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Filed by Fifth Third Bancorp
Pursuant to Rule 425 under the Securities Act of 1933
Subject Company: Old Kent Financial Corporation
Exchange Act File Number 000-14591
Company Name: Fifth Third Bank, Cincinnati Host: Neal Arnold
Scheduled Start Time: 8:30 A.M. CT Date: 11/20/00
Order Number: 3163633
Call Title: Conference Call
Available until November 30, 2000 by dialing 1-888-843-8954 (passcode: 3163633)
for domestic access and 1-847-619-6820 (passcode: 6306523043) for international
access.
Replay Operator: Welcome to the replay of the live conference call conducted by
Fifth Third Bancorp and Old Kent at 9:30 am Eastern Standard Time on November
20, 2000. The following constitutes the entire, unedited rebroadcast of such
call.
Before beginning the replay, Fifth Third and Old Kent have requested that we
inform all listeners of the following requirements pursuant to Rule 165 under
the Securities Act of 1933 and Rule 14a-12 under the Securities Exchange Act of
1934:
Investors and security holders are advised to read the proxy statement regarding
the transactions referenced in this document when it becomes available, because
it will contain important information. The proxy statement will be filed with
the Securities and Exchange Commission by Fifth Third Bancorp and Old Kent.
Security holders may receive a free copy of the proxy statement (when available)
and other related documents filed by Fifth Third Bancorp and Old Kent at the
Securities Exchange Commission's website at http://www.sec.gov and from Fifth
Third Bancorp or Old Kent.
Old Kent and its executive officers and directors may be deemed to be
participants in the solicitation of proxies from stockholders of Old Kent with
respect to the transactions contemplated by the merger agreement. Information
regarding such officers and directors is included in Old Kent's proxy statement
for its 2000 Annual Meeting of shareholders filed with the Commission on
February 25, 2000. This document is available free of charge at the Commission's
website at HTTP://WWW.SEC.GOV and from Old Kent.
Fifth Third Bancorp and its executive officers and directors may be deemed to be
participants in the solicitation of proxies from stockholders of Fifth Third
Bancorp with respect to the transactions contemplated by the merger agreement.
Information regarding such officers and directors is included in Fifth Third
Bancorp's proxy statement for its 2000 Annual Meeting of shareholders filed with
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the Commission on February 9, 2000. This document is available free of charge at
the Commission's website at HTTP://WWW.SEC.GOV and from Fifth Third Bancorp.
The replay will now begin. Thank you for your interest.
[INSTRUCTIONS FOR PROCEEDING WITH REPLAY]
Operator: Good morning ladies and gentlemen and welcome to the Fifth Third Bank
and Old Kent Conference Call. At this time all participants are in a listen only
mode. Before beginning today's call Firth Third and Old Kent have requested that
we inform all participants that the following discussion contains or may contain
forward-looking statements about Fifth Third Bancorp, Old Kent, and the combined
company which the parties believe are within the meaning of the Private
Securities Litigation Reform Act of 1995. This discussion will contain certain
forward-looking statements with respect to the financial condition, results of
operations, plans, objectives, future performance and businesses of Fifth Third
Bancorp, Old Kent, and the combined company including statements preceded by,
followed by, or that include the words believes, expects, anticipates, or
similar expressions. These forward-looking statements involve certain risks and
uncertainties. There are a number of important factors that could cause future
results to differ materially from historical performance in these
forward-looking statements. Factors that might cause such a difference include,
but are not limited to: competitive pressures among the depository institutions
increase significantly; changes in the interest rate environment reduce interest
margin; prepayment speeds, loan sales volume, charge offs, and loan loss
provisions; general economic conditions, either national or in the states in
which Fifth Third Bancorp and Old Kent do business, are less favorable than
expected; legislative or regulatory changes adversely affect the businesses in
which Fifth Third Bancorp and Old Kent are engaged; and changes in the
securities markets.
Further information on other factors, which could affect the financial results
of Fifth Third Bancorp after the merger are included in Fifth Third Bancorp's
and Old Kent's filings with the Commission. These documents are available free
of charge at the Commission's website at HTTP://WWW.SEC.GOV and from Fifth Third
Bancorp or Old Kent. Following the remarks of Fifth Third and Old Kent we will
conduct a question and answer session. I would now like to turn the call over to
Mr. Neal Arnold, Chief Financial Officer of Fifth Third Bancorp. Mr. Arnold you
may begin.
Neal: Thank you. In the future you are going to have to learn that statement
before the Pledge Allegiance, so I apologize for that. First of all as it
relates to format George Schaefer is going to lead off, then David Wagner, and
then we will walk you through the slide presentation in quick fashion and you'll
be able to ask questions at the end. So with that I'll turn it over to George
Schaefer to get started.
