ====
S-30
Quarterly Financial Data
The following is a summary of selected quarterly results of operations for the
years ended December 31, 1999 and 1998:
Three Months Ended
-----------------------------------
1999 March 31 June 30 Sept. 30 Dec. 31
- ---- -------- -------- -------- --------
(dollars in thousands, except per
share data)
Interest income $315,375 $317,180 $324,063 $325,655
Net interest income 163,913 168,685 174,344 170,257
Provision for credit losses 6,971 4,899 6,783 7,522
Income before income taxes 97,114 102,538 82,386 107,277
Net income 63,163 65,381 52,787 71,208
Basic earnings per share $.53 $.55 $.45 $.61
Diluted earnings per share $.52 $.55 $.44 $.60
Three Months Ended
-----------------------------------
1998 March 31 June 30 Sept. 30 Dec. 31
- ---- -------- -------- -------- --------
(dollars in thousands, except per
share data)
Interest income $326,237 $322,381 $314,733 $322,764
Net interest income 162,328 159,388 160,084 164,568
Provision for credit losses 15,478 11,955 8,664 11,121
Income before income taxes 88,998 94,513 93,518 66,665
Net income 58,203 61,322 61,884 43,914
Basic earnings per share $.46 $.49 $.51 $.36
Diluted earnings per share $.46 $.49 $.50 $.36
As discussed in Note 2 to the Financial Statements, Old Kent completed the
mergers of Pinnacle Banc Group, Inc. on September 3, 1999, CFSB Bancorp, Inc.
on July 9, 1999, and First Evergreen Corporation on October 1, 1998. These
mergers were accounted for as poolings-of-interests transactions and the
applicable data in the tables above has been restated to reflect these business
combinations. Also discussed in Note 2 to the Financial Statements, Old Kent
recognized $17.6 million in charges related to the mergers with CFSB and
Pinnacle during third quarter 1999. Excluding these charges, net income for the
quarter would have been $70.4 million, and diluted earnings per share would
have been $.15 higher. During the fourth quarter of 1998, Old Kent recognized
$19.7 million in charges related to the merger with First Evergreen. Excluding
these charges, net income for the quarter would have been $63.6 million, and
diluted earnings per share would have been $.15 higher.
S-31
Management's Responsibility for Financial Reporting
The management of Old Kent Financial Corporation is responsible for the
preparation of the financial statements and other related financial information
included in the annual report. The financial statements have been prepared in
accordance with generally accepted accounting principles and include amounts
based on management's estimates and judgments where applicable. Financial
information appearing throughout this annual report is consistent with the
financial statements.
The Corporation maintains a system of internal controls to provide reasonable
assurance that assets are safeguarded and that transactions are executed in
accordance with management's authorization and are recorded properly to permit
the preparation of financial statements in accordance with generally accepted
accounting principles. Management continually monitors the internal control
structure for compliance with established policies and procedures. As an
integral part of the internal control system, the Corporation maintains an
internal audit program to monitor compliance with internal controls and
coordinate audit coverage with the independent public accountants.
The Audit Committee of the board of directors, composed entirely of outside
directors, oversees the Corporation's financial reporting process and has
responsibility for recommending the independent public accountants who are
appointed by the board of directors to audit the Corporation's annual financial
statements.
The financial statements in this annual report have been audited by Arthur
Andersen LLP and their report appears on page S-33.
The Audit Committee of the board of directors meets regularly with management,
internal auditors, independent public accountants and regulatory examiners to
review matters relating to financial reporting and internal controls. The
internal auditors, independent public accountants and regulatory examiners have
direct access to the Audit Committee.
The Corporation assesses its internal control structure over financial
reporting in relation to the criteria described in the "Internal Control--
Integrated Framework" issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this assessment, management of the
Corporation believes that as of December 31, 1999, in all material respects,
the Corporation maintained an effective internal control structure over
financial reporting.
[/s/ David J. Wagner]
David J. Wagner
Chairman, President and
Chief Executive Officer
[/s/ Mark F. Furlong]
Mark F. Furlong
Executive Vice President and
Chief Financial Officer
[/s/ Janet S. Nisbett]
Janet S. Nisbett
Senior Vice President and
Controller
S-32
Report of Independent Public Accountants
To the Shareholders and the Board of Directors of Old Kent Financial
Corporation:
We have audited the accompanying consolidated balance sheets of Old Kent
Financial Corporation (a Michigan corporation) and subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of income, cash
flows and shareholders' equity for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Old Kent Financial Corporation
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP.........................................................
Chicago, Illinois
January 14, 2000
S-33
Consolidated Financial Statements
Consolidated Balance Sheet
December 31, December 31,
1999 1998
------------ ------------
(dollars in thousands)
ASSETS:
Cash and due from banks $589,369 $667,125
Federal funds sold and resale agreements 36,700 9,730
----------- -----------
Total cash and cash equivalents 626,069 676,855
Interest-earning deposits 155 7,578
Trading account securities -- 349,090
Mortgages held-for-sale 900,031 2,262,694
Securities available-for-sale:
Collateralized mortgage obligations and other
mortgage-backed securities 1,821,045 1,841,843
Other securities 793,123 1,493,659
----------- -----------
Total securities available-for-sale (amortized
cost of $2,701,532 and $3,285,350, respectively) 2,614,168 3,335,502
Securities held-to-maturity:
Collateralized mortgage obligations and other
mortgage-backed securities 92,335 180,369
Other securities 516,908 623,376
----------- -----------
Total securities held-to-maturity (market values
of $590,348 and $823,610, respectively) 609,243 803,745
Loans 12,067,061 10,220,078
Allowance for credit losses (184,287) (179,605)
----------- -----------
Net loans 11,882,774 10,040,473
----------- -----------
Premises and equipment 247,269 252,073
Other assets 1,090,123 885,615
----------- -----------
Total Assets $17,969,832 $18,613,625
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Non-interest-bearing $2,040,350 $2,244,534
Interest-bearing 11,544,601 12,028,828
Foreign deposits--interest-bearing 110,061 140,077
----------- -----------
Total deposits 13,695,012 14,413,439
Other borrowed funds 2,550,877 2,404,971
Other liabilities 297,070 274,461
Long-term debt 200,000 200,000
----------- -----------
Total Liabilities 16,742,959 17,292,871
----------- -----------
Shareholders' Equity:
Preferred stock: 25,000,000 shares authorized and
unissued -- --
Common stock, $1 par value: 300,000,000 shares
authorized; 117,610,000 and 114,937,000 shares
issued and outstanding 117,610 114,937
Capital surplus 329,003 253,859
Retained earnings 850,953 919,262
Accumulated other comprehensive (loss)/income (70,693) 32,696
----------- -----------
Total Shareholders' Equity 1,226,873 1,320,754
----------- -----------
Total Liabilities and Shareholders' Equity $17,969,832 $18,613,625
=========== ===========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
S-34
Consolidated Statement of Income
Year ended December 31
-----------------------------------
1999 1998 1997
----------- ----------- -----------
(dollars in thousands,
except per share data)
Interest Income:
Interest and fees on loans $927,592 $888,805 $915,101
Interest on mortgages held-for-sale 114,838 120,647 66,674
Interest on securities (taxable) 208,355 251,959 267,069
Interest on securities (non-taxable) 25,817 20,904 19,766
Interest on investments 5,671 3,801 9,079
----------- ----------- -----------
Total interest income 1,282,273 1,286,116 1,277,689
----------- ----------- -----------
Interest Expense:
Interest on deposits 474,184 501,873 519,749
Interest on other borrowed funds 117,737 124,394 103,555
Interest on long-term obligations 13,152 13,481 13,026
----------- ----------- -----------
Total interest expense 605,073 639,748 636,330
----------- ----------- -----------
Net Interest Income 677,200 646,368 641,359
Provision for Credit Losses 26,175 47,218 47,337
----------- ----------- -----------
Net Interest Income after Provision for
Credit Losses 651,025 599,150 594,022
----------- ----------- -----------
Other Income:
Mortgage banking revenue (net) 188,335 147,155 95,786
Investment management & trust revenues 73,835 66,250 56,801
Deposit account revenue 69,673 64,304 56,594
Transaction processing revenue 22,529 21,594 14,760
Insurance sales commissions 23,340 20,434 14,577
Other 47,048 49,741 45,698
----------- ----------- -----------
Total other income 424,760 369,478 284,216
----------- ----------- -----------
Other Expenses:
Salaries and employee benefits 340,432 322,308 295,966
Occupancy 51,472 46,677 43,636
Equipment 43,283 39,510 35,563
Professional services 44,469 29,783 22,701
Telephone and telecommunication 23,534 18,699 15,339
Postage and courier charges 17,161 16,461 14,848
Merger charges 26,000 24,993 --
Other 140,118 126,503 108,342
----------- ----------- -----------
Total other expenses 686,469 624,934 536,395
----------- ----------- -----------
Income before Income Taxes 389,316 343,694 341,843
Income taxes 136,777 118,371 118,323
----------- ----------- -----------
Net Income $252,539 $225,323 $223,520
=========== =========== ===========
Average number of shares used to
compute:
Basic earnings per share 118,700,000 123,512,000 129,374,000
Diluted earnings per share 119,715,000 124,766,000 130,446,000
Basic earnings per share $2.13 $1.82 $1.73
Diluted earnings per share $2.11 $1.81 $1.71
The accompanying notes to consolidated financial statements are an integral
part of these statements.
S-35
Consolidated Statement of Cash Flows
Twelve months ended December 31,
---------------------------------------
1999 1998 1997
------------ ------------ -----------
(dollars in thousands)
Cash Flows From Operating Activities:
Net income $252,539 $225,323 $223,520
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities:
Provision for credit losses 26,175 47,218 47,337
Depreciation, amortization and
accretion 57,988 56,929 61,420
Deferred income taxes 12,460 16,614 20,560
Net gains on sales of assets (172,110) (183,110) (100,628)
Net change in trading account
securities 349,411 (347,910) 61,523
Originations and acquisitions of
mortgages held-for-sale (12,212,473) (13,612,911) (6,899,161)
Proceeds from sales and prepayments
of mortgages held-for-sale 13,514,366 12,598,182 6,284,392
Net change in other assets (15,870) 80,762 (77,791)
Net change in other liabilities 63,203 (15,267) (24,765)
------------ ------------ -----------
Net cash provided by (used for)
operating activities 1,875,689 (1,134,170) (403,593)
------------ ------------ -----------
Cash Flows From Investing Activities:
Proceeds from maturities and
prepayments of securities available-
for-sale 755,326 212,926 181,661
Proceeds from sales of securities
available-for-sale 988,862 1,325,522 4,791,399
Purchases of securities available-for-
sale (1,160,664) (2,159,858) (4,998,678)
Proceeds from maturities and
prepayments of securities held-to-
maturity 294,042 1,105,076 802,948
Purchases of securities held-to-
maturity (86,247) (307,954) (663,796)
Net change in interest-earning
deposits 7,423 387 2,597
Proceeds from sale of loans 9,482 207,849 379,552
Net change in loans (1,877,750) (46,317) (642,156)
Purchases of leasehold improvements,
premises and equipment, net (31,400) (33,685) (40,173)
Acquisition of business units (net of
cash acquired) -- -- 17,204
Sale of business units (net of cash
sold) -- -- 1,234
------------ ------------ -----------
Net cash provided by (used for)
investing activities (1,100,926) 303,946 (168,208)
------------ ------------ -----------
Cash Flows From Financing Activities:
Change in time deposits (698,343) 49,558 (209,415)
Change in demand and savings deposits (20,084) 1,022,566 38,280
Change in other borrowed funds 145,906 45,432 844,248
Proceeds from issuance of capital
securities -- -- 100,000
Repurchases of common stock (178,626) (257,508) (196,180)
Proceeds from common stock issuances 23,107 20,776 11,683
Dividends paid to shareholders (97,509) (96,048) (80,791)
------------ ------------ -----------
Net cash provided by (used for)
financing activities (825,549) 784,776 507,825
------------ ------------ -----------
Net change in cash and cash
equivalents (50,786) (45,448) (63,976)
Cash and cash equivalents at beginning
of year 676,855 722,303 786,279
------------ ------------ -----------
Cash and cash equivalents at December
31 $626,069 $676,855 $722,303
============ ============ ===========
Supplemental disclosures of cash flow
information:
Interest paid on deposits, other
borrowed funds and subordinated debt $603,102 $655,375 $641,746
Federal income taxes paid 90,622 104,086 91,699
Significant non-cash transactions:
Stock dividend issued 221,943 184,748 135,388
Stock issued to acquire businesses -- -- 76,938
The accompanying notes to consolidated financial statements are an integral
part of these statements.
