<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------------------- -------------------
COMMISSION FILE NUMBER: 0-14591
OLD KENT FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
MICHIGAN 38-1986608
(State of Incorporation) (I.R.S. Employer Identification No.)
111 LYON STREET N.W.
GRAND RAPIDS, MICHIGAN 49503
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (616) 771-5000
Securities registered pursuant to Section 12(b) of the Securities Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant based on the closing price on the New York
Stock Exchange on February 19, 1999: $4,221,752,310.
Number of shares outstanding of the registrant's Common Stock, $1.00 par
value, as of February 19, 1999: 103,990,035.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's annual report to shareholders for the year
ended December 31, 1998, are incorporated by reference in Part I and Part II.
Portions of the registrant's proxy statement for its April 19, 1999, annual
meeting of shareholders are incorporated by reference in Part II and Part III.
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<PAGE> 2
PART I
FORWARD-LOOKING STATEMENTS
This Form 10-K Annual Report and the documents incorporated in this report
by reference 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 Financial
Corporation ("Old Kent") itself. Words such as "anticipates", "believes",
"estimates", "expects", "forecasts", "intends", "is likely", "plans",
"projects", variations of such words and similar expressions are intended to
identify such forward-looking statements. Assessments that Old Kent is Year 2000
"compliant" are necessarily statements of belief as to the outcome of future
events, based in part on information provided by vendors and others that Old
Kent has not independently verified. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions that
are difficult to predict with regard to timing, extent, likelihood, and degree
of occurrence. Therefore, actual results and outcomes may materially differ from
what may be expressed, implied, or forecasted in such forward-looking
statements. Future factors that could cause a difference between an ultimate
actual outcome and a preceding forward-looking statement include changes in
interest rates and interest rate relationships; demand for products and
services; the degree of competition by traditional and non-traditional
competitors; changes in banking regulations; changes in tax laws; changes in
prices, levies, and assessments; the impact of technological advances;
governmental and regulatory policy changes; the outcomes of pending and future
litigation and contingencies; trends in customer behaviors as well as their
ability to repay loans; the ability of the companies on which Old Kent relies to
make their computer systems Year 2000 compliant; the ability to locate and
convert all relevant computer codes and data; the vicissitudes of the national
economy; the possibility that expected cost savings from mergers might not be
fully realized within the expected time frame; and similar uncertainties. Old
Kent undertakes no obligation to update, amend or clarify forward-looking
statements, whether as a result of new information, future events, or otherwise.
ITEM 1. BUSINESS.
Old Kent is a financial services organization that operates as a bank
holding company headquartered in Grand Rapids, Michigan. Its principal banking
subsidiary, Old Kent Bank, serves more than 100 communities in Michigan and
Illinois with 235 banking offices. In addition, Old Kent Bank has one banking
office in Elkhart, Indiana. Old Kent Bank engages in commercial and retail
banking and provides trust and other financial services. Approximately 86% of
Old Kent's deposits and 74% of Old Kent's loans are associated with banking
offices serving the lower peninsula of Michigan. The balance of banking assets
are associated with offices serving northeastern Illinois as well as Indiana.
Old Kent mortgage companies operate 143 offices located in 32 states.
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.
<PAGE> 3
During 1997 and continuing through 1998, Old Kent has strategically aligned
its operations into six lines of business: Corporate Banking, Retail Banking,
Community Banking, Investment and Insurance Services, Mortgage Banking and
Treasury.
Corporate Banking is comprised of loans, deposits and other services for
larger corporate customers in metropolitan markets.
Retail Banking is comprised of loans, deposits and other services for
consumers in metropolitan markets.
Community Banking is comprised of loans, deposits and other services for
all customers in smaller communities.
Investment and Insurance Services is comprised of investment management,
trust, brokerage, and insurance services in all markets, as well as loans,
deposits and other services for private banking and small business
customers in metropolitan markets.
Mortgage Banking is comprised of origination and acquisition, sale and
servicing of residential mortgages on a nationwide basis.
Treasury is comprised of investment portfolio and funds management
activities.
The principal sources of revenues for Old Kent are interest and fees on
loans, principally originated by Corporate Banking, Retail Banking, Community
Banking and Mortgage Banking lines of business. Interest and fees on loans
accounted for 52% of total revenues in 1998, 57% in 1997 and 59% in 1996. With
the exception of the Mortgage Banking line of business which operates 143
offices in 32 states, approximately 74% of deposits and 86% of total loans at
December 31, 1998, were associated with these business lines serving the lower
peninsula of the State of Michigan.
Interest on securities, attributable to the Treasury line of business, is
also a significant source of revenue accounting for 16% of total revenues in
1998, 18% in 1997 and 21% in 1996.
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 9.3%, 8.2% and
7.9% of total revenues in 1998, 1997 and 1996 respectively. This business line
primarily services customers in the lower peninsula of the State of Michigan.
Further information about Old Kent's business segments is set forth in Note
17 to the Financial Statements included in Old Kent's Annual Report to
Shareholders for the year ended December 31, 1998, and is incorporated here by
reference.
Old Kent has had no foreign loans or hedge fund investments at any time
during the last five years. The foreign activities of Old Kent primarily involve
time deposits with banks, and placements and exchange transactions for domestic
customers of the banks. These activities were not material to Old Kent's
financial condition or results of operations.
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As of December 31, 1998, Old Kent conducted the business of banking through
the following bank subsidiaries:
<TABLE>
<CAPTION>
BANK MAIN OFFICE ASSETS DEPOSITS LOANS
---- ----------- ------ -------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Old Kent Bank Grand Rapids, MI $16,578 $13,220 $ 8,562
Old Kent Bank, National Association Jonesville, MI 117 94 97
</TABLE>
Old Kent also conducted business activities closely related to the business
of banking through the following direct and indirect nonbank subsidiaries as of
December 31, 1998:
<TABLE>
<CAPTION>
SUBSIDIARY BUSINESS ACTIVITY STATES WHERE OFFICES ARE LOCATED
---------- ----------------- --------------------------------
<S> <C> <C>
Old Kent Brokerage Services, Inc. Full service Michigan, Illinois
brokerage services
Old Kent Financial Life Insurance Company Credit life and Michigan
disability insurance
Old Kent Insurance Group, Inc. Insurance agency Michigan
Old Kent Mortgage Company Mortgage company Offices in 32 states
Old Kent Mortgage Services, Inc. Mortgage servicing Michigan
Vanguard Financial Service Corp. Leasing Illinois, Michigan
National Pacific Mortgage Corporation Mortgage company California, Arizona, Hawaii,
Oregon
Republic Mortgage Corp. Mortgage company Utah, Colorado, Idaho, Nevada,
New Mexico, Washington, Oregon
Lyon Street Asset Management Company Investment advisor Michigan
</TABLE>
RECENT DEVELOPMENTS
On February 24, 1999, Old Kent entered into an Agreement and Plan of Merger
with CFSB Bancorp, Inc., a Delaware corporation ("CFSB"), pursuant to which CFSB
will merge with and into Old Kent (the "Merger"). As a result of the Merger,
each outstanding share of CFSB's common stock, par value $0.01 per share will be
converted into the right to receive 0.6222 shares of Old Kent common stock. The
Merger is conditioned upon, among other things, approval by holders of a
majority of CFSB common stock and the receipt of certain regulatory and
governmental approvals. It is anticipated that the Merger will be treated as a
pooling-of-interests for accounting and financial reporting purposes. As of
December 31, 1998, CFSB had (on a consolidated basis) assets totaling
approximately $880 million and deposits of approximately $587 million. CFSB
provides banking services in the greater Lansing, Michigan area through 16
offices in Ingham, Clinton, Eaton, and Ionia counties.
Effective October 1, 1998, Old Kent acquired First Evergreen Corporation, a
bank holding company ("First Evergreen") and its wholly owned subsidiary, First
National Bank of Evergreen Park. Approximately 12.8 million shares of Old Kent
common stock were issued in the merger. The acquisition was effected by a merger
of First Evergreen with and into Old Kent. The transaction was accounted for as
a pooling-of-interests for financial reporting and accounting purposes. As of
September 30, 1998, First Evergreen had (on a consolidated basis) assets
totaling approximately $1.9 billion and deposits of approximately $1.7 billion.
The principal market for the financial services
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<PAGE> 5
offered by First Evergreen was metropolitan Chicago, Illinois. During December
1998, First National Bank of Evergreen Park was merged with and into Old Kent
Bank.
COMPETITION
The business of banking is highly competitive. In addition to competition
from other commercial banks, banks face significant competition from nonbank
financial institutions. Savings associations compete aggressively with
commercial banks for deposits and loans. Credit unions and finance companies are
significant factors in the consumer loan market. Insurance companies, investment
firms, and retailers are significant competitors for some types of business.
Banks compete for deposits with a broad spectrum of other types of investments
such as mutual funds, debt securities of corporations, and debt securities of
the federal government, state governments and their respective agencies. The
principal methods of competition for financial services are price (interest
rates paid on deposits, interest rates charged on borrowings, and fees charged
for services) and service (convenience and quality of services rendered to
customers).
SUPERVISION AND REGULATION
Banks and bank holding companies are extensively regulated. Old Kent Bank
is chartered under Michigan law and is a member of the Federal Reserve System.
It is supervised, examined, and regulated by the Federal Reserve System, the
Federal Deposit Insurance Corporation ("FDIC") and the Financial Institutions
Bureau of the State of Michigan. Old Kent Bank, N.A. is chartered under federal
law and supervised, examined, and regulated by the Office of the Comptroller of
the Currency ("OCC"). Deposits of all of the banks are insured by the FDIC to
the extent provided by law.
Federal and state laws that govern banks significantly limit their business
activities in a number of respects. Prior approval of the Board of Governors of
the Federal Reserve System ("Federal Reserve Board"), and in some cases various
other governing agencies, is required for Old Kent to acquire control of any
additional banks. The business activities of Old Kent and its subsidiaries are
limited to banking and other activities closely related to banking.
Old Kent is a legal entity separate and distinct from its subsidiary banks
and its other subsidiaries. Transactions between Old Kent's subsidiary banks are
significantly restricted. There are legal limitations on the extent to which Old
Kent's subsidiary banks can lend or otherwise supply funds to Old Kent or
certain of its affiliates. In addition, payment of dividends to Old Kent by
subsidiary banks is subject to various state and federal regulatory limitations.
Federal law contains a "cross-guarantee" provision that could result in
insured depository institutions owned by Old Kent being assessed for losses
incurred by the FDIC in connection with assistance provided to, or the failure
of, any other insured depository institution owned by Old Kent. Under Federal
Reserve Board policy, Old Kent is expected to act as a source of financial
strength to each subsidiary bank and to commit resources to support each
subsidiary bank. Under federal law, the FDIC also has authority to impose
special assessments on insured depository institutions to repay FDIC borrowings
from the United States Treasury or other sources and to establish semiannual
assessment rates on Bank Insurance Fund ("BIF") and Savings Association
Insurance Fund ("SAIF") deposits to maintain the BIF and SAIF at the designated
reserve ratio required by law.
Banks are subject to a number of federal and state laws and regulations
that have a material impact on their business. These include, among others,
state usury laws, state laws relating to fiduciaries, the Truth In Lending Act,
the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Expedited
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<PAGE> 6
Funds Availability Act, the Community Reinvestment Act, electronic funds
transfer laws, redlining laws, antitrust laws, environmental laws, and privacy
laws. The instruments of monetary policy of authorities such as the Federal
Reserve Board may influence the growth and distribution of bank loans,
investments, and deposits, and may also affect interest rates on loans and
deposits. These policies may have a significant effect on the operating results
of banks.
The nature of the business of Old Kent's subsidiaries is such that they
hold title, on a temporary or permanent basis, to a number of parcels of real
property. These include property owned for branch offices and other business
purposes as well as properties taken in or in lieu of foreclosure to satisfy
loans in default. Under current state and federal laws, present and past owners
of real property are potentially exposed to liability for the cost of clean up
or containment of contamination on or originating from those properties. These
liabilities can be material and can exceed the value of the contaminated
property.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act") substantially changed the geographic constraints
applicable to the banking industry. The Riegle-Neal Act allows bank holding
companies to acquire banks located in any state in the United States without
regard to geographic restrictions or reciprocity requirements imposed by state
law. Effective June 1, 1997 (or earlier if expressly authorized by applicable
state law), the Riegle-Neal Act also allows banks to establish interstate branch
networks through acquisitions of other banks. The establishment of de novo
interstate branches or the acquisition of individual branches of a bank in
another state (rather than the acquisition of an out-of-state bank in its
entirety) is allowed by the Riegle-Neal Act only if specifically authorized by
state law.
Michigan permits both U.S. and non-U.S. banks to establish branch offices
in Michigan. The Michigan Banking Code permits, in appropriate circumstances and
with the approval of the Commissioner, (1) acquisition of Michigan banks by
FDIC-insured banks, savings banks or savings and loan associations located in
other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank,
savings bank or savings and loan association located in a state in which a
Michigan bank could purchase branches of the purchasing entity, (3)
consolidation of Michigan banks and FDIC-insured banks, savings banks or savings
and loan associations located in other states having laws permitting such
consolidation, (4) establishment of branches in Michigan by FDIC-insured banks
located in other states, the District of Columbia or U.S. territories or
protectorates having laws permitting a Michigan bank to establish a branch in
such jurisdiction, and (5) establishment by foreign banks of branches located in
Michigan.
INVESTMENT ACTIVITIES
As detailed below in the "Investment Portfolio" table, Old Kent derives a
significant amount of income from its investment security portfolio, which is
composed of five general categories of securities: (1) U.S. Treasury and federal
agency securities; (2) collateralized mortgage obligations ("CMOs"); (3)
mortgage-backed pass-through securities ("MBSs"); (4) municipal bonds; and (5)
other securities.
U.S. Treasury and federal agency securities are securities backed by the
full faith and credit of the federal government. Most of these securities pay a
fixed rate of interest. Some federal agency securities pay a floating rate of
interest determined periodically according to a predefined index. Principal is
returned at par at a fixed maturity date for most of these securities and
reported yields remain relatively constant. Some federal agency securities are
"callable" and may be prepaid prior to the stated maturity date by the issuer
according to the terms of the obligation. These prepayments could affect the
reported yields if the recognition of purchase premium or discount must be
accelerated to match the timing of the prepaid principal.
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<PAGE> 7
CMOs are securities that are collateralized by either whole loan mortgages
or mortgage pass-through securities. CMOs are issued by federal agencies as well
as private entities. The return on these investments is realized through regular
receipt of interest on the outstanding principal amount at a predetermined rate,
combined with any accretion of discount or amortization of premium. Principal is
returned according to a predetermined payout sequence for the various pieces, or
"tranches," of the CMO according to the terms of the obligation, as regular
payments and prepayments are made on the underlying mortgages. The timing and
regularity of these principal receipts may vary over the term of the security.
The variability of these principal payments may affect reported yields as the
recognition of purchase premium or discount must be adjusted to match the timing
of the prepaid principal.
MBSs represent an undivided interest in an underlying pool of whole loans.
Old Kent currently only holds MBSs that are guaranteed by one of the federal
agencies. Regular monthly principal and interest payments on the underlying
mortgages are "passed through" to the security holders. Principal payments may
vary as some mortgages are prepaid due to refinancing, payoff, or additional
payment towards the balances of loans that make up the pool. The variability of
these principal payments may affect reported yields as the recognition of
purchase premium or discount must be adjusted to match the timing of the prepaid
principal.
Municipal bonds represent obligations of state and political subdivisions
or their created "authorities." Municipal bonds are issued in various forms.
They may have fixed or floating rates, a fixed maturity or a "callable"
prepayment provision, and interest paid regularly or at maturity. Interest is
generally exempt from federal income tax. The reported yield may be affected by
the prepayment of principal on a callable security.
Other securities represent Federal Reserve Bank stock, Federal Home Loan
Bank stock, and Federal National Mortgage Association stock. Old Kent receives
regular dividend payments from each of these issuers.
As of December 31, 1998, Old Kent had not identified any securities as
being "high risk" as defined by the FFIEC Supervisory Policy Statement on
Securities Activities.
EMPLOYEES
In the aggregate, Old Kent and its subsidiaries had 7,457 employees (on a
full time equivalent basis) at December 31, 1998. Old Kent and its subsidiaries
are equal opportunity employers whose affirmative action programs comply with
applicable federal laws and executive orders.
STATISTICAL INFORMATION
The statistical information on the following pages further describes
certain aspects of the business of Old Kent. Additional statistical information
describing the business of Old Kent appears in the following sections of
Management's Discussion and Analysis of Financial Condition and Results of
Operations incorporated by reference in Item 7 ("MD&A"), the Selected Financial
Data incorporated
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<PAGE> 8
by reference in Item 6 ("Selected Financial Data"), and the financial statements
and notes incorporated by reference in Item 8 ("Financial Statements"):
<TABLE>
<CAPTION>
ANNUAL REPORT
PAGES
-------------
<S> <C>
MD&A
Average Consolidated Balance Sheets S-13
Net Interest Income S-9 - S-12
Loan Portfolio S-14 - S-15
Nonperforming Assets S-19
Provision for Credit Losses S-16 - S-19
SELECTED FINANCIAL DATA
Dividend payout ratio S-3
Return on average total equity S-3
Return on average assets S-3
Average equity to average assets S-3
FINANCIAL STATEMENTS
Note 6. Loans and Nonperforming Assets S-51 - S-52
Note 17. Reportable Operating Segments S-61 - S-62
</TABLE>
7
<PAGE> 9
INVESTMENT PORTFOLIO
The following table summarizes Old Kent's securities classified as
available-for-sale at December 31, 1998, 1997, and 1996. Securities
available-for-sale are carried on the balance sheet at their estimated fair
market values, with corresponding valuation adjustments included as a component
of shareholders' equity.
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1998
U.S. Treasury and federal agency securities $ 726,839 $21,576 $ 42 $ 748,373
Collateralized mortgage obligations:
U.S. Government issued 1,301,667 8,661 1,817 1,308,511
Privately issued 365,343 2,055 902 366,496
Mortgage-backed pass-through securities 143,449 1,230 564 144,115
Other securities 198,003 1,659 461 199,201
---------- ------- ------- ----------
Total $2,735,301 $35,181 $ 3,786 $2,766,696
========== ======= ======= ==========
December 31, 1997
U.S. Treasury and federal agency securities $ 663,772 $ 2,186 $ 2,465 $ 663,493
Collateralized mortgage obligations:
U.S. Government issued 1,030,220 5,830 2,337 1,033,713
Privately issued 237,363 1,066 2,688 235,741
Mortgage-backed pass-through securities 134,127 280 135 134,272
Other securities 118,909 205 -- 119,114
---------- ------- ------- ----------
Total $2,184,391 $ 9,567 $ 7,625 $2,186,333
========== ======= ======= ==========
December 31, 1996
U.S. Treasury and federal agency securities $1,312,429 $ 298 $ 9,920 $1,302,807
Collateralized mortgage obligations:
U.S. Government issued 419,499 433 3,064 416,868
Privately issued 189,347 465 4,277 185,535
Mortgage-backed pass-through securities 72,452 46 1,179 71,319
Other securities 61,294 -- -- 61,294
---------- ------- ------- ----------
Total $2,055,021 $ 1,242 $18,440 $2,037,823
========== ======= ======= ==========
</TABLE>
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INVESTMENT PORTFOLIO -- CONTINUED
The following table summarizes Old Kent's securities classified as
held-to-maturity at December 31, 1998, 1997, and 1996. Securities
held-to-maturity are carried on the balance sheet at their amortized cost.
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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
========== ======= ======= ==========
December 31, 1997
U.S. Treasury and federal agency securities $ 466,989 $ 8,217 $ 187 $ 475,019
Collateralized mortgage obligations:
U.S. Government issued 634,597 1,636 4,738 631,495
Privately issued 126,492 428 992 125,928
Mortgage-backed pass-through securities 191,113 1,958 1,634 191,437
State and political subdivision securities 323,551 13,619 1,482 335,688
Other securities 7,265 -- -- 7,265
---------- ------- ------- ----------
Total $1,750,007 $25,858 $ 9,033 $1,766,832
========== ======= ======= ==========
December 31, 1996
U.S. Treasury and federal agency securities $ 542,686 $ 9,237 $ 1,031 $ 550,892
Collateralized mortgage obligations:
U.S. Government issued 640,524 2,710 4,118 639,116
Privately issued 173,396 -- 1,885 171,511
Mortgage-backed pass-through securities 206,597 3,161 1,944 207,814
State and political subdivision securities 329,949 12,156 1,535 340,570
Other securities 1,385 -- -- 1,385
---------- ------- ------- ----------
Total $1,894,537 $27,264 $10,513 $1,911,288
========== ======= ======= ==========
</TABLE>
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INVESTMENT PORTFOLIO -- CONTINUED
The following table shows, by class of maturities as of December 31, 1998,
the amounts and weighted average yields of securities available-for-sale and
securities held-to-maturity on the basis of amortized cost:
<TABLE>
<CAPTION>
MATURING
---------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
---------------- ------------------ ------------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. government agencies
and corporations $188,298 7.16% $492,317 5.86% $203,923 6.55% $ 24,665 6.70%
States and other political
subdivisions 30,602 5.42 129,794 5.43 128,275 5.18 151,406 4.84
Other Securities -- -- 50,000 6.72 7,555 6.36 141,383 7.99
-------- ---- -------- ---- -------- ---- -------- ----
Total $218,900 6.92% $672,111 5.84% $339,753 6.03% $317,454 6.39%
======== ==== ======== ===== ======== ==== ======== ====
</TABLE>
- -------------------------
(1) The effective yields are weighted for the scheduled maturity of each
security.
(2) Collateralized mortgage obligations and mortgage-backed securities of
$1,990,828, having a weighted average yield of 6.31% at December 31, 1998,
are not included in the table shown above.
(3) Weighted average interest rates have been computed on a fully taxable
equivalent basis. The rates shown on securities issued by states and
political subdivisions have been restated, assuming a 35% tax rate. The
amount of the adjustment, due to restating the rates, is as follows:
<TABLE>
<CAPTION>
TAX-EXEMPT RATE OF TAXABLE
RATE ADJUSTMENT EQUIVALENTS BASIS
---------- ---------- -----------------
<S> <C> <C> <C>
Under 1 Year 5.42% 2.91% 8.33%
1 to 5 Years 5.43 2.93 8.36
5 to 10 Years 5.18 2.79 7.97
Over 10 Years 4.84 2.60 7.44
---- ---- ----
Total 5.15% 2.78% 7.93%
==== ==== ====
</TABLE>
(4) The aggregate book value of securities of no single issuer except the U.S.
Government exceeds 10% of Old Kent's consolidated shareholders' equity.
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<PAGE> 12
INVESTMENT PORTFOLIO -- CONTINUED
The table below identifies the critical characteristics of Old Kent's three
classes of mortgage-backed related securities for December 31, 1998, 1997, and
1996.
<TABLE>
<CAPTION>
WEIGHTED ESTIMATED
AMORTIZED AVERAGE AVERAGE
COST YIELD LIFE*
--------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
December 31, 1998
Collateralized mortgage obligations:
U.S. Government issued $1,367,314 6.24% 3.54
Privately issued 391,553 6.32 4.11
Mortgage-backed pass-through securities 231,961 6.67 4.67
---------- ---- ----
Total $1,990,828 6.31% 3.78
========== ==== ====
December 31, 1997
Collateralized mortgage obligations:
U.S. Government issued $1,664,817 6.57% 3.3
Privately issued 363,855 6.55 3.3
Mortgage-backed pass-through securities 325,240 6.17 4.2
---------- ---- ----
Total $2,353,912 6.51% 3.4
========== ==== ====
December 31, 1996
Collateralized mortgage obligations:
U.S. Government issued $1,060,023 6.43% 2.9
Privately issued 362,743 6.47 3.1
Mortgage-backed pass-through securities 279,049 6.77 4.0
---------- ---- ----
Total mortgage-backed related securities $1,701,815 6.49% 3.1
========== ==== ====
</TABLE>
- -------------------------
* Estimated average life is the amortization period, in years, used by Old Kent
in the preparation of its financial statement.
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<PAGE> 13
LOAN PORTFOLIO
The following table shows the maturity of loans (excluding residential
mortgages of 1-4 family residences, consumer loans, credit card loans, and lease
financing) outstanding at December 31, 1998. Also provided are the amounts due
after one year classified according to their sensitivity to changes in interest
rates.
<TABLE>
<CAPTION>
DUE IN ONE DUE IN ONE DUE AFTER
YEAR OR LESS TO FIVE YEARS FIVE YEARS
------------ ------------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Commercial, financial and agricultural $1,631,933 $ 942,474 $153,485
Real estate-commercial(1) 437,746 1,231,353 251,008
Real estate-construction 312,435 233,634 147,889
---------- ---------- --------
Total $2,382,114 $2,407,461 $552,382
========== ========== ========
Loans due after one year:
With fixed rates $1,571,182 $371,172
With floating rates 836,279 181,210
---------- --------
Total $2,407,461 $552,382
========== ========
</TABLE>
- -------------------------
(1) Includes real estate commercial loans secured by 1-4 family residences.
Old Kent had no significant foreign outstandings at the end of any of the
last three years.
12
<PAGE> 14
DEPOSITS
The daily average amounts of deposits and rates paid on such deposits for
the periods indicated are:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- -------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
In Domestic Offices:
Non-interest-bearing demand
deposits $ 1,888,104 $ 1,686,796 $ 1,574,090
Savings deposits 4,013,366 2.79% 3,710,473 2.68% 3,712,081 2.72%
Time deposits 6,222,757 5.32 6,530,535 5.55 6,095,803 5.66
In Foreign Office:
Time deposits 37,384 5.37 38,791 5.45 46,841 5.73
----------- ----------- -----------
Total $12,161,611 $11,966,595 $11,428,815
=========== =========== ===========
</TABLE>
The time remaining until maturity of time deposits of $100,000 or more
issued by domestic offices (all of which are time certificates of deposit) at
December 31, 1998, is as follows:
<TABLE>
<CAPTION>
TIME CERTIFICATES
OF DEPOSIT
-----------------
(DOLLARS IN
THOUSANDS)
<S> <C>
3 months or less $ 673,272
Over 3 through 6 months 894,614
Over 6 through 12 months 554,063
Over 12 months 155,804
----------
Total $2,277,753
==========
</TABLE>
Time deposits in the foreign office are all in amounts of $100,000 or more.