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George: Good morning. Thank you all for listening out there. I know most of you
are quite familiar with the Fifth Third story, however it is worth reiterating
our operating principals again. We continue our long history of equal focus on
growing revenues and net income and maintaining a conservative risk position. We
feel very fortunate to have delivered double-digit earnings growth for over 20
years in many different economic environments. We also continue our rich culture
of aggressive sales efforts, very controlled expense management, conservative
credit philosophy, and a fortress balance sheet--and a fortress balance sheet.
We evaluate all business opportunities through a shareholder view because we all
have substantial net worth tied up in our stock. As you know we've been looking
at expansion opportunities in Michigan and Chicago in the past years. After
reviewing the Old Kent idea with our management team we decided to explore this
opportunity.
The first point I'd like to make is that we are very confident of our
ability to grow revenues in our historical fashion with this deal due to our
respect for David Wagner's management team, the attractiveness of the market Old
Kent operates in, and the fit of the franchise with Old Kent and decentralized
affiliate management structure. As you know we've known the Old Kent management
team for quite a long time. David grew up in Cincinnati, his predecessor was
from Cincinnati, and we've benchmarked on a number of occasions. Several of
David's management team has visited with our management teams over the years.
Recently several members of his team visited our Cleveland affiliate management
team. In addition our senior commercial banking and credit people have met in
the past and we share credits.
As we looked at the markets OK operates in, it struck us how well fit
they were into our affiliate market structure. They have a concentration in
vibrant large midwestern cities with solid market share, but with plenty of
growth opportunity. We see new opportunities in all business lines to grow
revenue together. Only of one of our affiliate management teams will be
distracted during this integration. The rest of our 13 affiliate banks in Ohio,
Kentucky, and Indiana will continue to focus on their local markets.
The second point I'd like to make is that we at Fifth Third and I'm
sure at Old Kent are all long-term investors. Both are shareholders and are
employee owners at Fifth Third.
The historical exchange ratio for Fifth Third is as wide as we've ever
seen it on a number of potential deal partners. We saw this has a unique
opportunity to acquire an important high quality franchise like Old Kent, but we
would not normally look at a transaction this size. As we evaluated the
potential deals this was by far the best all around opportunity for Fifth Third
in our markets. No other opportunity in the Midwest provides us with the kind of
large markets we like with
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plenty of future potential. We are also very familiar with their risk appetite
and believe we have very similar risk philosophies.
The market has clearly pushed down the value of several banking
franchises to historical low levels. Bank stock seems to go through these cycles
where markets just like them at any price like today. We believe our industry
continues to be very profitable and has excellent growth opportunities if you
execute well. The final point I'd like to add is that we are very confident of
our ability to convert Old Kent's systems and operating philosophies to ours
with minimal risk. In addition we believe and through our thorough due diligence
confirmed our comfort with their credit and other risk postures. I now like to
turn it over to David for a few comments.
David: Well, thank you, George, and good morning everyone. From the Old Kent
side because of the history of success we've enjoyed over the years we decided
that when we were interested in partnering with a larger banking institution we
really had a number of things that we had to accomplish. We needed to negotiate
an attractive deal for our shareholders, not just price but the quality of the
stock. We needed to join up with a partner with a similar operating philosophy
and we needed to create a partnership that would benefit both our customers and
our communities.
Well this morning we've accomplished that. You've seen the announcement
of the transaction details that represent a very fair premium for our
shareholders, but as important it gives them a stake in one of the most
successful and growing banking institutions in the country today, one that is
growing rapidly and generating significant profits through great execution of a
very distinctive bank model.
What may not have come through in the first headlines is the real
compatibility between our two companies. Our performance records are very
similar. Our credit cultures are very similar. Our community commitments are
almost identical. We both believe in local decision-making and strong customer
relationships. Both of us have shown we know how to integrate mergers and
acquisitions successfully. There is every reason to believe that we can put
these two companies together very smoothly and efficiently so that the only
difference our customers notice is a good one.
A last selling point for us is that this is really good for our
customers and our communities. They've gotten used to the very personalized
treatment that Old Kent has stood for all these years. We can now say to them
with a lot of confidence, we are going to take just as good care of you as we
always have only now we will have the financial strength and the broader product
line of one of America's great companies. That is a position that will help us
to grow more rapidly than ever before. I told George this and I tell you as
well, this is a great deal. I'm on board personally to make it work for all of
us, and my
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management team is onboard too. This is going to be one of the really great bank
mergers and we're delighted to be part of it.
George: Very good if you all flip now to page five, the transaction summary out
there we'll walk through this briefly and then do some questions. On the
transaction summary you see the exchange ratio at .74 shares. This is the
pooling of interest, the tax rate exchange, and there is a 19.9% lock up here.