S-36
Consolidated Statement of Shareholders' Equity
Accumulated
Other Total
Comprehensive Common Capital Retained Comprehensive Shareholders'
Income Stock Surplus Earnings Income Equity
------------- -------- -------- --------- ------------- -------------
(dollars in thousands, except per share data)
Balance at January 1,
1997 as previously
reported $57,809 $170,455 $963,110 $(11,177) $1,180,197
Adjustment to record
merger of CFSB Bancorp,
Inc. and Pinnacle Banc
Group, Inc. on a
pooling-of-interests
basis 12,871 87,390 55,772 7,262 163,295
-------- -------- --------- -------- ----------
Restated balance at
January 1, 1997 70,680 257,845 1,018,882 (3,915) 1,343,492
-------- -------- --------- -------- ----------
Net income for the year $223,520 223,520 223,520
Unrealized gains on
securities, net of
$11,900 taxes 22,066 22,066 22,066
--------
Total comprehensive
income $245,586
========
Cash dividends:
$.610 per common share (80,791) (80,791)
Common stock issued in
payment of stock
dividend -
4,686,000 shares (cash
in lieu of
fractionals--$326,000) 4,686 130,376 (135,388) (326)
Common stock issued for
Seaway Financial
Corporation
acquisition--1,924,000
shares 1,924 69,843 71,767
Common stock issued for
Grand Rapids Holland
Insurance Agency, Inc.
acquisition--86,000
shares 86 5,085 5,171
Common stock repurchased
for dividend
reinvestment plan,
employee stock plans,
acquisitions, stock
dividends and other
purposes--5,800,000
shares (5,800) (187,479) (2,901) (196,180)
Common stock issued
under dividend
reinvestment plan,
employee stock plans,
and other--857,000
shares 857 14,249 (214) 14,892
Common stock issued in
payment of 2-for-1
stock split -
46,447,000 shares 46,447 (46,447)
Tax benefit relating to
employee stock plans 4,977 4,977
-------- -------- --------- -------- ----------
Balance at December 31,
1997 118,880 294,896 976,661 18,151 1,408,588
-------- -------- --------- -------- ----------
Net income for the year $225,323 225,323 225,323
Unrealized gains on
securities, net of
$7,800 taxes 14,545 14,545 14,545
--------
Total comprehensive
income $239,868
========
Cash dividends:
$.688 per common share (96,048) (96,048)
Common stock issued in
payment of stock
dividend -
8,181,000 shares (cash
in lieu of
fractionals--$221,000) 8,181 176,346 (184,748) (221)
Common stock repurchased
for dividend
reinvestment plan,
employee stock plans,
acquisitions, stock
dividends and other
purposes-- 13,498,000
shares (13,498) (242,787) (1,223) (257,508)
Common stock issued
under dividend
reinvestment plan,
employee stock plans,
and other--1,374,000
shares 1,374 21,792 (703) 22,463
Tax benefit relating to
employee stock plans 3,612 3,612
-------- -------- --------- -------- ----------
Balance at December 31,
1998 114,937 253,859 919,262 32,696 1,320,754
-------- -------- --------- -------- ----------
Net income for the year $252,539 252,539 252,539
Unrealized losses on
securities, net of
$34,300 tax benefit (103,389) (103,389) (103,389)
--------
Total comprehensive
income $149,150
========
Cash dividends:
$.800 per common share (97,509) (97,509)
Common stock issued in
payment of stock
dividend -
5,624,000 shares (cash
in lieu of
fractionals--$155,000 ) 5,624 216,164 (221,943) (155)
Common stock repurchased
for dividend
reinvestment plan,
employee stock plans,
acquisitions, stock
dividends and other
purposes--4,175,000
shares (4,175) (173,055) (1,396) (178,626)
Common stock issued
under dividend
reinvestment plan,
employee stock plans,
and other--1,224,000
shares 1,224 29,133 30,357
Tax benefit relating to
employee stock plans 2,902 2,902
-------- -------- --------- -------- ----------
Balance at December 31,
1999 $117,610 $329,003 $850,953 $(70,693) $1,226,873
======== ======== ========= ======== ==========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
S-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
The Consolidated Financial Statements have been prepared in conformity with
generally accepted accounting principles and reporting practices prescribed for
the banking industry. A description of significant accounting policies follows:
Basis of Presentation
The Consolidated Financial Statements for the Corporation include the accounts
of Old Kent Financial Corporation ("Parent Company") and its wholly owned
subsidiaries (collectively, "Old Kent" or the "Corporation"). Significant
intercompany balances and transactions have been eliminated in consolidation.
Nature of Operations
The Corporation operates two commercial banks with 203 full service offices
throughout Michigan, 49 such offices in the metropolitan markets in and around
Chicago, Illinois, and two such offices in Indiana. It also operates a mortgage
banking company with 147 offices located in thirty-two states. Other business
activities include investment management and trust services, as well as
brokerage and insurance services. Old Kent's revenue is mainly derived by
providing financial services to commercial and retail customers located within
those markets. The financial services provided primarily consist of the
extension of credit and acceptance of deposits.
Use of Estimates
Conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, and the disclosure of contingent assets and liabilities at the
date of the financial statements, as well as the amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates.
Trading Account Securities
Trading account securities are carried at market value. Gains and losses on
trading activities are included in other income in the Consolidated Statement
of Income.
Securities Available-for-Sale
Securities available-for-sale include those securities which might be sold as
part of Old Kent's management of interest rate risk, in response to changes in
interest rates, prepayment or credit risk or due to a desire to increase
capital or liquidity. While Old Kent has no current intention to sell these
securities, they may not be held for long-term investment. These assets are
carried on the balance sheet at their estimated fair values, with corresponding
(after-tax) valuation adjustments included as a component of shareholders'
equity. Gains and losses realized on sales of such securities are determined
using the specific identification method and are included in other income in
the Consolidated Statement of Income.
Premiums and discounts on securities available-for-sale, as well as securities
held-to-maturity, are amortized over the estimated lives of the related
securities. This amortization and adjustments stemming from changes in
estimated lives, are included in interest income in the accompanying
Consolidated Statement of Income.
Securities Held-to-Maturity
Securities held-to-maturity are stated at amortized cost. Designation as such a
security is made at the time of acquisition and is based on intent and ability
to hold the security to maturity.
S-38
Note 1. Summary of Significant Accounting Policies (continued)
Mortgage Banking Activities
The Corporation sells residential mortgage loans to investors on both a
servicing released and servicing retained basis. Gains on sales of mortgages
are recorded to the extent proceeds exceed the carrying value of the loans.
Mortgage loans held-for-sale are carried at the lower of cost or market, which
is determined under the aggregate method. In determining the lower of cost or
market, the gains and losses associated with the corresponding financial
instruments used to hedge against increases in interest rates, are considered.
The fair value of the Corporation's mortgage servicing rights is determined
based on quoted market prices for comparable transactions, if available, or a
valuation model that calculates the present value of expected future cash
flows. Mortgage servicing rights are amortized ratably in relation to the
associated servicing revenue over the estimated lives of the serviced loans.
The Corporation evaluates and measures impairment of its capitalized servicing
rights using stratifications based on the risk characteristics of the
underlying loans. Management has determined those risk characteristics to
include loan type and interest rate. Impairment, when present, is recognized
through a valuation allowance.
Loans
Loans are generally stated at their principal amount outstanding, net of
unearned income. Loan performance is reviewed regularly by loan review
personnel, loan officers and senior management. A loan is placed on nonaccrual
status and evaluated for impairment when principal or interest is past due 90
days or more and the loan is not well secured and in the process of collection,
or when, in the opinion of management, there is sufficient reason to doubt
collectibility of principal or interest. Interest previously accrued, but not
collected, is reversed and charged against interest income at the time the loan
is placed on nonaccrual status. Generally, the terms of loans that resulted
from troubled debt restructurings are at interest rates considered below
current market rates for comparable loans and are evaluated for impairment. The
Corporation considers loans which are on nonaccrual or restructured status as
impaired.
Old Kent's policy is to review impaired loans to determine the need for a
valuation allowance. The Corporation determines this need using the most
appropriate of the following methods: (1) the present value of the expected
future cash flows discounted at the loan's effective rate of interest, (2) the
loan's observable market price, or (3) the fair value of the collateral, if the
loan is collateral dependent. Large groups of smaller balance homogenous loans
with common risk characteristics are aggregated and collectively evaluated for
impairment. These large groups of smaller balance homogenous loans include
residential mortgages, consumer loans, and certain commercial loans, such as
those to small businesses.
Interest payments received on nonaccrual loans are recorded as principal
reductions if principal repayment is doubtful. Loans are no longer classified
as impaired when principal and interest payments are current and collectibility
is no longer in doubt. Interest income on restructured loans is recognized
according to the terms of the restructure, subject to the nonaccrual policy
described above.
Certain commitment and loan origination fees are deferred and amortized as an
adjustment of the related loan's yield over its contractual life using the
interest method, or other sufficiently similar methods. All remaining
commitment and loan origination fees and all direct costs associated with
originating or acquiring loans are recognized currently, which is not
materially different than the prescribed method.
Allowance for Credit Losses
The allowance for credit losses is maintained at a level that, in management's
judgment, is adequate to absorb losses inherent in the loan portfolio. The
amount is based on management's specific review and analysis of the loan
portfolio, and evaluation of the effects of current economic conditions on the
loan portfolio. This process
S-39
Note 1. Summary of Significant Accounting Policies (continued)
is based on estimates, and ultimate losses may materially differ in the near
term from the current estimates. As changes in estimates occur, adjustments to
the level of the allowance are recorded in the provision for credit losses in
the period in which they become known.
Premises and Equipment
Premises and equipment are stated at original costs, less accumulated
depreciation and amortization computed on the straight-line method over the
estimated useful lives of the assets or terms of the leases, whichever period
is shorter. For income tax purposes, minimum lives and accelerated methods are
used.
Other Real Estate Owned
Other real estate owned consists of properties acquired in partial or total
satisfaction of debt. Other real estate owned is stated at fair value. Losses
arising at acquisition are charged against the allowance for credit losses.
Reductions in fair value subsequent to acquisition are recorded in other
expense in the Consolidated Statement of Income.
Intangible and Other Long-lived Assets
Goodwill, representing the cost of investments in subsidiaries in excess of the
fair value of the net assets at acquisition, is amortized over periods ranging
from ten to twenty years. Other acquired intangible assets, such as those
associated with acquired core deposits, are amortized over periods not
exceeding fifteen years. When factors indicate that a long-lived asset or
identifiable intangible asset should be evaluated for impairment, the
Corporation estimates the undiscounted future cash flows over the remaining
life of the asset in assessing whether impairment should be recognized.
Trust Assets
Property, other than cash deposits, held in a fiduciary or agency capacity is
not included in the Consolidated Balance Sheet, since such assets are not owned
by the Corporation.
Retirement Plans
The defined benefit pension plan covers substantially all employees. The plan
provides for normal and early retirement, deferred benefits for vested
employees and, under certain circumstances, survivor benefits in the event of
death. Benefits are based on the employees' years of service and their five
highest consecutive years of compensation over the last ten years of service,
subject to certain limits. The proportion of average compensation paid as a
pension is determined by age and length of service as defined in the plan.
Contributions to the plan satisfy or exceed the minimum funding requirement of
the Employee Retirement Income Security Act (ERISA). Assets held by the plan
consist primarily of investments in several of Old Kent's proprietary mutual
funds.