13
<PAGE> 15
OTHER BORROWED FUNDS
Other borrowed funds consist of federal funds purchased, securities sold
under agreements to repurchase, bank notes, treasury tax, loan and demand notes.
The following amounts and rates applied during the last three years:
<TABLE>
<CAPTION>
FEDERAL FUNDS PURCHASED AND
SECURITIES SOLD UNDER FEDERAL HOME LOAN
AGREEMENTS TO REPURCHASE: BANK NOTES BANK ADVANCES
-------------------------------- -------------------------------- ------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts outstanding at
year-end $1,150,223 $812,975 $499,734 $ 250,000 $960,500 $445,000 $525,000 $100,000 $100,000
Average amount outstanding
during year $ 980,700 $716,754 $534,903 $ 722,819 $590,886 $415,410 $189,110 $100,000 $ 43,716
Maximum amount outstanding
any month-end $1,259,242 $904,204 $631,046 $1,010,500 $960,500 $495,000 $525,000 $100,000 $100,000
Weighted average interest
rate at year-end(1) 4.98% 5.80% 5.24% 4.59% 5.88% 6.22% 5.10% 5.75% 5.72%
Weighted average interest
rate during year(1) 5.46% 4.81% 4.65% 5.70% 6.04% 6.36% 5.51% 5.67% 5.51%
<CAPTION>
AGGREGATE OTHER
BORROWED FUNDS
--------------------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amounts outstanding at
year-end $2,061,142 $2,090,095 $ 1,252,979
Average amount outstanding
during year $2,074,403 $1,581,049 $ 1,170,640
Maximum amount outstanding
any month-end $2,467,066 $2,090,095 $ 1,327,547
Weighted average interest
rate at year-end(1) 4.80% 5.21% 5.47%
Weighted average interest
rate during year(1) 5.29% 5.51% 5.49%
</TABLE>
- -------------------------
(1) The weighted average interest rates are derived by dividing the interest
expense for the period by the daily average balance during the period.
14
<PAGE> 16
ITEM 2. PROPERTIES.
The executive offices of Old Kent and the main office of Old Kent Bank are
located in an office complex in downtown Grand Rapids, Michigan. This complex
consists of two interconnected buildings, including a 10-story office building.
Approximately 71% of the 305,633 square feet of space in the complex is occupied
by Old Kent and Old Kent Bank. The balance is leased to others for terms of
varying lengths.
Old Kent's operations center is housed in two buildings located near Grand
Rapids. The two buildings, which have a total of 310,000 square feet, are owned
by Old Kent Bank.
Old Kent's subsidiary banks conducted business from a total of 236 full
service banking offices as of December 31, 1998. Of the full service banking
offices, 166 are owned by the banks or their subsidiaries, and 70 are leased
from various independent parties for various lease terms.
ITEM 3. LEGAL PROCEEDINGS.
Old Kent's subsidiaries are parties, as plaintiff or defendant, to a number
of legal proceedings. All of these proceedings are considered to be ordinary
routine litigation incidental to their business, and none is considered to be a
material pending legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
Old Kent's executive officers are appointed annually by, and serve at the
pleasure of, the Old Kent board of directors. Biographical information
concerning executive officers as of March 1, 1999, who are not directors or
nominated for election to the board of directors is presented below:
Gary S. Bernard (age 45) has been Senior Vice President (Consumer Lending)
of Old Kent Bank since January 1999 and Senior Vice President of Old Kent Bank
since August 1998. Prior to that, he was a Managing Associate of Coopers and
Lybrand Consulting from 1997 to 1998, a Senior Vice President of Great Western
Bank from 1996 to 1997, and a Senior Vice President of Banc One from 1989 to
1996. Mr. Bernard is also a member of Old Kent's Management Group.
Donald R. Britton (age 55) has been President and Chief Operating Officer
of Old Kent Mortgage Company since 1997. He was Executive Vice President of Old
Kent Mortgage Company from 1995 to 1997. Prior to that, he was a Senior Vice
President of First Fidelity Bank from 1992 to 1995. Mr. Britton is also a member
of Old Kent's Management Group.
Steven D. Crandall (age 46) has been Senior Vice President (Human
Resources) of Old Kent since 1997 and Senior Vice President of Old Kent since
1989. Mr. Crandall is also a member of Old Kent's Management Group.
David A. Dams (age 46) has been Executive Vice President (Corporate
Banking) of Old Kent Bank since 1989 and Executive Vice President of Old Kent
Bank since 1986. Mr. Dams is also a member of Old Kent's Management Group.
15
<PAGE> 17
Gregory K. Daniels (age 46) has been Senior Vice President of Old Kent
since 1996 and Chief Information Officer of Old Kent since 1997. Prior to that,
he was a Business Unit Executive with IBM. Mr. Daniels is also a member of Old
Kent's Management Group.
Mark F. Furlong (age 41) has been Executive Vice President of Old Kent and
Old Kent Bank since October 1998 and Chief Financial Officer of Old Kent Bank
since March 1998. He was Senior Vice President of Old Kent Bank from March 1998
to October 1998. Prior to that, he was a First Vice President of H.F.
Ahmanson/Home Savings of America. Mr. Furlong is also a member of Old Kent's
Senior Policy Committee and Old Kent's Management Group.
Stanlee P. Greene, Jr. (age 38) has been Senior Vice President (Sales and
Marketing) of Old Kent since February 1999. Prior to that, he was a partner of
Williams Marketing Services, a consulting firm. Mr. Greene is also a member of
Old Kent's Management Group.
Richard L. Haug (age 59) has been Senior Vice President and General Auditor
of Old Kent since 1986.
James A. Hubbard (age 44) has been Senior Executive Vice President
(Corporate Banking) of Old Kent since February 1998. He was President of Old
Kent Bank-Illinois from 1997 to August 1998 and Executive Vice President of Old
Kent from 1997 to February 1998. Prior to that, Mr. Hubbard held various
positions with American National Bank. Mr. Hubbard is also a member of Old
Kent's Senior Policy Committee and Old Kent's Management Group.
Joseph T. Keating (age 46) has been Senior Vice President of Old Kent Bank
since 1987 and President of Lyon Street Asset Management Company since January
1998. Mr. Keating is also a member of Old Kent's Management Group.
Kenneth C. Krei (age 49) has been Executive Vice President (Investment and
Insurance Services) of Old Kent Bank since 1998 and Executive Vice President of
Old Kent Bank since 1997. He was Senior Vice President of Old Kent Bank from
1996 to 1997. Prior to that, Mr. Krei held various positions with Bank of
America (Continental Bank) in Chicago, Illinois. Mr. Krei is also a member of
Old Kent's Senior Policy Committee and Old Kent's Management Group.
Larry S. Magnesen (age 41) has been Senior Vice President (Business
Banking) of Old Kent Bank since January 1999 and Senior Vice President of Old
Kent Bank since 1997. He was Senior Vice President of Old Kent from 1996 to
1997. Prior to that, he was a Vice President of Banc One Corporation and Banc
One Ohio Corporation. Mr. Magnesen is also a member of Old Kent's Management
Group.
William K. McGowan (age 37) has been Executive Vice President of Old Kent
Bank and President of Old Kent Bank-Illinois since August 1998. Prior to that,
he was a First Vice President of American National Bank from 1994 to 1998. Mr.
McGowan is also a member of Old Kent's Management Group.
Ronald C. Mishler (age 38) has been Senior Vice President and Treasurer of
Old Kent and Old Kent Bank since August 1998. Prior to that, he was Vice
President and Treasurer of United States Fidelity and Guaranty Corporation from
1996 to August 1998. Prior to that, he was a Senior Vice President of Heller
International Corporation. Mr. Mishler is also a member of Old Kent's Management
Group.
Janet S. Nisbett (age 48) has been Senior Vice President and Controller of
Old Kent since November 1998 and Senior Vice President and Controller of Old
Kent Bank since 1990.
16
<PAGE> 18
Albert T. Potas (age 47) has been Senior Vice President (Investor Relations
and Strategic Planning) of Old Kent since November 1998 and Senior Vice
President of Old Kent since 1992. He was Controller of Old Kent from 1986 to
November 1998.
David C. Schneider (age 33) has been Executive Vice President (Retail
Administration) of Old Kent since October 1998. Prior to that, he was a partner
of The Stratmor Group, a consulting firm, from 1997 to 1998. He was Assistant
Vice President and Controller of Old Kent Mortgage Company from 1994 to 1995,
Vice President of Old Kent Mortgage Company from 1995 to 1996, Chief Financial
Officer of Old Kent Mortgage Company from 1995 to 1997, and Senior Vice
President of Old Kent Mortgage Company from 1996 to 1997. Mr. Schneider is also
a member of Old Kent's Senior Policy Committee and Old Kent's Management Group.
Daniel W. Terpsma (age 44) has been Executive Vice President of Old Kent
Bank and President of Old Kent Bank-East since 1997. Prior to that, he was
Senior Vice President of Old Kent Bank. Mr. Terpsma is a director of Riviera
Tool Company. Mr. Terpsma is also a member of Old Kent's Management Group.
Mary E. Tuuk (age 34) has been Senior Vice President (Legal Coordinator) of
Old Kent since February 1998 and Secretary of Old Kent since 1996. She was Vice
President of Old Kent from 1996 to February 1998. Prior to that, she was an
attorney with the law firm Chapman and Cutler in Chicago, Illinois.
Michelle L. Van Dyke (age 35) has been Executive Vice President (Community
Banking) of Old Kent since November 1998. She was President of the Central
Region of Old Kent Mortgage Company from 1997 to November 1998, Senior Vice
President of Old Kent Mortgage Company from 1995 to 1997, and Vice President of
Old Kent Mortgage Company from 1993 to 1995. Ms. Van Dyke is also a member of
Old Kent's Senior Policy Committee and Old Kent's Management Group.
Michael J. Whalen (age 50) has been Senior Vice President and Senior Credit
Officer of Old Kent since 1997. Prior to that, he was President of Old Kent
Bank-Illinois. Mr. Whalen is also a member of Old Kent's Management Group.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information under the caption "Old Kent Common Stock" and "Cash
Dividends" on pages S-26 and S-27 of Old Kent's Annual Report to Shareholders
for the year ended December 31, 1998 (the "1998 Annual Report"), is here
incorporated by reference. Old Kent's 1998 Annual Report is printed and
distributed with its definitive Proxy Statement for its Annual Meeting of
Shareholders to be held April 19, 1999 (the "1999 Proxy Statement").
ITEM 6. SELECTED FINANCIAL DATA.
The information under the caption "Five Year Summary of Selected Financial
Data" on page S-3 of Old Kent's 1998 Annual Report is here incorporated by
reference.
17
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information under the caption "Financial Review" on pages S-4 through
S-35 of Old Kent's 1998 Annual Report is here incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information under the caption "Market Risk Management" on pages S-29
through S-33 of Old Kent's 1998 Annual Report is here incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements, notes and the report of independent public
accountants on pages S-37 through S-71 of Old Kent's 1998 Annual Report is here
incorporated by reference.
The information under the caption "Quarterly Financial Data" on page S-35
of Old Kent's 1998 Annual Report is here incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the captions "Old Kent's Board of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
1999 Proxy Statement is here incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the captions "Summary of Executive
Compensation," "Equity Based Compensation Program," "Retirement Plans,"
"Executive Severance Agreements," and "Compensation of Directors" in the 1999
Proxy Statement is here incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Ownership of Old Kent Stock"
in the 1999 Proxy Statement is here incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Certain Relationships and
Related Transactions" in the 1999 Proxy Statement is here incorporated by
reference.
18
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements. The following financial statements and report of
independent public accountants of Old Kent Financial Corporation and its
subsidiaries are filed as part of this report:
Report of Independent Public Accountants dated January 14, 1999
Consolidated Balance Sheet--December 31, 1998 and 1997
Consolidated Statement of Income for each of the three years in the period
ended December 31, 1998
Consolidated Statement of Cash Flows for each of the three years in the
period ended December 31, 1998
Consolidated Statement of Shareholders' Equity for each of the three years
in the period ended December 31, 1998
Notes to Consolidated Financial Statements
The financial statements, the notes to financial statements, and the report
of independent public accountants listed above are incorporated by reference in
Item 8 of this report.
(2) Financial Statement Schedules. Not applicable.
(3) Exhibits. The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
NUMBER EXHIBIT
- ------ -------
<S> <C>
3.1 Restated Articles of Incorporation. Previously filed as
Exhibit 3.1 to Old Kent's Form S-4 Registration Statement
(Registration No. 333-56209) filed June 5, 1998. Here
incorporated by reference.
3.2 Bylaws. Previously filed as Exhibit 3.2 to Old Kent's Form
8-K Current Report dated March 15, 1999. Here incorporated
by reference.
4.1 Rights Agreement. Previously filed as an exhibit to Old
Kent's Form 8-A/A Registration Statement filed December 30,
1998. Here incorporated by reference.
4.2 Certificate of Designation, Preferences, and Rights of
Series C Preferred Stock. Previously filed as Exhibit 4.3 to
Old Kent's Form 8-K filed March 5, 1997. Here incorporated
by reference.
4.3 Form of Old Kent Capital Trust I Floating Rate Subordinated
Capital Income Securities (Liquidation Amount of $1,000 per
Capital Security). Previously filed as Exhibit 4.7 to Old
Kent's Form S-4 Registration Statement filed July 10, 1997.
Here incorporated by reference.
4.4 Form of Old Kent Financial Corporation Floating Rate Junior
Subordinated Debenture due 2027. Previously filed as Exhibit
4.5 to Old Kent's Form S-4 Registration Statement filed July
10, 1997. Here incorporated by reference.
4.5 Amended and Restated Declaration of Trust, dated as of
January 31, 1997, among Old Kent; Albert T. Potas, Thomas E.
Powell, and Mary E. Tuuk, as "Regular Trustees" (as defined
therein); Bankers Trust Company; and Bankers Trust
(Delaware). Previously filed as Exhibit 4.6 to Old Kent's
Form 8-K filed March 5, 1997. Here incorporated by
reference.
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
NUMBER EXHIBIT
- ------ -------
<S> <C>
4.6 Guarantee Agreement, dated as of August 21, 1997, between
Old Kent and Bankers Trust Company. Previously filed as
Exhibit 4.7 to Old Kent's Form 8-K filed March 4, 1998. Here
incorporated by reference.
4.7 Indenture, dated as of January 31, 1997, between Old Kent
and Bankers Trust Company. Previously filed as Exhibit 4.8
to Old Kent's Form 8-K filed March 5, 1997. Here
incorporated by reference.
4.8 Long-Term Debt. Old Kent has outstanding long-term debt
that, at the time of this report, does not exceed 10% of Old
Kent's total consolidated assets. Old Kent agrees to furnish
copies of the agreements defining the rights of holders of
such long-term indebtedness to the Securities and Exchange
Commission upon request.
10.1 Executive Stock Option Plan of 1986.* Previously filed as
Exhibit 10 to Old Kent's Form 10-Q Quarterly Report for its
fiscal quarter ended September 30, 1995. Here incorporated
by reference.
10.2 Amendment to Executive Stock Option Plan of
1986.* Previously filed as Exhibit 10.19 to Old Kent's Form
8-K filed March 5, 1997. Here incorporated by reference.
10.3 Restricted Stock Plan of 1987.* Previously filed as part of
Old Kent's Definitive Proxy Statement dated March 6, 1992.
Here incorporated by reference.
10.4 Amendment to Restricted Stock Plan of 1987.* Previously
filed as Exhibit 10(f) to Old Kent's Form 8-K filed February
23, 1996. Here incorporated by reference.
10.5 Old Kent Executive Retirement Income Plan and Related
Trust.* Previously filed as Exhibit 10.5 to Old Kent's Form
8-K filed March 4, 1998. Here incorporated by reference.
10.6 Amendment to Executive Retirement Income Plan.* Previously
filed as Exhibit 10.6 to Old Kent's Form 8-K filed March 4,
1998. Here incorporated by reference.
10.7 Old Kent Executive Thrift Plan and Related
Trust.* Previously filed as Exhibit 10.7 to Old Kent's Form
8-K filed March 4, 1998. Here incorporated by reference.
10.8 Amendment to Executive Thrift Plan.* Previously filed as
Exhibit 10(h) to Old Kent's Form 10-K Annual Report for its
fiscal year ended December 31, 1994. Here incorporated by
reference.
10.9 Old Kent Deferred Compensation Plan and Related
Trust.* Previously filed as Exhibit 10.9 to Old Kent's Form
8-K filed March 4, 1998. Here incorporated by reference.
10.10 Stock Option Incentive Plan of 1992.* Previously filed as
Exhibit 10(b) to Old Kent's Form 10-Q Quarterly Report for
its fiscal quarter ended June 30, 1995. Here incorporated by
reference.
10.11 Amendment to Stock Option Incentive Plan of
1992.* Previously filed as Exhibit 10.20 to Old Kent's Form
8-K filed March 5, 1997. Here incorporated by reference.
10.12 Amendment to Stock Option Incentive Plan of
1992.* Previously filed as Exhibit 10(d) to Old Kent's Form
10-Q Quarterly Report for the fiscal quarter ended June 30,
1997. Here incorporated by reference.
10.13 Deferred Stock Compensation Plan and Related
Trust.* Previously filed as Exhibit 10(j) to Old Kent's Form
10-K Annual Report for its fiscal year ended December 31,
1994. Here incorporated by reference.
10.14 Old Kent Directors' Deferred Compensation Plan and Related
Trust.* Previously filed as Exhibit 10(n) to Old Kent's Form
10-K Annual Report for its fiscal year ended December 31,
1994. Here incorporated by reference.
10.15 Amendment to Old Kent Directors' Deferred Compensation
Plan.* Previously filed as Exhibit 10.15 to Old Kent's Form
8-K filed March 4, 1998. Here incorporated by reference.
10.16 Executive Incentive Bonus Plan.* Previously filed as part of
Old Kent's Definitive Proxy Statement dated March 1, 1997.
Here incorporated by reference.
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
NUMBER EXHIBIT
- ------ -------
<S> <C>
10.17 Executive Stock Incentive Plan of 1997.* Previously filed as
part of Old Kent's Definitive Proxy Statement dated March 1,
1997. Here incorporated by reference.
10.18 Amendment to Executive Stock Incentive Plan of
1997.* Previously filed as Exhibit 10(d) to Old Kent's Form
10-Q Quarterly Report for the fiscal quarter ended June 30,
1997. Here incorporated by reference.
10.19 Stock Incentive Plan of 1999.* Previously filed as part of
Old Kent's Definitive Proxy Statement dated March 1, 1999.
Here incorporated by reference.
10.20 Employee Stock Purchase Plan of 1999.* Previously filed as
part of Old Kent's Definitive Proxy Statement dated March 1,
1999. Here incorporated by reference.
10.21 Pooling and Service Agreement. Previously filed as Exhibit
10(r) to Old Kent's Form 8-K filed February 23, 1996. Here
incorporated by reference.
10.22 Executive Severance Agreements.* The form of Executive
Severance Agreement was previously filed as Exhibit 10.17 to
Old Kent's Form 8-K filed March 5, 1997. Here incorporated
by reference. An updated participant schedule was previously
filed as Exhibit 10.22 to Old Kent's Form 8-K filed March
15, 1999. Here incorporated by reference.
10.23 Executive Severance Agreements.* The form of Executive
Severance Agreement was previously filed as Exhibit 10.18 to
Old Kent's Form 8-K filed March 5, 1997. Here incorporated
by reference. An updated participant schedule was previously
filed as Exhibit 10.23 to Old Kent's Form 8-K filed March
15, 1999. Here incorporated by reference.
10.24 Executive Severance Agreements.* The form of Executive
Severance Agreement, with a schedule of participants, was
previously filed as Exhibit 10.24 to Old Kent's Form 8-K
filed March 15, 1999. Here incorporated by reference.
10.25 Indemnity Agreement.* The form of Indemnity Agreement was
previously filed as Exhibit 10(c) to Old Kent's Form 10-Q
Quarterly Report for the fiscal quarter ended June 30, 1997.
Here incorporated by reference. A participant schedule was
previously filed as Exhibit 10.25 to Old Kent's Form 8-K
filed March 15, 1999. Here incorporated by reference.
10.26 Restricted Stock Agreement for Mr. Warrington.* Previously
filed as Exhibit 10(p) to Old Kent's Form 8-K filed February
23, 1996. Here incorporated by reference.
10.27 Restricted Stock Agreement for Mr. Warrington.* Previously
filed as Exhibit 10(q) to Old Kent's Form 8-K filed February
23, 1996. Here incorporated by reference.
12 Statement Re Computation of Other Ratios.
13 Annual Report to Shareholders. This exhibit, except for
those portions expressly incorporated by reference in this
filing, is furnished for the information of the Commission
and is not deemed "filed" as part of this filing.
21 Subsidiaries of Registrant. Previously filed as Exhibit 21
to Old Kent's Form 8-K filed March 15, 1999. Here
incorporated by reference.
23 Consent of Independent Public Accountants.
24 Powers of Attorney.
27 Financial Data Schedule.
99 Old Kent Thrift Plan Performance Table.
</TABLE>
- -------------------------
* These agreements are management contracts or compensation plans or
arrangements required to be filed as exhibits to this Form 10-K.
21
<PAGE> 23
Old Kent will furnish a copy of any exhibit listed above to any Old Kent
shareholder without charge upon written request to Ms. Mary E. Tuuk,
Secretary, Old Kent Financial Corporation, 111 Lyon St., N.W., Grand Rapids,
Michigan 49503.
(b) Reports on Form 8-K. Old Kent filed the following report on Form 8-K during
the last quarter of the period covered by this report:
<TABLE>
<S> <C> <C>
Date of Event Reported Item Reported
November 9, 1998 Item 5
October 1, 1998 Item 5
</TABLE>
22
<PAGE> 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OLD KENT FINANCIAL CORPORATION
(Registrant)
<TABLE>
<S> <C>
Date: March 16, 1999 By /s/ MARY E. TUUK
-----------------------------------------
Mary E. Tuuk
Secretary and Senior Vice President
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
<TABLE>
<S> <C>
March 16, 1999 /s/ RICHARD L. ANTONINI*
-----------------------------------------------------------
Richard L. Antonini
Director
March 16, 1999 /s/ JOHN D. BOYLES*
-----------------------------------------------------------
John D. Boyles
Director
March 16, 1999 /s/ WILLIAM P. CRAWFORD*
-----------------------------------------------------------
William P. Crawford
Director
March 16, 1999 /s/ RICHARD M. DEVOS, JR.*
-----------------------------------------------------------
Richard M. DeVos, Jr.
Director
March 16, 1999 /s/ WILLIAM G. GONZALEZ*
-----------------------------------------------------------
William G. Gonzalez
Director
March 16, 1999 /s/ JAMES P. HACKETT*
-----------------------------------------------------------
James P. Hackett
Director
March 16, 1999 /s/ ERINA HANKA*
-----------------------------------------------------------
Erina Hanka
Director
March 16, 1999 /s/ EARL D. HOLTON*
-----------------------------------------------------------
Earl D. Holton
Director
</TABLE>
23
<PAGE> 25
<TABLE>
<S> <C>
March 16, 1999 /s/ MICHAEL J. JANDERNOA*
-----------------------------------------------------------
Michael J. Jandernoa
Director
March 16, 1999 /s/ KEVIN T. KABAT*
-----------------------------------------------------------
Kevin T. Kabat
Vice Chairman of the Board and Director
March 16, 1999 /s/ FRED P. KELLER*
-----------------------------------------------------------
Fred P. Keller
Director
March 16, 1999 /s/ JOHN P. KELLER*
-----------------------------------------------------------
John P. Keller
Director
March 16, 1999 /s/ HENDRIK G. MEIJER*
-----------------------------------------------------------
Hendrik G. Meijer
Director
March 16, 1999 /s/ PERCY A. PIERRE*
-----------------------------------------------------------
Percy A. Pierre
Director
March 16, 1999 /s/ MARILYN J. SCHLACK*
-----------------------------------------------------------
Marilyn J. Schlack
Director
March 16, 1999 /s/ PETER F. SECCHIA*
-----------------------------------------------------------
Peter F. Secchia
Director
March 16, 1999 /s/ DAVID J. WAGNER*
-----------------------------------------------------------
David J. Wagner
Chairman, President, Chief Executive Officer, and Director
(Principal Executive Officer)
March 16, 1999 /s/ MARGARET SELLERS WALKER*
-----------------------------------------------------------
Margaret Sellers Walker
Director
March 16, 1999 /s/ ROBERT H. WARRINGTON*
-----------------------------------------------------------
Robert H. Warrington
Vice Chairman of the Board, Chief Financial Officer,
and Director
(Principal Financial and Accounting Officer)
March 16, 1999 *By MARY E. TUUK
------------------------------------------------------
Mary E. Tuuk
Attorney-in-Fact
</TABLE>
24
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1 Restated Articles of Incorporation. Previously filed as
Exhibit 3.1 to Old Kent's Form S-4 Registration Statement
(Registration No. 333-56209) filed June 5, 1998. Here
incorporated by reference.
3.2 Bylaws. Previously filed as Exhibit 3.2 to Old Kent's Form
8-K Current Report dated March 15, 1999. Here incorporated
by reference.
4.1 Rights Agreement. Previously filed as an exhibit to Old
Kent's Form 8-A/A Registration Statement filed December 30,
1998. Here incorporated by reference.
4.2 Certificate of Designation, Preferences, and Rights of
Series C Preferred Stock. Previously filed as Exhibit 4.3 to
Old Kent's Form 8-K filed March 5, 1997. Here incorporated
by reference.
4.3 Form of Old Kent Capital Trust I Floating Rate Subordinated
Capital Income Securities (Liquidation Amount of $1,000 per
Capital Security). Previously filed as Exhibit 4.7 to Old
Kent's Form S-4 Registration Statement filed July 10, 1997.
Here incorporated by reference.
4.4 Form of Old Kent Financial Corporation Floating Rate Junior
Subordinated Debenture due 2027. Previously filed as Exhibit
4.5 to Old Kent's Form S-4 Registration Statement filed July
10, 1997. Here incorporated by reference.
4.5 Amended and Restated Declaration of Trust, dated as of
January 31, 1997, among Old Kent; Albert T. Potas, Thomas E.
Powell, and Mary E. Tuuk, as "Regular Trustees" (as defined
therein); Bankers Trust Company; and Bankers Trust
(Delaware). Previously filed as Exhibit 4.6 to Old Kent's
Form 8-K filed March 5, 1997. Here incorporated by
reference.