Board representation will add three additional directors to our board. The due
diligence has been completed. This does require regulatory and both sets of
shareholders to approve. The final bullet point is key there will be significant
roles for Old Kent's management team there. We look at this to be management
accretive as well as financially accretive.
On page six of the transaction summary we believe this is completely
consistent with our stated strategies. We've been looking to expand into
Michigan and Chicago. We acquire a significant market share in two new markets,
and as we've stated before we will become the number two deposit market
shareholder in the states of Ohio, Kentucky, Indiana, Illinois, and Michigan.
There are excellent growth opportunities in these highly populated MSAs. We will
only have one out of 16 depositors. We'll only hold about 6.7% of the deposits
here giving us plenty of growth opportunity. Old Kent has a very attractive
commercial and trust platform. I mentioned the management accretion. You know
the financially attractive nature of this transaction and we'll walk through
that in a little bit, but it's immediately accretive without any synergies and
we think that there is minimal risk involved here.
On page eight the rationale. Our expansion into attractive Michigan and
Chicago markets was very compelling. On a combined basis we will achieve a
leading position in Michigan. We will be number three in the state of Michigan
and yet only have a nine percent share there. Michigan is the 10th largest
deposit market in the United States. This will get us firmly into the Chicago
market. We will rank number five in Chicago with about $6 billion in deposits
and in Illinois we will rank number five in the entire state of Illinois with
about $6.7 billion in deposits. This adds over a million customers to our
franchise. The incremental franchise area has sixteen million potential
customers for us, and in one transaction we've accomplished what would have
taken we believe maybe two years to piece meal together. On page nine if you
look at the geography - the dots on the map are very compelling. We've got an
excellent geographic spread in the Midwest here and you can see we are in the
largest MSAs in the area. We would have number one share in Cincinnati, Grand
Rapids, Dayton, Toledo, Ohio, and be major players in all of the major
metropolitan areas in these five states. On page ten there is a unique
consolidation opportunity here, as I mentioned we achieved in one transaction
which would have taken several years to acquire, this had significant trust and
commercial banking businesses that may not be fully developed in other potential
acquisitions. If we'd done a number of thrift deals or smaller bank deals we
wouldn't have picked up the significant
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commercial banking and investment management type opportunities that we think
we're going to have here. Again, you can see the market shares in Michigan and
Chicago. On the next page, on page eleven, you can see where we rank in our five
state area, and who our competitors are. Again, I'll mention that only one out
of sixteen households is a Fifth Third customer. We have the best major MSA
concentration. The competitors in these markets are people that we are very
familiar competing with and competing against and they're all good competitors,
but we've done very well in that competition so far and again, the market
remains very fragmented. On page twelve some of the demographics, these are the
top ten states for business expansion you see Michigan, Ohio, Illinois are way
up there in the new and expanded facilities. New manufacturing plants, Michigan,
Ohio, and Illinois are two, three and four and these are two of the top three
metropolitan areas for total facilities here, a very dynamic market. On page
thirteen the transaction rationale again we think this is completely consistent
with our stated strategies. This is in the Midwest consistent with our markets
and demographics. The credit quality and operating philosophies of both
companies are very similar. We have very similar lines of business. We're going
to run the whole operation on a decentralized basis the way we run our
operations today and again our risk philosophies are very, very similar. If you
look at the revenue potential for expansion here you can see what we're trying
to accomplish here. Our core businesses I think are going to be complemented by
other business expertise here. We're taking the Fifth Third's mid-sized business
banking, retail banking, wealth management and merging that with Old Kent's and
both are very similar, and so we think there's going to be a lot of synergies
there. We're going to put our deposit generation and fee income growth and some
of our merchant processing and data processing capabilities over into the Old
Kent franchise areas and we're going to be able to use a lot of their local
management talent and their high customer affinity to help supplement our
management group at Fifth Third. On the next page, page 15, we have an
uninterrupted growth story. Fifth Third and Old Kent combined will continue to
generate high revenue growth rates. The sources for these revenues, additional
revenue are coming out of attractive new markets for our products. We're going
to duplicate our deposit campaign successes. In these new markets we're going to
sell our Midwest Payments Systems E-Commerce Solutions here, and again expand
the commercial and investment advisory business.