Old Kent also maintains noncontributory, nonqualified pension, thrift, and
deferred compensation plans for certain participants whose retirement benefit
payments under qualified plans are expected to exceed the limits imposed by the
Internal Revenue Code. Old Kent maintains nonqualified trusts, referred to as
"rabbi" trusts, primarily to assure the benefits in excess of those permitted
in certain of the Old Kent qualified plans. These arrangements offer certain
officers of the Corporation a degree of assurance for ultimate payment of
benefits. The assets remain subject to the claims of creditors of Old Kent and
are not the property of the employees. Therefore, they are accounted for as
assets of the Corporation with a corresponding liability in the Consolidated
Balance Sheet.
S-40
Note 1. Summary of Significant Accounting Policies (continued)
Old Kent maintains a defined contribution retirement savings plan covering
substantially all employees. The Corporation's contribution is currently equal
to 50% of the amount contributed by the participating employees, limited to a
maximum of 3% of compensation as described under the terms of the plan. The
estimated contribution by Old Kent is charged to expense during the year in
which the employee contribution is received and is included in employee
benefits in the Consolidated Statement of Income.
Income Taxes
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using the enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be reversed. Old Kent and its subsidiaries file a consolidated
federal income tax return.
Earnings per Share
Basic earnings per share is computed by dividing net income by the average
number of common shares outstanding. Diluted earnings per share is computed by
dividing net income by the average number of common shares outstanding plus all
potential common shares. Dilutive potential common shares include all shares
which may become contractually issuable. For Old Kent, dilutive potential
common shares are primarily comprised of shares issuable under employee stock
plans.
Comprehensive Income
Comprehensive income consists of net income and adjustments to available-for-
sale securities. Old Kent presents comprehensive income in the Consolidated
Statement of Shareholders' Equity.
Financial Instrument Accounting Policy
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 contract
term.
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 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 sales of loans.
S-41
Note 1. Summary of Significant Accounting Policies (continued)
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.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS 137, "Deferral of the
Effective Date of FASB Statement No. 133." The Statement establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in the 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, 2001. 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 on or after January 1, 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.
Reclassification
Certain reclassifications have been made to prior periods' financial statements
to place them on a basis comparable with the current period's financial
statements.
Note 2. Business Acquisitions
On September 3, 1999, Old Kent completed the acquisition of Pinnacle Banc
Group, Inc. ("Pinnacle"). The merger was accounted for as a pooling-of-
interests and all financial statements in this report have been adjusted to
reflect this business combination. Old Kent exchanged approximately 5.6 million
shares of Old Kent Common Stock for all of the outstanding shares of Pinnacle
Common Stock. Pinnacle was a bank holding company headquartered in the Chicago
suburb of Oak Brook, Illinois. When acquired, Pinnacle had assets of
approximately $1.0 billion and consolidated deposits of approximately $861
million. Pinnacle was the parent of Pinnacle Bank, which operated thirteen
branches in the Chicago metropolitan area and Pinnacle Bank of the Quad-Cities,
which operated three branches in western Illinois.
On July 9, 1999, Old Kent completed the acquisition of CFSB Bancorp, Inc.
("CFSB"). The merger was accounted for as a pooling-of-interests and all
financial statements in this report have been adjusted to reflect
S-42
Note 2. Business Acquisitions (continued)
this business combination. Old Kent exchanged approximately 5.5 million shares
of Old Kent Common Stock for all of the outstanding shares of CFSB Common
Stock. CFSB was a holding company headquartered in Lansing, Michigan. When
acquired, CFSB had consolidated assets of approximately $878 million and
consolidated deposits of approximately $567 million. CFSB was the parent of
Community First Bank. CFSB provided banking services through sixteen offices in
Ingham, Clinton, Eaton and Ionia Counties in Michigan.
During the third quarter of 1999, Old Kent recognized $17.6 million of after-
tax, merger-related charges associated with CFSB and Pinnacle, which had the
effect of reducing earnings per share by $.15. On a pre-tax basis, the charges
consisted of transaction costs of $2.0 million; employment charges of $11.8
million primarily related to redundant staffing; and $12.2 million mainly
associated with contract cancellation costs and asset obsolescence for
duplicate operations. Old Kent's unexpended reserves for these charges were
$7.7 million at December 31, 1999. These reserves are expected to be utilized
during 2000.
On October 1, 1998, Old Kent completed the acquisition of First Evergreen
Corporation ("First Evergreen"). When acquired, First Evergreen had assets of
approximately $1.9 billion and deposits of approximately $1.7 billion. The
merger was accounted for as a pooling-of-interests and all financial statements
in this report have been adjusted to reflect this business combination. Old
Kent exchanged approximately 12.8 million shares of Old Kent Common Stock for
all the outstanding shares of First Evergreen Common Stock. During the fourth
quarter of 1998, Old Kent recognized $19.7 million of after-tax, merger related
charges, which had the effect of reducing earnings per share by $.15. First
Evergreen was a bank holding company headquartered in Evergreen Park, Illinois.
First Evergreen provided banking services through eight offices in Cook County,
Illinois.
Pending Acquisitions as of December 31, 1999
On July 29, 1999, Old Kent entered into a definitive agreement for the
acquisition of Merchants Bancorp, Inc. ("Merchants"). The merger is intended to
be accounted for as a pooling-of-interests. Old Kent will exchange .83 shares
of Old Kent Common Stock for each outstanding share of Merchants Common Stock.
Old Kent expects to issue approximately 4.5 million shares related to this
transaction. Merchants is a bank holding company headquartered in Aurora,
Illinois, with consolidated assets of approximately $979 million and
consolidated deposits of approximately $721 million at December 31, 1999.
Merchants operates 12 suburban Chicago area banking sites as well as two
banking sites in DeKalb and Kendall Counties, Illinois. The merger is expected
to be completed in February, 2000. The following details the proforma effects
of the merger as if it had been completed as of December 31, 1999:
Year ended December 31
-----------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
Old Kent Proforma Old Kent Proforma Old Kent Proforma
-------- -------- -------- -------- -------- --------
(dollars in thousands, except per share data)
Net income $252,539 $259,109 $225,323 $233,737 $223,520 $230,861
Basic E.P.S. $2.13 $2.11 $1.82 $1.83 $1.73 $1.73
Diluted E.P.S. $2.11 $2.09 $1.81 $1.81 $1.71 $1.71
Number of shares used to
calculate basic E.P.S. 118,700 123,005 123,512 127,808 129,374 133,658
Number of shares used to
calculate diluted
E.P.S. 119,715 124,070 124,766 129,124 130,446 134,760
On September 9, 1999, Old Kent entered into a definitive agreement for the
acquisition of Grand Premier Financial, Inc. ("Grand Premier"). The merger is
intended to be accounted for as a pooling-of-interests. Old Kent will exchange
.4231 shares of Old Kent Common Stock for each outstanding share of Grand
Premier Common Stock. Old Kent expects to issue approximately 10 million shares
related to this transaction. Grand
S-43
Note 2. Business Acquisitions (continued)
Premier is a bank holding company headquartered in Wauconda, Illinois, with
consolidated assets of approximately $1.7 billion and consolidated deposits of
approximately $1.4 billion at December 31, 1999. Grand Premier operates 23
banking offices in the Chicago area and northern Illinois. The merger is
expected to be completed in the second quarter of 2000.
Note 3. Pledged and Restricted Assets
The Federal Reserve requires the banking subsidiaries to maintain certain
average non-interest bearing cash balances in accordance with stated reserve
requirements. These average reserves approximated $18.1 million during 1999 and
$54.1 million during 1998.
At December 31, 1999, securities having an aggregate amortized cost of
approximately $2.1 billion were pledged to secure public and trust deposits and
for other purposes as required by law. These pledged assets primarily consisted
of securities available-for-sale and securities held-to-maturity.
The average Securities Sold Under Agreements to Repurchase was $681 million in
1999, and $661 million in 1998. The maximum amount of outstanding agreements at
any month-end during 1999 was $786 million. The average Securities Purchased
Under Agreements to Resell was $90 thousand in 1999. There were no outstanding
agreements to resell at any time during 1998. It is Old Kent's policy to take
possession of securities purchased under agreements to resell.
Note 4. Securities Available-for-Sale
The following summarizes amortized cost and market values of securities
available-for-sale at December 31, 1999 and 1998:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1999 Gross Gains Losses Value
- ----------------- ---------- ---------- ---------- ----------
(dollars in thousands)
U.S. Treasury and federal agency
securities $609,003 $59 $19,494 $589,568
Collateralized mortgage
obligations:
U.S. Government issued 1,048,542 -- 32,497 1,016,045
Privately issued 394,974 40 8,521 386,493
Mortgage-backed pass-through
securities 444,309 221 26,023 418,507
State and political subdivisions 8,295 1,426 11 9,710
Other securities 196,409 294 2,858 193,845
---------- ------- ------- ----------
Total $2,701,532 $2,040 $89,404 $2,614,168
========== ======= ======= ==========
December 31, 1998
- -----------------
U.S. Treasury and federal agency
securities $1,168,946 $28,964 $51 $1,197,859
Collateralized mortgage
obligations:
U.S. Government issued 1,267,819 8,661 1,817 1,274,663
Privately issued 366,307 2,057 902 367,462
Mortgage-backed pass-through
securities 198,890 1,499 671 199,718
State and political subdivisions 16,851 2,591 1 19,441
Other securities 266,537 11,399 1,577 276,359
---------- ------- ------- ----------
Total $3,285,350 $55,171 $5,019 $3,335,502
========== ======= ======= ==========
S-44
Note 4. Securities Available-for-Sale (continued)
The amortized cost and market values of securities available-for-sale at
December 31, 1999, are shown below by their contractual maturity. Expected
maturities may differ from contractual maturities because issuers may have the
right to call or prepay the obligation with or without call or prepayment
penalties.
Estimated
Amortized Market
December 31, 1999 Cost Value
- ----------------- ---------- ----------
(dollars in
thousands)
U.S. Treasury and federal agency securities:
Due in one year or less $75,531 $75,442
Due after one year through five years 385,445 373,150
Due after five years through ten years 134,186 128,197
Due after ten years 13,841 12,779
---------- ----------
Total U.S. Treasury and federal agency securities 609,003 589,568
---------- ----------
State and political subdivision securities:
Due in one year or less 2,366 2,503
Due after one year through five years 4,323 5,304
Due after five years through ten years 1,371 1,663
Due after ten years 235 240
---------- ----------
Total state and political subdivision securities 8,295 9,710
Collateralized mortgage obligations and other mortgage-
backed securities 1,887,825 1,821,045
Other securities 196,409 193,845
---------- ----------
Total $2,701,532 $2,614,168
========== ==========
Note 5. Securities Held-to-Maturity
The following summarizes amortized cost and market values of securities held-
to-maturity at December 31, 1999 and 1998:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1999 Cost Gains Losses Value
- ----------------- --------- ---------- ---------- ---------
(dollars in thousands)
U.S. Treasury and federal agency
securities $30,507 $9 $534 $29,982
Collateralized mortgage
obligations:
U.S. Government issued 25,973 -- 503 25,470
Privately issued 5,266 -- 55 5,211
Mortgage-backed pass-through
securities 61,096 947 791 61,252
State and political subdivision
securities 482,253 5,660 23,630 464,283
Other securities 4,148 2 -- 4,150
-------- ------- ------- --------
Total $609,243 $6,618 $25,513 $590,348
======== ======= ======= ========
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 subdivision
securities 440,077 16,347 467 455,957
Other securities 935 -- -- 935
-------- ------- ------- --------
Total $803,745 $20,804 $939 $823,610
======== ======= ======= ========
S-45
Note 5. Securities Held-to-Maturity (continued)
The amortized cost and market values of securities held-to-maturity at December
31, 1999, are shown below by their contractual maturity. Expected maturities
may differ from contractual maturities because issuers may have the right to
call or prepay the obligation with or without call or prepayment penalties.