4.6 Guarantee Agreement, dated as of August 21, 1997, between
Old Kent and Bankers Trust Company. Previously filed as
Exhibit 4.7 to Old Kent's Form 8-K filed March 4, 1998. Here
incorporated by reference.
4.7 Indenture, dated as of January 31, 1997, between Old Kent
and Bankers Trust Company. Previously filed as Exhibit 4.8
to Old Kent's Form 8-K filed March 5, 1997. Here
incorporated by reference.
4.8 Long-Term Debt. Old Kent has outstanding long-term debt
that, at the time of this report, does not exceed 10% of Old
Kent's total consolidated assets. Old Kent agrees to furnish
copies of the agreements defining the rights of holders of
such long-term indebtedness to the Securities and Exchange
Commission upon request.
10.1 Executive Stock Option Plan of 1986.* Previously filed as
Exhibit 10 to Old Kent's Form 10-Q Quarterly Report for its
fiscal quarter ended September 30, 1995. Here incorporated
by reference.
10.2 Amendment to Executive Stock Option Plan of
1986.* Previously filed as Exhibit 10.19 to Old Kent's Form
8-K filed March 5, 1997. Here incorporated by reference.
10.3 Restricted Stock Plan of 1987.* Previously filed as part of
Old Kent's Definitive Proxy Statement dated March 6, 1992.
Here incorporated by reference.
10.4 Amendment to Restricted Stock Plan of 1987.* Previously
filed as Exhibit 10(f) to Old Kent's Form 8-K filed February
23, 1996. Here incorporated by reference.
10.5 Old Kent Executive Retirement Income Plan and Related
Trust.* Previously filed as Exhibit 10.5 to Old Kent's Form
8-K filed March 4, 1998. Here incorporated by reference.
10.6 Amendment to Executive Retirement Income Plan.* Previously
filed as Exhibit 10.6 to Old Kent's Form 8-K filed March 4,
1998. Here incorporated by reference.
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.7 Old Kent Executive Thrift Plan and Related
Trust.* Previously filed as Exhibit 10.7 to Old Kent's Form
8-K filed March 4, 1998. Here incorporated by reference.
10.8 Amendment to Executive Thrift Plan.* Previously filed as
Exhibit 10(h) to Old Kent's Form 10-K Annual Report for its
fiscal year ended December 31, 1994. Here incorporated by
reference.
10.9 Old Kent Deferred Compensation Plan and Related
Trust.* Previously filed as Exhibit 10.9 to Old Kent's Form
8-K filed March 4, 1998. Here incorporated by reference.
10.10 Stock Option Incentive Plan of 1992.* Previously filed as
Exhibit 10(b) to Old Kent's Form 10-Q Quarterly Report for
its fiscal quarter ended June 30, 1995. Here incorporated by
reference.
10.11 Amendment to Stock Option Incentive Plan of
1992.* Previously filed as Exhibit 10.20 to Old Kent's Form
8-K filed March 5, 1997. Here incorporated by reference.
10.12 Amendment to Stock Option Incentive Plan of
1992.* Previously filed as Exhibit 10(d) to Old Kent's Form
10-Q Quarterly Report for the fiscal quarter ended June 30,
1997. Here incorporated by reference.
10.13 Deferred Stock Compensation Plan and Related
Trust.* Previously filed as Exhibit 10(j) to Old Kent's Form
10-K Annual Report for its fiscal year ended December 31,
1994. Here incorporated by reference.
10.14 Old Kent Directors' Deferred Compensation Plan and Related
Trust.* Previously filed as Exhibit 10(n) to Old Kent's Form
10-K Annual Report for its fiscal year ended December 31,
1994. Here incorporated by reference.
10.15 Amendment to Old Kent Directors' Deferred Compensation
Plan.* Previously filed as Exhibit 10.15 to Old Kent's Form
8-K filed March 4, 1998. Here incorporated by reference.
10.16 Executive Incentive Bonus Plan.* Previously filed as part of
Old Kent's Definitive Proxy Statement dated March 1, 1997.
Here incorporated by reference.
10.17 Executive Stock Incentive Plan of 1997.* Previously filed as
part of Old Kent's Definitive Proxy Statement dated March 1,
1997. Here incorporated by reference.
10.18 Amendment to Executive Stock Incentive Plan of
1997.* Previously filed as Exhibit 10(d) to Old Kent's Form
10-Q Quarterly Report for the fiscal quarter ended June 30,
1997. Here incorporated by reference.
10.19 Stock Incentive Plan of 1999.* Previously filed as part of
Old Kent's Definitive Proxy Statement dated March 1, 1999.
Here incorporated by reference.
10.20 Employee Stock Purchase Plan of 1999.* Previously filed as
part of Old Kent's Definitive Proxy Statement dated March 1,
1999. Here incorporated by reference.
10.21 Pooling and Service Agreement. Previously filed as Exhibit
10(r) to Old Kent's Form 8-K filed February 23, 1996. Here
incorporated by reference.
10.22 Executive Severance Agreements.* The form of Executive
Severance Agreement was previously filed as Exhibit 10.17 to
Old Kent's Form 8-K filed March 5, 1997. Here incorporated
by reference. An updated participant schedule was previously
filed as Exhibit 10.22 to Old Kent's Form 8-K filed March
15, 1999. Here incorporated by reference.
10.23 Executive Severance Agreements.* The form of Executive
Severance Agreement was previously filed as Exhibit 10.18 to
Old Kent's Form 8-K filed March 5, 1997. Here incorporated
by reference. An updated participant schedule was previously
filed as Exhibit 10.23 to Old Kent's Form 8-K filed March
15, 1999. Here incorporated by reference.
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.24 Executive Severance Agreements.* The form of Executive
Severance Agreement, with a schedule of participants, was
previously filed as Exhibit 10.24 to Old Kent's Form 8-K
filed March 15, 1999. Here incorporated by reference.
10.25 Indemnity Agreement.* The form of Indemnity Agreement was
previously filed as Exhibit 10(c) to Old Kent's Form 10-Q
Quarterly Report for the fiscal quarter ended June 30, 1997.
Here incorporated by reference. A participant schedule was
previously filed as Exhibit 10.25 to Old Kent's Form 8-K
filed March 15, 1999. Here incorporated by reference.
10.26 Restricted Stock Agreement for Mr. Warrington.* Previously
filed as Exhibit 10(p) to Old Kent's Form 8-K filed February
23, 1996. Here incorporated by reference.
10.27 Restricted Stock Agreement for Mr. Warrington.* Previously
filed as Exhibit 10(q) to Old Kent's Form 8-K filed February
23, 1996. Here incorporated by reference.
12 Statement Re Computation of Other Ratios.
13 Annual Report to Shareholders. This exhibit, except for
those portions expressly incorporated by reference in this
filing, is furnished for the information of the Commission
and is not deemed "filed" as part of this filing.
21 Subsidiaries of Registrant. Previously filed as Exhibit 21
to Old Kent's Form 8-K filed March 15, 1999. Here
incorporated by reference.
23 Consent of Independent Public Accountants.
24 Powers of Attorney.
27 Financial Data Schedule.
99 Old Kent Thrift Plan Performance Table.
</TABLE>
- -------------------------
* These agreements are management contracts or compensation plans or
arrangements required to be filed as exhibits to this Form 10-K.
Old Kent will furnish a copy of any exhibit listed above to any Old Kent
shareholder without charge upon written request to Ms. Mary E. Tuuk,
Secretary, Old Kent Financial Corporation, 111 Lyon St., N.W., Grand Rapids,
Michigan 49503.
27
<PAGE> 1
EXHIBIT 12
STATEMENT OF COMPUTATION OF OTHER RATIOS
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
For the year ended December 31: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income $ 198,798 $ 198,418 $ 179,393 $ 162,044 $ 157,499
Less: preferred stock dividends - - - - -
----------- ----------- ----------- ----------- -----------
Net income available to common shareholders $ 198,798 $ 198,418 $ 179,393 $ 162,044 $ 157,499
Average common equity $ 1,154,687 $ 1,228,864 $ 1,193,334 $ 1,137,445 $ 1,037,669
Average total equity $ 1,163,708 $ 1,217,038 $ 1,179,562 $ 1,125,103 $ 1,033,616
Average assets $15,833,614 $15,217,901 $14,119,056 $13,518,294 $12,625,208
Primary net income per common share* $ 1.84 $ 1.75 $ 1.54 $ 1.37 $ 1.33
Dividends per common share* $ 0.722 $ 0.641 $ 0.576 $ 0.528 $ 0.485
Ratios:
Return on average common equity 17.22% 16.15% 15.03% 14.25% 15.18%
(net income available to common shareholders
divided by average common equity)
Return on average total equity 17.08% 16.30% 15.21% 14.40% 15.24%
(net income divided by average total equity)
Return on average assets 1.26% 1.30% 1.27% 1.20% 1.25%
(net income divided by average assets)
Average total equity to average assets 7.35% 8.00% 8.35% 8.32% 8.19%
Dividend payout ratio 39.3% 36.7% 37.4% 38.5% 36.5%
(dividends per common share divided by
net income per common share)
</TABLE>
- ----------------------------
* Per share amounts are shown adjusted for a 5% stock dividend paid on August
15, 1995, July 25, 1996, July 28, 1997, and July 17, 1998, and a 2-for-1 stock
split paid December 15, 1997.
<PAGE> 1
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.
<PAGE> 2
OLD KENT FINANCIAL CORPORATION
1998 Annual Report
<TABLE>
<CAPTION>
Contents Page
- ------------------------------------------------------------------------
<S> <C>
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-36
Report of Independent Public Accountants S-37
Consolidated Financial Statements S-38
Notes to Consolidated Financial Statements S-43
Board of Directors and Senior Management Back Cover
</TABLE>
S-1
<PAGE> 3
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 and
Illinois with 235 banking offices. In addition, Old Kent Bank has one banking
office in Elkhart, Indiana. Old Kent Bank engages in commercial and retail
banking and provides trust and other financial services. Approximately 86% of
the Corporation's deposits and 74% 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 northeastern Illinois as well
as Indiana. Old Kent mortgage companies operate 143 offices located in 32
states.
A MESSAGE TO OUR SHAREHOLDERS
This 1998 Annual Report contains audited financial statements and a detailed
financial review. This is Old Kent Financial Corporation's 1998 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 1998 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 shareholders will
find useful and informative. Shareholders who would like to receive even more
detailed information than that contained in this 1998 Annual Report are invited
to request our Annual Report on Form 10-K.
THE 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
<PAGE> 4
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
December 31
(dollars in thousands, except per share data) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Net interest income $ 587,882 $ 582,708 $ 551,873 $ 536,390 $ 518,505
Provision for credit losses 46,828 46,977 35,636 21,666 22,465
Net income 198,798 198,418 179,393 162,044 157,499
Cash dividends 84,983 70,887 65,163 60,594 55,155
AVERAGE FOR THE YEAR
Assets $15,833,614 $15,217,901 $14,119,056 $13,518,294 $12,625,208
Deposits 12,161,611 11,966,595 11,428,815 10,975,188 10,507,336
Loans 8,900,637 9,062,384 8,375,277 7,729,041 6,512,549
Total interest-earning assets 14,577,321 14,094,481 13,119,283 12,615,383 11,786,756
Long term debt 200,000 191,787 100,000 12,603 --
Total shareholders' equity 1,163,708 1,217,038 1,179,562 1,125,103 1,033,616
AT YEAR-END
Assets $16,588,858 $15,706,615 $14,556,841 $13,891,172 $13,349,745
Deposits 12,939,418 11,928,907 11,775,994 11,019,312 11,123,954
Loans 8,883,716 9,144,497 8,715,751 7,961,051 7,333,613
Long term debt 200,000 200,000 100,000 100,000 --
Total shareholders' equity 1,135,110 1,225,595 1,180,197 1,189,754 1,053,461
PER COMMON SHARE (IN DOLLARS)*
Basic earnings per share $ 1.86 $ 1.76 $ 1.55 $ 1.38 $ 1.34
Diluted earnings per share 1.84 1.75 1.54 1.37 1.33
Cash dividends .722 .641 .576 .528 .485
Book value at year-end 10.86 11.12 10.54 10.08 8.93
Dividend payout ratio 39.3% 36.7% 37.4% 38.5% 36.5%
PERFORMANCE RATIOS
Return on average total equity 17.08% 16.30% 15.21% 14.40% 15.24%
Return on average assets 1.26 1.30 1.27 1.20 1.25
Average equity to average assets 7.35 8.00 8.35 8.32 8.19
Yield on average interest-earning assets 8.01 8.22 8.25 8.29 7.55
Cost of average interest-bearing liabilities 4.53 4.68 4.66 4.64 3.56
Average net interest spread 3.48 3.54 3.59 3.65 3.99
Average net interest margin 4.11 4.22 4.29 4.35 4.51
CAPITAL RATIOS AT YEAR-END
Equity to assets 6.84% 7.80% 8.11% 8.56% 7.89%
Leverage ratio 6.89 7.72 7.63 8.05 7.44
Risk-based capital ratio -- Tier 1 9.30 10.60 10.53 11.68 12.02
Risk-based capital ratio -- Tiers 1 & 2 11.40 12.68 12.69 13.97 13.24
CREDIT QUALITY RATIOS
Allowance for credit losses to total loans 1.89% 1.76% 1.94% 2.24% 2.33%
Impaired loans to total loans .67 .62 .50 .56 .83
Nonperforming assets to total assets .40 .41 .35 .41 .56
Allowance to impaired loans 280 282 389 397 281
Net charge-offs to average loans .45 .55 .52 .17 .15
</TABLE>
- ------------------------------
* Share data has been adjusted for stock dividends and splits
S-3
<PAGE> 5
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-38 and the five year
summary of selected financial data on page S-3. As discussed in Note 2 to the
Financial Statements, on October 1, 1998, Old Kent completed the merger of First
Evergreen Corporation into Old Kent. 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.
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
the Corporation itself. Words such as "anticipates," "believes," "estimates,"
"expects," "forecasts," "intends," "is likely," "plans," "judgment," "projects,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. Management judgments relating to, and discussion of
the provision and allowance for credit losses involve judgments as to future
events and are inherently forward looking statements. Assessments that Old Kent
is Year 2000 "compliant" are necessarily statements of belief as to the outcome
of future events, based in part on information provided by vendors and others
which Old Kent has not independently verified. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions which are difficult to predict with regard to timing, extent,
likelihood and degree of occurrence. Therefore, actual results and outcomes may
materially differ from what may be expressed, implied or forecasted in such
forward-looking statements. Internal and external factors that might cause such
a difference include, but are not limited to, (1) the ability to fully realize
expected cost savings from the merger within the expected time frame, (2) the
ability of other companies on which the Corporation relies to modify or convert
their systems to be Year 2000 compliant, and (3) the ability to locate and
correct all relevant computer codes and similar uncertainties. Future factors
that could cause a difference between an ultimate actual outcome and a preceding
forward-looking statement include changes in interest rates and interest rate
relationships; demand for products and services; the degree of competition by
traditional and non-traditional competitors; changes in banking regulations;
changes in tax laws; changes in prices, levies, and assessments; the impact of
technological advances; governmental and regulatory policy changes; the outcomes
of pending and future litigation and contingencies; trends in customer behaviors
as well as their ability to repay loans; and the vicissitudes of the national
economy. Old Kent undertakes no obligation to update, amend or clarify
forward-looking statements, whether as a result of new information, future
events, or otherwise.
Overview
Net income was $198.8 million for 1998, the fortieth consecutive year of
increased earnings and dividends in Old Kent's history. This represented a .2%
increase over net income of $198.4 million for 1997. Diluted net income per
share was $1.84 for 1998, up by 5.1% over the $1.75 of diluted net income per
share for 1997. Diluted net income per common share has increased at an annual
compound rate of 11.5% over the past five years.
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 $.18. Excluding these merger charges, diluted earnings per
share was $2.02 for 1998, or 15.4% better than the $1.75 of diluted earnings per
share for 1997. For the year ended December 31, 1998, operating net income was
S-4
<PAGE> 6
$218.5 million, 10.1% more than net income of $198.4 million for 1997. Excluding
a large one-time gain on sale of the Corporation's credit card portfolio
included in the 1997 results, the 1998 diluted earnings per share of $2.02
represents a 22.4% increase.
Effective with the fourth quarter of 1998, the quarterly cash dividend rate on
common stock was increased to $.20 per share. The new annualized rate of $.80
per share is 16.9% greater than the rate paid in the fourth quarter of 1997 and
includes the effect of a five percent stock dividend paid on July 17, 1998. Old
Kent has paid increased cash dividends 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 10.4% and the dividend payout ratio
has averaged 37.7% over that same period.
Old Kent's corporate culture is geared toward maximizing shareholder value. The
information appearing on page 16 of the accompanying proxy statement compares
the performance of Old Kent Common Stock with the S&P 500 and the KBW 50
indices. 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 bank holding
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. The graph displays the December 31,
1998 value of an initial $100 investment in Old Kent Common Stock made one, five
and ten years prior to the year-end 1998 date (with dividends reinvested). The
graphs indicate that the total return on an investment in Old Kent Common Stock
surpassed that of the KBW 50 in all three periods, was essentially the same as
that of the S&P 500 in the one year measure, and exceeded the S&P 500 in the
five and ten year period. It also lists the equivalent compound annual rate of
return.
<TABLE>
<CAPTION>
Equivalent Compound
December 31, 1998 value of a Annual
$100 investment made Rate of Return
--------------------------------------- ---------------------------------
1 yr ago 5 yrs ago 10 yrs ago 1 year 5 year 10 year
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Old Kent Common Stock $125.6 $437.6 $1,017.0 25.6% 34.3% 26.1%
S&P 500 $128.6 $293.9 $ 579.6 28.6% 24.1% 19.2%
KBW 50 $108.3 $340.3 $ 618.6 8.3% 27.8% 20.0%
</TABLE>
The Corporation's return on average total equity in 1998 was 17.08%, compared to
an equity return of 16.3% for 1997. Old Kent's return on equity has averaged
15.65% over the past five years. Old Kent's return on average assets was 1.26%
for 1998 compared to 1.3% for 1997, and has averaged 1.26% 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 $483 million, or 3.4%, in 1998 and by $975 million, or 7.4%, in
1997. Over the last five years, total average interest-earning assets have
increased at a compound annual growth rate of 6.18%. 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 $124 million, or 3.1%, in 1998. This decrease was
primarily the result of Old Kent's use of liquidity to fund growth in mortgages
held-for-sale, which averaged $1.7 billion in 1998 compared to $882.1 million in
1997. In 1998, total loans averaged $8.9 billion, a decrease of $162 million, or
1.8% less than the average for 1997. During 1998, the Corporation took measures
to reduce credit risk by exiting certain marginal commercial relationships as
well as by
S-5
<PAGE> 7
reducing certain consumer loan portfolio components having higher credit risk,
which management believed would have had a negative impact on the Corporation's
future profitability absent these actions.
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 Corporate Banking, Retail Banking, Community Banking
and Mortgage Banking lines of business. Interest and fees on loans accounted for
52% of total revenues in 1998, 57% in 1997 and 59% in 1996. With the exception
of the Mortgage Banking line of business which operates 143 offices in 32
states, approximately 74% of deposits and 86% of total loans at December 31,
1998, were associated with these business lines serving the lower peninsula of
the State of Michigan.
Interest on securities, attributable to the Treasury line of business, is also a
significant source of revenue accounting for 16% of total revenues in 1998, 18%
in 1997 and 21% in 1996.
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 9.3%, 8.2% and
7.9% of total revenues in 1998, 1997 and 1996 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."
S-6
<PAGE> 8
Old Kent has identified these lines as follows:
<TABLE>
<CAPTION>
Line Old Kent Executive Primary Business Activities
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Corporate Banking James A. Hubbard Loans, deposits and other services for
larger corporate customers in
metropolitan markets
Retail Banking David C. Schneider Loans, deposits and other services for
consumers in metropolitan markets
Community Banking Michelle L. Van Dyke Loans, deposits and other services for
all customers in smaller communities
Investment and Kenneth C. Krei Investment management, trust, brokerage,
Insurance Services and insurance services in all markets.
Loans, deposits and other services for
private banking and small business
customers in metropolitan markets
Mortgage Banking Donald R. Britton Origination and acquisition, sale and
servicing of residential mortgages on
nationwide basis
Treasury Ronald C. Mishler Investment portfolio and funds management
</TABLE>
The following represents the percentage of net income provided by each line of
business in 1998, excluding the $19.7 million of after-tax, merger related
charges associated with Old Kent's acquisition of First Evergreen Corporation,
on October 1, 1998 in a pooling-of-interests transaction. Excluding these
charges, Old Kent's net income on an operating basis was $218.5 million for
1998.
<TABLE>
<S> <C>
Corporate Banking 26%
Retail Banking 28
Community Banking 25
Investment and Insurance Services 9
Mortgage Banking 8
Treasury 4
----
Total 100%
====
</TABLE>
During 1998, Old Kent adopted the provisions of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" which was issued by the Financial Accounting Standards
Board in June, 1997. The disclosures about Old Kent's business segments required
by this statement are included in Note 17 to the Financial Statements.
Mergers and Acquisitions
Much of Old Kent's growth has been through acquisitions. The primary method of
expansion into new markets has been through acquisitions of other financial
institutions or branches. 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 October 1, 1998, Old Kent completed the merger of First Evergreen Corporation
("First Evergreen") into Old Kent. When acquired, First Evergreen had assets of
approximately $1.9 billion and deposits of approximately $1.7 billion. The
merger was accounted for as a pooling-of-interests. Old Kent issued
approximately 12.8 million shares of its common stock in exchange for all of the
outstanding stock of First Evergreen. First Evergreen was a bank holding company
headquartered in
S-7
<PAGE> 9
Evergreen Park, Illinois. First Evergreen provided banking services through
eight offices in Cook County, Illinois. During December 1998, First National
Bank of Evergreen Park, First Evergreen's banking subsidiary, was merged into
and with Old Kent Bank. This operational assimilation and systems conversion was
expediently completed just 73 days after the acquisition. During 1999, the
Corporation expects to realize $12 million of savings resulting from elimination
of redundant operations and staffing.
On September 1, 1997, Old Kent Insurance Group, Inc.("OKIG"), 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 of 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 its 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.
On December 4, 1996, Guyot, Hicks, Anderson & Associates, Inc. ("GHA"), a
subsidiary of Old Kent Bank, purchased the assets of Insurance Resource Group,
L.L.C., Poggi & Associates, L.L.C., and Insurance Consultants, L.L.C., each of
which provided commercial insurance products and services through one office in
Grand Rapids, Michigan. This agency, along with GHA and GRH, were combined into
OKIG in 1997.
On August 1, 1996, Old Kent acquired National Pacific Mortgage Corporation
("NPMC"), a mortgage company headquartered in Anaheim, California. When
acquired, NPMC had assets of approximately $150 million and a mortgage servicing
portfolio of approximately $1.8 billion. NPMC is operated as a division of Old
Kent Mortgage Company ("OKMC"), a wholly owned subsidiary of the Corporation,
and currently operates 28 offices in five states.
On January 22, 1996, Old Kent acquired Republic Mortgage Corp. ("RMC"),
headquartered in Salt Lake City, Utah. When acquired, RMC had total assets of
approximately $39 million and serviced residential mortgages totaling
approximately $127 million. RMC is operated as a subsidiary of OKMC, and
operates 35 offices in six states.
S-8
<PAGE> 10
SUMMARY OF OPERATING RESULTS
The following is a summary of the major components of the Corporation's
operating results for the last five years:
<TABLE>
<CAPTION>
Proforma
1998
Excluding
Year ended December 31 Merger
(in thousands) Charges* 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 587,882 $ 587,882 $ 582,708 $ 551,873 $ 536,390 $ 518,505
Add: taxable-equivalent adjustment 12,036 12,036 11,647 11,557 12,845 13,108
--------- --------- --------- --------- --------- ---------
Taxable-equivalent net interest
income 599,918 599,918 594,355 563,430 549,235 531,613
Provision for credit losses (43,328) (46,828) (46,977) (35,636) (21,666) (22,465)
Non-interest income 347,900 347,900 276,512 215,572 166,917 135,900
Non-interest expense (559,213) (584,206) (507,970) (461,779) (440,225) (398,389)
Income taxes, including taxable-
equivalent adjustment (126,801) (117,986) (117,502) (102,194) (92,217) (89,160)
--------- --------- --------- --------- --------- ---------
Net income $ 218,476 $ 198,798 $ 198,418 $ 179,393 $ 162,044 $ 157,499
========= ========= ========= ========= ========= =========
</TABLE>
- ------------------------------
*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.
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 1998, total average interest-earning assets increased by $483 million, or
3.4%. In that same period, total average interest-bearing liabilities increased
by $495 million, or 4.1%.
S-9
<PAGE> 11
The following table sets forth the changes in interest income and interest
expense as they relate to changes in volumes and changes in rates:
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease)* Increase (Decrease)*
------------------------------- -------------------------------
Change in Change in
(Fully taxable-equivalent, Income/ Due to Due to Income/ Due to Due to
in thousands) Expense Volume Rate Expense Volume Rate
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans (including mortgages
held-for-sale) $ 28,070 $ 60,713 $(32,643) $ 90,660 $106,720 $(16,060)
Taxable securities (13,686) (10,418) (3,268) (13,922) (15,092) 1,170
Tax-exempt securities 1,731 3,129 (1,398) (1,570) (385) (1,185)
Interest-earning deposits (15) 39 (54) 329 364 (35)
Federal funds sold and resale
agreements (4,821) (4,808) (13) (369) (436) 67
Trading account securities (1,005) (475) (530) 1,074 762 312
-------- -------- -------- -------- -------- --------
Change in Interest Income 10,274 48,180 (37,906) 76,202 91,933 (15,731)
-------- -------- -------- -------- -------- --------
Interest-Bearing Liabilities:
Savings deposits 12,558 8,356 4,202 (1,431) (41) (1,390)
Time deposits:
Negotiable (1,696) 319 (2,015) (14,272) (11,667) (2,605)
Foreign (106) (75) (31) (572) (445) (127)
Consumer (29,052) (16,843) (12,209) 32,346 35,268 (2,922)
Federal funds purchased and
repurchase agreements 12,647 12,647 - 9,636 8,750 886
Other borrowed funds 9,906 13,269 (3,363) 13,303 13,948 (645)
Long term debt 454 548 (94) 6,267 6,282 (15)
-------- -------- -------- -------- -------- --------
Change in Interest Expense 4,711 18,221 (13,510) 45,277 52,095 (6,818)
-------- -------- -------- -------- -------- --------
Change in Net Interest Income $ 5,563 $ 29,959 $(24,396) $ 30,925 $ 39,838 $ (8,913)
======== ======== ======== ======== ======== ========
</TABLE>
- ------------------------------
*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 4.11% in 1998 compared
to 4.22% for 1997. The interest spread was 3.48% for 1998 and 3.54% for 1997.