You can see down at the bottom of the page if we improve Old Kent's fee
income to net revenue ratio to the Fifth Third type ratio there's significant
opportunities there. Flipping to page 17, - this is consistent shareholder M&A
focus here. It's immediately accretive to earnings per share before cost
savings. You can see the numbers there. In 2001 with no synergies it's 9.4%
accretive. The second point this is a conservative identifiable and readily
achievable cost savings that are out there. We are only estimating 20% of Old
Kent's overhead in these estimates and we're spreading them out over a three
year period, 25% in the first year, 75% by the end of the second year, and 100%
by the end of the third year. Our goal is very much to protect and grow revenues
and the position
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to roll out typical Fifth Third enhancement programs. And again, the IRR is well
above the cost of capital with these conservative assumptions. On page eighteen
you can see that there are no revenue enhancements assumed but a long-standing
track record of improving performance and revenue is out there. Significant
potential for revenue and productivity improvements exist. You can see on here
if we improve the net income per FTE up to our traditional levels there's a lot
of room there. It's true on the net income side and the revenue side, and in
terms of the efficiency ratio. The final bullet point shows the demonstrative
performance that we've done with the Civitas Bank in Indiana only after about a
year here. We've been able to bring their net income per employee from $35,000
up to about $77,000.
Neal: It's probably worth pointing out that that comes from a variety of sources
on the revenue side not just duplicate support function. It's really a function
of growing deposits and driving fee income as well. I might take a shot at page
19 and give George a break, but if you look at the multiples of this transaction
a couple points I'd make. It's about fourteen times 2001 estimates, about 11
times adjusted for synergies. On a relative basis certainly toward the lower end
of the transactions we've done. They end up with about 18% of the proforma
target ownership. It's accretive to book value. It's accretive obviously to the
rest of the pieces. One of the things I think it's worth pointing out on the far
box on the right hand side - if you look at a couple of peer banks that would
include the Mercantile, the NCBCs, the TCS, the Zions of the world, some high
quality franchises like an Old Kent - we think that we've got this in an
attractive fashion. At the same time I think it's worth pointing out in a market
today people are over fascinated on buying something cheap. I would tell you
must also buy something you can grow. And so we think we'd rather pay the right
price for the right franchise and I think that's tantamount to understanding our
story.
George: Ok, on page 20 you can see here in the combination that we're going to
have an on going superior performing institution here. If you combine Fifth
Third and Old Kent you're going to see on a proforma basis a return on equity of
21.8% and return on assets approaching two at 193. The efficiency ratio on a
combined basis at 42.9 and then extremely strong capital levels that you're used
to with us. We will continue to deliver industry-leading returns there and you
can see whether it's ROE, return on assets, whether it's efficiency, whether
it's long-term growth we're at the very high end of these charts. And on a
combined basis intend to stay at these very high levels.
On page 22 you can see the accelerating EPS growth that we have here.
Historically, it's been 16% on an on going basis. We're assuming 16% but
following the transaction it's even greater than that. On page 23 you can see
what a Midwestern powerhouse this will create here in terms of the market
values, the pricing, and where the combined team would rank out there - whether
it's in financial services or in the traditional banks.
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Neal: Page 24 I might take a shot at. As most of you are familiar with we
continue to try to harp on the idea that banks are excellent growth companies if
you run them properly. If you look at where this company ranks you can see if
you look at a multiple of P/E to G, if you will, or price earnings to growth
rate, we don't feel like we have to apologize for where we are. Where we trade
relative to some other very large companies in the industries that aren't
necessarily all that interesting to people but also if you look within financial
services up against Northern Trust and Bank of New York, we think the breadth of
our product line and our ability to have sustainable growth matches up quite
nicely. So we continue to think that our franchise is fairly valued in that set
up.
George: Flipping up to page 26 - you can see that we believe there's very low
execution risk here. Both of us have an excellent record of making acquisitions
work and execute well afterwards. We are combining two superior performing
banks. They are very contiguous and similar in the markets. Local management
teams and our affiliate structure are going to be the order of the day. Both
institutions now are on a single operating platform. Everyone at Fifth Third
runs on one checking account system. All the Old Kent Banks run on one system.
Even at our branch level we're running on similar frame relay systems out there
- same PC type systems, our commercial loan systems are on the same platforms
today. There are numerous similarities between the two that will make this
combination go very well. We are very experienced with integrating Old Kent's
type systems. These are a thoughtful and delivered approach to this integration.
These are very conservative assumptions. We're talking about 25% of these
synergies in year one, 75% by the end of year two, and all of them by the end of
year three. And we're very cautious about preserving our revenue and growth
rates out there. So you can see... Go ahead, Neal.
Neal: I think it's worth pointing out that as it relates to integrations here
that not only is it the operating systems, we have chunked up deals. If you look
at CNB we broke it up into three different conversions to manage it by market
and that's clearly how we'd approach it as it relates to this to manage that
integration in a clear fashion. We don't think we have to rush to get this deal
integrated to make the numbers work, and I think that gives us great latitude to
do the right thing and to do it in the right fashion.