Estimated
Amortized Market
December 31, 1999 Cost Value
- ----------------- --------- ---------
(dollars in
thousands)
U.S. Treasury and federal agency securities:
Due in one year or less $3,011 $3,020
Due after one year through five years 5,000 4,886
Due after five years through ten years 22,496 22,076
-------- --------
Total U.S. Treasury and federal agency securities 30,507 29,982
-------- --------
State and political subdivision securities:
Due in one year or less 36,467 36,735
Due after one year through five years 117,548 119,495
Due after five years through ten years 129,860 128,457
Due after ten years 198,378 179,596
-------- --------
Total state and political subdivision securities 482,253 464,283
Collateralized mortgage obligations and other mortgage-
backed securities 92,335 91,933
Other 4,148 4,150
-------- --------
Total $609,243 $590,348
======== ========
Note 6. Loans and Nonperforming Assets
The following summarizes loans:
December 31
-----------------------
1999 1998
----------- -----------
(dollars in thousands)
Commercial $3,169,549 $2,818,558
Real estate--Commercial 2,397,663 2,093,009
Real estate--Construction 1,091,864 742,834
Real estate--Residential mortgages 1,647,064 1,895,912
Real estate--Consumer home equity 2,081,893 1,125,139
Consumer 1,416,694 1,378,252
Lease financing 262,334 166,374
----------- -----------
Total Loans $12,067,061 $10,220,078
=========== ===========
Loans made by Old Kent to its directors and executive officers, including their
family members and associated entities, aggregated $78 million and $54 million
at December 31, 1999 and 1998, respectively. During 1999, new loans and other
additions amounted to $53 million and repayments and other reductions were $29
million. These loans were made in the ordinary course of business under normal
credit terms, including interest rate and collateralization and do not
represent more than a normal risk of collection.
During 1998, Old Kent sold $90.1 million of student loans and $47.4 million of
auto loans. A $1.7 million gain was recognized on these sales. During 1997, Old
Kent sold its credit card loan portfolio of $266.3 million and $59.3 million of
other consumer loans. A $17.0 million gain was recognized on these sales.
S-46
Note 6. Loans and Nonperforming Assets (continued)
The table below summarizes impaired loans and other nonperforming assets:
December 31
-----------------------
1999 1998
----------- -----------
(dollars in thousands)
Impaired loans:
Nonaccrual loans $ 55,491 $ 61,238
Restructured loans 1,878 3,147
----------- -----------
Total impaired loans 57,369 64,385
Other real estate owned 8,151 8,106
----------- -----------
Total nonperforming assets $ 65,520 $ 72,491
=========== ===========
Loans past due 90 days or more for which interest income continues to be
recognized totaled $14.2 million and $16.9 million at December 31, 1999, and
1998, respectively. Gross interest income that would have been recorded in 1999
for nonaccrual and restructured loans as of December 31, 1999, assuming
interest had been accrued throughout the year in accordance with original
terms, was $5.6 million. The comparable total for 1998 was $6.2 million. The
amount of interest included in income on these loans was $2.0 million and $2.3
million in 1999 and 1998, respectively. During the years 1999 and 1998,
impaired loans averaged $58.9 million and $71.4 million, respectively. At
December 31, 1999, there was no specific valuation allowance associated with
impaired loans.
At December 31, 1999, the Corporation's management has also identified loans
totaling approximately $14.3 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 December 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.
Although Old Kent has a diversified loan portfolio, a substantial natural
geographic concentration of credit risk exists within the Corporation's defined
customer market areas. These geographic market areas are the State of Michigan,
the greater Grand Rapids, Michigan area, and the Chicago, Illinois metropolitan
and suburban markets. There are no significant concentrations of credit where
customers' ability to honor loan terms is dependent upon a single economic
sector.
Note 7. Allowance for Credit Losses
The following summarizes the changes in the allowance for credit losses:
Year ended December 31
----------------------------
1999 1998 1997
-------- -------- --------
(dollars in thousands)
Balance at beginning of year $179,605 $173,203 $181,898
Additions:
Provision charged to operations 26,175 47,218 47,337
Business acquisitions and loan purchases 120 -- 3,204
-------- -------- --------
Total additions 26,295 47,218 50,541
-------- -------- --------
Deductions:
Credit losses (42,445) (57,387) (67,389)
Less recoveries 20,832 17,048 16,748
-------- -------- --------
Net credit losses (21,613) (40,339) (50,641)
Loan sales and other dispositions -- (477) (8,595)
-------- -------- --------
Total deductions (21,613) (40,816) (59,236)
-------- -------- --------
Balance at end of year $184,287 $179,605 $173,203
======== ======== ========
S-47
Note 8. Premises and Equipment
The following summarizes leasehold improvements, premises and equipment:
December 31,
-----------------------
1999 1998
----------- -----------
(dollars in thousands)
Land $40,836 $41,469
Land improvements 12,082 9,866
Buildings and improvements 231,780 235,930
Leasehold improvements 27,150 24,716
Furniture and equipment 227,609 212,876
----------- -----------
539,457 524,857
Less accumulated depreciation and amortization 292,188 272,784
----------- -----------
Net premises and equipment $ 247,269 $ 252,073
=========== ===========
Note 9. Other Assets
Other assets shown on the consolidated balance sheet include the following
intangible assets (net of accumulated amortization):
December 31,
-----------------------
1999 1998
----------- -----------
(dollars in thousands)
Goodwill $ 113,273 $ 122,089
Core deposit intangibles 16,407 20,560
----------- -----------
Total $ 129,680 $ 142,649
=========== ===========
Other assets shown on the consolidated balance sheet include mortgage servicing
rights ("MSRs") as follows:
December 31,
-----------------------
1999 1998
----------- -----------
(dollars in thousands)
MSRs, net of amortization $ 274,896 $ 228,672
Less servicing valuation reserve -- (9,129)
----------- -----------
Carrying value of MSRs $ 274,896 $ 219,543
=========== ===========
Estimated aggregate fair value of capitalized MSRs $ 323,000 $ 255,000
The estimated fair values shown above for these MSRs, were determined based
upon quoted market prices for comparable transactions, where available, or the
present value of expected future cash flows.
S-48
Note 9. Other Assets (continued)
The following reflects capitalized mortgage servicing rights and the related
servicing valuation reserve for the years indicated:
Year Ended December 31,
------------------------
1999 1998
----------- -----------
(dollars in thousands)
MSRs:
Balance at beginning of period $228,672 $151,390
Additions 257,720 202,695
Sales (155,840) (73,740)
Amortization (55,656) (51,673)
----------- -----------
Balance at end of period $274,896 $228,672
=========== ===========
Related servicing valuation reserve:
Balance at beginning of period $(9,129) $(4,629)
Servicing valuation provision 9,129 (4,500)
----------- -----------
Balance at end of period $0 $(9,129)
=========== ===========
Note 10. Other Borrowed Funds
The following summarizes other borrowed funds:
December 31,
-----------------------
1999 1998
----------- -----------
(dollars in thousands)
Bank notes $500,000 $250,000
Securities sold under agreements to repurchase 699,617 756,968
Treasury tax and loan demand notes 161,084 110,940
Federal funds purchased 235,486 502,000
Federal Home Loan Bank advances 927,170 736,835
Other borrowed funds 27,520 48,228
----------- -----------
Total other borrowed funds $ 2,550,877 $ 2,404,971
=========== ===========
The $500.0 million of bank notes bear interest at variable rates indexed to
three-month LIBOR and prime, and mature at various dates through 2000.
The Federal Home Loan Bank (FHLB) advances are at fixed and variable interest
rates and mature at various dates through 2011. There are $402.2 million in
fixed interest rate advances that have a weighted average interest rate of
6.06%. There are $525.0 million in variable interest rate advances that are
indexed to one-month LIBOR and Fed effective rates. Advances from the FHLB are
collateralized by 1-4 family mortgages.
Note 11. Long-Term Debt
Long-term debt, as shown in the accompanying consolidated balance sheets,
consists of the following:
1999 1998
----------- -----------
(dollars in thousands)
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
=========== ===========
S-49
Note 11. Long-Term Debt (continued)
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 Debenture ranks 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 the 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 and the
Indenture, 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.
Note 12. Preferred Stock and Preferred Stock Purchase Rights
At December 31, 1999, 1998 and 1997, there were 25,000,000 shares of preferred
stock authorized but not issued. At December 31, 1999, 1998 and 1997, 3,000,000
of these shares were designated Series A Preferred Stock and 500,000 shares
were designated Series B Preferred Stock. At December 31, 1999 and 1998,
1,000,000 shares of authorized but unissued preferred stock were designated
Series C Preferred Stock.
On December 31, 1999, approximately 50.8 million Series C Preferred Stock
Purchase Rights ("Series C Rights") were outstanding. Series C Rights were
issued under the Preferred Stock Purchase Rights Plan of 1997 and are governed
by a rights agreement (the "Rights Agreement"), which was adopted by the Board
on January 20, 1997. Series C Rights were issued on February 14, 1997 as a
dividend to holders of the Corporation's common stock at the rate of one right
for each share of common stock outstanding. As a result of a two-for-one stock
split paid in 1997 and a 5% stock dividend paid in 1997, 1998 and 1999, each
share of the Corporation's common stock carried .4319 of a Series C Right at
December 31, 1999. Each full Series C Right entitled the holder to buy 1/100 of
a share of Series C Preferred Stock at a price of $160.00. The exercise price
and the number of shares of Series C Preferred Stock issuable upon the exercise
of the Series C Rights are subject to adjustment in certain cases to prevent
dilution. Series C Rights are attached to and evidenced by common stock
certificates and are not transferable apart from the common stock until the
occurrence of certain events set forth in the Rights Agreement. Series C Rights
do not have any voting rights. Series C Rights are redeemable at the option of
the Corporation, at a price of $.01 per Series C Right, prior to the time any
person or group acquires beneficial ownership of 15% or more of the then
outstanding common stock, commences a
S-50
Note 12. Preferred Stock and Preferred Stock Purchase Rights (continued)
tender offer for 15% or more of the then outstanding common stock, or is
declared by the board of directors to be an "adverse person" under the plan.
Series C Rights expire on February 13, 2007. So long as the Rights are not
separately transferable, the Corporation will issue .4319 of a Right (subject
to possible future adjustment) with each newly issued share of common stock.
On December 31, 1999, 7,250 shares of preferred stock were designated Series D
Perpetual Preferred Stock ("Series D Shares") and 2,000 shares of preferred
stock were designated Series E Preferred Stock ("Series E Shares"). Series D
Shares and Series E Shares were, at December 31, 1999, authorized, unissued,
and reserved for issuance in the then pending acquisition of Grand Premier.
Each Series D Share and Series E Share would have a stated value of $1,000 per
share and would provide for cumulative dividends, payable quarterly, at an
annual rate of 8% based on the $1,000 stated value. Series D Shares are senior
as to dividends to Series E Shares and both Series D and Series E Shares are
senior as to dividends to Old Kent Series C Preferred Stock and Old Kent Common
Stock. In the event of liquidation, Series D Shares and Series E Shares would
rank on parity and would be senior to Old Kent Series C Preferred Stock and Old
Kent Common Stock. Neither Series D Shares nor Series E Shares are redeemable
at the option of either Old Kent or the holder. Series D Shares are
convertible, at the option of the holder, into shares of Old Kent Common Stock,
at a price of $18.2905 of stated value per share of Old Kent Common Stock,
subject to antidilution provisions. Series E Shares would not be convertible,
but would, in the event of certain business combinations, be entitled to
receive a cash payment equivalent to the conversion value of Series D Shares.
Series D Shares and Series E Shares would be issued to holders of equivalent
classes of preferred stock of Grand Premier in Old Kent's pending acquisition
of Grand Premier, expected to be completed during the second quarter of 2000.