The primary factor underlying the decreases in net interest margin and interest
spread was a decline in yield on total interest earning assets from 8.22% in
1997 to 8.01% in 1998. This decrease was due to both lower interest rates and a
change in asset mix, as discussed later in this Financial Review. The average
cost of interest-bearing liabilities was 4.53% in 1998 and 4.68% in 1997. Thus
earning assets yields decreased six basis points more than the cost of paying
liabilities, resulting in the decline in net interest margin.
The net interest margin was 4.22% in 1997 compared to 4.29% for 1996. The
interest spread was 3.54% for 1997 and 3.59% for 1996. The average yield on
interest-earning assets also decreased to 8.22% in 1997 from 8.25% in 1996. 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 total loans
to 9.01% for 1997 from 9.12% in 1996. The average cost of interest-bearing
liabilities was 4.68% in 1997 and
S-10
<PAGE> 12
4.66% in 1996. Therefore, the reduction in net interest margin was a result of
the combined effects of an increase in the average cost of interest bearing
liabilities and a decrease in asset yields.
<TABLE>
<CAPTION>
Three Month U.S.
Prime Interest Rate Treasury Bill Rate
----------------------- -----------------------
Percentage 1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Simple average during year 8.35% 8.44% 8.27% 4.89% 5.19% 5.14%
At December 31 7.75% 8.50% 8.25% 4.45% 5.35% 5.17%
</TABLE>
As indicated above, interest rates over the past three years have been
relatively stable, but rose slightly in 1997 and declined more substantially in
the latter part of 1998. As shown in the preceding "rate/ volume" table, 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 rates. In 1997, the increase in average total
loans was the main reason for the increase in net interest income for that year.
This volume increase was the result of internally generated loan growth as well
as the acquisition of Seaway.
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, 1998,
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 to interest-earning assets to
show how much was attributable to interest-bearing liabilities, and how much was
attributable to non-interest-bearing liabilities and equity capital. 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.
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
Average Net Average Net Average Net
(Fully taxable-equivalent, Earning Interest Interest Earning Interest Interest Earning Interest Interest
dollars in millions) Assets Spread Income Assets Spread Income Assets Spread Income
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Source of Funding:
Interest-bearing
liabilities............ $12,547.9 3.48% $436.7 $12,052.6 3.54% $426.7 $11,125.6 3.59% $399.4
Non-interest-bearing
liabilities and equity 2,029.4 8.01% 163.2 2,041.9 8.22% 167.7 1,993.7 8.25% 164.0
--------- ------ --------- ------ --------- ------
Total $14,577.3 $599.9 $14,094.5 $594.4 $13,119.3 $563.4
========= ====== ========= ====== ========= ======
</TABLE>
S-11
<PAGE> 13
The following table shows the relative importance of changes in interest spread,
earning asset volumes and changes in funding sources:
<TABLE>
<CAPTION>
1998 Over (Under) 1997 1997 Over (Under) 1996
-------------------------------- --------------------------------
Average Net Average Net
(Fully taxable-equivalent, Earning Interest Interest Earning Interest Interest
dollars in millions) Assets Spread Income Assets Spread Income
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Source of Funding:
Interest-bearing liabilities $495.3 (.06)% $10.0 $927.1 (.05)% $27.3
Non-interest-bearing
liabilities and equity (12.5) (.21)% (4.5) 48.1 (.03)% 3.7
------ ----- ------ -----
Total $482.8 $ 5.5 $975.2 $31.0
====== ===== ====== =====
<CAPTION>
1996 Over (Under) 1995
--------------------------------
Average Net
(Fully taxable-equivalent, Earning Interest Interest
dollars in millions) Assets Spread Income
<S> <C> <C> <C>
Source of Funding:
Interest-bearing liabilities $425.2 (.06)% $ 8.9
Non-interest-bearing
liabilities and equity 78.7 (.04)% 5.3
------ -----
Total $503.9 $14.2
====== =====
</TABLE>
S-12
<PAGE> 14
AVERAGE CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
1998 1997
---------------------------------- ------------------------
(Income and rates on fully taxable-equivalent Average Average Average
basis, dollars in thousands) Balance Interest Rate Balance Interest
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average Assets:
Loans(1) $ 8,900,637 $ 790,483 8.88% $ 9,062,384 $ 816,392
Taxable investment securities 3,504,238 224,692 6.41 3,666,072 238,378
Tax-exempt investment securities(2) 358,748 29,161 8.13 320,723 27,430
Mortgages held-for-sale 1,745,646 120,647 6.91 882,085 66,668
Interest-earning deposits:
Domestic 16,447 809 4.92 13,052 675
Foreign -- -- 2,630 149
Federal funds sold and resale agreements 37,996 2,079 5.47 125,989 6,900
Trading account securities(2) 13,609 596 4.38 21,546 1,601
----------- ---------- ----------- ----------
Total earning assets 14,577,321 1,168,467 8.01 14,094,481 1,158,193
----------- ---------- ----------- ----------
Unrealized gain/(loss) on securities available-for-sale 13,915 (19,048)
Allowance for loan losses (167,546) (165,142)
Cash and due from banks 543,875 509,301
Other Assets 866,049 798,309
----------- -----------
Total Assets $15,833,614 $15,217,901
=========== ===========
Average Liabilities and Shareholders' Equity:
Savings Deposits $ 4,013,366 111,996 2.79% $ 3,710,473 99,438
Time Deposits:
Negotiable 1,080,080 59,370 5.50 1,074,219 61,066
Foreign 37,384 2,007 5.37 38,791 2,113
Other time 5,142,677 271,915 5.29 5,456,316 300,967
----------- ---------- ----------- ----------
Total interest-bearing deposits 10,273,507 445,288 4.33 10,279,799 463,584
Federal funds purchased and repurchase agreements 980,700 47,153 4.81 716,754 34,506
Other borrowed funds 1,093,703 62,627 5.73 864,295 52,721
Subordinated and other long-term debt 100,000 6,745 6.75 100,000 6,745
Capital Securities 100,000 6,736 6.74 91,787 6,282
----------- ---------- ----------- ----------
Total interest-bearing funds 12,547,910 568,549 4.53 12,052,635 563,838
----------- ---------- ----------- ----------
Demand deposits 1,888,104 1,686,796
Other liabilities 233,892 261,432
Shareholders' equity:
Common stock, capital surplus and retained earnings 1,154,687 1,228,864
Accumulated other comprehensive income 9,021 (11,826)
----------- -----------
Total Liabilities and Shareholders' Equity $15,833,614 $15,217,901
=========== ===========
Fully Taxable -- Equivalent Net Interest Income $ 599,918 3.48% $ 594,355
========== ==========
Net Interest Income as a Percentage of Average Earning
Assets 4.11%
Percentage of Total Assets:
Foreign Assets - .02%
Foreign Liabilities .24% .25%
<CAPTION>
1997 1996
------- ----------------------------------
(Income and rates on fully taxable-equivalent Average Average Average
basis, dollars in thousands) Rate Balance Interest Rate
- ------------------------------------------------------------ --------------------------------------------
<S> <C> <C> <C> <C>
Average Assets:
Loans(1) 9.01% $ 8,375,277 $ 764,026 9.12%
Taxable investment securities 6.50 3,899,467 252,300 6.47
Tax-exempt investment securities(2) 8.55 325,098 29,000 8.92
Mortgages held-for-sale 7.56 366,380 28,374 7.74
Interest-earning deposits:
Domestic 5.17 1,919 105 5.47
Foreign 5.67 6,885 390 5.66
Federal funds sold and resale agreements 5.48 133,977 7,269 5.43
Trading account securities(2) 7.43 10,280 527 5.13
----------- ----------
Total earning assets 8.22 13,119,283 1,081,991 8.25
----------- ----------
Unrealized gain/(loss) on securities available-for-sale (19,275)
Allowance for loan losses (176,617)
Cash and due from banks 546,989
Other Assets 648,676
-----------
Total Assets $14,119,056
===========
Average Liabilities and Shareholders' Equity:
Savings Deposits 2.68% $ 3,712,081 100,869 2.72%
Time Deposits:
Negotiable 5.68 1,278,399 75,338 5.89
Foreign 5.45 46,841 2,685 5.73
Other time 5.52 4,817,404 268,621 5.58
----------- ----------
Total interest-bearing deposits 4.51 9,854,725 447,513 4.54
Federal funds purchased and repurchase agreements 4.81 534,903 24,870 4.65
Other borrowed funds 6.10 635,925 39,418 6.20
Subordinated and other long-term debt 6.75 100,000 6,760 6.76
Capital Securities 6.84 -- --
----------- ----------
Total interest-bearing funds 4.68 11,125,553 518,561 4.66
----------- ----------
Demand deposits 1,574,090
Other liabilities 239,851
Shareholders' equity:
Common stock, capital surplus and retained earnings 1,193,334
Accumulated other comprehensive income (13,772)
-----------
Total Liabilities and Shareholders' Equity $14,119,056
===========
Fully Taxable -- Equivalent Net Interest Income 3.54% $ 563,430 3.59%
==========
Net Interest Income as a Percentage of Average Earning
Assets 4.22% 4.29%
Percentage of Total Assets:
Foreign Assets .05%
Foreign Liabilities .33%
<CAPTION>
1995 1994
---------------------------------- --------------------------------
(Income and rates on fully taxable-equivalent Average Average Average Average
basis, dollars in thousands) Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------ ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average Assets:
Loans(1) $ 7,729,041 $ 709,542 9.18% $ 6,512,549 $544,123 8.35%
Taxable investment securities 3,940,287 264,929 6.72 4,518,355 290,849 6.44
Tax-exempt investment securities(2) 356,218 32,037 8.99 363,155 32,090 8.84
Mortgages held-for-sale 247,659 19,140 7.73 224,481 14,781 6.58
Interest-earning deposits:
Domestic 5,635 319 5.66 1,991 97 4.87
Foreign 42,599 2,515 5.90 18,077 894 4.95
Federal funds sold and resale agreements 273,301 16,426 6.01 122,134 5,369 4.40
Trading account securities(2) 20,643 1,197 5.80 26,014 1,160 4.46
----------- ---------- ----------- --------
Total earning assets 12,615,383 1,046,105 8.29 11,786,756 889,363 7.55
----------- ---------- ----------- --------
Unrealized gain/(loss) on securities available-for-sale (18,157) (4,835)
Allowance for loan losses (177,801) (163,561)
Cash and due from banks 495,308 462,615
Other Assets 603,561 544,233
----------- -----------
Total Assets $13,518,294 $12,625,208
=========== ===========
Average Liabilities and Shareholders' Equity:
Savings Deposits $ 3,917,460 107,983 2.76% $ 4,467,933 108,917 2.44%
Time Deposits:
Negotiable 1,586,867 96,166 6.06 1,575,248 70,415 4.47
Foreign 225,964 14,137 6.26 245,109 10,407 4.25
Other time 3,760,122 207,423 5.52 2,824,836 129,281 4.58
----------- ---------- ----------- --------
Total interest-bearing deposits 9,490,413 425,709 4.49 9,113,126 319,020 3.50
Federal funds purchased and repurchase agreements 440,547 22,572 5.12 418,412 15,615 3.73
Other borrowed funds 756,815 47,712 6.30 520,071 23,115 4.43
Subordinated and other long-term debt 12,603 877 6.96 -- --
Capital Securities -- -- -- --
----------- ---------- ----------- --------
Total interest-bearing funds 10,700,378 496,870 4.64 10,051,609 357,750 3.56
----------- ---------- ----------- --------
Demand deposits 1,484,775 1,394,210
Other liabilities 208,038 145,773
Shareholders' equity:
Common stock, capital surplus and retained earnings 1,137,445 1,037,669
Accumulated other comprehensive income (12,342) (4,053)
----------- -----------
Total Liabilities and Shareholders' Equity $13,518,294 $12,625,208
=========== ===========
Fully Taxable -- Equivalent Net Interest Income $ 549,235 3.65% $531,613 3.99%
========== ========
Net Interest Income as a Percentage of Average Earning
Assets 4.35% 4.51%
Percentage of Total Assets:
Foreign Assets .32% .14%
Foreign Liabilities 1.67% 1.94%
</TABLE>
- ------------------------------
(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-13
<PAGE> 15
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 market areas
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.
<TABLE>
<CAPTION>
Percent of
Composition of total loans at December 31, 1998: total
- ------------------------------------------------------------------------------
<S> <C>
Commercial, financial, agricultural loans and leases 33%
Real estate loans -- commercial and construction 29
---
Total commercial 62
Real estate loans -- residential mortgages 11
Consumer home equity loans 12
Consumer loans (primarily automobile loans) 15
---
Total 100%
===
</TABLE>
One of Old Kent's strengths is its diversified loan portfolio. Approximately 38%
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.
During 1997, Old Kent discontinued business activity as an underwriter of credit
card loans with the sale of its credit card loan portfolio in June.
Loans to commercial borrowers represent approximately 62% of Old Kent's loan
portfolio. These loans are grouped by their nature and industry diversification
as non-real estate related and as real estate related.
S-14
<PAGE> 16
Commercial loan mix at December 31, 1998:
<TABLE>
<CAPTION>
Real Estate Related
------------------------- Non-Real
Owner Non-owner Estate
(dollars in millions) Total Occupied Occupied Related
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Contractors & Property Managers $1,618.5 $ 379.7 $ 902.4 $ 336.4
Services 1,014.7 300.1 218.8 495.8
Manufacturing 809.2 77.0 16.8 715.4
Retail 503.2 106.9 28.4 367.9
Wholesale 402.9 38.1 15.3 349.5
Finance 315.0 87.6 99.4 128.0
Transportation 110.2 25.5 13.1 71.6
Agriculture 62.4 9.9 5.5 47.0
Other 505.9 210.8 78.8 216.3
Leasing 163.6 - - 163.6
-------- -------- -------- --------
Total $5,505.6 $1,235.6 $1,378.5 $2,891.5
======== ======== ======== ========
</TABLE>
At December 31, 1998, Old Kent's commercial loan and lease portfolio, excluding
real estate related loans, approximated $2.9 billion, or about 33% of total
loans. Loans to manufacturers represented the largest component at 25% 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, 1998 totaled
approximately $2.6 billion, or 29% of total loans. These loans have been grouped
as owner-occupied (borrowers who occupy and utilize the 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 47% of commercial real estate and construction
loans and loans for non-owner-occupied properties were 53% of that total.
Non-owner-occupied loans totaled $1.4 billion, or 16% 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 35% of total commercial
real estate and construction loans.
Old Kent has no foreign loans. In addition, 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, and the Corporation is
extremely selective in participating in loan syndications.
The following table summarizes the components of the Corporation's total loans
at December 31 for each of the last five years:
<TABLE>
<CAPTION>
December 31 (dollars in millions) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural
loans $2,727.9 $2,674.1 $2,303.3 $2,086.8 $1,728.8
Real estate loans -- commercial 1,920.1 1,909.6 1,828.2 1,718.5 1,407.4
Real estate loans -- construction 694.0 571.6 438.9 271.7 398.1
Real estate loans -- residential
mortgages 1,012.5 1,173.2 1,220.2 1,148.8 1,299.6
Consumer home equity loans 1,031.3 925.0 745.0 639.3 577.0
Consumer loans -- other 1,334.3 1,717.8 1,661.2 1,576.2 1,709.3
Credit card loans - 1.7 317.6 323.6 102.3
Lease financing 163.6 171.5 201.4 196.2 111.2
-------- -------- -------- -------- --------
Total loans $8,883.7 $9,144.5 $8,715.8 $7,961.1 $7,333.7
======== ======== ======== ======== ========
</TABLE>
S-15
<PAGE> 17
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:
<TABLE>
<CAPTION>
Year ended December 31
(dollars in thousands) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Provision for credit losses $ 46,828 $ 46,977 $ 35,636 $ 21,666 $ 22,465
Net credit losses 39,640 49,604 43,571 13,464 9,683
Allowance for credit losses at
year-end 167,665 160,952 168,990 178,064 171,125
Allowance as a percentage of:
Year-end loans 1.89% 1.76% 1.94% 2.24% 2.33%
Year-end loans, excluding loans
secured by residential mortgages 2.13% 2.02% 2.26% 2.62% 2.84%
Impaired loans 280% 282% 389% 397% 281%
Ratio of net credit losses to
average loans outstanding during
the year .45% .55% .52% .17% .15%
Credit loss recoveries as a
percentage of prior year credit
losses 25% 28% 54% 60% 44%
</TABLE>
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, the provision for credit losses was $43.3 million in 1998, down from a
provision of $47.0 million in 1997. As discussed previously, management took
measures to reduce the risk in certain loan components, which, in its judgment,
justified a reduction of the provision from that of 1997. Impaired loans at
December 31, 1998 totaled $59.8 million, an increase of $2.8 million over $57.0
million at year-end 1997. At December 31, 1998, the ratio of the allowance to
impaired loans was 280%. Over the past five years, the Corporation's actual loss
experience on residential real estate loans has been negligible. At December 31,
1998, the ratio of the allowance to total loans exclusive of residential
mortgages was 2.13%.
S-16
<PAGE> 18
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:
<TABLE>
<CAPTION>
Year ended December 31
(dollars in thousands) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans outstanding at end of
year $8,883,716 $9,144,497 $8,715,764 $7,961,073 $7,333,661
========== ========== ========== ========== ==========
Daily average of loans
outstanding for year $8,900,637 $9,062,384 $8,375,277 $7,729,041 $6,512,549
========== ========== ========== ========== ==========
Balance of allowance for
credit losses at beginning
of year $ 160,952 $ 168,990 $ 178,064 $ 171,125 $ 149,107
Net change in allowance due
to loans (sold) and
purchased (475) (5,411) (1,139) (1,263) 9,236
Provision for credit losses 46,828 46,977 35,636 21,666 22,465
Loans charged-off:
Commercial, financial and
agricultural loans 22,638 12,197 4,808 5,428 3,749
Real estate loans --
commercial 3,533 1,315 3,451 2,805 7,460
Real estate loans --
construction 160 911 67 29 605
Real estate loans --
residential mortgages 156 6 14 232 645
Consumer loans (including
home equity loans) 25,122 32,765 18,906 11,075 6,482
Credit card loans 2 13,551 20,855 5,626 1,718
Lease financing 4,693 5,021 9,621 1,148 743
---------- ---------- ---------- ---------- ----------
Total charged-off 56,304 65,766 57,722 26,343 21,402
---------- ---------- ---------- ---------- ----------
Recoveries of loans
previously charged-off:
Commercial, financial and
agricultural loans 3,152 4,404 3,232 2,852 3,250
Real estate loans --
commercial 1,165 3,242 4,703 5,779 3,915
Real estate loans --
construction 58 73 1,359 469 927
Real estate loans --
residential mortgages 4 4 58 47 292
Consumer loans (including
home equity loans) 10,726 6,367 3,061 2,945 2,485
Credit card loans 1 579 929 600 556
Lease financing 1,558 1,493 809 187 294
---------- ---------- ---------- ---------- ----------
Total recovered 16,664 16,162 14,151 12,879 11,719
---------- ---------- ---------- ---------- ----------
Balance of allowance for
credit losses at end of
year $ 167,665 $ 160,952 $ 168,990 $ 178,064 $ 171,125
========== ========== ========== ========== ==========
</TABLE>
S-17
<PAGE> 19
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:
<TABLE>
<CAPTION>
Net credit losses (recoveries) for the year
ended December 31 (in thousands) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural
loans $19,486 $ 7,793 $ 1,576 $ 2,576 $ 499
Real estate loans -- commercial 2,368 (1,927) (1,252) (2,974) 3,545
Real estate loans -- construction 102 838 (1,292) (440) (322)
Real estate loans -- residential mortgages 152 2 (44) 185 353
Consumer loans (including home equity
loans) 14,396 26,398 15,845 8,130 3,997
Credit card loans 1 12,972 19,926 5,026 1,162
Lease financing 3,135 3,528 8,812 961 449
------- ------- ------- ------- ------
Total net credit losses $39,640 $49,604 $43,571 $13,464 $9,683
======= ======= ======= ======= ======
Net credit losses as a percentage of daily
average total loans .45% .55% .52% .17% .15%
======= ======= ======= ======= ======
</TABLE>
The allowance for credit losses has been allocated according to the amount
deemed reasonably necessary to provide for the probable losses inherent within
each of the following categories at the dates indicated:
<TABLE>
<CAPTION>
1998 1997 1996 1995
Allocation of allowance ----------------------- ----------------------- ----------------------- -----------------------
for credit losses at Percent of Percent of Percent of Percent of
December 31 loans to loans to loans to loans to
(dollars in thousands) Allowance total loans Allowance total loans Allowance total loans Allowance total loans
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 70,000 30.7% $ 68,000 29.2% $ 56,000 26.4% $ 61,000 26.2%
Real estate -- commercial 35,000 21.6 27,000 20.9 27,000 21.0 37,000 21.6
Real estate --
construction 10,000 7.8 3,000 6.3 3,000 5.0 3,000 3.4
Real estate --
residential 2,000 11.4 2,000 12.8 2,000 14.0 3,000 14.4
Consumer loans (including
home equity loans) 30,000 26.7 42,000 28.9 40,000 27.7 35,000 27.8
Credit card loans - - - - 16,000 3.6 8,000 4.1
Leases 6,000 1.8 8,000 1.9 11,000 2.3 3,000 2.5
Not allocated 14,665 - 10,952 - 13,990 - 28,064 -
-------- ------ -------- ------ -------- ------ -------- ------
Total allowance for
credit losses $167,665 100.0% $160,952 100.0% $168,990 100.0% $178,064 100.0%
======== ====== ======== ====== ======== ====== ======== ======
<CAPTION>
1994
Allocation of allowance -----------------------
for credit losses at Percent of
December 31 loans to
(dollars in thousands) Allowance total loans
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial and
agricultural $ 53,000 23.6%
Real estate -- commercial 34,000 19.2
Real estate --
construction 5,000 5.4
Real estate --
residential 4,000 17.7
Consumer loans (including
home equity loans) 35,000 31.2
Credit card loans 5,000 1.4
Leases 2,000 1.5
Not allocated 33,125 -
-------- ------
Total allowance for
credit losses $171,125 100.0%
======== ======
</TABLE>
<TABLE>
<CAPTION>
Net credit losses as a percent of daily average
balance for the year 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural loans .22% .09% .02% .03% .01%
Real estate loans -- commercial .03 (.02) (.01) (.04) .05
Real estate loans -- construction - .01 (.02) (.01) -
Real estate loans -- residential mortgages - - - - .01
Consumer loans (including home equity loans) .16 .29 .18 .11 .05
Credit card loans - .14 .24 .07 .02
Leases .04 .04 .11 .01 .01
------ ------ ------ ------ ------
Total .45% .55% .52% .17% .15%
====== ====== ====== ====== ======
</TABLE>
The decrease from 1997 to 1998 of 10 basis points is primarily the result of
more conservative underwriting standards which were employed for the consumer
portfolios as well as management's actions to reduce risk in certain components
of those portfolios. In addition, 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,
S-18
<PAGE> 20
attributable to Old Kent's application of its credit evaluation policies and
practices to First Evergreen's loan portfolio at the time of merger. Management
believes all other categories to be reasonable based on current conditions,
however management cannot predict whether credit quality will improve or further
deteriorate in the near-term.
Nonperforming Assets
The following is a summary of nonperforming assets for the last five years:
<TABLE>
<CAPTION>
December 31 (dollars in thousands) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Impaired loans:
Nonaccrual loans $57,120 $54,319 $40,638 $41,792 $54,990
Restructured loans 2,664 2,688 2,832 3,075 5,838
------- ------- ------- ------- -------
Total impaired loans 59,784 57,007 43,470 44,867 60,828
Other real estate owned 6,872 7,619 7,273 11,511 13,622
------- ------- ------- ------- -------
Total nonperforming assets $66,656 $64,626 $50,743 $56,378 $74,450
======= ======= ======= ======= =======
Impaired loans as a percentage of total
loans .67% .62% .50% .56% .83%
</TABLE>
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.
<TABLE>
<CAPTION>
December 31 (dollars in thousands) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans past due ninety days or more $15,083 $16,795 $40,133 $31,431 $13,529
Loans past due ninety days or more, as a
percentage of total loans .17% .18% .46% .39% .18%
</TABLE>
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, 1998 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 increased $71.4 million, or 25.8% in 1998 compared to
$60.9 million, or 28.3% in 1997. Non-interest income (excluding security
transactions and non-recurring gains) has become a proportionally greater
component of Old Kent's total revenues. In 1998, non-interest income was 36.1%
of total revenues compared to 30.5% for 1997, and 26.9% for 1996. 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.
S-19
<PAGE> 21
The following table summarizes the major categories of other income for the last
three years:
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage banking revenues (net) $146,979 $ 94,423 $ 57,830
Investment management and trust revenues 63,351 54,257 46,891
Deposit account revenue 56,728 49,657 45,779
Transaction processing revenue 20,409 13,799 13,937
Non-recurring income 4,963 14,660 6,783
Retail insurance commissions 15,224 9,421 7,832
Credit life insurance commissions 4,826 4,791 4,565
Brokerage commissions 3,439 1,559 1,420
Safe deposit box rental revenue 2,584 2,574 2,512
Securities transactions 4,142 1,232 1,322
Other 25,255 30,139 26,701
-------- -------- --------
Total other income $347,900 $276,512 $215,572
======== ======== ========
</TABLE>
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 basis. OKMC is
primarily engaged in the origination, sale and servicing of single family
mortgage loans. On a periodic basis, OKMC also purchases and sells mortgage
servicing portfolios.
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.