George: On page 27 we talk about how our cultures align. We're both committed to
superior financial performance. Old Kent has a 41-year track record. Ours is 27
years. Both of us are committed to a strong sales culture. We're both committed
to solid capital ratios and high ratings, and both of us have maintained
pristine asset qualities and are going to continue to do that. On the next page,
page 28, you can see our businesses align very, very well here. And you can see
in the pie charts there what the old, Old Kent structure and the old Fifth Third
structure look on a proforma-combined basis. These are very compatible.
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Neal: I think also it's worth pointing out that if you look at the mix of
business and the type of customers that we serve, we think that these are core
franchises that are very durable. The customers like us. They know us. These are
not national market businesses. This is not syndicated lending. This is not
trading. These are franchises where customer bases know and respect both
institutions. And you can see even on the fee side we think we have franchises
that are very durable in a day and age where customers obviously are the key.
George: On the next page 29 we talk about the high credit quality culture that
we have here. These are some historic charts on the non-performing loans, loan
loss ratios, and charge offs, and you can see the conservative and historical
nature of these ratios and we think they're going to continue to be very, very
strong in relation to the industry. On page 30 we talk about the management
accretion here. If you look down at the bottom you can see David's team is
committed to staying on and making this work very, very well here. David will
become the Chairman and CEO of the Michigan bank. Bob Warrington is going to be
the President of the mortgage business. Kevin Kabat is going to be the President
of our Grand Rapids affiliates. Our entire management team, all of us from
Cincinnati, our top ten or so people, and David's team - his top eight, ten
people met yesterday for dinner and several hours already beginning the
integration process and those meetings are going very, very well. There's a
tremendous amount of enthusiasm and respect for each other's cultures. On page
31 again we're going to run a decentralized structure the way we always have.
This is affiliate bank structure. We'll have a separate bank in Chicago, one in
Grand Rapids, one in Detroit, and one up in northern Michigan up in the Traverse
City area. We think this will work very well with David's set up here and you
can see on the next page - on page thirty two - how the Old Kent affiliates will
represent a significant portion of the combined franchise. But you can see also
some of the veteran players that we're going to have here. This is the way our
banks are going to be run following the combination here. On page 33 we show the
before and after our record of successful acquisition-integration. We feel very
good about being able to hit these same types of targets and returns with the
Old Kent acquisition here and think this will be a very, very positive
combination.
Neal: We recognize that near term performance a lot of times on acquisitions is
focused on expenses, but clearly to make them work long term for equity players
you have to have revenue growth and we think that's what is interesting. If you
look at our deals through time - performance accelerates because you manage the
mix of business and because you have follow on revenue growth. Otherwise, that
performance would tail off.
George: I'd like to give you a little perspective on the deal size here. We
don't think there's going to be any diminution of the Fifth Third culture here.
Ok. Old Kent is going to be easily assimilated because of this decentralized
structure. Our most recent acquisition, Civitas, is fully integrated and
performing at FITB
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performance levels here - at our old levels before we acquired them. And as
compared to many recent bank M & A transactions there's a low deal value here as
a percent of the market cap. Our lower one-year phased in cost savings
assumptions and the strong financial position affords Fifth Third the
opportunity to preserve these revenue and growth rates out here. We're very
focused on maintaining this revenue growth, and again the internal rate of
return estimates exceed all previous Fifth Third transactions here. On the next
page you can see the share ownership. We are going to continue to link share
ownership to behavior. Our incentive type programs will be implemented. We list
the key components there. The incentive based comp, continued heavy use of stock
options, and then both of us have big share ownership here. Seventy seven
percent of our employees own shares. Thirty three percent of the Old Kent
employees own shares and again the numbers are pretty compelling, and with Old
Kent we're hoping that is going to continue to increase. Ok. Let me turn it over
to Neal for this on page 37 to walk through this.
Neal: This gives you some of the details as it relates to 2001, 2002 type
earnings projections. Again, based on the timing of the phase in of those costs
save 25% in the first year, 75% in the second year, and 100% in year three. We
think those things are conservative, but again our focus is on doing the right
things and executing them correctly. As it relates to cost saves, we're
targeting twenty percent cost saves. We have spent substantial time on due
diligence both on all the various pieces and expect that those are achievable.
If you turn to page 39, merger related charges, much as you'd see in any deal
pre-tax $304 million, $235 million after tax those charges obviously duplicative
costs, signage, facilities, and data processing equipment. As it relates to the
balance sheet two things going on there. Obviously we recognize margin
challenges here and we have the ability to take the opportunity to restructure
balance sheet that we think will benefit on going earnings. In addition, we are
conforming the loan loss reserves closer to the historical Fifth Third rather
than allow those to be diluted. We think that's just prudent in today's economic
environment to make sure that we have all the flexibility that we need.