Note 13. Common Stock
During the three years ended December 31, 1999, the Corporation has issued
shares for stock dividends as follows:
Amount of Number of
Stock Shares Payment Record Declaration
Dividend Issued Date Date Date
Year --------- --------- ------- ------- -----------
1999 5 percent 5,125,000 July 19 June 29 June 21
1998 5 percent 4,489,000 July 17 June 26 June 15
1997 5 percent 2,269,000 July 28 June 27 June 16
On December 15, 1997, the Corporation issued 46.4 million shares of its common
stock in a two-for-one stock split, effected as a 100 percent stock dividend,
to shareholders of record on November 14, 1997. All per share amounts included
in this report have been retroactively adjusted to reflect the effect of the
stock dividends and the stock split. On June 16, 1997, the Board of Directors
of the Corporation authorized repurchase of up to 3.0 million shares of Old
Kent Common Stock, which would be reserved for later reissue in connection with
future stock dividends, employee stock plans and other corporate purposes. This
authorization was amended by the Board of Directors on October 20, 1997, to
give effect to the two-for-one stock split paid December 15, 1997. The amended
authorization doubled the number of shares authorized for repurchase but not
yet repurchased on the payment date of the stock split. On June 15, 1998, the
Board of Directors of the Corporation authorized repurchase of up to 6.0
million shares of Old Kent Common Stock, which are reserved for later reissue
in connection with future stock dividends, employee stock plans, and other
corporate purposes. On June 21, 1999, Old Kent's Board of Directors authorized
repurchase of up to 3.0 million shares of Old Kent Common Stock, which are
reserved for later reissue in connection with future stock dividends, employee
stock plans and other corporate purposes.
S-51
Note 13. Common Stock (continued)
The table below summarizes shares repurchased and reserved with the intent of
future reissuance at December 31, 1999:
Dividend
Reinvestment
Stock and Employee
Total Dividends Stock Plans
---------- ---------- ------------
Shares reserved at December 31, 1998 3,801,670 2,600,000 1,201,670
Shares repurchased under authorizations 4,128,908 3,168,209 960,699
Shares issued for related stated purposes (5,939,532) (5,018,209) (921,323)
---------- ---------- ---------
Shares reserved at December 31, 1999 1,991,046 750,000 1,241,046
========== ========== =========
Of the 4.1 million shares repurchased during 1999, 1.5 million shares were
repurchased under the June 15, 1999, authorization. At December 31, 1999, Old
Kent had remaining authorization to repurchase approximately 1.5 million shares
of its common stock over the ensuing seven month period. Shares intended for
anticipated future stock dividends are reacquired ratably on a quarterly basis;
shares intended for reissue in connection with dividend reinvestment and
employee stock plans are reacquired quarterly as needed to maintain shares
reserved for those purposes at a level consistent with anticipated permissible
needs; shares for use in connection with general corporate purposes and
business acquisitions are reacquired based upon need.
Note 14. Stock Based Compensation
Old Kent has stock option plans under which options may be granted to certain
key employees at not less than the market price of Old Kent's common stock on
the date of grant. The options granted are exercisable immediately, or are
subject to a vesting schedule where one third of the shares vests immediately,
one third vests at the first anniversary date of the grant, and the final third
vests at the second anniversary date. Options granted expire within ten years
of the date of grant, subject to certain cancellation provisions relating to
employment. In addition, under the Stock Incentive Plan of 1999, Old Kent may
also award restricted stock to certain key employees. At December 31, 1999, a
total of 7.5 million shares were reserved for option or restricted stock
grants, including 3.4 million shares available for future option or restricted
stock grants under stock incentive plans. Restricted shares issued pursuant to
the plans are restricted as to sale or transfer for a specified period,
typically five years and are forfeitable (subject to certain exceptions) upon
termination of employment, but provide the recipients with all other rights and
benefits of ownership. During 1999, 1998, and 1997, Old Kent issued 50,159
shares, 107,306 shares and 200,955 shares of its common stock with total market
values of $1,892,100, $3,835,000 and $5,071,000, respectively, which are being
amortized ratably to expense over the period of restriction. The following
table summarizes stock option transactions and the related average exercise
prices for the last three years:
1999 1998 1997
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
No. of Exer. No. of Exer. No. of Exer.
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
(adjusted for stock splits and dividends)
Options outstanding at
beginning of year 2,838,410 $21.49 2,224,254 $13.34 2,709,212 $10.25
Options granted 1,822,964 41.21 1,051,417 34.73 489,320 24.22
Options exercised (560,314) (15.87) (388,278) (10.45) (958,478) (11.13)
Options forfeited or
canceled (61,534) (37.89) (48,983) (23.73) (15,800) (9.43)
--------- --------- ---------
Options outstanding at
end of year 4,039,526 $32.08 2,838,410 $21.49 2,224,254 $13.34
========= ========= =========
Weighted average
estimated fair value of
options granted in year $11.48 $9.31 $5.49
Exercisable at end of
year 2,535,655 $27.41 2,366,947 $20.30 2,038,567 $13.43
========= ========= =========
S-52
Note 14. Stock Based Compensation (continued)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. The following weighted average assumptions
were used to estimate the fair value of options granted for:
1999 1998 1997
------- ------- -------
Dividend yield 2.0% 2.0% 2.5%
Expected average life (in years) 6 6 5
Expected volatility 22% 23% 20%
Risk free interest rate 5.8-6.3% 4.5-5.5% 5.7-6.2%
Options were outstanding at December 31, 1999 as follows:
Outstanding Stock Exercisable
Options Options
-------------------- ------------------
Weighted
Average
Number of Weighted Remaining Weighted
Exercise Options Average Contractual Average
price per Lowest Highest at year Exercise Life Number of Exercise
share Price Price end Price (years) Options Price
--------- ------ ------- --------- -------- ----------- --------- --------
Under $11 $4.65 $10.54 188,359 $8.48 1.7 188,359 $8.48
$11 -$20 12.39 16.04 689,105 13.96 5.1 689,105 13.96
$21 -$32 21.06 31.25 357,889 25.00 7.5 352,639 24.90
$33 -$41 34.17 40.74 983,806 34.93 8.5 686,921 34.95
Over $41 41.16 41.85 1,820,367 41.23 9.5 618,631 41.23
--------- ---------
All options $4.65 $41.85 4,039,526 $32.08 8.0 2,535,655 $27.41
========= =========
The Corporation accounts for its option plans and employee stock purchase plan
under the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25), under which no compensation cost has
been recognized in the accompanying Consolidated Statement of Income. The table
below displays pro forma amounts for net income and net income per common share
which reflects the effects of additional compensation cost for 1999, 1998, and
1997 option grants as if they had been recognized under SFAS No. 123,
"Accounting for Stock Based Compensation." The 1999 proforma figures also
include the impact of additional compensation cost associated with the 15%
discount provided to eligible employees who participate in the Old Kent
Financial Corporation Employee Stock Purchase Plan of 1999, which is further
described below.
1999 1998 1997
--------------------------- --------------------------- ---------------------------
Basic Diluted Basic Diluted Basic Diluted
Net Income EPS EPS Net Income EPS EPS Net Income EPS EPS
------------- ----- ------- ------------- ----- ------- ------------- ----- -------
(in millions) (in millions) (in millions)
As reported $252.5 $2.13 $2.11 $225.3 $1.82 $1.81 $223.5 $1.73 $1.71
Pro forma 243.3 2.05 2.03 220.6 1.79 1.77 221.9 1.72 1.70
Old Kent also has a deferred stock compensation plan under which key employees
may be awarded shares of stock as deferred compensation to be received at a
specified later date, which may be up to five years after the date of the
award. The plan provides for the issuance of a maximum of 766,348 authorized
but previously unissued shares of Old Kent's common stock. Shares awarded under
the plan would not be issued until the end of the deferral period, unless there
is a change in control of the Corporation, in which case the shares would be
issued to a trust where they are to be held and distributed at the end of the
deferral period. Employees who receive awards under this plan will receive
additional shares as if the dividends which would have been paid on the shares
awarded if they were outstanding during the deferral period were reinvested
under Old Kent's dividend reinvestment plan. There were no awards of deferred
stock during 1999 or 1998. During 1997, Old Kent awarded 30,840 shares of its
common stock valued at $755,000 at their award date. At December 31, 1999,
there were 498,382 shares reserved for future deferred stock compensation plan
awards.
S-53
Note 14. Stock Based Compensation (continued)
The Old Kent Financial Corporation Employee Stock Purchase Plan of 1999 (the
"Purchase Plan") provides for eligible employees to authorize the Corporation
to withhold up to $1,000 of their compensation for the purchase of shares of
Old Kent Common Stock. Approximately 2,379 or 30% of the Company's eligible
employees participate in the Purchase Plan. The purchase price for each share
is equal to 85% of the market value on the day of the purchase. A total of 2.1
million shares were reserved for issuance under the Purchase Plan. The market
value of shares purchased by a participant cannot exceed $25,000 in any one
year. Since the inception of the Purchase Plan in July of 1999, a total of
24,357 shares have been purchased by participants at prices ranging from $30.68
to $33.87 per share. The weighted average fair value of these shares was
$32.44. As of December 31,1999, 2.08 million shares of the Corporation's common
stock are available for purchase under the Purchase Plan.
Old Kent also had restricted stock plans under which certain key employees were
awarded restricted stock. These plans were replaced in 1999 by the Stock
Incentive Plan of 1999 and all future awards will be made under this plan.
Shares issued pursuant to the plans are restricted as to sale or transfer for a
period of up to five years and are forfeitable (subject to certain exceptions)
upon termination of employment, but provide the recipients with all other
rights and benefits of ownership. During 1998 and 1997, Old Kent issued 107,306
shares and 200,955 shares of its common stock with total market values of
$3,835,000 and $5,071,000, respectively, which are being amortized ratably to
expense over the period of restriction.
Note 15. Employee Benefits
The Corporation provides pension benefits to substantially all of its employees
under the terms of the "Old Kent Retirement Income Plan." Old Kent also
provides its key executives with pension benefits under the provisions of the
"Old Kent Executive Retirement Income Plan." Old Kent uses a measurement date
of September 30 for its disclosures. The following table sets forth the changes
in the benefit obligation and plan assets as well as the funded status of both
pension plans for the years ended December 31, 1999 and 1998 in accordance with
the provisions of SFAS No. 132, "Employers' Disclosures about Pensions and
Other Post-Retirement Benefits."
Qualified Non-Qualified
Retirement Income Retirement Income
Plan Plan
------------------- ------------------
1999 1998 1999 1998
-------- -------- -------- --------
(dollars in thousands)
Change in Benefit Obligation
Benefit obligation at prior
measurement date $116,040 $107,314 $22,194 $20,030
Service cost 9,544 9,085 766 875
Interest cost 7,478 7,582 1,420 1,448
Amendments -- 2,594 -- 431
Actuarial (gain)/loss (21,071) 4,572 (3,803) 746
Benefits paid in current year (11,302) (15,107) (1,219) (1,336)
-------- -------- -------- --------
Benefit obligation at measurement
date $100,689 $116,040 $19,358 $22,194
======== ======== ======== ========
Change in Plan Assets
Market value of assets at prior
measurement date $114,661 $111,094 -- --
Actual return on assets 880 15,674 -- --
Contributions made in current year 2,009 3,000 1,219 1,336
Benefits paid in current year (11,302) (15,107) (1,219) (1,336)
-------- -------- -------- --------
Market value of assets at
measurement date $106,248 $114,661 $0 $0
======== ======== ======== ========
Reconciliation of Funded Status
Funded status $5,559 $(1,379) $(19,358) $(22,194)
Unrecognized transition
(asset)/obligation (8,965) (10,792) 157 245
Unrecognized prior service cost 4,225 4,785 2,062 2,332
Unrecognized net (gain)/loss (10,374) 2,426 910 4,997
-------- -------- -------- --------
Accrued pension cost, December 31,
1999 $(9,555) $(4,960) $(16,229) $(14,620)
======== ======== ======== ========
S-54
Note 15. Employee Benefits (continued)
At December 31, 1999, $16.4 million was held in "rabbi" trust accounts to fund
and secure the benefits of the Non-Qualified Retirement Income Plan as
described in Note 1.