The following summarizes the mortgage banking activity and revenue for the past
three years:
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Originations and acquisitions of mortgages
held-for-sale $13,547,917 $6,878,737 $3,409,276
=========== ========== ==========
Proceeds from sales & prepayments of mortgages
held-for-sale and other retained interests $12,532,456 $6,265,742 $3,236,859
=========== ========== ==========
Mortgage banking revenue (net), consisted of:
Mortgage banking gains $ 160,743 $ 69,546 $ 33,746
Mortgage origination fees (net of direct costs) (2,516) 14,547 14,316
Mortgage loan servicing revenues (net of direct
costs) (11,248) 10,330 9,768
----------- ---------- ----------
Total mortgage banking revenue (net) $ 146,979 $ 94,423 $ 57,830
=========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31 (in millions) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgages serviced for third parties $14,006 $11,805 $ 9,863
Mortgages held-for-sale 2,263 1,272 589
Mortgage loans serviced by Old Kent for its own
portfolio 1,013 1,173 1,220
------- ------- -------
Total $17,282 $14,250 $11,672
======= ======= =======
</TABLE>
S-20
<PAGE> 22
The following table summarizes location and origination volume for the past
three years:
<TABLE>
<CAPTION>
December 31 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
States/Offices 32/143 25/104 17/79
Originations (in billions) $ 13.5 $ 6.9 $ 3.4
</TABLE>
OKMC has aggressively expanded its retail loan origination network during the
past three years. A significant amount of growth occurred in 1996 with the
acquisition of two mortgage companies. Since that time, the company has
continued to acquire established branches and add de novo branches. The growth
in the retail origination network, combined with a favorable interest rate
environment in 1998, allowed loan origination volumes to climb to record levels.
During 1998, OKMC was one of the twenty largest loan originators nationally and
garnered a 1% share of the national mortgage market.
Mortgage banking gains include gains and losses from the sale of mortgage loans
as well as gains and losses from the periodic sale of servicing portfolios.
Mortgage banking gains have increased steadily since 1996, primarily reflecting
the higher level of loan sales and securitizations. Included in the gains from
the sale of loans is the value of servicing inherent in the underlying loans.
During 1997 and continuing into 1998, OKMC became an active seller of mortgage
servicing portfolios. OKMC views these sales as an opportunity to maximize the
value of the mortgage servicing rights retained on the Company's balance sheet
while simultaneously limiting the exposure to the Company of changes in the
value of mortgage servicing rights. At December 31, 1998, OKMC had commitments
to sell mortgage servicing rights associated with between $2.5 and $6.0 billion
of newly originated conventional mortgage loans. OKMC expects to fulfill its
commitment during the first three quarters of 1999.
Net mortgage origination fees (as a percent of loan originations) have declined
since 1996. Most of the decline is associated with an increasingly competitive
primary mortgage market and higher direct loan origination costs.
Mortgage servicing revenues in 1998 were adversely impacted by lower mortgage
interest rates and higher mortgage refinancing activity. Higher refinancing
activity caused OKMC to accelerate the amortization of previously recorded
mortgage servicing rights. During 1998, management increased its reliance upon
financial hedges to protect the value of the mortgage servicing rights
portfolio. See Note 20 to Consolidated Financial Statements for further
discussion.
For the past three years, net mortgage servicing revenue was comprised of:
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage servicing revenues $ 46,801 $ 41,265 $ 28,223
Amortization of servicing rights and other direct
servicing costs (58,049) (30,935) (18,455)
-------- -------- --------
Mortgage loan servicing revenues (net of direct costs) $(11,248) $ 10,330 $ 9,768
======== ======== ========
</TABLE>
S-21
<PAGE> 23
The following reflects changes in the carrying value of mortgage servicing
rights:
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $146,359 $ 96,106 $ 57,947
Additions 201,711 111,192 62,612
Sales (73,740) (30,457) (2,587)
Amortization (50,905) (30,335) (17,384)
Other (429) - -
Servicing valuation reserve (4,500) (147) (4,482)
-------- -------- --------
Balance at end of period $218,496 $146,359 $ 96,106
======== ======== ========
Estimated fair value of mortgage servicing rights $253,000 $166,000 $135,000
======== ======== ========
</TABLE>
Investment Management and Trust Revenues
Investment Management and Trust activities also generate a significant amount of
revenue for Old Kent. Trust revenues increased to $63.4 million in 1998, up $9.1
million, or 16.8%, over 1997. This compares to a $7.4 million increase, or
15.7%, in 1997. 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.
<TABLE>
<CAPTION>
December 31 (in billions) 1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets managed directly by Old Kent for customers $11.1 $9.0 $7.4
Kent Fund Assets -- managed on behalf of Old Kent for
customers $ 6.1 $5.1 $4.2
</TABLE>
Deposit Account Revenues
Service charges on deposit accounts increased to $56.7 million in 1998, an
increase of $7.1 million or 14.2%. This compares to an increase of $3.9 million,
or 8.5% in 1997. These increases were due both to an increase in the deposit
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 traveler checks, foreign exchange fees, debit card interchange
income, check cashing and collection charges. These revenues totaled $20.4
million in 1998 and $13.8 million in 1997. The $6.6 million increase in
comparing 1998 to 1997 was due to increased money order commissions and debit
card interchange income.
Retail Insurance Commissions
The increase in retail insurance commissions to $15.2 million in 1998 and $9.4
million in 1997 is due to Old Kent's acquisition of insurance agencies,
beginning in late 1995, as part of the Corporation's emphasis on fee-based
revenues. At December 31, 1998, Old Kent Insurance Group, Inc. was the third
largest Michigan-based insurance agency in the State of Michigan.
Non-recurring Income
Non-recurring income includes those items which Old Kent considers to be outside
the norm of its typical business activities, such as gains on the sale of "other
real estate owned." The 1998 amount reflects the gain on sale of three banking
sites and their related deposits. The amount reported for 1997 includes a $16.7
million (pre-tax) gain on a June 1997 sale of a $266 million credit card loan
portfolio.
S-22
<PAGE> 24
This gain contributed $10.6 million to net income and $.10 to earnings per share
for 1997. This transaction resulted from Old Kent's decision to discontinue
business activity as an underwriter of credit card loans, with the intent of
improving the future profitability of the Corporation.
OTHER EXPENSES
The following table summarizes the major categories of other expenses for the
last three years:
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries $250,433 $225,563 $190,325
Employee benefits 48,557 48,306 43,770
Occupancy 42,078 39,377 34,317
Equipment 36,689 32,574 27,414
Professional services 28,642 21,532 17,894
Telephone and telecommunication 17,989 14,758 11,698
Stationery and supplies 14,975 12,639 10,817
Taxes other than income taxes 4,831 6,788 8,032
Amortization of goodwill and core deposit intangibles 14,240 14,254 10,951
Postage and courier charges 15,426 13,819 13,230
Advertising and promotion 9,233 10,262 25,390
Legal, audit and examination fees 7,545 6,224 5,336
FDIC insurance (including $1.7 million SAIF
assessment in 1996) 1,586 1,520 2,460
Merger related charges 24,993 - -
Other 66,989 60,354 60,145
-------- -------- --------
Total other expenses $584,206 $507,970 $461,779
======== ======== ========
</TABLE>
Salaries and Employee Benefits
Salaries and employee benefits represent the largest category of non-interest
expense. These personnel costs increased by $25.1 million in 1998 and $39.8
million in 1997 primarily due to business acquisitions, growth and expansion of
OKMC, and increased staffing of the Investment and Insurance Services business
line. 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. The following summarizes FTE staff sizes as of the dates
indicated:
<TABLE>
<CAPTION>
FTE change
Dec. 31, 1998
Full-time Equivalent Staff vs. Dec. 31, 1997 12/31/98 12/31/97 12/31/96
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Banking units (412) 4,576 4,988 4,855
Mortgage banking 956 2,578 1,622 1,159
Insurance, leasing and brokerage units (13) 303 316 212
---- ----- ----- -----
Total FTE 531 7,457 6,926 6,226
==== ===== ===== =====
</TABLE>
The table displays a 956 person increase in the staff size of OKMC. This
increase is primarily attributable to geographic expansion of Old Kent's
mortgage banking business as previously discussed.
In 1999, the Corporation intends to enhance its sales effectiveness by shifting
a greater portion of its compensation to a "pay for performance" sales incentive
based structure.
S-23
<PAGE> 25
Occupancy and Equipment Expense
Occupancy expense increased by $2.7 million, or 6.8% in 1998 due to business
acquisitions and the geographic expansion of OKMC. Occupancy expense increased
by $5.1 million, or 14.7%, in 1997 due to the effect of OKMC business
acquisitions. The table below summarizes occupancy expense for the years
indicated:
<TABLE>
<CAPTION>
1998 over
Occupancy expense for the year (dollars in thousands) 1997 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Banking units $ (184) $32,172 $32,356 $29,849
Mortgage banking 2,452 8,528 6,076 3,757
Insurance, leasing and brokerage units 433 1,378 945 711
------ ------- ------- -------
Total occupancy expense $2,701 $42,078 $39,377 $34,317
====== ======= ======= =======
</TABLE>
Equipment expense increased by approximately $4 million in 1998 as compared to
the prior year. This increase includes the effects of acquisition and expansion.
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, 1998, Old Kent had 511 ATMs
in operation.
Professional Services
Expenses related to professional services increased $7.1 million, or 33%, from
1997 to 1998. The increase was primarily related to outside support in the
origination and servicing of mortgage loans, maintenance and processing of the
Corporation's trust system and technology support related to the Corporation's
Year 2000 remediation.
Amortization of Intangibles
Amortization of goodwill and core deposit intangibles totaled $14.2 million,
$14.3 million, and $11.0 million in 1998, 1997 and 1996, respectively. The 1997
increase was primarily the result of the Seaway acquisition on January 1, 1997.
This amortization represents non-cash charges to operations. The table below
illustrates the proforma effect on earnings per share as if these charges were
excluded from net income, sometimes referred to as "cash" earnings per share.
<TABLE>
<CAPTION>
Year ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share (as reported) $1.86 $1.76 $1.55
Proforma "basic cash earnings per share" 1.99 1.89 1.65
Diluted earnings per share (as reported) 1.84 1.75 1.54
Proforma "diluted cash earnings per share" 1.97 1.88 1.64
</TABLE>
Advertising and Promotion Expense
In 1998, advertising and promotion costs totaled $9.2 million, about $1 million
less than in 1997. The $15.1 million decrease in 1997 from 1996 was the result
of the discontinuation of a costly promotional program related to credit cards
in 1996.
FDIC Insurance
As shown in the consolidated statements of income, FDIC deposit insurance has
steadily declined in the last three years. This decline is entirely due to
reductions in assessment rates charged by the Federal
S-24
<PAGE> 26
Deposit Insurance Corporation ("FDIC"). In 1998, FDIC assessments totaled $1.6
million compared to $1.5 million in 1997, and $2.5 million in 1996 which
included a special $1.7 million FDIC levy intended to recapitalize its "Savings
Association Insurance Fund" ("SAIF").
Additionally, for the semiannual assessment period beginning January 1, 1999,
the FDIC will assess an insurance rate of zero for banks meeting the eligibility
requirements, and an additional assessment of $.0122 per $100 of insured
deposits. This rate is intended to finance the interest obligations of the
Financing Corporation ("FICO") resultant from the Deposit Insurance Act of 1996.
Merger Related Charges
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 $.18. 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 Corporation is currently in the process of addressing a significant issue
facing all users of automated information systems. The problem is that many
computer systems that process transactions based on two digits representing the
year of transaction may recognize a date using "00" as the year 1900 rather than
the year 2000. The problem could affect a wide variety of automated information
systems such as mainframe applications, personal computers and communication
systems, and software failure in the form of errors or miscalculations. By
nature, the banking and financial services industries are highly dependent upon
computer systems to process significant transaction volumes and because of a
date dependency for interest measurements on financial instruments such as loans
and deposits.
The Corporation initiated its Year 2000 analysis in early 1995. The assessment
included an inventory of software applications, communications with third party
vendors and suppliers, and certification of compliance from third party
providers. The Corporation has a comprehensive written plan which is regularly
updated and monitored by technical and non-technical management and personnel.
Plan status is regularly reviewed by management of the Corporation and reported
upon to the Board of Directors.
The Corporation utilizes vendor supplied software packages for its "mission
critical" applications. All "mission critical" systems were Year 2000 ready with
the current releases installed and tested for all applications and were in
production on December 31, 1998. In addition, the Corporation has acquired
testing tools to be used during a second phase of testing. During this phase,
which will occur during the first half of 1999, system dates will be reset and
validation will take place in an integrated event level testing environment.
In a worst case scenario, testing of the remediated systems could yield a
failure when processing data beyond December 31, 1999. However, management
believes this to be a remote possibility since initial testing has yielded no
issues of significant consequence. In addition, the second phase of testing is
expected to allow adequate time to address any issues which are identified. The
Corporation is also updating its business resumption plans to include
contingency actions for Year 2000 issues. With these measures in place, the
Corporation expects no materially adverse failures in its data processing
systems as a result of the century change.
Diagnosis, reprogramming and other remedies are expected to result in
expenditures of approximately $16 million, over the four years ended December
31, 1999. As of December 31, 1998, approximately $13 million of these
expenditures have been recognized as incurred by Old Kent in the preceding three
year period. As of December 31, 1998, Old Kent was fully compliant on all
"mission critical" computer
S-25
<PAGE> 27
systems and 75% compliant on non-critical applications. Management expects to be
fully compliant on non-critical applications by mid-1999. Management expects to
expend the remaining $3 million during 1999.
In addition to reviewing its own computer operating systems and applications,
the Corporation has initiated formal communications with its significant
suppliers (operating risk) and large customers (credit risk) to determine the
extent to which Old Kent is vulnerable to those third parties' failure to
resolve their own Year 2000 issues. There is no assurance that the systems of
other companies on which the Corporation's systems rely will be timely
converted. If such modifications and conversions are not made, or are not
completed in a timely manner, the Year 2000 issue could have an adverse impact
on the operations of the Corporation. The Corporation's Year 2000 contingency
plans for each line of business will address alternative processing methods for
all critical functions including lending, transaction processing, liquidity and
service delivery methods.
This Year 2000 Readiness Disclosure is based upon and partially repeats
information provided by Old Kent's outside consultants, vendors and others
regarding the Year 2000 readiness of Old Kent and its customers, vendors and
other parties. Although management believes this information to be accurate, it
has not in each case independently verified such information.
Income Taxes
The income tax provision was $106.0 million in 1998, $105.9 million in 1997 and
$90.6 million in 1996. Income tax expense as a percentage of pre-tax income was
34.8% in 1998 and 1997. This compares with 33.6% in 1996.
Old Kent Common Stock
Old Kent Common Stock is traded in 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; these quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions. Prices have been adjusted to reflect
5% stock dividends distributed in both 1998 and 1997, and a two-for-one stock
split distributed in 1997.
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
Quarter Low High Low High
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1st $34.29 $39.05 $21.37 $23.70
2nd 35.65 39.46 21.09 26.36
3rd 28.88 39.75 25.53 32.62
4th 29.13 46.50 29.34 40.12
</TABLE>
As of February 19, 1999 there were 103,990,035 shares of Old Kent Financial
Corporation Common Stock issued and outstanding, held by approximately 15,996
holders of record.
S-26
<PAGE> 28
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 40 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 in 1998, 1997, 1996 and 1995, and for a two-for-one stock split paid in
December, 1997.
<TABLE>
<CAPTION>
Quarter 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1st $.171 $.154 $.138 $.128 $.119
2nd .171 .154 .138 .128 .119
3rd .180 .162 .146 .134 .119
4th .200 .171 .154 .138 .128
----- ----- ----- ----- -----
Total $.722 $.641 $.576 $.528 $.485
===== ===== ===== ===== =====
</TABLE>
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 1999.
Capital
At December 31, 1998, the Corporation's total equity was $1.1 billion, or 7.4%
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 benefit plans and 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 1999, under the June, 1998 authorization cited in Note 13 to the
consolidated financial statements.
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" requires that the after-tax
unrealized gain or loss on securities available-for-sale be carried as a
separate component of shareholders' equity. At December 31, 1998 this after-tax
gain was $20.4 million compared to $1.3 million on December 31, 1997. Market
values of securities, particularly those that are of longer terms, 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, 1998, ratios of Old Kent and
its subsidiary banks exceeded the regulatory guidelines to be considered "well
capitalized" for regulatory purposes.
S-27
<PAGE> 29
At December 31, 1998, the ratio of total shareholder's equity to total assets
was 6.84% compared to 7.80% 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:
<TABLE>
<CAPTION>
Per share amount
- ------------------------------------------------------------------------------
<S> <C>
Book value per common share at December 31, 1997 $11.12
For the year ended December 31, 1998:
Basic earnings per share 1.86
Dividends per common share (0.72)
Effect of stock repurchases (net of stock issuances) (1.62)
Change in unrealized gain on securities available-for-sale
and other changes 0.22
------
Book value per common share at December 31, 1998 $10.86
======
</TABLE>
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.
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 $2.8 billion
at December 31, 1998, represent a highly accessible source of liquidity. The
Corporation's portfolio of securities held-to-maturity, which totaled $804
million at December 31, 1998, 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 $11.5 billion at December 31, 1998, up from $11.1 billion at December
31, 1997. These same markets offer additional liquidity in the form of large
deposit instruments and other equivalent non-deposit products.
The national capital markets represent a further source of liquidity to Old
Kent. During 1998, Old Kent filed three shelf registrations. A $250 million
shelf registration was filed to issue common stock, preferred stock, depository
shares, debt securities and warrants. Old Kent filed a shelf registration to
issue an additional $200 million of trust preferred securities. The proceeds of
any issuance will be for general corporate purposes, which may include reducing
debt and repurchasing common stock. The third shelf registration was filed to
issue 2.5 million shares of common stock to use for 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 $250 million of bank notes outstanding at December 31, 1998.
S-28
<PAGE> 30
On January 31, 1997, Old Kent Capital Trust I, a Delaware business trust
controlled by Old Kent Financial Corporation, issued $100 million of Floating
Rate Subordinated Capital Income Securities. These securities represent
undivided interests in an Old Kent Financial Corporation debenture which matures
February 1, 2027 and is callable after ten years or upon the occurrence of
certain defined events. The interest payments adjust based upon a yield of 80
basis points over LIBOR ("London Inter Bank Offered Rate").
The Corporation may make use of brokers to place large deposit instruments or
bank note offerings when advantageous. Additionally, Old Kent Bank may access
the federal funds markets or utilize collateralized borrowings.
<TABLE>
<CAPTION>
Thomson Standard
Credit ratings at December 31, 1998 BankWatch Moody's & Poor's
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
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+
</TABLE>
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.
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 vulnerability 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 indices. 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 re-price
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
re-pricing profiles are monitored through static gap analysis, future business
results are simulated through computer modeling, and the net present value of
the Corporation's financial instruments is estimated through economic value of
equity measurement. While these three tools utilize different measurement
techniques, combined they are valuable tools 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 trading account securities balance, which totaled
$349 million at December 31, 1998, was comprised of a $5 million security that
was earmarked for sale out of the bank's investment portfolio and $344 million
in mortgage backed securities held by Old Kent Mortgage Company for delivery in
January, 1999 in order to optimize pricing execution. Accordingly, the
Corporation does not consider the market risk of its trading portfolio to be
material. The Corporation's foreign exchange activities are
S-29
<PAGE> 31
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 re-pricing opportunities of interest-earning
assets and interest-bearing liabilities. The following table summarizes the
interest rate re-pricing gaps for selected maturity periods as of December 31,
1998:
<TABLE>
<CAPTION>
0 - 30 31 - 90 91 - 180 181 - 365 1 - 5 Over 5
(in millions) Days Days Days Days Years Years Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Non-loan interest-earning assets $ 464 $ 128 $ 186 $ 435 $1,830 $ 859 $ 3,902
Loans 4,744 1,499 462 887 3,054 475 11,121
------ ------ ------- ------ ------ ------- -------
Total interest-earning assets 5,208 1,627 648 1,322 4,884 1,334 15,023
------ ------ ------- ------ ------ ------- -------
Savings & money market accounts* 868 712 -- -- -- 2,899 4,479
Domestic time deposits 465 1,300 1,721 1,580 1,137 19 6,222
Foreign time deposits 140 -- -- -- -- -- 140
Purchased funds and long-term
debt 2,060 100 -- -- -- 101 2,261
------ ------ ------- ------ ------ ------- -------
Total interest-bearing
liabilities 3,533 2,112 1,721 1,580 1,137 3,019 13,102
Interest-earning assets less
interest-bearing liabilities 1,675 (485) (1,073) (258) 3,747 (1,685) 1,921
Impact of interest rate swaps (450) (220) -- 50 620 -- --
------ ------ ------- ------ ------ ------- -------
Asset (liability) gap $1,225 $ (705) $(1,073) $ (208) $4,367 $(1,685) $ 1,921
Cumulative asset gap $1,225 $ 520 $ (553) $ (761) $3,606 $ 1,921
Cumulative gap as a percentage
of cumulative earning assets 23.5% 7.6% (7.4)% (8.6)% 26.3% 12.8%
</TABLE>
- ------------------------------
* (The placement of indeterminate maturity deposits on the gap analysis
represents an allocation of 19% of the balances to the 0-30 Days period, 16%
to the 31 -- 90 Days period, and 65% 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, 1998. This difference was funded through non-interest
bearing liabilities and shareholders' equity. The above table shows that total
liabilities maturing or re-pricing within one year exceed assets maturing or re-
pricing within one year by $761 million. However, the re-pricing and cash-flows
of certain categories of assets and liabilities are subject to competitive and
other influences that are beyond the control of Old Kent. As a result, certain
assets and liabilities indicated as maturing or re-pricing within a stated
period may, in fact, mature or re-price 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 potentials. 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
S-30
<PAGE> 32
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 ("ALCO") which has established limits in
the interest rate risk limit policy. Throughout 1998, the forecasted exposure
was within the Corporation's established policy limits.
At December 31, 1997, a maturity table was used to display information about Old
Kent's financial instruments that were subject to market risk. For 1998, the
Corporation elected to present a net interest income sensitivity profile and an
economic value of equity profile because they better reflect the anticipated
impact on earnings and fair values of changes in market interest rates.
Net Interest Income Sensitivity Change Vs. Projected Results Under Constant
Rates
Year-End 1998 12-Month Projection
<TABLE>
<CAPTION>
ALCO
Rate Shock Amount: (2.00%) (1.00%) 0.00% 1.00% 2.00% Policy
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Percent Change In Net
Interest (0.9%) (0.1%) -- (0.3%) (0.9%) (10.00%)
Income Vs. Constant Rates
</TABLE>
Year-End 1997 12-Month Projection
<TABLE>
<CAPTION>
ALCO
Rate Shock Amount: (2.00%) (1.00%) 0.00% 1.00% 2.00% Policy
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Percent Change In Net
Interest 0.8% 0.5% -- (0.5%) (1.3%) (10.00%)
Income Vs. Constant Rates
</TABLE>
An important component of Old Kent's management of interest rate risk is the
Corporation's use of interest rate swaps. At December 31, 1998 the total
notional amount (the amount used to calculate interest) of outstanding interest
rate swap agreements used to manage interest rate risk was $869.9 million. For
1998 and 1997, Old Kent's interest rate swaps increased net interest income by
approximately $5.1 million and $3.1 million respectively. This improved the
Corporation's net interest margin by .03% in 1998 and by .02% in 1997. The
following table presents information regarding swap activity during 1998.
Swap Activity
<TABLE>
<CAPTION>
12/31/97 New Swap 12/31/98
(in millions) Notional Matured Notional Notional
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Receive Fixed/Pay Floating $506.2 $(86.3) $400.0 $819.9
Receive Floating/Pay Fixed 25.0 (25.0) 50.0 50.0
------ ------- ------ ------
$531.2 $(111.3) $450.0 $869.9
====== ======= ====== ======
</TABLE>
S-31
<PAGE> 33
Swap Maturity Profile
Notional amounts of swaps are anticipated to mature as follows, assuming that
market rates in effect at December 31, 1998 remain unchanged:
<TABLE>
<CAPTION>
(in millions) 1999 2000 2001 2002 2003+ Total
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Receive Fixed/Pay Floating $150.0 $400.0 $144.9 $125.0 $ -- $819.9
Receive Floating/Pay Fixed -- -- -- -- 50.0 50.0
</TABLE>
The weighted average interest rates for the above swap portfolio are summarized
as follows:
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
------------------------ ------------------------
Receive Rate Pay Rate Receive Rate Pay Rate
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Receive Fixed/Pay Floating 6.34% 5.30% 6.71% 5.82%
Receive Floating/Pay Fixed 5.34% 5.48% 5.84% 7.17%
</TABLE>
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, 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 adjusted for 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 1998, the estimated variability of
the economic value of equity was within the Corporation's established policy
limits.
S-32
<PAGE> 34
Economic Value of Equity Sensitivity Change Vs. Results Under Constant Rates
Year-End 1998 Economic Value of Equity Profile
<TABLE>
<S> <C> <C> <C> <C>
ALCO
Rate Shock Amount: (2.00%) 0.00% 2.00% Policy
- ------------------------------------------------------------------------------------------
Static Economic Value of Equity Change (9.4%) -- (1.9%) (16.0%)
</TABLE>
Year-End 1997 Economic Value of Equity Profile
<TABLE>
<S> <C> <C> <C> <C>
ALCO
Rate Shock Amount: (2.00%) 0.00% 2.00% Policy
- ------------------------------------------------------------------------------------------
Static Economic Value of Equity Change (5.1%) -- (2.0%) (16.0%)
</TABLE>
Note: The Year-End 1997 Economic Value of Equity Profile has not been restated
to include First Evergreen Corporation. The required data was not available and
it was impracticable to re-create the analysis for that entity.
The Corporation's projected net interest income sensitivity and economic value
of equity sensitivity both indicate a slightly greater exposure to a downward
2.00% rate shock at December 31, 1998 than at December 31, 1997. This is
primarily due to an expected acceleration of projected prepayment speeds for
mortgage-related assets. The estimated sensitivity as of December 31, 1998 is
well within approved policy limits and does not 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 of 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 1998, net gains on the sale of securities were $4.1 million. This compares to
net gains of $1.2 million in 1997 and $1.3 million in 1996.
S-33
<PAGE> 35
Sources and Uses of Funds Trends
As shown on the accompanying consolidated balance sheets, total assets at
December 31, 1998 were $16.6 billion, up by $.9 billion, or 5.6%, from the
preceding year-end. In general, Old Kent's management relies more on the use of
daily average balances, rather than on balances at a period end, to analyze
trends. Old Kent's average consolidated balance sheets for the last five years
appears on page S-13 of this report. Information contained in that statement was
the basis for the summarized trends in sources and uses of funds appearing
below.