George: So in summary here on page forty we think this is a great fit with Fifth
Third's existing businesses. We think this enhances our revenue growth
potential. It is financially very compelling over all and on a per share basis.
We think there's very low execution risk here and we think it's an example of
the Fifth Third financial strength and valuation providing flexibility to
acquire an attractive - very attractive franchise here. So we're very excited
about this.
Neal: With that, I'm going to open it up to questions. Feel free to give us
questions. Both David and George will be answering any questions that you might
have for us. So I'll open it up.
Operator: Thank you. We will now begin the question and answer session. If you
have a question, you will need to press the "1" on your touchtone phone.
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You will hear an acknowledgement that you have been placed in queue. If your
question has been answered and you wish to be removed from the queue, please
press the # sign. Your questions will be queued in the order that they are
received. If you are using a speakerphone please pick up the handset before
pressing the numbers. Once again, if there are any questions, please press the
"1" on your touchtone phone. Fred Cummings of McDonald on line with a question.
Please state your question.
Fred: Yes, good morning. Congratulations on a very nice transaction, and a
couple questions here. First, was this a negotiated deal or was this an auction?
I didn't really understand that up front. I think David...
David: Yes, Fred, let me answer that one. We've always had an annual process
where we've reviewed our strategy and this year that process became a bit more
extensive as we were really looking out a few years thinking about some of the
secular changes in the industry and what it was going to take to be successful
as we have been historically over the long haul. And issues of what's it going
to take in terms of a cost structure, long term, having the breadth of product
line and treasury management services, leasing, 401K administration, all kinds
of areas. Things that we're working on today but the question is could we get
there fast enough, and that really generated some thinking on our part and Fifth
Third was a very logical the most logical partner for us because of the
similarities of the culture. Certainly the credit culture but the performance
culture of the organization is very similar to what we're used to and the
consistency of performance is very similar to what we've been used to at Old
Kent. So that's really how this all came about. And we're very pleased that the
partnership has come together.
Fred: And as a follow up, David, Neil, I know you guys. Well, it's directed to
both of you. David, how much confidence do you have in that $2.50 number for '01
that's out there on IBES. The numbers have been coming down for Old Kent. It
looks like it was $2.70 six months ago. How confident are you in hitting that
$2.50 number for next year?
David: I'm not sure how relevant it is, Fred, at this stage, but let me just
tell you I don't think we've disappointed you in forty one years.
Neal: We recognize the estimates have come down. What I'd absolutely tell you is
these management teams will be focused on delivering on the promises. That's how
both of us have been successful in the past. We think combined together that
those revenues are going to start building starting tomorrow and that's clearly
what we're trying to do.
Fred: Ok. Thanks.
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Operator: Chip Dickson of Lehman Brothers is on line with a question. Please
state your question.
Chip: Thanks. Good morning, a couple questions. One, George, if you would talk
about the deal in terms of any change in your risk appetite because in your past
presentations one of the things you've highlighted is that you've never done
deals that were over 10% of your market cap. This is 20%. So is that changing
and in that theme if you would also talk about how you go about creating new
affiliates and the challenges and just the business proposition you have in
place that allows you to do that and lower your risk for the rest of the
franchise.
George: Yeah, Chip, I think this was very typical of what we've done in the
past. As you know we chunk these acquisitions apart, split them into pieces to
insure low risk like we mentioned in the briefing today. So we're going to run a
separate bank in Chicago, a separate bank in Grand Rapids, a separate bank up
north, and one over in the Detroit area and we think that's very consistent with
the way we operate and we think that significantly lowers the risk here. This is
not going to change our operating philosophies at all and it is very consistent
with the way Old Kent operates. A number of their businesses, their trust groups
for example are aligned in those very same markets. Their retail groups are
split that way. And so we think there's a lot of similarities there.
David: Chip, one thing to think about from our standpoint is one of the
attractions of Fifth Third to us is the ability to take this decentralized model
and allow us to differentiate ourselves from the other regional banks in the
Midwest and I think frankly, you know, the integration, the risks of integration
fall dramatically when you're willing to create the local decision making, local
boards, and local management teams that really pull all the lines of business
together in a market. And frankly, we had started moving that way in Chicago and
southeast Michigan and up north in a hybrid format to a straight line of
business situation because we found it just worked better. So it's a very
natural change for us and one that I think will be embraced by each of those
four markets.
Chip: How soon before they're put on your systems, George?