Net pension expense included the following components:
Year ended December 31
--------------------------------------------
Non-Qualified
Qualified Retirement Retirement Income
Income Plan Plan
---------------------- --------------------
1999 1998 1997 1999 1998 1997
------ ------ ------ ------ ------ ------
(dollars in thousands)
Service cost (benefits earned
during the year) $9,544 $9,085 $7,739 $766 $875 $946
Interest cost on projected
benefit obligation 7,478 7,582 7,955 1,420 1,448 1,639
Expected (return)/loss on plan
assets (9,633) (9,365) (8,348) -- -- --
Amortization of transition
obligation (1,827) (1,827) (1,827) 89 89 89
Amortization of prior service
cost 560 216 216 261 207 207
Recognized net actuarial
(gain)/loss 482 1,046 926 284 316 399
------ ------ ------ ------ ------ ------
Net periodic pension expense $6,604 $6,737 $6,661 $2,820 $2,935 $3,280
====== ====== ====== ====== ====== ======
The following assumptions were used in determining the actuarial present value
of the projected benefit obligations as of the measurement date for each of the
following years:
Qualified Non-Qualified
Retirement Income Retirement
Plan Income Plan
------------------- ----------------
1999 1998 1997 1999 1998 1997
----- ----- ----- ---- ---- ----
Discount rate 7.75% 6.75% 7.00% 7.75% 6.75% 7.00%
Rate of increase in future compensation
levels 4.50 4.25 4.25 6.00 6.00 6.00
Expected long-term rate of return on
plan assets 10.00 10.00 10.00 -- -- --
Old Kent has adopted amended assumptions, as shown above, for use in the
actuarial determination of its projected benefit obligations at December 31,
1999. Beginning with 1999, Old Kent changed its measurement date from December
31 to September 30. The effects of these changes are included in the actuarial
gain for 1999. The amended assumptions reflect a change in outlook based on
management's assessment of expected economic conditions for the foreseeable
future.
Eligible employees may elect to participate in Old Kent's retirement savings
plans whereby the Corporation contributes a 50% matching contribution for each
amount contributed by participating employees, within limits as defined in the
plans. The cost of these retirement savings plans was $6,334,000, $8,575,000,
and $7,071,000 for 1999, 1998 and 1997, respectively.
The Corporation provides post-retirement benefits other than pensions for a
small group of employees who were entitled to such benefits under plans of
predecessor banking organizations acquired by Old Kent. These benefits
primarily consist of health care and life insurance. The costs of these
benefits are not material and are recognized in the financial statements during
the employees' years of service.
S-55
Note 16. Taxes on Income
Components of the provision for income taxes are as follows:
Year ended December 31
--------------------------
1999 1998 1997
-------- -------- --------
(dollars in thousands)
Federal income taxes:
Current $115,258 $96,066 $90,936
Deferred 12,460 16,614 20,560
State income taxes 9,059 5,691 6,827
-------- -------- --------
Total provision $136,777 $118,371 $118,323
======== ======== ========
The preceding table excludes tax (benefit) expense of ($34.3 million) and $7.8
million for 1999 and 1998, respectively, related to the market value
adjustments on investment securities available-for-sale, which is recorded
directly in shareholders' equity.
Income tax expense differs from that computed at the federal statutory rate as
follows:
Year ended December 31
----------------------------
1999 1998 1997
-------- -------- --------
(dollars in thousands)
Tax at 35% statutory rate $136,261 $120,293 $119,645
Tax effect of:
Tax-exempt interest (10,897) (9,176) (7,796)
Other, net 11,413 7,254 6,474
-------- -------- --------
Income tax expense $136,777 $118,371 $118,323
======== ======== ========
Effective tax rate 35.1% 34.4% 34.6%
Components of the deferred tax assets and liabilities were as follows:
Year ended
December 31
---------------
1999 1998
------- -------
(dollars in
thousands)
Deferred tax assets:
Allowance for credit losses $67,362 $66,377
Deferred compensation 23,330 19,633
Accrued expenses 9,273 6,107
Unrealized loss on securities available-for-sale 16,671 --
Other 13,779 12,211
------- -------
Total deferred tax assets 130,415 104,328
Valuation allowance -- --
------- -------
Deferred tax assets 130,415 104,328
------- -------
Deferred tax liabilities:
Mortgage servicing rights 80,939 60,116
Unrealized gain on securities available-for-sale -- 17,606
Other 19,817 18,764
------- -------
Deferred tax liabilities 100,756 96,486
------- -------
Net deferred tax assets $29,659 $7,842
======= =======
S-56
Note 17. 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.
Corporate Banking provides a full array of credit, cash management and
international services to corporate customers. The majority of Old Kent's
corporate customers are owner-operated, middle-market companies with $5-150
million in annual sales. This customer base is spread across industries,
including manufacturing, wholesaling, distributing, real estate developing, and
retailing. Retail Banking distributes a broad array of consumer and small
business products including deposits, loans and other transaction oriented
services. These products and services are delivered through a comprehensive
distribution system which includes ATMs, telephone, on-line and supermarket
banking as well as conventional branch sales offices. Community Banking
provides locally-based delivery of a complete range of financial products and
services to smaller communities. Investment and Insurance Services delivers
investment and insurance products through a wide network which includes
traditional trust, private banking, brokerage, investment advisory, insurance
agency, mutual funds, employee benefit administration and other financial
services. Mortgage Banking provides a wide array of residential mortgage loan
products to borrowers through a branch network of 147 offices in 32 states. The
Treasury function primarily manages Old Kent's liquidity and interest rate
risk. With the exception of the Mortgage Banking segment which operates
nationwide, Old Kent's segments operate primarily within the lower peninsula of
Michigan and northern Illinois.
The Treasury function administers intersegment funding using transfer pricing
techniques, consistent with market rates. The elimination of intersegment
funding interest income and expense is included in the Treasury line of
business results.
The accounting policies of the segments are essentially the same as those
described in the summary of significant accounting policies. Old Kent evaluates
performance based on profit and loss from operations. Management assesses
performance of each segment based upon all relevant results as shown in the
table below.
Old Kent's revenues are derived almost entirely from sources within the United
States. Old Kent does not rely on any customer to provide 10% or more of
revenues.
S-57
Note 17. Reportable Operating Segments (continued)
Old Kent began transitioning to line of business management during 1997 and
continued through 1998. As a result, management has concluded that it is
impracticable to recreate data in a manner that allows for comparison of 1997
to 1998 and 1999. The following table summarizes information about reportable
operating segments' profit and loss and segments' assets as of December 31,
1999 and 1998:
Year ended December 31, 1999
--------------------------------------------------------------------------------------
Investment
Corporate Retail Community & Mortgage Reconciling Consolidated
Banking Banking Banking Insurance Banking Treasury Items* Total
--------- --------- --------- ---------- --------- --------- ----------- ------------
(dollars in thousands)
Net interest revenues $155,319 $280,841 $174,598 $19,739 $47,294 $(591) -- $677,200
Provision for loan
losses 7,390 9,457 4,572 770 4,093 (107) -- 26,175
Non-interest revenues
and fees 17,231 66,145 38,616 107,195 189,776 5,797 -- 424,760
Depreciation and
amortization 7,706 21,566 11,311 4,324 11,590 2,865 -- 59,362
Segment income taxes 39,743 38,055 32,859 16,419 21,772 (3,671) (8,400) 136,777
Net segment profit
(after taxes) 69,424 67,578 61,337 29,848 23,156 18,796 (17,600) 252,539
Segment assets 3,547,831 3,918,467 2,844,415 338,354 2,031,647 5,289,118 -- 17,969,832
Segment loans 3,558,319 3,627,999 2,725,432 275,383 649,718 1,230,210 -- 12,067,061
Segment allowance for
loan losses 77,675 48,105 47,830 4,233 5,249 1,195 -- 184,287
Net segment loans 3,480,644 3,579,894 2,677,602 271,150 644,469 1,229,015 -- 11,882,774
Segment deposits 982,501 7,740,253 3,271,642 483,581 2,100 1,214,935 -- 13,695,012
Year ended December 31, 1998
--------------------------------------------------------------------------------------
Investment
Corporate Retail Community & Mortgage Reconciling Consolidated
Banking Banking Banking Insurance Banking Treasury Items* Total
--------- --------- --------- ---------- --------- --------- ----------- ------------
(dollars in thousands)
Net interest revenues $146,193 $269,795 $171,566 $16,397 $27,299 $15,118 -- $646,368
Provision for loan
losses 12,045 12,347 16,459 899 1,252 716 3,500 47,218
Non-interest revenues
and fees 16,439 58,932 47,791 94,362 148,687 3,267 -- 369,478
Depreciation and
amortization 7,763 19,557 11,460 4,128 8,001 3,852 -- 54,761
Segment income taxes 31,317 35,885 32,216 11,575 15,193 1,000 (8,815) 118,371
Net segment profit
(after taxes) 57,865 66,097 61,275 20,857 16,701 22,206 (19,678) 225,323
Segment assets 3,096,064 2,574,580 2,565,990 265,288 3,404,540 6,707,163 -- 18,613,625
Segment loans 3,092,319 2,419,796 2,431,477 220,938 261,569 1,793,979 -- 10,220,078
Segment allowance for
loan losses 73,000 45,000 54,000 4,200 1,672 1,733 -- 179,605
Net segment loans 3,019,319 2,374,796 2,377,477 216,738 259,897 1,792,246 -- 10,040,473
Segment deposits 852,476 8,113,660 3,420,381 363,113 7,463 1,656,346 -- 14,413,439
* The reconciling items in the table reflect one-time charges related to Old
Kent's mergers during 1998 and 1999. During 1999 Old Kent merged with CFSB
and Pinnacle. Merger charges related to these transactions totaled $17.6
million after-tax. During 1998 Old Kent merged with First Evergreen
Corporation. Merger charges related to this transaction totaled $19.7 million
after-tax. These mergers are described in more detail in Note 2.
S-58
Note 18. Earnings per Share
The following table reconciles the numerators and denominators used in the
calculations of basic and diluted earnings per share for each of the last three
years:
1999 1998 1997
------------ ------------ ------------
Numerators:
Numerator for both basic and diluted
earnings per share, net income $252,539,000 $225,323,000 $223,520,000
============ ============ ============
Denominators:
Denominator for basic earnings per
share, average outstanding common
shares 118,700,000 123,512,000 129,374,000
Potential dilutive shares resulting
from employee stock plans 1,015,000 1,254,000 1,072,000
------------ ------------ ------------
Denominator for diluted earnings per
share 119,715,000 124,766,000 130,446,000
============ ============ ============
Earnings per Share:
Basic $2.13 $1.82 $1.73
============ ============ ============
Diluted $2.11 $1.81 $1.71
============ ============ ============
Note 19. Commitments and Contingencies
Certain facilities and equipment are leased under noncancelable operating lease
agreements which expire at various dates through the year 2021. The aggregate
minimum rental commitments are as follows:
Year ending December 31
--------------------------
Premises Equipment Total
-------- --------- -------
(dollars in thousands)
2000 $14,080 $3,763 $17,843
2001 11,521 1,898 13,419
2002 9,501 959 10,460
2003 6,088 163 6,251
2004 3,981 14 3,995
Thereafter 12,443 -- 12,443
------- ------ -------
Total minimum payments $57,614 $6,797 $64,411
======= ====== =======
Rental expense charged to operations in 1999, 1998, and 1997, amounted to
approximately $19,211,000, $14,876,000 and $11,201,000, respectively, including
amounts paid under short-term cancelable leases. Certain leases contain
provisions for renewal and purchase options, and require payment of property
taxes, insurance and related expenses.
Included as a reduction of Old Kent's occupancy expense is building rental
income of approximately $4,379,000, $3,929,000 and $3,790,000, for 1999, 1998,
and 1997, respectively.
At December 31, 1999, Old Kent and its subsidiaries were parties, both as
plaintiff and as defendant, to a number of lawsuits which arose in the ordinary
course of business. In the opinion of management, after consultation with the
Corporation's counsel, the ultimate resolution of these matters will not have a
material effect on the Corporation's consolidated financial position or results
of operations.