<TABLE>
<CAPTION>
1998 1997
----------------------------------- -----------------------------------
Increase (Decrease) Increase (Decrease)
Average -------------------- Average --------------------
(dollars in millions) Balance Amount Percent Balance Amount Percent
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Funding Uses:
Loans $ 8,900.6 $(161.8) (1.8)% $ 9,062.4 $ 687.1 8.2%
Mortgages
held-for-sale 1,745.7 863.6 97.9 882.1 $ 515.7 140.7
Taxable securities 3,504.2 (161.9) (4.4) 3,666.1 $(233.4) (6.0)
Tax-exempt securities 358.8 38.1 11.9 320.7 $ (4.4) (1.4)
Interest-earning
deposits 16.4 .7 4.5 15.7 $ 7.0 80.5
Federal funds sold and
resale agreements 38.0 (88.0) (69.8) 126.0 $ (8.0) (6.0)
Trading account
securities 13.6 (7.9) (36.7) 21.5 $ 11.2 108.7
--------- ------- ----- --------- ------- -----
Total Uses $14,577.3 $ 482.8 3.4% $14,094.5 $ 975.2 7.4%
========= ======= ===== ========= ======= =====
Funding Sources:
Demand deposits $ 1,888.1 $ 201.3 11.9% $ 1,686.8 $ 112.7 7.2%
Savings deposits 4,013.3 302.9 8.2 3,710.4 (1.6) (0.0)
Time deposits:
Negotiable 1,080.1 5.9 .5 1,074.2 (204.2) (16.0)
Foreign 37.4 (1.4) (3.6) 38.8 (8.0) (17.1)
Consumer 5,142.7 (313.6) (5.7) 5,456.3 638.9 13.3
Federal funds
purchased and
repurchase
agreements 980.7 263.9 36.8 716.8 181.9 34.0
Other borrowed funds 1,093.7 229.4 26.5 864.3 229.3 36.1
Long-term debt 200.0 8.2 4.3 191.8 90.8 91.8
Other 141.3 (213.8) (60.2) 355.1 (64.6) (15.4)
--------- ------- ----- --------- ------- -----
Total Sources $14,577.3 $ 482.8 3.4% $14,094.5 $ 975.2 7.4%
========= ======= ===== ========= ======= =====
</TABLE>
During 1998, mortgages held-for-sale averaged $1.7 billion, an increase of 98%
over 1997. The primary funding sources to accommodate this growth were higher
demand and savings deposit balances as well as federal funds purchased,
repurchase agreements and other borrowed funds. Dependent upon economic
conditions and management strategies employed by the Corporation, mortgages
held-for-sale may significantly increase or decrease from period to period.
Lower interest rates over the years preceding 1994 had an effect on the relative
mix in Old Kent's core deposits. During the periods of lower rates, consumer
time deposits have grown to become a proportionally greater component of average
core deposits as shown in the table below. Because
S-34
<PAGE> 36
consumer time deposits typically pay interest at rates higher than savings and
demand deposits, the growth in consumer time deposits has had the effect of
increasing interest expense in years after 1994.
<TABLE>
<CAPTION>
Based on annual averages
-------------------------------------------------
Relative core deposit mix 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Demand deposits 15.5% 14.1% 13.8% 13.5% 13.3%
Savings deposits 33.0 31.0 32.5 35.7 42.5
Consumer time deposits 51.5 54.9 53.7 50.8 44.2
----- ----- ----- ----- -----
Total core deposits 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
Quarterly Financial Data
The following is a summary of selected quarterly results of operations for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
(in thousands, except per share data) Three Months Ended
- --------------------------------------------------------------------------------------------
1998 March 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income $294,299 $290,234 $282,235 $289,662
Net Interest Income 148,016 144,800 145,406 149,660
Provision for Credit Losses 15,381 11,858 8,567 11,023
Income Before Income Taxes 79,042 84,791 82,874 58,040
Net Income 51,523 54,834 54,580 37,861
Basic Earnings Per Share $.47 $.51 $.51 $.36
Diluted Earnings Per Share $.47 $.50 $.51 $.36
</TABLE>
<TABLE>
<CAPTION>
(in thousands, except per share data) Three Months Ended
- --------------------------------------------------------------------------------------------
1997 March 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income $276,009 $287,191 $290,694 $292,652
Net Interest Income 143,062 146,405 147,042 146,199
Provision for Credit Losses 10,371 12,041 11,939 12,626
Income Before Income Taxes 69,209 88,130 73,938 72,996
Net Income 45,531 57,432 48,126 47,329
Basic Earnings Per Share $.40 $.51 $.43 $.43
Diluted Earnings Per Share $.40 $.51 $.43 $.42
</TABLE>
As previously discussed, during fourth quarter 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 $57.5 million, and diluted
earnings per share would have been $.18 higher.
S-35
<PAGE> 37
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 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-37.
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, 1998, in all material respects, the Corporation
maintained an effective internal control structure over financial reporting.
David J. Wagner
David J. Wagner
Chairman, President and
Chief Executive Officer
Robert H. Warrington
Robert H. Warrington
Vice Chairman and
Chief Financial Officer
Janet S. Nisbett
Janet S. Nisbett
Senior Vice President and
Controller
S-36
<PAGE> 38
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, 1998 and 1997, and the related consolidated statements of income, cash flows
and shareholders' equity for each of the three years in the period ended
December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois
January 14, 1999
S-37
<PAGE> 39
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31, December 31,
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 615,845 $ 547,319
Federal funds sold and resale agreements 9,230 127,330
----------- -----------
Total cash and cash equivalents 625,075 674,649
Interest-earning deposits 5,044 2,153
Trading account securities 349,090 986
Mortgages held-for-sale 2,262,696 1,271,784
Securities available-for-sale:
Collateralized mortgage obligations and other
mortgage-backed securities 1,819,122 1,403,726
Other securities 947,574 782,607
----------- -----------
Total securities available-for-sale (amortized cost of
$2,735,301 and $2,184,391 respectively) 2,766,696 2,186,333
Securities held-to-maturity:
Collateralized mortgage obligations and other
mortgage-backed securities 180,369 952,202
Other securities 623,376 797,805
----------- -----------
Total securities held-to-maturity (market values of
$823,610 and $1,766,832 respectively) 803,745 1,750,007
Loans 8,883,716 9,144,497
Allowance for credit losses (167,665) (160,952)
----------- -----------
Net loans 8,716,051 8,983,545
----------- -----------
Premises and equipment 220,981 220,587
Other assets 839,480 616,571
----------- -----------
TOTAL ASSETS $16,588,858 $15,706,615
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Non-interest-bearing $ 2,098,446 $ 1,858,990
Interest-bearing 10,700,895 10,039,905
Foreign deposits - interest-bearing 140,077 30,012
----------- -----------
Total deposits 12,939,418 11,928,907
Other borrowed funds 2,061,142 2,090,095
Other liabilities 253,188 262,018
Long term debt 200,000 200,000
----------- -----------
TOTAL LIABILITIES 15,453,748 14,481,020
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock: 25,000,000 shares authorized and
unissued -- - -
Common stock, $1 par value: 300,000,000 shares authorized;
104,498,649 and 105,604,936 shares issued and outstanding 104,499 105,605
Capital surplus 139,736 198,857
Retained earnings 870,468 919,870
Accumulated other comprehensive income 20,407 1,263
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 1,135,110 1,225,595
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $16,588,858 $15,706,615
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statement are an integral part
of these statements.
S-38
<PAGE> 40
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year ended December 31
(dollars in thousands, except per share data) 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 788,103 $ 814,341 $ 762,619
Interest on mortgages held-for-sale 120,647 66,668 28,374
Interest on securities available-for-sale 152,428 133,644 138,101
Interest on securities held-to-maturity 91,768 122,970 133,049
Interest on deposits 809 824 496
Interest on federal funds sold and resale
agreements 2,079 6,900 7,268
Interest on trading account securities 596 1,199 527
----------- ----------- -----------
Total interest income 1,156,430 1,146,546 1,070,434
----------- ----------- -----------
INTEREST EXPENSE:
Interest on domestic deposits 443,281 461,471 444,829
Interest on foreign deposits 2,007 2,113 2,685
Interest on other borrowed funds 109,779 87,228 64,321
Interest on long term obligations 13,481 13,026 6,726
----------- ----------- -----------
Total interest expense 568,548 563,838 518,561
----------- ----------- -----------
NET INTEREST INCOME 587,882 582,708 551,873
PROVISION FOR CREDIT LOSSES 46,828 46,977 35,636
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT
LOSSES 541,054 535,731 516,237
----------- ----------- -----------
OTHER INCOME:
Mortgage banking revenue -- net 146,979 94,423 57,830
Investment management and trust revenues 63,351 54,257 46,891
Deposit account revenue 56,728 49,657 45,779
Transaction processing revenue 20,409 13,799 13,937
Insurance sales commissions 20,050 14,212 12,397
ATM fees 7,439 6,068 2,734
Brokerage commissions 3,439 1,559 1,420
Securities transactions 4,142 1,232 1,322
Non-recurring income 4,963 14,660 6,783
Other 20,400 26,645 26,479
----------- ----------- -----------
Total other income 347,900 276,512 215,572
----------- ----------- -----------
OTHER EXPENSES:
Salaries and employee benefits 298,990 273,869 234,095
Occupancy 42,078 39,377 34,317
Equipment 36,689 32,574 27,414
Professional services 28,642 21,532 17,894
Telephone and telecommunications 17,989 14,758 11,698
Postage and courier 15,426 13,819 13,230
Stationery and supplies 14,975 12,639 10,817
Amortization of goodwill and intangibles 14,240 14,254 10,951
Advertising and promotion 9,233 10,262 25,390
Taxes other than income 4,831 6,788 8,032
FDIC deposit insurance 1,586 1,520 2,460
Merger related charges 24,993 - -
Other 74,534 66,578 65,481
----------- ----------- -----------
Total other expenses 584,206 507,970 461,779
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 304,748 304,273 270,030
Income taxes 105,950 105,855 90,637
----------- ----------- -----------
NET INCOME $ 198,798 $ 198,418 $ 179,393
=========== =========== ===========
Average number of shares used to compute:
Basic earnings per share 107,145,708 112,555,481 115,403,935
Diluted earnings per share 108,079,477 113,360,894 116,177,830
Basic earnings per share $1.86 $1.76 $1.55
Diluted earnings per share $1.84 $1.75 $1.54
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
S-39
<PAGE> 41
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
(dollars in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 198,798 $ 198,418 $ 179,393
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for credit losses 46,828 46,977 35,636
Depreciation, amortization and accretion 52,864 56,899 70,576
Deferred income taxes 16,597 20,099 (1,552)
Net gains on sales of assets (168,423) (91,183) (47,090)
Net change in trading account securities (347,910) 61,523 (5,058)
Originations and acquisitions of mortgages
held-for-sale (13,547,917) (6,878,737) (3,409,276)
Proceeds from sales and prepayments of
mortgages held-for-sale and other retained
interests 12,532,456 6,265,742 3,236,859
Net change in other assets 77,316 (82,752) (30,050)
Net change in other liabilities (15,682) (24,243) (7,083)
------------ ----------- -----------
Net cash provided by (used for) operating
activities (1,155,073) (427,257) 22,355
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and prepayments of
securities available-for-sale 181,724 166,065 342,487
Proceeds from sales of securities
available-for-sale 542,522 3,196,180 4,647,454
Purchases of securities available-for-sale (1,277,467) (3,421,587) (4,715,288)
Proceeds from maturities and prepayments of
securities held-to-maturity 1,105,076 802,948 522,015
Proceeds from sales of securities
held-to-maturity - - 860
Purchases of securities held-to-maturity (307,954) (663,796) (482,766)
Net change in interest-earning deposits (2,891) (1,350) 174,611
Proceeds from sale of loans 141,102 351,112 -
Net change in loans 83,654 (592,319) (833,613)
Purchases of leasehold improvements, premises
and equipment, net (28,530) (37,065) (24,641)
Acquisition of business units (net of cash
acquired) - 17,204 (23,598)
Sale of business units (net of cash sold) - 1,234 7,123
------------ ----------- -----------
Net cash provided by (used for) investing
activities 437,236 (181,374) (385,356)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in time deposits 36,061 (183,004) 882,104
Change in demand and savings deposits 974,431 34,114 (42,721)
Change in other borrowed funds (28,953) 836,994 (175,934)
Proceeds from issuance of capital securities - 100,000 -
Repurchases of common stock (248,812) (190,189) (136,307)
Proceeds from common stock issuances 20,519 10,799 10,421
Dividends paid to shareholders (84,983) (70,887) (65,163)
------------ ----------- -----------
Net cash provided by financing activities 668,263 537,827 472,400
------------ ----------- -----------
Net change in cash and cash equivalents (49,574) (70,804) 109,399
Cash and cash equivalents at beginning of year 674,649 745,453 636,054
------------ ----------- -----------
Cash and cash equivalents at December 31 $ 625,075 $ 674,649 $ 745,453
</TABLE>
S-40
<PAGE> 42
<TABLE>
<CAPTION>
Year ended December 31
(dollars in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid on deposits, other borrowed
funds and long-term debt $ 566,193 $ 567,898 $ 520,582
Income taxes paid 87,222 80,588 93,121
Significant non-cash transactions:
Stock dividend issued 163,011 124,009 83,596
Stock issued to acquire businesses - 76,938 8,431
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
S-41
<PAGE> 43
Consolidated Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Accumulated Total
Other Share-
Comprehensive Common Capital Retained Comprehensive holders'
(dollars in thousands, except per share data) Income Stock Surplus Earnings Income Equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 AS PREVIOUSLY REPORTED $ 45,383 $ 200,101 $767,085 $ 3,367 $1,015,936
Adjustment to record merger of First Evergreen
Corporation on a pooling-of-interest basis 12,901 (4,908) 165,629 196 173,818
-------- --------- -------- -------- ----------
Restated balance at January 1, 1996 58,284 195,193 932,714 3,563 1,189,754
-------- --------- -------- -------- ----------
Net income for the year $179,393 179,393 179,393
Unrealized loss on securities, net of $7,900 tax
benefit (14,740) (14,740) (14,740)
--------
Total Comprehensive income $164,653
========
Cash dividends:
$ .576 per common share (59,122) (59,122)
Cash dividends paid by pooled affiliate (6,041) (6,041)
Common stock issued in payment of 5% stock dividend
-- 2,229,606 shares (cash in lieu of fractionals
-- $238,000) 2,230 81,366 (83,834) (238)
Common stock issued for Republic Mortgage
Corporation acquisition -- 216,160 shares 216 8,215 8,431
Common stock repurchased for dividend reinvestment
plans, employee stock plans, acquisitions, stock
dividends and other purposes -- 3,378,035 shares (3,378) (132,929) (136,307)
Common stock issued under dividend reinvestment
plan, employee stock plans, and other -- 456,953
shares 457 13,464 13,921
Tax benefit relating to employee stock plans 5,146 5,146
-------- --------- -------- -------- ----------
BALANCE AT DECEMBER 31, 1996 57,809 170,455 963,110 (11,177) 1,180,197
-------- --------- -------- -------- ----------
Net income for the year $198,418 198,418 198,418
Unrealized gains on securities, net of $6,700 taxes 12,440 12,440 12,440
--------
Total Comprehensive income $210,858
========
Cash dividends:
$ .641 per common share (64,059) (64,059)
Cash dividends paid by pooled affiliate (6,828) (6,828)
Common stock issued in payment of 5% stock dividend
-- 2,269,430 shares (cash in lieu of fractionals
-- $315,000) 2,270 121,739 (124,324) (315)
Common stock issued for Seaway Financial
Corporation acquisition -- 1,924,177 shares 1,924 69,843 71,767
Common stock issued for Grand Rapids Holland
Insurance Agency, Inc. acquisition -- 86,246
shares 86 5,085 5,171
Common stock repurchased for dividend reinvestment
plans, employee stock plans, acquisitions, stock
dividends and other purposes -- 3,462,228 shares (3,462) (186,727) (190,189)
Common stock issued under dividend reinvestment
plan, employee stock plans, and other -- 530,614
shares 531 13,485 14,016
Common stock issued in payment of 2-for-1 stock
split -- 46,447,461 shares 46,447 (46,447)
Tax benefit relating to employee stock plans 4,977 4,977
-------- --------- -------- -------- ----------
BALANCE AT DECEMBER 31, 1997 105,605 198,857 919,870 1,263 1,225,595
-------- --------- -------- -------- ----------
Net income for the year $198,798 198,798 198,798
Unrealized gains on securities, net of $10,300
taxes 19,144 19,144 19,144
--------
Total Comprehensive income $217,942
========
Cash dividends:
$ .722 per common share (70,971) (70,971)
Cash dividends paid by pooled affiliate (14,012) (14,012)
Common stock issued in payment of 5% stock dividend
-- 4,489,497 shares (cash in lieu of fractionals
-- $206,000) 4,489 158,522 (163,217) (206)
Common stock repurchased for dividend reinvestment
plans, employee stock plans, acquisitions, stock
dividends and other purposes -- 6,433,299 shares (6,433) (242,379) (248,812)
Common stock issued under dividend reinvestment
plan, employee stock plans, and other -- 837,808
shares 838 21,218 22,056
Tax benefit relating to employee stock plans 3,518 3,518
-------- --------- -------- -------- ----------
BALANCE AT DECEMBER 31, 1998 $104,499 $ 139,736 $870,468 $ 20,407 $1,135,110
======== ========= ======== ======== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
S-42
<PAGE> 44
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 202 full service offices
throughout Michigan, 33 such offices in the metropolitan markets in and around
Chicago, Illinois, and one such office in Elkhart, Indiana. It also operates a
mortgage banking company with 143 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 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 statements
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 classified as other income in the consolidated
statements 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, is included in interest income on the accompanying consolidated statement
of income.
S-43
<PAGE> 45
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Mortgage Banking Activities
The Corporation routinely sells to investors its originated residential mortgage
loans, as well as those acquired from third parties. The Corporation may or may
not retain the servicing rights related to the mortgages sold. 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 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
S-44
<PAGE> 46
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 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. Any gains realized on dispositions are
included in other 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 sheets, since such assets are not owned
by the Corporation.
Pension Benefits
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 a noncontributory, nonqualified pension plan for certain
participants whose retirement benefit payments under the qualified plan are
expected to exceed the limits imposed by the Internal Revenue Code. Old Kent
maintains nonqualified trusts, referred to as "rabbi" trusts, primarily to fund
and secure the benefits in excess of those permitted in certain of the Old Kent
qualified pension
S-45
<PAGE> 47
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Hence, they are accounted for as assets of the Corporation with a corresponding
liability in the consolidated balance sheets.
Retirement Savings Plans
Old Kent maintains a defined contribution retirement savings plan covering
substantially all employees. The Corporation's contribution is 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 plans. 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 statements 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
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting the components of
comprehensive income. Comprehensive income consists of net income and
adjustments to available-for-sale securities and is presented in the
Consolidated Statement of Shareholders' Equity. The adoption of SFAS 130 had no
impact on total equity. Prior year financial statements have been restated to
conform with SFAS 130 requirements.
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 hedged
item.
Old Kent uses forward sale agreements and options on forward sale agreements to
protect the value of residential loan commitments, loans held for sale and
related mortgage backed securities held in the
S-46
<PAGE> 48
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
sale of loans.
Old Kent uses Treasury futures and options on treasury futures to help protect
against market value changes in the mortgage servicing right ("MSR") portfolio.
The fair value of the hedges are recorded as an adjustment to the carrying
amount of the MSR with a corresponding adjustment to cash or other receivables
or payables. If terminated, the realized gain or loss on the hedge is included
in MSR amortization over the estimated life of the loan servicing that had been
hedged. Option premiums paid or received are deferred as a component of other
assets and amortized as MSR amortization over the contract term.
Derivative financial instruments, such as caps and floors, that do not meet the
required criteria are carried on the balance sheet at fair value with realized
and unrealized changes in that value recognized in earnings. If the hedged item
is sold or its outstanding balance otherwise declines below that of the related
hedging instrument, the derivative product (or applicable excess portion
thereof) is marked-to-market and the resulting gain or loss is included in
earnings.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or a liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
Statement 133 is effective beginning January 1, 2000. A company may also
implement the Statement as of the beginning of any fiscal quarter after issuance
(that is, fiscal quarters beginning June 16, 1998 and thereafter). Statement 133
cannot be applied retroactively. Statement 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1997
(and, at Old Kent's election, those issued or acquired before January 1, 1998).
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.
The Financial Accounting Standards Board issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise: an amendment of FASB Statement
No. 65," which was adopted on January 1, 1999. This statement requires that
after the securitization of a mortgage loan held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities or
other retained interests based on its ability and intent to sell or hold those
investments. This statement conforms the subsequent accounting for securities
retained after the securitization of mortgage loans held by a mortgage banking
entity with the required accounting for securities retained after the
securitization of other types of assets
S-47
<PAGE> 49
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
by a non-mortgage banking enterprise. In the opinion of management, the adoption
of this statement will not materially impact the Corporation's Consolidated
Financial Statements.
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 AND DISPOSITIONS
On October 1, 1998, Old Kent completed the merger of First Evergreen Corporation
("First Evergreen") into Old Kent. When acquired, First Evergreen had assets of
approximately $1.9 billion 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 32.0312 shares of Old Kent Common Stock for each share of First
Evergreen stock. The issuance totaled approximately 12.8 million shares. 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
$.18. On a pre-tax basis, the charges consisted of transaction costs of $6.0
million, employment charges of $9.4 million primarily related to 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. Excluding the special credit loss provision, Old Kent's
unexpended reserves for these charges was $11.7 million at December 31, 1998.
These reserves are expected to be utilized during 1999. 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 of the outstanding common stock of GRH. When acquired, GRH had
assets of approximately $6.2 million. This acquisition was accounted for as a
purchase. Accordingly, the results of operations of GRH are included in Old
Kent's consolidated results of operations from the date of acquisition. Had this
purchase been effective January 1, 1996, there would have been no material
effect on Old Kent's consolidated results of operations and financial condition.
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. This
acquisition was accounted for as a purchase. Accordingly, the results of
Seaway's operations are included in Old Kent's consolidated results of
operations from the date of acquisition. If this purchase had been effective
January 1, 1996, there would have been no material effect on Old Kent's
consolidated results of operations and financial condition.
During January, 1997, Old Kent sold its commercial mortgage banking subsidiary,
Hartger & Willard Mortgage Associates, Inc., for approximately $1.3 million in
cash.
S-48
<PAGE> 50
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 $52.4 million during 1998 and
$51.2 million during 1997.
At December 31, 1998, securities having an aggregate amortized cost of
approximately $1.4 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 $646 million in
1998, and $583 million in 1997. The maximum amount of outstanding agreements at
any month-end during 1998 was $689 million. The average Securities Purchased
Under Agreements to Resell was $2 million in 1997. 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, 1998 and 1997:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1998 (in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and federal agency securities $ 726,839 $21,576 $ 42 $ 748,373
Collateralized mortgage obligations:
U.S. Government issued 1,301,667 8,661 1,817 1,308,511
Privately issued 365,343 2,055 902 366,496
Mortgage-backed pass-through securities 143,449 1,230 564 144,115
Other securities 198,003 1,659 461 199,201
---------- ------- ------ ----------
Total $2,735,301 $35,181 $3,786 $2,766,696
========== ======= ====== ==========
December 31, 1997 (in thousands)
- ----------------------------------------------------------------------------------------------------
U.S. Treasury and federal agency securities $ 663,772 $ 2,186 $2,465 $ 663,493
Collateralized mortgage obligations:
U.S. Government issued 1,030,220 5,830 2,337 1,033,713
Privately issued 237,363 1,066 2,688 235,741
Mortgage-backed pass-through securities 134,127 280 135 134,272
Other securities 118,909 205 - 119,114
---------- ------- ------ ----------
Total $2,184,391 $ 9,567 $7,625 $2,186,333
========== ======= ====== ==========
</TABLE>
S-49
<PAGE> 51
NOTE 4. SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
The amortized cost and market values of securities available-for-sale at
December 31, 1998, 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.
<TABLE>
<CAPTION>
Estimated
Amortized Market
December 31, 1998 (in thousands) Cost Value
- ----------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury and federal agency securities:
Due in one year or less $ 77,503 $ 78,901
Due after one year through five years 484,311 494,745
Due after five years through ten years 140,360 146,794
Due after ten years 24,665 27,933
---------- ----------
Total U.S. Treasury and federal agency securities 726,839 748,373
Collateralized mortgage obligations and other
mortgage-backed securities 1,810,459 1,819,122
Other securities 198,003 199,201
---------- ----------
Total $2,735,301 $2,766,696
========== ==========
</TABLE>
NOTE 5. SECURITIES HELD-TO-MATURITY
The following summarizes amortized cost and market values of securities
held-to-maturity at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1998 (in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 935 - - 935
---------- ------- ------ ----------
Total $ 803,745 $20,804 $ 939 $ 823,610
========== ======= ====== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997 (in thousands)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and federal agency
securities $ 466,989 $ 8,217 $ 187 $ 475,019
Collateralized mortgage obligations:
U.S. Government issued 634,597 1,636 4,738 631,495
Privately issued 126,492 428 992 125,928
Mortgage-backed pass-through securities 191,113 1,958 1,634 191,437
State and political subdivision
securities 323,551 13,619 1,482 335,688
Other securities 7,265 - - 7,265
---------- ------- ------ ----------
Total $1,750,007 $25,858 $9,033 $1,766,832
========== ======= ====== ==========
</TABLE>
S-50
<PAGE> 52
The amortized cost and market values of securities held-to-maturity at December
31, 1998, 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.