George: I think we are looking for a conversion in the second quarter. Now some
of that might occur earlier depending on contract terminations with stuff like
ATMs, merchant processing, some of the trust lines of business. Some are leasing
products. Some are international systems. There's a possibility that a lot of
that stuff could start earlier. Stuff like municipal underwriting, some of the
401K stuff, we could start doing right away. So some of that stuff we're already
looking at, Chip.
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Neal: We would refer (inaudible) we can clearly start measuring deposits. We
have similar kinds of financial system feeds so our ability to rank performance
and get people focused on keeping score will happen well before closing.
Chip: Thanks.
Operator: Diane Merdian of Morgan Stanley is on line with a question. Please
state your question.
Diane: Good morning. It's actually Diane Merdian and Adam Compton here. We had a
couple of questions. One, if you could just address, Neil, on the deposit
growth. This year your deposit growth has been a little bit less than sort of
historic Fifth Third deposit growth. I guess one of the questions is are you
confident that returns to normal because that is part of how you get the revenue
growth from these acquired companies? And to follow up to Chip's question, I
wasn't clear whether or not you're saying that going forward you'd be more
likely to do deals above the 10% type rough area, and then Adam, you had a
question on credit, I think.
Adam: Just on the restructuring charge with the 40 million that apparently
applies to conforming credit policies. Is that all just bringing reserves up or
is there some extra charge off in there?
Neal: I assume that, Adam, I assume on the credit side, whether it's provision
or charge-off what we're trying to do is make sure we have plenty of
flexibility. I would also say as it relates to Diane's questions a couple of
things that we - the only types of deals we're obviously focused on integration.
We've said that from the outset. Integration is what we do well. It's what you
have to do to have credibility. We expect that we will see small asset managers,
small MPS deals in the ensuing future, but clearly no other bank deals. As it
relates to future sizes I will tell you we're clearly aimed strictly at making
sure we make the right decisions for shareholders. That's probably going to be a
small fill in deals in the Midwest down the road, but that's really not our
focus for the next several years. What was the rest of your question, Diane?
Diane: The other question was really just deposit growth. Is the recent slow
down temporary or not?
Neal: Yeah, I think it absolutely is temporary. I think you'll see that in the
numbers. Clearly, our focus is we think you make more money on the deposit side
not on the asset side. That's been the hallmark of our customer or our franchise
for a number of years. We think there's great opportunity in Old Kent's market
to improve the deposit growth in Michigan. We think there are a lot of
competitors that don't spend as much time focused on that side.
Diane: Thank you. That's great.
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Operator: Lori Appelbaum of Goldman Sachs is on line with a question. Please
state your question.
Lori: Hi, Neal and George. My question relates to top line trends. While it was
mentioned that Old Kent is a similar performance culture the top line at the
company has been dead flat for the past year. So and the challenges look like it
hasn't all been interest rate related because the top line focus has extended
beyond mortgage banking and net interest income. So maybe if you could talk a
little bit about the challenges there and how long you think it will take to see
some turn.
Neal: Lori, I think we understand that we have to grow revenue. That's quite
honestly why we put together these management teams to start looking in a
disaggregated way at each line of business for where are there opportunities
starting right now and we think as George said, we can cross sell each other's
products immediately. We can work together to bring those products together. I
think that some of their revenue diminution probably is more mortgage related
than you think. I think a lot of it has-- There's a lot of good core franchise
there interest rate and mortgage related that I think they've done an awful good
job to come through the last year with the slow down in mortgage refinance and
everything as well as they did.
Operator: Adam Hurwich of Ulysses Management is on line with a question. Please
state your question.
Adam: Good morning. Part of the appeal of the Fifth Third story in the past has
been that your size has been a manageable size off of which to grow 15% was seen
as not a stretch. And partly management express, the little bit of reticence
regarding large deals as a result of kind of that logic. Could you just give us
some indication moving into the future what you think a manageable size is? What
kind of growth can be expected and at which point should we be a little bit
concerned that maybe the bank should pare things back a bit?
George: Yeah-I think our history - if you go back and look at our history - when
we were five billion there was the concern that we were getting too big. And
when we were 10 there was concern out there and as we got to 20, and I think the
way we chunk our business, the way we split it apart into 16 or 17 different
smaller banks and then within those banks we have a separate P & L at each
branch. We're effectively running each branch as a business out there and so
we're not looking at it as a 66 - 69 billion dollar organization but as a group
of a thousand small profit centers out there, and that totally changes the
outlook here. You know, if we would have done an acquisition in Chicago for 6%
of our market value and one in Grand Rapids for another 6% and another one in
Detroit for 6% and we would have done this over the next three or four months we
wouldn't be having these kinds of questions, and the way we see it we just kind
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of combined that all together here. So we don't see it as really a big change in
strategy and that our consistency in terms of looking at the deals remains very
much the same, again, this was a very unique opportunity here. When you look at
the geography, in one transaction we were able to do Chicago. We were able to do
Michigan. We were able to get Fort Wayne, Detroit, all at the same point in
time. So we think this was very, very attractive here and that's really what
compelled us to do this. It really had nothing to do with whether they were a 22
billion dollar bank or a 14 billion dollar bank, or the size wasn't really the
measure. There was concern that this was bigger than we've ever done and we
realize we've got a lot of work to do here. But I think we're looking at it in
three or four different parts, which is very consistent with the way we've
operated and we don't think that's going to change.