S-59
Note 20. Financial Instruments with Off-Balance Sheet Risk
Old Kent utilizes various derivative financial instruments in the normal course
of business both as part of its risk management strategy and as a means to meet
customer needs. The activities which currently employ financial derivatives are
interest rate risk management, corporate banking, mortgage banking, and foreign
exchange operations. Old Kent also enters into commitments to extend credit and
letters of credit in connection with its lending activities.
Interest Rate Risk Management
The Corporation's asset/liability management focuses on limiting the volatility
of both earnings and the value of capital that can result from changes in
market interest rates. Interest rate risk exists to the extent that interest-
earning assets and interest-bearing liabilities have different maturity or
repricing characteristics. The Corporation uses investment security and
wholesale funding instruments to manage its exposure to interest rate risk.
Interest rate swap contracts are also used as a means to manage interest rate
risk.
Interest rate swap contracts involve the exchange of interest payments at
specified intervals between two parties without the exchange of any underlying
principal. Notional amounts are used in such contracts to calculate interest
payments due to each counterparty and do not represent credit exposure. Old
Kent pays a floating rate and receives a fixed rate for the majority of its
swaps, which are hedges related to prime rate based loans. Old Kent pays a
fixed rate and receives a floating rate on swaps that hedge certain floating
rate liabilities.
Old Kent's credit risk in these contracts relates to the failure of a
counterparty to pay according to the contractual terms of the swap agreement.
The Corporation manages the credit risk of its interest rate swap agreements
through credit approvals, risk control limits and ongoing monitoring
procedures. Credit exposure is represented by the fair value of interest rate
swaps with a positive fair value, adjusted for accrued interest.
December 31
-------------------------------------
1999 1998
------------------- -----------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
---------- -------- -------- --------
(dollars in thousands)
Swap Categories:
Receive fixed/pay floating $1,019,917 $2,423 $819,917 $19,668
Receive floating/pay fixed 400,000 4,175 50,000 --
---------- ------ -------- -------
$1,419,917 $6,598 $869,917 $19,668
========== ====== ======== =======
S-60
Note 20. Financial Instruments with Off-Balance Sheet Risk (continued)
Corporate Banking
Old Kent has entered into interest rate cap, floor, and swap agreements with
corporate clients to assist them in managing their business risks. The
Corporation mitigated its exposure to interest rate risk in these contracts by
entering into offsetting positions with authorized counterparties. The credit
risk from such agreements represents the possibility of a counterparty not
paying according to the terms of the contract. This credit risk is controlled
through credit approvals, risk control limits, and ongoing monitoring
procedures. Credit exposure is represented by the fair value of interest rate
contracts with a positive fair value, adjusted for accrued interest where
applicable.
December 31
-----------------------------------
1999 1998
----------------- -----------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
-------- -------- -------- --------
(dollars in thousands)
Interest rate caps sold $26,000 $ -- $26,000 $ --
Interest rate caps purchased 26,000 227 26,000 105
Interest rate floors sold 26,000 -- 26,000 --
Interest rate floors purchased 26,000 57 26,000 366
Receive fixed/pay floating swap 6,500 -- 6,500 --
Receive floating/pay fixed swap 6,500 597 6,500 117
Mortgage Banking
The Corporation uses forward sales, futures, and option contracts to protect
the value of residential mortgage loans that are being underwritten or
warehoused for future sale to investors in the secondary market. Adverse market
interest rate changes, between the time that a customer receives a rate-lock
commitment and when the fully-funded mortgage loan is sold to an investor, can
erode the value of that mortgage. Therefore, Old Kent enters into forward sales
and futures contracts and purchases exchange-traded option contracts to
mitigate the interest rate risk associated with the origination and sale of
mortgage loans. Old Kent accepts credit risk in forward sales contracts to the
extent of nonperformance by a counterparty, in which case Old Kent would be
compelled to sell the mortgages to another party at the current market price.
The credit exposure of forward sales, futures, and option contracts represents
the aggregate value of contracts with a positive fair value.
December 31
--------------------------------------------
1999 1998
-------------------- -----------------------
Contractual Credit Contractual Contractual
Amount Exposure Amount Amount
----------- -------- ----------- -----------
(dollars in thousands)
Mortgage forward sales $618,000 $5,290 $2,257,013 $1,304
Futures and options 389,000 460 390,000 80
Old Kent began utilizing Treasury futures and options in 1998 to hedge the
value of its mortgage servicing rights that could result from falling mortgage
rates and increased mortgage prepayments. The credit risk inherent in these
transactions relates to the possibility of a counterparty not paying according
to the terms of the contract, however this risk is minimal in these hedge
instruments since exchange traded futures and options contracts are used. The
credit exposure is represented by the aggregate value of futures, puts, and
calls with a positive fair value. There were no contracts of this type
outstanding as of December 31, 1999.
December 31, 1998
--------------------------------------
Expiration Number of Notional Credit
Date Contracts Amount Exposure
---------- --------- -------- --------
(dollars in thousands)
Ten-year Treasury note futures March 1999 1,666 $166,600 $ --
Ten-year Treasury note put options March 1999 (1,516) 151,600 --
Ten-year Treasury note call options March 1999 1,192 119,200 887
S-61
Note 20. Financial Instruments with Off-Balance Sheet Risk (continued)
Foreign Exchange Contracts
Old Kent enters into foreign exchange forward contracts to purchase or sell
foreign currencies at a future date at a predetermined exchange rate. These
contracts are used to assist customers with international transactions
denominated in foreign currencies. The Corporation manages its exposure to
foreign currency fluctuations by entering into offsetting contracts with
authorized counterparties, usually foreign banks. The credit risk inherent in
these transactions relates to the possibility of failure by a counterparty to
fulfill its purchase or delivery responsibility, whereby Old Kent would execute
the transaction with another counterparty at the prevailing currency exchange
rate.
The credit exposure of Old Kent's foreign exchange contracts represents the
aggregate value of contracts with a positive fair value. The extension of
foreign exchange credit facilities to counterparties follows the same approval
process as other credit facilities. The majority of Old Kent's foreign exchange
contracts relate to major currencies such as Canadian Dollars, British Pounds
Sterling, German Deutschemarks, Japanese Yen, Italian Lira, and French Francs.
December 31
-----------------------------------------
1999 1998
-------------------- --------------------
Contractual Credit Contractual Credit
Amount Exposure Amount Exposure
----------- -------- ----------- --------
(dollars in thousands)
Foreign exchange forward contracts $32,211 $798 $10,774 $134
Commitments
Commitments to extend credit are agreements to lend cash to a customer as long
as there is no breach of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require the payment of a fee. The majority of Old Kent's loan commitments have
maturities that are less than one year and reflect the prevailing market rates
at the time of the commitment. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if deemed necessary by Old Kent, upon extension of credit is based
upon management's credit evaluation of the counterparty. Standby and commercial
letters of credit are Old Kent's conditional commitments to guarantee the
performance of a customer to another party. The Corporation's exposure to
credit loss in the event of nonperformance by the other party is represented by
the contractual amount of those instruments. Old Kent uses the same credit
underwriting policies in making commitments and issuing letters of credit as it
does for its other lending activities.
Contractual Amount at
December 31,
---------------------
1999 1998
---------- ----------
(dollars in millions)
Commitments to extend credit $5,187 $5,358
Standby and commercial letters of credit 493 470
Note 21. Estimated Fair Value of Financial Instruments
In accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments" ("SFAS No. 107"), the
following methods and assumptions were used to estimate the fair value of each
significant class of financial instrument, as defined by SFAS No. 107, for
which it is practicable to estimate that value.
S-62
Note 21. Estimated Fair Value of Financial Instruments (continued)
The estimated fair values of financial instruments, as shown below, are not
intended to reflect the estimated liquidation or market value of the
Corporation taken as a whole. The disclosed fair value estimates are limited to
Old Kent's significant financial instruments. These include financial
instruments recognized as assets and liabilities on and off the Consolidated
Balance Sheet. The estimated fair values shown below do not include any value
for assets and liabilities which are not financial instruments as defined by
SFAS No. 107, such as the value of real property, the value of "core deposit
intangibles," the value of mortgage servicing rights, nor the value of
anticipated future business.
The estimated fair value amounts were determined using available market
information, current pricing information applicable to Old Kent and various
valuation methodologies. Where market quotations were not available for
financial instruments, considerable management judgment was involved in the
determination of estimated fair values. Therefore, the estimated fair value of
financial instruments shown below may not be representative of the amounts at
which they could be exchanged in a current or future transaction. Due to the
inherent uncertainties of expected cash flows of financial instruments, the use
of alternate valuation assumptions and methods could have a significant effect
on the derived estimated fair value amounts.
Cash and cash equivalents, interest receivable and interest payable
For these short-term instruments, the carrying amount was deemed to be a
reasonable estimate of fair value.
Interest-earning deposits
The estimated fair value of these holdings was calculated by discounting the
expected future cash flows using rates applicable to similar instruments with
the same remaining maturity.
Trading account securities, securities available-for-sale and securities held-
to-maturity
The estimated fair values were based upon quoted market or dealer prices.
Net loans and mortgages held-for-sale
Generally, the fair value of loans was estimated by discounting the expected
future cash flows using current interest rates at which similar loans would be
made to borrowers with similar credit ratings and remaining maturities. For
certain variable rate loans that reprice frequently the estimated fair value is
equal to the carrying value. For mortgages held-for-sale the estimated fair
value is equal to the carrying value adjusted for any price appreciation or
depreciation due to changes in secondary market prices and other inherent
values.
Deposit liabilities
The fair value of fixed-maturity time deposits was estimated using the rates
currently offered for deposits of similar remaining maturities. The fair value
of demand and savings deposits is the amount payable on demand at the reporting
date.
Other borrowed funds
The carrying amount was deemed to be a reasonable estimate of fair value for
all instruments that had either short-term maturities or variable repricing
structures. The fair value of medium-term fixed rate borrowed funds was
estimated by discounting the expected future cash flows using current interest
rates at which similar borrowings could be made at comparable maturities.
Subordinated debt
The fair value of subordinated debt was based on quoted market prices.
S-63
Note 21. Estimated Fair Value of Financial Instruments (continued)
Capital securities
The carrying amount of these debentures was deemed to be a reasonable estimate
of their fair value due to their adjustable rate structure.
Off-balance sheet financial instruments
The carrying value of Old Kent's interest rate contracts represents accrued
interest as reflected in the consolidated balance sheets. The estimated fair
value of interest rate contracts was based upon dealer or third-party
quotations for the amount which might be realized from a transfer, sale or
termination of such agreements. The fair value of Old Kent's commitments to
extend credit, its outstanding letters of credit and foreign exchange contracts
are insignificant.