<TABLE>
<CAPTION>
Estimated
Amortized Market
December 31, 1998 (in thousands) Cost Value
- -----------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury and federal agency securities:
Due in one year or less $110,795 $112,235
Due after one year through five years 8,006 8,100
Due after five years through ten years 63,563 64,402
-------- --------
Total U.S. Treasury and federal agency securities 182,364 184,737
-------- --------
State and Political subdivision securities:
Due in one year or less 30,602 31,437
Due after one year through five years 129,794 134,581
Due after five years through ten years 128,275 134,467
Due after ten years 151,406 155,472
-------- --------
Total state and political subdivision securities 440,077 455,957
Collateralized mortgage obligations and other
mortgage-backed securities 180,369 181,981
Other 935 935
-------- --------
Total $803,745 $823,610
======== ========
</TABLE>
NOTE 6. LOANS AND NONPERFORMING ASSETS
The following summarizes loans:
<TABLE>
<CAPTION>
December 31 (in thousands) 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Commercial $2,727,892 $2,674,119
Real estate -- Commercial 1,920,107 1,909,599
Real estate -- Construction 693,958 571,639
Real estate -- Residential mortgages 1,012,510 1,173,166
Real estate -- Consumer home equity 1,031,312 925,004
Consumer 1,334,374 1,717,823
Credit card loans - 1,694
Lease financing 163,563 171,453
---------- ----------
Total Loans $8,883,716 $9,144,497
========== ==========
</TABLE>
Loans made by Old Kent to its directors and executive officers, including their
family members and associated entities, aggregated $54 million and $71 million
at December 31, 1998 and 1997, respectively. During 1998, new loans and other
additions amounted to $65 million and repayments and other reductions were $82
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-51
<PAGE> 53
NOTE 6. LOANS AND NONPERFORMING ASSETS (CONTINUED)
The table below summarizes impaired loans and other nonperforming assets:
<TABLE>
<CAPTION>
December 31 (in thousands) 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans:
Nonaccrual loans $57,120 $54,319
Restructured loans 2,664 2,688
------- -------
Total impaired loans 59,784 57,007
Other real estate owned 6,872 7,619
------- -------
Total nonperforming assets $66,656 $64,626
======= =======
</TABLE>
Loans past due 90 days or more for which interest income continues to be
recognized totaled $15.1 million and $16.8 million at December 31, 1998 and
1997, respectively. Gross interest income that would have been recorded in 1998
for nonaccrual and restructured loans as of December 31, 1998, assuming interest
had been accrued throughout the year in accordance with original terms, was $5.9
million. The comparable total for 1997 was $4.5 million. The amount of interest
included in income on these loans was $2.1 million and $2.0 million in 1998 and
1997, respectively. During the years 1998 and 1997, impaired loans averaged
$67.1 million and $48.9 million, respectively. At December 31, 1998 and 1997,
there was no specific valuation allowance associated with impaired loans.
At December 31, 1998, the Corporation's management has also identified loans
totaling approximately $20.7 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, 1998, 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:
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $160,952 $168,990 $178,064
Additions:
Provision charged to operations 46,828 46,977 35,636
Business acquisitions and loan purchases - 3,184 41
-------- -------- --------
Total additions 46,828 50,161 35,677
-------- -------- --------
Deductions:
Credit losses (56,304) (65,766) (57,722)
Less recoveries 16,664 16,162 14,151
-------- -------- --------
Net credit losses (39,640) (49,604) (43,571)
Loan sales and other dispositions (475) (8,595) (1,180)
-------- -------- --------
Total deductions (40,115) (58,199) (44,751)
-------- -------- --------
Balance at end of year $167,665 $160,952 $168,990
======== ======== ========
</TABLE>
S-52
<PAGE> 54
NOTE 8. PREMISES AND EQUIPMENT
The following summarizes premises and equipment:
<TABLE>
<CAPTION>
December 31 (in thousands) 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Land $ 34,951 $ 35,333
Land improvements 9,367 8,570
Buildings and improvements 204,603 208,122
Leasehold improvements 24,716 21,254
Furniture and equipment 191,097 173,209
-------- --------
464,734 446,488
Less accumulated depreciation and amortization 243,753 225,901
-------- --------
Net premises and equipment $220,981 $220,587
======== ========
</TABLE>
NOTE 9. OTHER ASSETS
Other assets shown on the consolidated balance sheet include the following
intangible assets (net of accumulated amortization):
<TABLE>
<CAPTION>
December 31 (in thousands) 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Goodwill $102,538 $112,253
Core deposit intangibles 19,452 23,130
-------- --------
Total $121,990 $135,383
======== ========
</TABLE>
Other assets shown on the consolidated balance sheet include mortgage servicing
rights ("MSRs") as follows:
<TABLE>
<CAPTION>
December 31 (in thousands) 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
MSRs, net of amortization $227,625 $150,988
Less servicing impairment reserve (9,129) (4,629)
-------- --------
Carrying value of MSRs $218,496 $146,359
======== ========
Estimated aggregate fair value of capitalized MSRs $253,000 $166,000
======== ========
</TABLE>
The estimated fair values shown above for these MSRs, as well as those which had
been capitalized, were determined based upon quoted market prices for comparable
transactions, where available, or the present value of expected future cash
flows.
S-53
<PAGE> 55
NOTE 9. OTHER ASSETS (CONTINUED)
The following reflects capitalized mortgage servicing rights and related
impairment transactions for the years indicated:
<TABLE>
<CAPTION>
Year Ended December 31, (in thousands) 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
MSRs:
Balance at beginning of period $150,988 $100,588
Additions 201,711 111,192
Sales (73,740) (30,457)
Amortization (51,334) (30,335)
-------- --------
Balance at end of period $227,625 $150,988
======== ========
Related impairment reserve:
Balance at beginning of period $ (4,629) $ (4,482)
Servicing impairment provision (4,500) (147)
-------- --------
Balance at end of period $ (9,129) $ (4,629)
======== ========
</TABLE>
NOTE 10. OTHER BORROWED FUNDS
The following summarizes other borrowed funds:
<TABLE>
<CAPTION>
December 31 (in thousands) 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Bank notes $ 250,000 $ 960,500
Securities sold under agreements to repurchase 656,023 623,305
Treasury tax and loan demand notes 30,209 90,273
Federal funds purchased 494,200 189,670
Federal Home Loan Bank advances 525,000 100,000
Other borrowed funds 105,710 126,347
---------- ----------
Total other borrowed funds $2,061,142 $2,090,095
========== ==========
</TABLE>
The $250.0 million in bank notes mature during 1999 and pay floating interest
rates based upon Prime and three-month LIBOR.
The Federal Home Loan Bank advances all pay floating interest rates and mature
as follows:
<TABLE>
<CAPTION>
Advance Amount Maturity Date Rate Calculations
- -----------------------------------------------------------
<C> <C> <S>
$125,000 02/26/2001 Three-month LIBOR - .13%
200,000 12/03/2001 Federal funds + .20%
100,000 12/09/2002 Federal funds + .20%
100,000 12/09/2003 Federal funds + .20%
</TABLE>
NOTE 11. LONG TERM DEBT
Long term debt, as shown in the accompanying consolidated balance sheets,
consists of the following:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Subordinated notes, 6 5/8% due November 15, 2005 $100,000 $100,000
Capital securities, as described below 100,000 100,000
-------- --------
Total long term debt $200,000 $200,000
======== ========
</TABLE>
S-54
<PAGE> 56
On January 31, 1997, Old Kent issued a floating rate junior subordinated
debenture (the "Debenture") having a principal amount of $103,092,784 to Old
Kent Capital Trust I (the "Trust"). Cumulative interest on the principal sum of
the Debenture accrues from January 31, 1997, and it is payable quarterly in
arrears on the first day of February, May, August and November of each year at a
variable rate per annum equal to LIBOR (London Interbank Offering Rate) plus
.80% until paid. Interest is computed on the actual number of days elapsed in a
year of twelve 30 day months. The Debentures rank subordinate and junior in
right of payment to all indebtedness (as defined) of Old Kent. The Debenture
matures on February 1, 2027, but may be redeemed in whole or in part beginning
on February 1, 2007, or earlier upon the occurrence of certain special events
defined in the Indenture governing the Debenture.
On January 31, 1997, the Trust sold Floating Rate Subordinated Capital Income
Securities ("Preferred Securities") having an aggregate liquidation amount of
$100 million to investors and issued Common Capital Securities ("Common
Securities") having an aggregate liquidation amount of $3,092,784 to Old Kent.
All of the proceeds from 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. Proceeds from the sale of the
Debenture to the Trust were available for general corporate purposes, including
repurchase of shares.
NOTE 12. PREFERRED STOCK AND PREFERRED STOCK PURCHASE RIGHTS
At December 31, 1998 and 1997, there were 25,000,000 shares of preferred stock
authorized but not issued. At December 31, 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, 1998 and 1997, 1,000,000
shares of authorized but unissued preferred stock were designated Series C
Preferred Stock.
On December 31, 1998, approximately 46.4 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 and 1998, each share of
the Corporation's common stock carried .4533 of a Series C Right at December 31,
1998. 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
S-55
<PAGE> 57
NOTE 12. PREFERRED STOCK AND PREFERRED STOCK PURCHASE RIGHTS (CONTINUED)
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
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 .4533 of a Right (subject to
possible future adjustment) with each newly issued share of common stock.
NOTE 13. COMMON STOCK
During the three years ended December 31, 1998, the Corporation has issued
shares for stock dividends as follows:
<TABLE>
<CAPTION>
Amount of Number of Payment Record Declaration
Year Stock Dividend Shares Issued Date Date Date
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 5 percent 4,489,497 July 17 June 26 June 15
1997 5 percent 2,269,430 July 28 June 27 June 16
1996 5 percent 2,229,606 July 25 June 25 June 17
</TABLE>
On December 15, 1997, the Corporation issued 46,447,461 shares of its common
stock in a two-for-one stock split, effected as a 100 percent stock dividend, to
shareholders of record 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
benefit 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 benefit plans and other corporate purposes.
The table below summarizes shares repurchased and reserved with the intent of
future reissuance at December 31, 1998:
<TABLE>
<CAPTION>
Dividend
Reinvestment General
Stock and Employee Corporate
Total Dividends Stock Plans Purposes
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares reserved at December 31, 1997 3,189,543 1,920,000 1,269,543 -
Shares repurchased under authorizations 6,428,975 5,169,497 766,160 493,318
Shares issued for related stated
purposes (5,816,848) (4,489,497) (834,033) (493,318)
---------- ---------- --------- --------
Shares reserved at December 31, 1998 3,801,670 2,600,000 1,201,670 0
========== ========== ========= ========
</TABLE>
Of the 6.4 million shares repurchased during 1998, 3.4 million shares were
repurchased under the June 15, 1998, authorization. At December 31, 1998, Old
Kent had remaining authorization to repurchase approximately 2.6 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
S-56
<PAGE> 58
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. At December 31, 1998, a total of 4,321,759 shares were reserved for
options, including 2,012,896 shares available for future option grants under
stock option plans.
The following table summarizes stock option transactions and the related average
exercise prices for the last three years.
<TABLE>
<CAPTION>
(adjusted for stock splits and dividends)
---------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
No. of Average No. of Average No. of Average
Shares Exer. Price Shares Exer. Price Shares Exer. Price
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 1,708,172 $ 15.53 2,162,278 $ 11.62 2,392,365 $ 9.84
Options granted 974,485 36.61 404,101 26.28 322,920 16.84
Options exercised (342,295) (11.38) (858,207) (11.25) (483,332) (6.91)
Options forfeited or
canceled (31,500) (32.02) - - (69,675) (7.32)
--------- --------- ---------
Options outstanding at end
of year 2,308,862 $ 24.82 1,708,172 $ 15.53 2,162,278 $11.62
========= ========= =========
Weighted average estimated
fair value of options
granted in year $ 9.87 $ 6.07 $ 3.32
Exercisable at end of year 2,018,067 $ 23.12 1,708,172 $ 15.53 2,162,278 $11.62
========= ========= =========
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend Yield 2.0% 2.5% 3.3%
Expected Average Life (in years) 6 5 5
Expected Volatility 22.9% 20.0% 17.6%
Risk Free Interest Rate 4.5-5.5% 5.7-6.2% 6.6%
</TABLE>
S-57
<PAGE> 59
NOTE 14. STOCK BASED COMPENSATION (CONTINUED)
Options were outstanding at December 31, 1998 as follows:
<TABLE>
<CAPTION>
Outstanding Stock Options Exercisable Options
----------------------------------- ----------------------
Number Weighted Number
of Weighted Average of Weighted
Options Average Remaining Options Average
Exercise Price Lowest Highest at Year Exercise Contractual at Year Exercise
per Share: Price Price End Price Life (years) End Price
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under $14 $ 6.72 $13.93 613,803 $11.55 4.0 613,803 $11.55
$14 to $26 14.14 25.88 716,823 20.08 7.6 716,823 20.08
Over $26 32.81 42.78 978,236 36.62 9.5 687,441 36.62
--------- --- ---------
All options 6.72 42.78 2,308,862 $24.82 7.5 2,018,067 $23.12
========= === =========
</TABLE>
The Corporation accounts for its option plans 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 statements 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 1997 and 1996 option grants as if they had been
recognized under SFAS No. 123, "Accounting for Stock-Based Compensation."
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
Net Net Net
Income Basic Diluted Income Basic Diluted Income Basic Diluted
(in millions) EPS EPS (in millions) EPS EPS (in millions) EPS EPS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As Reported $198.8 $1.86 $1.84 $198.4 $1.76 $1.75 $179.4 $1.55 $1.54
Pro forma $194.4 $1.81 $1.80 $197.1 $1.75 $1.74 $178.7 $1.55 $1.54
</TABLE>
Old Kent also has restricted stock plans under which certain key employees may
be awarded restricted stock. The plans provide for the issuance of a maximum of
2,713,696 authorized but previously unissued shares of Old Kent's Common Stock,
subject to certain antidilution adjustments, as defined in the plans. 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, 1997, and 1996, Old Kent issued 102,196
shares, 191,386 shares and 157,273 shares of its common stock with total market
values of $3,835,000, $5,071,000 and $2,656,000, respectively, which are being
amortized ratably to expense over the period of restriction. At December 31,
1998, there were 180,527 shares reserved for future restricted stock plan
awards.
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 729,855 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 of 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
1998. During 1997 and 1996, Old Kent awarded 29,371 shares and 39,993 shares of
its common stock valued at $755,000 and $674,000, respectively at their award
dates. Deferred stock compensation is ratably charged to expense from the date
of award to the
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<PAGE> 60
end of the deferral period based on current market value. At December 31, 1998,
there were 465,140 shares reserved for future deferred stock compensation plan
awards.
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." 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, 1998 and 1997 in accordance with
the provisions of SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits".
<TABLE>
<CAPTION>
Non-Qualified
Qualified Retirement Retirement
Income Plan Income Plan
-------------------- --------------------
December 31 (in thousands) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation at prior measurement date $107,734 $107,442 $ 20,030 $ 21,453
Service cost 9,346 7,716 875 947
Interest cost 7,582 7,902 1,448 1,639
Amendments 2,594 - 431 -
Actuarial (gain)/loss 4,572 (4,909) 746 (3,366)
Benefits paid in current year (15,107) (10,417) (1,336) (643)
-------- -------- -------- --------
Benefit obligation at measurement date $116,721 $107,734 $ 22,194 $ 20,030
======== ======== ======== ========
Change in Plan Assets
Market value of assets at prior measurement
date $111,094 $102,377 $ - $ -
Actual return on assets 15,674 19,133 - -
Contributions made in current year 3,000 - 1,336 642
Benefits paid in current year (15,107) (10,416) (1,336) (642)
-------- -------- -------- --------
Market value of assets at measurement date $114,661 $111,094 $ 0 $ 0
======== ======== ======== ========
Reconciliation of Funded Status
Funded status $ (1,379) $ 3,780 $(22,194) $(20,030)
Unrecognized transition (asset)/obligation (10,792) (12,619) 245 334
Unrecognized prior service cost 4,785 2,407 2,332 2,098
Unrecognized net loss 2,426 5,209 4,997 4,567
-------- -------- -------- --------
Accrued pension cost $ (4,960) $ (1,223) $(14,620) $(13,031)
======== ======== ======== ========
</TABLE>
At December 31, 1998, $15.2 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.
S-59
<PAGE> 61
NOTE 15. EMPLOYEE BENEFITS (CONTINUED)
Net pension expense included the following components:
<TABLE>
<CAPTION>
Qualified Retirement Non-Qualified Retirement
Income Plan Income Plan
--------------------------- ------------------------
Year ended December 31 (in thousands) 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost (benefits earned during
the year) $ 9,346 $ 7,716 $ 7,008 $ 875 $ 946 $ 842
Interest cost on projected benefit
obligation 7,582 7,902 7,907 1,448 1,639 1,658
Expected return on plan assets (9,365) (8,348) (8,702) - - -
Amortization of transition obligation (1,827) (1,827) (1,828) 89 89 89
Amortization of prior service cost 216 216 189 207 207 198
Recognized net actuarial loss 1,046 926 1,107 316 399 557
------- ------- ------- ------ ------ ------
Net periodic pension expense $ 6,998 $ 6,585 $ 5,681 $2,935 $3,280 $3,344
======= ======= ======= ====== ====== ======
</TABLE>
The following assumptions were used in determining the actuarial present value
of the benefit obligations as of December 31 for each of the following years:
<TABLE>
<CAPTION>
Qualified Retirement Non-Qualified Retirement
Income Plan Income Plan
----------------------- ------------------------
1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 6.75% 7.00% 7.75% 6.75% 7.00% 7.75%
Rate of increase in future
compensation levels 4.25% 4.25% 4.50% 6.00% 6.00% 6.00%
Expected long-term rate of return on
plan assets 10.00% 10.00% 9.00% - - -
</TABLE>
During 1998, the Old Kent Retirement Income Plan was amended to clarify entry
date for purposes of determining benefits under the plan.
Old Kent has adopted amended assumptions, as shown above, for use in the
actuarial determination of its projected benefit obligations at December 31,
1998. 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 Company 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 $7,814,000, $6,437,000,
and $5,540,000 for 1998, 1997 and 1996, 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.
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<PAGE> 62
NOTE 16. TAXES ON INCOME
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes:
Current $ 83,982 $ 78,970 $88,582
Deferred expense (benefit) 16,597 20,099 (1,552)
State income taxes 5,371 6,786 3,607
-------- -------- -------
Total provision $105,950 $105,855 $90,637
======== ======== =======
</TABLE>
The preceding table excludes tax expense of $10.3 million and $6.7 million for
1998 and 1997 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:
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at 35% statutory rate $106,648 $106,496 $94,511
Tax effect of:
Tax-exempt interest (8,585) (7,196) (7,056)
Other, net 7,887 6,555 3,182
-------- -------- -------
Income tax expense $105,950 $105,855 $90,637
======== ======== =======
Effective tax rate 34.8% 34.8% 33.6%
======== ======== =======
</TABLE>
Components of the deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses $63,232 $54,767
Deferred compensation 18,197 16,771
Accrued expenses 6,057 5,869
Other 11,165 12,396
------- -------
Total deferred tax assets 98,651 89,803
Valuation allowance - -
------- -------
Deferred tax assets 98,651 89,803
------- -------
Deferred tax liabilities:
Mortgage servicing rights 59,750 32,317
Unrealized gain on securities available-for-sale 10,988 679
Other 17,166 19,326
------- -------
Deferred tax liabilities 87,904 52,322
------- -------
Net deferred tax assets $10,747 $37,481
======= =======
</TABLE>
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
S-61
<PAGE> 63
NOTE 17. REPORTABLE OPERATING SEGMENTS (CONTINUED)
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 other
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, financial services and retailing. Retail Banking
distributes a broad array of consumer 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 customers in 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 143 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 mainly operate within the lower
peninsula of Michigan and in the Chicago area of 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.
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
and 1996 to 1998. The following table summarizes information about reportable
operating segments' profit and loss and segments' assets as of December 31,
1998:
<TABLE>
<CAPTION>
Year ended December 31, 1998
---------------------------------------------------------------
Corporate Retail Community Investment Mortgage
(in thousands) Banking Banking Banking & Insurance Banking
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 137,602 $ 248,435 $ 154,104 $ 14,353 $ 26,904
Provision for credit losses 12,046 12,348 16,069 899 1,252
Non-interest income and
fees 14,415 53,580 38,067 91,170 148,145
Depreciation and
amortization 6,869 16,915 10,302 3,980 8,000
Income taxes 30,356 33,751 28,184 11,311 15,055
Net income 56,002 62,114 53,789 20,370 16,444
Total assets 2,910,076 2,403,685 2,373,524 244,012 3,404,540
Total loans 2,925,418 2,313,686 2,273,250 199,216 261,569
Allowance for credit losses 70,000 43,700 47,000 4,200 1,672
Net total loans 2,855,418 2,269,986 2,226,250 195,016 259,897
Total deposits 770,425 7,350,117 2,831,360 323,707 407,463
<CAPTION>
Year ended December 31, 1998
---------------------------------------
Reconciling Consolidated
(in thousands) Treasury Items* Total
- --------------------------- ---------------------------------------
<S> <C> <C> <C>
Net interest income $ 6,484 $ - $ 587,882
Provision for credit losses 714 3,500 46,828
Non-interest income and
fees 2,523 - 347,900
Depreciation and
amortization 2,990 - 49,056
Income taxes (3,892) (8,815) 105,950
Net income 9,757 (19,678) 198,798
Total assets 5,253,021 - 16,588,858
Total loans 910,577 - 8,883,716
Allowance for credit losses 1,093 - 167,665
Net total loans 909,484 - 8,716,051
Total deposits 1,256,346 - 12,939,418
</TABLE>
* The reconciling items in the table reflect the one-time charges related to Old
Kent's merger with First Evergreen Corporation. The merger charges totaled
$19.7 million after tax and are described in more detail in Note 2.
S-62
<PAGE> 64
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:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerators:
Numerator for both basic and diluted earnings
per share, net income $198,798,000 $198,418,000 $179,393,000
============ ============ ============
Denominators:
Denominator for basic earnings per share,
average outstanding common shares 107,145,708 112,555,481 115,403,935
Potential dilutive shares resulting from
employee stock plans 933,769 805,413 773,895
------------ ------------ ------------
Denominator for diluted earnings per share 108,079,477 113,360,894 116,177,830
============ ============ ============
Earnings per Share:
Basic $1.86 $1.76 $1.55
------------ ------------ ------------
Diluted $1.84 $1.75 $1.54
============ ============ ============
</TABLE>
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:
<TABLE>
<CAPTION>
Year ending December 31
(in thousands) Premises Equipment Total
- ---------------------------------------------------------------
<S> <C> <C> <C>
1999 $13,258 $3,364 $16,622
2000 10,229 2,572 12,801
2001 7,942 900 8,842
2002 6,136 483 6,619
2003 3,305 75 3,380
Thereafter 9,813 - 9,813
------- ------ -------
Total minimal payments $50,683 $7,394 $58,077
======= ====== =======
</TABLE>
Rental expense charged to operations in 1998, 1997, and 1996, amounted to
approximately $19,119,000, $15,588,000, and $11,925,000, 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 $3,622,000, $3,413,000, and $3,289,000, for 1998, 1997,
and 1996, respectively.
At December 31, 1998, 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 and results
of operations.
S-63
<PAGE> 65
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's traditional banking operations result in an
asset-sensitive position, where assets reprice more rapidly than liabilities.
This asset-sensitive profile has been moderated through the strategic use of the
investment portfolio. 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 controls 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.
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
Notional Credit Notional Credit
December 31 (in thousands) Amount Exposure Amount Exposure
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Swap Categories:
Receive fixed/pay floating $819,917 $19,668 $506,231 $10,172
Receive floating/pay fixed 50,000 - 25,000 -
-------- ------- -------- -------
$869,917 $19,668 $531,231 $10,172
</TABLE>
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
S-64
<PAGE> 66
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.
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
Notional Credit Notional Credit
December 31 (in thousands) Amount Exposure Amount Exposure
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate caps sold $26,000 $ - $20,000 $ -
Interest rate caps bought 26,000 105 20,000 -
Interest rate floors sold 26,000 - 20,000 -
Interest rate floors bought 26,000 366 20,000 24
Receive fixed/pay floating swap 6,500 - - -
Receive floating/pay fixed swap 6,500 117 - -
</TABLE>
Mortgage Banking
The Corporation uses both forward sales and option contracts to protect the
value of residential mortgage loans that are being underwritten 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 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 and option
contracts represents the aggregate value of contracts with a positive fair
value.
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Contractual Credit Contractual Credit
December 31 (in thousands) Amount Exposure Amount Exposure
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage forward sales $2,257,013 $1,304 $1,217,500 $264
Mortgage & Treasury options 390,000 80 842,500 286
</TABLE>
Old Kent began utilizing Treasury futures and options in 1998 to hedge the value
of its mortgage servicing rights that could be impacted by 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.
<TABLE>
<CAPTION>
1998
-------------------------------------------------
Expiration Number of Notional Credit
December 31 (dollars in thousands) Date Contracts Amount Exposure
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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 based
upon foreign denominated currencies. The Corporation manages its exposure to
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<PAGE> 67
NOTE 20. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
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 valuation,
which may be different than the value in the original contract. 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, Pounds Sterling, Deutschemarks,
Japanese Yen, Italian Lira, and French Francs.
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Contractual Credit Contractual Credit
December 31 (in thousands) Amount Exposure Amount Exposure
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign exchange forward contracts $10,774 $134 $19,262 $323
</TABLE>
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.
<TABLE>
<CAPTION>
Contractual Amount at December 31 (in millions) 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit $5,128 $4,354
Standby and commercial letters of credit 465 448
</TABLE>
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 instruments, as defined by SFAS No. 107, for
which it is practicable to estimate that value.
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, or 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
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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 re-price 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 since
all contracts had either short-term maturities or variable re-pricing
structures.
Subordinated debt
The fair value of subordinated debt was based on quoted market prices.