Adam: So we should, as investors, assume moving forward that contiguous
acquisitions are actually more manageable than in market.
George: Yeah, I think so. Yes. I think the answer to that is yes.
Adam: Thank you very much.
Operator: Carol Berger of Cress is on line with a question. Please state your
question.
Carol: Good morning.
Neal: Hi, Carol.
Carol: How are you? Two things, you kept mentioning the extraordinary IRR. Could
you tell us what it was? Secondarily, is there anything that would require three
years to get the kind of cost savings? I mean I realize you're being
conservative but is there anything about this that would take that long?
Neal: No, there's nothing we envision that would take that long, Carol. Clearly,
our interest is to insure that this goes smoothly. Our interest is to insure
that we build the revenue platforms as well so I would tell you we think we have
a lot of flexibility. The challenge with IRR as you all know is that it depends
on what you put on terminal value. Rather than quarrel with people you can all
run the sensitivities depending on what you put on the multiples it's well in
excess of the cost of capital by a factor of three or four percent, and whether
it's 16, 18, or 20 I'll let you guys quarrel as it relates to that, but clearly
very attractive.
Carol: Thank you.
Operator: Ken Puglisi of Sandler O'Neil is on line with a question. Please state
your question.
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Ken: Good morning, guys. Strikes me as a wonderful fit here for you. I just have
two questions. Number one - the exchange ratio, .74, I assume that's fixed and
are there any significant walk away provisions? Secondly, this gets thrown into
the mortgage banking business in a more significant way than they had been in
the past and I'm wondering how you see the mortgage banking business develop in
going forward.
George: Yeah, this .74 is fixed and there is no walk away in the transaction. On
the mortgage side our mortgage servicing numbers are about the same. I think the
mortgage revenues there is a slight inherent---
Neal: On page ___ If you go to the pie chart I think it's page 50 or ___ Here it
is its page 28. Mortgage Banking on the combined company becomes five percent of
the net income, which we don't - You know there are two pieces of the mortgage
business. We think it's a great customer platform like some others in our
industry do. We think it's one of the best opportunities to cross sell from. We
clearly at Fifth Third don't like volatility so you are managing that position.
We think it's five percent and the servicing nature of this portfolio that we'll
do just fine.
Ken: Thank you.
Operator: Joe Duwan of KBW is online with a question. Please state your
question.
Joe: Yes, good morning everyone. Are any divestitures planned and if so is there
any impact on the pro formas?
Neal: Joe this is Neal. As it relates to divestitures I'd settle for none, but I
would say in our calculations we have anticipated that it could be as much as
$200 million dollars but I think that's worse case kind of number.
Joe: And would that be in Western Michigan?
Neal: Yes.
Joe: And Neal any other color in terms of the due diligence on that loan
portfolio intensity of the percentage of the portfolio reviewed and any other
color?
Neal: Yeah we spent a substantial portion of time. We did a couple of three
things as it relates to the loan portfolio. I think we had a team of about 40
people in that reviewed in that reviewed risk ratings, validated risk ratings.
We looked at the largest and I think it was 75 or a 100 credits. We looked at
the lowest rated credits, all the watch list parts of the credit and because of
familiarity both with their head of credit and their commercial lender I think
we walked away very impressed with what we saw.
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David: Hey Joe we also reviewed their credit loss experience over the past 10
years and have seen that the credit quality here has been very, very excellent
here if you go back and look, back historically, back in the tough times 89-90
all the way through the last ten years and plowed it through there and the
record has really been pretty pristine.
Joe: Ok thank you.
Operator: Once again if there are any questions, please press the one (1) on
your touchtone phone.
Neal: If there aren't any further questions I guess I appreciate everyone's time
and attention this morning. Clearly this is a transaction that we are excited
about. Two great companies joined together and we certainly see it has
financially compelling, but in addition to that going forward our ability to
grow this franchise up against the competitors we're used to competing against
and in markets that we know and are very familiar to us and very similar to what
we've seen in Ohio. So we're excited and we appreciate your attention.
Unknown: Thank you.
Operator: Thank you for participating in today's conference call. You may all
disconnect.
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