The following summarizes the carrying value and estimated fair value of
financial instruments:
December 31
-------------------------------------------------
1999 1998
------------------------ -----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----------- ----------- ----------- -----------
(dollars in thousands)
Financial Assets:
Cash and cash equivalents $626,069 $626,069 $676,855 $676,855
Interest-earning deposits 155 155 7,578 7,578
Trading account securities -- -- 349,090 349,090
Securities available-for-
sale 2,614,168 2,614,168 3,335,502 3,335,502
Securities held-to-
maturity 609,243 590,348 803,745 823,610
Mortgages held-for-sale 900,031 923,881 2,269,694 2,312,750
Net loans 11,882,774 11,992,219 10,040,473 10,390,484
Interest receivable 124,568 124,568 113,136 113,136
Financial Liabilities:
Non-interest-bearing
deposits 2,040,350 2,040,350 2,244,534 2,244,534
Interest-bearing deposits
-- no maturities 5,306,108 5,306,108 5,122,008 5,122,008
Interest-bearing deposits
-- fixed maturities 6,348,555 6,335,495 7,046,898 7,083,705
Other borrowed funds 2,550,877 2,540,117 2,404,971 2,406,664
Interest payable 55,107 55,107 53,135 53,135
Subordinated debt 100,000 95,910 100,000 104,510
Capital securities 100,000 100,000 100,000 100,000
Interest Rate Contracts
Relating To:
Assets:Commercial loans 3,803 (8,503) 3,925 15,744
Mortgages held-for-sale -- 5,007 -- (3,554)
Liabilities (208) 4,383 -- (953)
S-64
Note 22. Condensed Financial Information of the Parent Company
The condensed financial information of the parent company, Old Kent Financial
Corporation, is summarized as follows:
Condensed Balance Sheet
December 31
---------------------
1999 1998
---------- ----------
(dollars in
thousands)
Assets:
Cash and cash equivalents $1,747 $3,394
Interest-earning deposits and other securities 94,231 149,837
Premises and equipment 13,201 10,099
Investment in and advances to subsidiaries 1,350,544 1,418,882
Other assets 52,052 55,350
---------- ----------
Total Assets $1,511,775 $1,637,562
========== ==========
Liabilities and Shareholders' Equity:
Other borrowed funds $ -- $20,750
Long-term debt 203,093 203,093
Accrued expenses and other liabilities 81,809 92,965
---------- ----------
Total Liabilities 284,902 316,808
Shareholders' Equity 1,226,873 1,320,754
---------- ----------
Total Liabilities and Shareholders' Equity $1,511,775 $1,637,562
========== ==========
Condensed Statement of Income
Year ended December 31
---------------------------
1999 1998 1997
-------- -------- --------
(dollars in thousands)
Income:
Dividends from subsidiaries $244,166 $347,513 $180,794
Service fees from subsidiaries 89,065 69,801 60,459
Interest and other 12,292 19,503 13,566
-------- -------- --------
Total income 345,523 436,817 254,819
-------- -------- --------
Expenses:
Interest 14,483 17,684 17,939
Salaries and benefits 47,779 53,662 51,214
Occupancy 4,548 5,340 4,795
Equipment 7,790 7,441 7,559
Other 44,906 40,499 30,652
-------- -------- --------
Total expenses 119,506 124,626 112,159
-------- -------- --------
Income before income taxes and equity in
undistributed net income of subsidiaries 226,017 312,191 142,660
Income tax benefit 5,202 11,520 12,197
-------- -------- --------
Income before equity in undistributed net income
of subsidiaries 231,219 323,711 154,857
Equity in undistributed net income of subsidiaries 21,320 (98,388) 68,663
-------- -------- --------
Net Income $252,539 $225,323 $223,520
======== ======== ========
S-65
Note 22. Condensed Financial Information of the Parent Company (continued)
Condensed Statement of Cash Flows
Year ended December 31
----------------------------
1999 1998 1997
-------- -------- --------
(dollars in thousands)
Cash flows from operating activities:
Net income $252,539 $225,323 $223,520
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of
subsidiaries (21,320) 98,388 (68,663)
Depreciation, amortization and accretion 9,725 11,563 12,686
Net gains on sales of assets (6,855) (11,358) (2,843)
Net change in other assets (1,842) (3,495) (8,928)
Net change in other liabilities (5,193) (6,844) 24,849
-------- -------- --------
Net cash provided by operating activities 227,054 313,577 180,621
-------- -------- --------
Cash flows from investing activities:
Net change in interest-earning assets 54,093 20,111 (10,777)
Net change in investment in and advances to
subsidiaries (2,878) (118) (5,510)
Purchases of leasehold improvements, premises
& equipment, net (6,138) (4,731) (3,216)
-------- -------- --------
Net cash provided by (used for) investing
activities 45,077 15,262 (19,503)
-------- -------- --------
Cash flows from financing activities:
Payments on other borrowed funds (20,750) (23,075) (34,523)
Proceeds from other borrowings -- 23,825 21,600
Issuance of long-term debt, net -- -- 97,872
Proceeds from common stock issuances 23,107 20,776 27,420
Repurchases of common stock (178,626) (257,508) (196,180)
Dividends paid to shareholders (97,509) (96,048) (80,791)
-------- -------- --------
Net cash used for financing activities (273,778) (332,030) (164,602)
-------- -------- --------
Net decrease in cash and cash equivalents (1,647) (3,191) (3,484)
Cash and cash equivalents at beginning of year 3,394 6,585 10,069
-------- -------- --------
Cash and cash equivalents at end of year $1,747 $3,394 $6,585
======== ======== ========
Federal and state banking laws and regulations place certain restrictions on
the amount of dividends and loans a bank may make to its parent company. As of
January 2000, the subsidiary banks may distribute to the parent company, in
addition to their 2000 net income, approximately $8.6 million in dividends
without written approval from bank regulatory agencies. The remaining net
assets of subsidiary banks, approximating $1.3 billion at December 31, 1999,
are unavailable for transfer to the parent company without prior regulatory
consent.
Note 23. Risk Based Capital
The Corporation and its subsidiary banks are subject to various regulatory
capital requirements administered by federal and other banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory,
and possibly additional discretionary, actions by regulators that, if
undertaken, could have a material effect on the Corporation's financial
statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation and its subsidiary banks must meet specific
capital guidelines that involve quantitative measures of the
S-66
Note 23. Risk Based Capital (continued)
Corporation's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Corporation and its
subsidiary banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios of core (Tier 1)
capital, total capital and leverage ratios. Management believes, as of December
31, 1999, that the Corporation and its subsidiary banks meet all capital
adequacy requirements to which it is subject.
In the most recent examinations by Federal and State regulatory agencies, the
Corporation and its subsidiary banks were categorized as "well capitalized"
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized the Corporation and its subsidiary banks must maintain
minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the table below. There are no conditions or events since that
notification that management believes have changed the Corporation's or its
subsidiary banks' categories.
The following summarizes the Corporation's, and its subsidiary banks'
regulatory capital ratios at December 31, 1999 and 1998:
To Be "Well
Capitalized"
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
------------ ------------ ------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in millions)
As of December 31, 1999:
Total Capital (to Risk Weighted
Assets)
Consolidated $1,548 11.11% $1,115 8.00% $1,393 10.00%
Old Kent Bank 1,441 10.53 1,095 8.00 1,368 10.00
Old Kent Bank, N.A. 11 10.02 9 8.00 11 10.00
Tier 1 Capital (to Risk Weighted
Assets)
Consolidated 1,273 9.14 557 4.00 836 6.00
Old Kent Bank 1,270 9.28 547 4.00 821 6.00
Old Kent Bank, N.A. 10 8.95 4 4.00 7 6.00
Leverage Ratio (to Average Assets)
Consolidated 1,273 7.17 532 3.00 887 5.00
Old Kent Bank 1,270 7.25 526 3.00 876 5.00
Old Kent Bank, N.A. 10 7.69 4 3.00 6 5.00
As of December 31, 1998:
Total Capital (to Risk Weighted
Assets)
Consolidated $1,505 11.72% $1,027 8.00% $1,284 10.00%
Old Kent Bank 1,393 11.16 999 8.00 1,248 10.00
Old Kent Bank, N.A. 10 10.64 8 8.00 9 10.00
Tier 1 Capital (to Risk Weighted
Assets)
Consolidated 1,246 9.71 514 4.00 770 6.00
Old Kent Bank 1,239 9.92 500 4.00 749 6.00
Old Kent Bank, N.A. 9 9.39 4 4.00 6 6.00
Leverage Ratio (to Average Assets)
Consolidated 1,246 6.97 537 3.00 895 5.00
Old Kent Bank 1,239 7.02 529 3.00 882 5.00
Old Kent Bank, N.A. 9 7.71 3 3.00 6 5.00
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Board of Directors and Senior Management
Board of Directors+
Richard L. Antonini Erina Hanka Percy A. Pierre, Ph.D.
Retired Chairman, President, Professor of
President and Suspa Inc. Electrical
Chief Executive (manufacturer of lift, Engineering,
Officer, support, dampening, and Michigan State
Foremost Corporation adjustment devices) University
of America Michael J. Jandernoa Marilyn J. Schlack
(a specialty property Chairman and Chief President,
and casualty insurer) Executive Officer, Kalamazoo Valley
John D. Boyles Perrigo Company Community College
Attorney-at-Law, (manufacturer of store- Peter F. Secchia
Verspoor, Waalkes, brand health products) Chairman,
Lalley, Slotsema & Kevin T. Kabat Universal Forest
Talen, P.C. Vice Chairman of the Products, Inc.
William P. Crawford Corporation, (manufacturer and
President and Chief and President of Old distributor of
Executive Officer, Kent Bank building supplies)
Steelcase Design Fred P. Keller David J. Wagner
Partnership Chairman and Chief Chairman, President
(manufacturer of Executive Officer, and Chief Executive
office systems) Cascade Engineering, Officer of the
Dick DeVos Inc. Corporation, and
President, (manufacturer of plastic Chairman and Chief
Amway Corporation and injection molded Executive Officer of
(manufacturer of home automotive, seating, and Old Kent Bank
and personal care container products) Margaret Sellers
products) John P. Keller Walker
William G. Gonzalez President, Keller Group, Professor of Public
Retired President and Inc. Administration,
Chief Executive (a diversified School of Public and
Officer, manufacturer) Nonprofit
Spectrum Health Hendrik G. Meijer Administration,
(integrated healthcare Co-Chairman, Grand Valley State
network) Meijer, Inc. University
James P. Hackett (food and general Robert H. Warrington
President and Chief merchandise retailer) Vice Chairman of the
Executive Officer, Corporation,
Steelcase Inc. and Chairman of Old
(manufacturer of Kent Mortgage Company
office systems)
+Board of Directors committees and committee members are listed on page 4 of
the attached Proxy Statement.
Senior Policy Committee
Mark F. Furlong* David C. Schneider* David J. Wagner*
Executive Vice Executive Vice Chairman, President
President, President, and
Chief Financial Retail Strategy and Chief Executive
Officer, Product Development, Officer,
Old Kent Financial Old Kent Financial Old Kent Financial
Corporation Corporation Corporation;
Kevin T. Kabat* Daniel W. Terpsma* Chairman and Chief
Vice Chairman, Executive Vice Executive Officer,
Old Kent Financial President, Old Kent Bank
Corporation; Corporate Banking, Robert H. Warrington*
President, Old Kent Financial Vice Chairman,
Old Kent Bank Corporation; Old Kent Financial
Kenneth C. Krei* President, Corporation;
Executive Vice Old Kent Bank-Illinois Chairman,
President, Michelle L. Van Dyke* Old Kent Mortgage
Investment and Executive Vice Company
Insurance Services, President,
Old Kent Financial Retail Distribution,
Corporation Old Kent Financial
Corporation
Other Senior Officers
Mary Ellen Baker* Stanlee P. Greene, Jr.* Janet S. Nisbett
Executive Vice Senior Vice President, Senior Vice President
President, Sales and Marketing, and Controller,
Corporate Operations Old Kent Financial Old Kent Financial
and Technology, Corporation Corporation;
Old Kent Financial Joseph T. Keating* Senior Vice President
Corporation Senior Vice President, and Controller,
Gary S. Bernard* Old Kent Bank; Old Kent Bank
Senior Vice President, President, Albert T. Potas
Consumer Lending, Old Lyon Street Asset Senior Vice President,
Kent Bank Management Company Investor Relations,
Donald R. Britton* Larry S. Magnesen* Old Kent Financial
President and Chief Senior Vice President, Corporation
Executive Officer, Business Banking, Walter J. Smiechewicz
Old Kent Mortgage Old Kent Bank Senior Vice President,
Company Richard A. McGarrity Chief Risk Officer,
Steven D. Crandall* Senior Vice President, Old Kent Financial
Senior Vice President, Corporate Finance, Corporation
Human Resources, Old Kent Financial Mary E. Tuuk
Old Kent Financial Corporation Senior Vice President
Corporation Ronald C. Mishler* and Secretary,
David A. Dams* Senior Vice President Legal Coordinator,
Executive Vice and Treasurer, Old Kent Financial
President, Old Kent Financial Corporation
Corporate Banking, Old Corporation Michael J. Whalen*
Kent Bank Senior Vice President,
Gregory K. Daniels* Senior Credit Officer,
Senior Vice President, Old Kent Financial
Chief Information Corporation
Officer,
Old Kent Financial
Corporation
* Member of Management Group
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