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
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<PAGE> 69
NOTE 21. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Carrying Estimated Carrying Estimated
December 31 (in thousands) Value Fair Value Value Fair Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 625,075 $ 625,075 $ 674,649 $ 674,649
Interest-earning deposits 5,044 5,044 2,153 2,153
Trading account securities 349,090 349,090 986 986
Securities available-for-sale 2,766,696 2,766,696 2,186,333 2,186,333
Securities held-to-maturity 803,745 823,610 1,750,007 1,766,832
Mortgages held-for-sale 2,262,696 2,305,721 1,271,784 1,301,905
Net loans 8,716,051 9,027,746 8,983,545 9,261,190
Interest receivable 108,755 108,755 118,053 118,053
Financial Liabilities:
Non-interest-bearing deposits 2,098,446 2,098,446 1,858,990 1,858,990
Interest-bearing deposits -- no
maturities 4,478,874 4,478,874 3,743,881 3,743,881
Interest-bearing deposits -- fixed
maturities 6,362,097 6,402,620 6,326,036 6,359,151
Other borrowed funds 2,061,142 2,061,142 2,090,095 2,090,095
Interest payable 46,927 46,927 62,960 62,960
Subordinated debt 100,000 104,510 100,000 100,870
Capital Securities 100,000 100,000 100,000 100,000
Interest Rate Contracts Relating To:
Assets: Commercial loans 3,925 15,744 3,705 6,467
Mortgages held-for-sale - (3,554) - (5,981)
Liabilities - (953) 88 71
</TABLE>
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<PAGE> 70
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:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31 (in thousands) 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 645 $ 6,446
Interest-earning deposits and other securities 105,870 123,908
Premises and equipment 10,083 8,281
Investment in and advances to subsidiaries 1,258,659 1,336,709
Other assets 49,164 51,444
---------- ----------
Total Assets $1,424,421 $1,526,788
========== ==========
Liabilities and Shareholders' Equity:
Long-term debt $ 203,093 $ 203,093
Accrued expenses and other liabilities 86,218 98,100
---------- ----------
Total liabilities 289,311 301,193
Shareholders' equity 1,135,110 1,225,595
---------- ----------
Total Liabilities and Shareholders' Equity $1,424,421 $1,526,788
========== ==========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Year ended December 31 (in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiaries $324,699 $163,118 $ 96,906
Service fees from subsidiaries 69,801 60,459 56,032
Interest and other 6,983 9,981 10,705
-------- -------- --------
Total income 401,483 233,558 163,643
-------- -------- --------
Expenses:
Interest 16,316 16,086 8,634
Salaries and benefits 52,650 50,112 43,102
Occupancy 5,283 4,760 4,551
Equipment 7,441 7,559 6,838
Other 39,188 29,647 26,234
-------- -------- --------
Total expenses 120,878 108,164 89,359
-------- -------- --------
Income before income taxes and equity in undistributed
net income of subsidiaries 280,605 125,394 74,284
Income tax benefit 14,465 12,531 8,066
-------- -------- --------
Income before equity in undistributed net income of
subsidiaries 295,070 137,925 82,350
Equity in undistributed net income of subsidiaries (96,272) 60,493 97,043
-------- -------- --------
Net Income $198,798 $198,418 $179,393
======== ======== ========
</TABLE>
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<PAGE> 71
NOTE 22. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 198,798 $ 198,418 $ 179,393
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of
subsidiaries 96,272 (60,493) (97,043)
Depreciation, amortization and accretion 11,154 12,277 9,193
Net losses (gains) on sales of assets 169 (1) (199)
Net change in other assets (2,907) (9,064) (2,361)
Net change in other liabilities (9,212) 24,925 12,413
--------- --------- ---------
Net cash provided by operating activities 294,274 166,062 101,396
--------- --------- ---------
Cash flows from investing activities:
Net change in interest-earning assets 18,032 (7,296) 76,249
Net change in investment in and advances to
subsidiaries (118) (5,510) 16,658
Purchases of leasehold improvements, premises &
equipment, net (4,713) (3,216) (3,361)
--------- --------- ---------
Net cash provided by (used for) investing
activities 13,201 (16,022) 89,546
--------- --------- ---------
Cash flows from financing activities:
Payments on long-term debt obligations - (123) (61)
Issuance of long-term debt, net - 97,872 -
Proceeds from common stock issuances 20,519 10,799 10,421
Repurchases of common stock (248,812) (190,189) (136,307)
Dividends paid to shareholders (84,983) (70,887) (65,163)
--------- --------- ---------
Net cash used for financing activities (313,276) (152,528) (191,110)
--------- --------- ---------
Net decrease in cash and cash equivalents (5,801) (2,488) (168)
Cash and cash equivalents at beginning of year 6,446 8,934 9,102
--------- --------- ---------
Cash and cash equivalents at end of year $ 645 $ 6,446 $ 8,934
========= ========= =========
</TABLE>
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 1999, the subsidiary banks may distribute to the parent company, in
addition to their 1999 net income, approximately $38 million in dividends
without written approval from bank regulatory agencies. The remaining net assets
of subsidiary banks, approximating $1,075 million at December 31, 1998, 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 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
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<PAGE> 72
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, 1998, 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, 1998 and 1997:
<TABLE>
<CAPTION>
To Be "Well
Capitalized"
Under
Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
--------------- --------------- ---------------
(dollars in millions) Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk Weighted Assets)
Consolidated $1,342 11.40% $942 8.00% $1,178 10.00%
Old Kent Bank 1,247 10.89 916 8.00 1,146 10.00
Old Kent Bank, N.A. 10 10.64 8 8.00 9 10.00
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 1,095 9.30 471 4.00 707 6.00
Old Kent Bank 1,104 9.64 458 4.00 687 6.00
Old Kent Bank, N.A. 9 9.39 4 4.00 6 6.00
Leverage Ratio (to Average Assets)
Consolidated 1,095 6.89 477 3.00 794 5.00
Old Kent Bank 1,104 7.03 471 3.00 785 5.00
Old Kent Bank, N.A. 9 7.71 3 3.00 6 5.00
As of December 31, 1997:
Total Capital (to Risk Weighted Assets)
Consolidated $1,430 12.68% $902 8.00% $1,127 10.00%
Old Kent Bank 1,324 12.16 871 8.00 1,089 10.00
Old Kent Bank, N.A. 9 10.71 7 8.00 9 10.00
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 1,194 10.60 451 4.00 676 6.00
Old Kent Bank 1,193 10.96 435 4.00 653 6.00
Old Kent Bank, N.A. 8 9.46 4 4.00 5 6.00
Leverage Ratio (to Average Assets)
Consolidated 1,194 7.72 464 3.00 774 5.00
Old Kent Bank 1,193 7.81 611 4.00 764 5.00
Old Kent Bank, N.A. 8 7.48 3 3.00 6 5.00
</TABLE>
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<PAGE> 73
BOARD OF DIRECTORS AND SENIOR MANAGEMENT
BOARD OF DIRECTORS
Richard L. Antonini
Chairman, President and
Chief Executive Officer,
Foremost Corporation of America
(a specialty property and casualty insurer)
John D. Boyles
Attorney-at-Law,
Verspoor, Waalkes, Lalley, Slotsema &
Talen, P.C.
William P. Crawford
President and Chief Executive Officer,
Steelcase Design Partnership
(manufacturer of office systems)
Dick DeVos
President,
Amway Corporation
(manufacturer of home and personal care
products)
William G. Gonzalez
President and Chief Executive Officer,
Spectrum Health
(integrated healthcare network)
James P. Hackett
President and Chief Executive Officer,
Steelcase Inc.
(manufacturer of office systems)
Erina Hanka
President,
Suspa Inc.
(manufacturer of gas cylinders for industry)
Earl D. Holton
Vice Chairman,
Meijer, Inc.
(food and general merchandise retailer)
Michael J. Jandernoa
Chairman and Chief Executive Officer,
Perrigo Company
(manufacturer of store-brand health and personal care products)
Kevin T. Kabat
Vice Chairman of the Corporation,
and President of Old Kent Bank
Fred P. Keller
Chairman and Chief Executive Officer,
Cascade Engineering, Inc.
(manufacturer of plastic injection molded
automotive, seating and container products)
John P. Keller
President,
Keller Group, Inc.
(a diversified manufacturer)
Hendrik G. Meijer
Co-Chairman,
Meijer, Inc.
(food and general merchandise retailer)
Percy A. Pierre, Ph.D.
Professor of Electrical Engineering,
Michigan State University
Marilyn J. Schlack
President,
Kalamazoo Valley Community College
Peter F. Secchia
Chairman,
Universal Forest Products, Inc.
(manufacturer and distributor of
building supplies)
David J. Wagner
Chairman, President and Chief Executive
Officer of the Corporation, and
Chairman and Chief Executive Officer
of Old Kent Bank
Margaret Sellers Walker
Professor of Public Administration,
School of Public and Nonprofit
Administration,
Grand Valley State University
Robert H. Warrington
Vice Chairman and Chief Financial
Officer of the Corporation,
and Chairman and Chief Executive
Officer of Old Kent Mortgage Company
SENIOR POLICY COMMITTEE
Mark F. Furlong*
Executive Vice President,
Old Kent Financial Corporation;
Chief Financial Officer,
Old Kent Bank
James A. Hubbard*
Senior Executive Vice President,
Corporate Banking,
Old Kent Financial Corporation
Kevin T. Kabat*
Vice Chairman,
Old Kent Financial Corporation;
President,
Old Kent Bank
Kenneth C. Krei*
Executive Vice President,
Investment and Insurance Services,
Old Kent Bank
David C. Schneider*
Executive Vice President,
Retail Administration,
Old Kent Financial Corporation
Michelle L. Van Dyke*
Executive Vice President,
Community Banking,
Old Kent Financial Corporation
David J. Wagner*
Chairman, President and
Chief Executive Officer,
Old Kent Financial Corporation;
Chairman and Chief Executive Officer,
Old Kent Bank
Robert H. Warrington*
Vice Chairman and Chief Financial Officer,
Old Kent Financial Corporation;
Chairman and Chief Executive Officer,
Old Kent Mortgage Company
OTHER SENIOR OFFICERS
Gary S. Bernard*
Senior Vice President,
Consumer Lending,
Old Kent Bank
Donald R. Britton*
President and Chief Operating Officer,
Old Kent Mortgage Company
Steven D. Crandall*
Senior Vice President,
Human Resources,
Old Kent Financial Corporation
David A. Dams*
Executive Vice President,
Corporate Banking,
Old Kent Bank
Gregory K. Daniels*
Senior Vice President,
Chief Information Officer,
Old Kent Financial Corporation
Stanlee P. Greene, Jr.*
Senior Vice President,
Sales and Marketing,
Old Kent Financial Corporation
Richard L. Haug
Senior Vice President,
General Auditor,
Old Kent Financial Corporation
Joseph T. Keating*
Senior Vice President,
Old Kent Bank;
President,
Lyon Street Asset Management Company
Larry S. Magnesen*
Senior Vice President,
Business Banking,
Old Kent Bank
William K. McGowan*
Executive Vice President,
Old Kent Bank;
President,
Old Kent Bank - Illinois
Ronald C. Mishler*
Senior Vice President and Treasurer,
Old Kent Financial Corporation
Janet S. Nisbett
Senior Vice President and Controller,
Old Kent Financial Corporation;
Senior Vice President and Controller,
Old Kent Bank
Albert T. Potas
Senior Vice President,
Investor Relations and Strategic Planning,
Old Kent Financial Corporation
Daniel W. Terpsma*
Executive Vice President,
Old Kent Bank;
President,
Old Kent Bank - East
Mary E. Tuuk
Senior Vice President and Secretary,
Legal Coordinator,
Old Kent Financial Corporation
Michael J. Whalen*
Senior Vice President,
Senior Credit Officer,
Old Kent Financial Corporation
* Members of Management Group
(LOGO)
Printed on Recycled Paper
<PAGE> 1
EXHIBIT 23
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated January 14, 1999, included in this Form 10-K, in the Corporation's
previously filed registration statements, as amended, for Old Kent Financial
Corporation's offering of senior and unsubordinated debt (Registration No.
33-46205), Old Kent Thrift Plan (Registration No. 33-17309 and No. 33-39740),
Executive Stock Option Plan of 1986 (Registration No. 33-4723), Stock Option
Incentive Plan of 1992 (Registration No. 33-49896), Employee Stock Purchase Plan
(Registration No. 33-57334), Dividend Reinvestment Plan (Registration No.
33-33058), Executive Thrift Plan (Registration No. 33-52883 and No. 333-20383),
Deferred Compensation Plan (Registration No. 33-52885 and No. 333-20381), 1994
Stock Option Plan for EdgeMark Optionholders (Registration No. 33-53391),
Directors' Deferred Compensation Plan (Registration No. 33-56519 and 333-39953),
Incentive Stock Option Plan for Employee Optionholders of First National Bank
Corp. (Registration No. 33-57527), Stock Option Plan for Nonemployee Director
Optionholders of First National Bank Corp. (Registration No. 33-57529),
Executive Stock Incentive Plan of 1997 (Registration No. 333-39957), Capital
Trust Securities of Old Kent Capital Trust I and Floating Rate Junior
Subordinated Debentures of Old Kent Financial Corporation (Registration No.
333-26183), Old Kent Bank's offering of asset-backed securities (Registration
No. 33-94578), Shelf Offering of Capital Trust Securities of Old Kent Capital
Trust II, III, and IV, and Junior Subordinated Debentures of Old Kent Financial
Corporation on Form S-3 (Registration No. 333-59459), Universal Shelf
Registration Statement on Form S-3 (Registration No. 333-61505), Acquisition
Shelf Registration Statement of Form S-4 (Registration No. 333-56209), and First
Evergreen Corporation (Registration No. 333-56965).
/s/ Arthur Andersen LLP
Chicago, Illinois
March 15, 1999
<PAGE> 1
EXHIBIT 24
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or
officer, or both, as the case may be, of Old Kent Financial Corporation, does
hereby appoint DAVID J. WAGNER; ROBERT H. WARRINGTON; MARK F. FURLONG; and MARY
E. TUUK, or any of them, his or her attorneys or attorney to execute in his or
her name an Annual Report of Old Kent Financial Corporation on Form 10-K for its
fiscal year ended December 31, 1998, and any amendments to that report, and to
file it with the Securities and Exchange Commission. Each attorney shall have
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the premises as
fully and to all intents and purposes as the undersigned could do in person,
and the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: February 7, 1999 /s/ Robert H. Warrington
-------------------------
Robert H. Warrington
<PAGE> 2
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or
officer, or both, as the case may be, of Old Kent Financial Corporation, does
hereby appoint DAVID J. WAGNER; ROBERT H. WARRINGTON; MARK F. FURLONG; and MARY
E. TUUK, or any of them, his or her attorneys or attorney to execute in his or
her name an Annual Report of Old Kent Financial Corporation on Form 10-K for its
fiscal year ended December 31, 1998, and any amendments to that report, and to
file it with the Securities and Exchange Commission. Each attorney shall have
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the premises as
fully and to all intents and purposes as the undersigned could do in person,
and the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 29, 1999 /s/ Kevin T. Kabat
------------------
Kevin T. Kabat
<PAGE> 3
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or
officer, or both, as the case may be, of Old Kent Financial Corporation, does
hereby appoint DAVID J. WAGNER; ROBERT H. WARRINGTON; MARK F. FURLONG; and MARY
E. TUUK, or any of them, his or her attorneys or attorney to execute in his or
her name an Annual Report of Old Kent Financial Corporation on Form 10-K for its
fiscal year ended December 31, 1998, and any amendments to that report, and to
file it with the Securities and Exchange Commission. Each attorney shall have
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the premises as
fully and to all intents and purposes as the undersigned could do in person,
and the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: February 2, 1999 /s/ David J. Wagner
--------------------
David J. Wagner
<PAGE> 4
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or
officer, or both, as the case may be, of Old Kent Financial Corporation, does
hereby appoint DAVID J. WAGNER; ROBERT H. WARRINGTON; MARK F. FURLONG; and MARY
E. TUUK, or any of them, his or her attorneys or attorney to execute in his or
her name an Annual Report of Old Kent Financial Corporation on Form 10-K for its
fiscal year ended December 31, 1998, and any amendments to that report, and to
file it with the Securities and Exchange Commission. Each attorney shall have
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the premises as
fully and to all intents and purposes as the undersigned could do in person,
and the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 18, 1999 /s/ John D. Boyles
-------------------
John D. Boyles
<PAGE> 5
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or
officer, or both, as the case may be, of Old Kent Financial Corporation, does
hereby appoint DAVID J. WAGNER; ROBERT H. WARRINGTON; MARK F. FURLONG; and MARY
E. TUUK, or any of them, his or her attorneys or attorney to execute in his or
her name an Annual Report of Old Kent Financial Corporation on Form 10-K for its
fiscal year ended December 31, 1998, and any amendments to that report, and to
file it with the Securities and Exchange Commission. Each attorney shall have
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the premises as
fully and to all intents and purposes as the undersigned could do in person,
and the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 18, 1999 /s/ Richard M. DeVos, Jr.
--------------------------------
Richard M. DeVos, Jr.
<PAGE> 6
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or
officer, or both, as the case may be, of Old Kent Financial Corporation, does
hereby appoint DAVID J. WAGNER; ROBERT H. WARRINGTON; MARK F. FURLONG; and MARY
E. TUUK, or any of them, his or her attorneys or attorney to execute in his or
her name an Annual Report of Old Kent Financial Corporation on Form 10-K for its
fiscal year ended December 31, 1998, and any amendments to that report, and to
file it with the Securities and Exchange Commission. Each attorney shall have
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the premises as
fully and to all intents and purposes as the undersigned could do in person,
and the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 18, 1999 /s/ James P. Hackett
---------------------
James P. Hackett
<PAGE> 7
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or
officer, or both, as the case may be, of Old Kent Financial Corporation, does
hereby appoint DAVID J. WAGNER; ROBERT H. WARRINGTON; MARK F. FURLONG; and MARY
E. TUUK, or any of them, his or her attorneys or attorney to execute in his or
her name an Annual Report of Old Kent Financial Corporation on Form 10-K for its
fiscal year ended December 31, 1998, and any amendments to that report, and to
file it with the Securities and Exchange Commission. Each attorney shall have
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the premises as
fully and to all intents and purposes as the undersigned could do in person,
and the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 20, 1999 /s/ Erina Hanka
----------------
Erina Hanka
<PAGE> 8
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or
officer, or both, as the case may be, of Old Kent Financial Corporation, does
hereby appoint DAVID J. WAGNER; ROBERT H. WARRINGTON; MARK F. FURLONG; and MARY
E. TUUK, or any of them, his or her attorneys or attorney to execute in his or
her name an Annual Report of Old Kent Financial Corporation on Form 10-K for its
fiscal year ended December 31, 1998, and any amendments to that report, and to
file it with the Securities and Exchange Commission. Each attorney shall have
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the premises as
fully and to all intents and purposes as the undersigned could do in person,
and the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 21, 1999 /s/ Earl D. Holton
-------------------
Earl D. Holton
<PAGE> 9
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or
officer, or both, as the case may be, of Old Kent Financial Corporation, does
hereby appoint DAVID J. WAGNER; ROBERT H. WARRINGTON; MARK F. FURLONG; and MARY
E. TUUK, or any of them, his or her attorneys or attorney to execute in his or
her name an Annual Report of Old Kent Financial Corporation on Form 10-K for its
fiscal year ended December 31, 1998, and any amendments to that report, and to
file it with the Securities and Exchange Commission. Each attorney shall have
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the premises as
fully and to all intents and purposes as the undersigned could do in person,
and the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 18, 1999 /s/ Michael J. Jandernoa
-------------------------
Michael J. Jandernoa
<PAGE> 10
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or
officer, or both, as the case may be, of Old Kent Financial Corporation, does
hereby appoint DAVID J. WAGNER; ROBERT H. WARRINGTON; MARK F. FURLONG; and MARY
E. TUUK, or any of them, his or her attorneys or attorney to execute in his or
her name an Annual Report of Old Kent Financial Corporation on Form 10-K for its
fiscal year ended December 31, 1998, and any amendments to that report, and to
file it with the Securities and Exchange Commission. Each attorney shall have
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the premises as
fully and to all intents and purposes as the undersigned could do in person,
and the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 18, 1999 /s/ John P. Keller
-------------------
John P. Keller
<PAGE> 11
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or
officer, or both, as the case may be, of Old Kent Financial Corporation, does
hereby appoint DAVID J. WAGNER; ROBERT H. WARRINGTON; MARK F. FURLONG; and MARY
E. TUUK, or any of them, his or her attorneys or attorney to execute in his or
her name an Annual Report of Old Kent Financial Corporation on Form 10-K for its
fiscal year ended December 31, 1998, and any amendments to that report, and to
file it with the Securities and Exchange Commission. Each attorney shall have
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the premises as
fully and to all intents and purposes as the undersigned could do in person,
and the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 18, 1999 /s/ Percy A. Pierre, Ph.D.
-----------------------------------
Percy A. Pierre, Ph.D.
<PAGE> 12
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or
officer, or both, as the case may be, of Old Kent Financial Corporation, does
hereby appoint DAVID J. WAGNER; ROBERT H. WARRINGTON; MARK F. FURLONG; and MARY
E. TUUK, or any of them, his or her attorneys or attorney to execute in his or
her name an Annual Report of Old Kent Financial Corporation on Form 10-K for its
fiscal year ended December 31, 1998, and any amendments to that report, and to
file it with the Securities and Exchange Commission. Each attorney shall have
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the premises as
fully and to all intents and purposes as the undersigned could do in person,
and the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 18, 1999 /s/ Peter F. Secchia
---------------------
Peter F. Secchia
<PAGE> 13
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or
officer, or both, as the case may be, of Old Kent Financial Corporation, does
hereby appoint DAVID J. WAGNER; ROBERT H. WARRINGTON; MARK F. FURLONG; and MARY
E. TUUK, or any of them, his or her attorneys or attorney to execute in his or
her name an Annual Report of Old Kent Financial Corporation on Form 10-K for its
fiscal year ended December 31, 1998, and any amendments to that report, and to
file it with the Securities and Exchange Commission. Each attorney shall have
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the premises as
fully and to all intents and purposes as the undersigned could do in person,
and the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 19, 1999 /s/ Richard L. Antonini
------------------------
Richard L. Antonini
<PAGE> 14
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or
officer, or both, as the case may be, of Old Kent Financial Corporation, does
hereby appoint DAVID J. WAGNER; ROBERT H. WARRINGTON; MARK F. FURLONG; and MARY
E. TUUK, or any of them, his or her attorneys or attorney to execute in his or
her name an Annual Report of Old Kent Financial Corporation on Form 10-K for its
fiscal year ended December 31, 1998, and any amendments to that report, and to
file it with the Securities and Exchange Commission. Each attorney shall have
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the premises as
fully and to all intents and purposes as the undersigned could do in person,
and the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 18, 1999 /s/ William P. Crawford
------------------------
William P. Crawford
<PAGE> 15
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or
officer, or both, as the case may be, of Old Kent Financial Corporation, does
hereby appoint DAVID J. WAGNER; ROBERT H. WARRINGTON; MARK F. FURLONG; and MARY
E. TUUK, or any of them, his or her attorneys or attorney to execute in his or
her name an Annual Report of Old Kent Financial Corporation on Form 10-K for its
fiscal year ended December 31, 1998, and any amendments to that report, and to
file it with the Securities and Exchange Commission. Each attorney shall have
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the premises as
fully and to all intents and purposes as the undersigned could do in person,
and the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 24, 1999 /s/ William G. Gonzalez
------------------------
William G. Gonzalez
<PAGE> 16
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or
officer, or both, as the case may be, of Old Kent Financial Corporation, does
hereby appoint DAVID J. WAGNER; ROBERT H. WARRINGTON; MARK F. FURLONG; and MARY
E. TUUK, or any of them, his or her attorneys or attorney to execute in his or
her name an Annual Report of Old Kent Financial Corporation on Form 10-K for its
fiscal year ended December 31, 1998, and any amendments to that report, and to
file it with the Securities and Exchange Commission. Each attorney shall have
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the premises as
fully and to all intents and purposes as the undersigned could do in person,
and the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: February 10, 1999 /s/ Fred P. Keller
------------------
Fred P. Keller
<PAGE> 17
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or
officer, or both, as the case may be, of Old Kent Financial Corporation, does
hereby appoint DAVID J. WAGNER; ROBERT H. WARRINGTON; MARK F. FURLONG; and MARY
E. TUUK, or any of them, his or her attorneys or attorney to execute in his or
her name an Annual Report of Old Kent Financial Corporation on Form 10-K for its
fiscal year ended December 31, 1998, and any amendments to that report, and to
file it with the Securities and Exchange Commission. Each attorney shall have
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the premises as
fully and to all intents and purposes as the undersigned could do in person,
and the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 29, 1999 /s/ Hendrik G. Meijer
----------------------
Hendrik G. Meijer
<PAGE> 18
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or
officer, or both, as the case may be, of Old Kent Financial Corporation, does
hereby appoint DAVID J. WAGNER; ROBERT H. WARRINGTON; MARK F. FURLONG; and MARY
E. TUUK, or any of them, his or her attorneys or attorney to execute in his or
her name an Annual Report of Old Kent Financial Corporation on Form 10-K for its
fiscal year ended December 31, 1998, and any amendments to that report, and to
file it with the Securities and Exchange Commission. Each attorney shall have
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the premises as
fully and to all intents and purposes as the undersigned could do in person,
and the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 18, 1999 /s/ Marilyn J. Schlack
-----------------------
Marilyn J. Schlack
<PAGE> 19
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or
officer, or both, as the case may be, of Old Kent Financial Corporation, does
hereby appoint DAVID J. WAGNER; ROBERT H. WARRINGTON; MARK F. FURLONG; and MARY
E. TUUK, or any of them, his or her attorneys or attorney to execute in his or
her name an Annual Report of Old Kent Financial Corporation on Form 10-K for its
fiscal year ended December 31, 1998, and any amendments to that report, and to
file it with the Securities and Exchange Commission. Each attorney shall have
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the premises as
fully and to all intents and purposes as the undersigned could do in person,
and the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 18, 1999 /s/ Margaret Sellers Walker
----------------------------
Margaret Sellers Walker
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES AS
OF DECEMBER 31, 1998, AND THE RELATED CONSOLIDATED STATEMENT OF INCOME FOR THE
YEAR THEN ENDED, AND THE NOTES THERETO, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 615,845
<INT-BEARING-DEPOSITS> 5,044
<FED-FUNDS-SOLD> 9,230
<TRADING-ASSETS> 349,090
<INVESTMENTS-HELD-FOR-SALE> 2,766,696
<INVESTMENTS-CARRYING> 803,745
<INVESTMENTS-MARKET> 823,610
<LOANS> 8,883,716
<ALLOWANCE> 167,665
<TOTAL-ASSETS> 16,588,858
<DEPOSITS> 12,939,418
<SHORT-TERM> 2,061,142
<LIABILITIES-OTHER> 253,188
<LONG-TERM> 200,000
104,499
0
<COMMON> 0
<OTHER-SE> 1,030,611
<TOTAL-LIABILITIES-AND-EQUITY> 16,588,858
<INTEREST-LOAN> 908,750
<INTEREST-INVEST> 244,196
<INTEREST-OTHER> 3,484
<INTEREST-TOTAL> 1,156,430
<INTEREST-DEPOSIT> 445,288
<INTEREST-EXPENSE> 568,548
<INTEREST-INCOME-NET> 587,882
<LOAN-LOSSES> 46,828
<SECURITIES-GAINS> 4,142
<EXPENSE-OTHER> 584,206
<INCOME-PRETAX> 304,748
<INCOME-PRE-EXTRAORDINARY> 304,748
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 198,798
<EPS-PRIMARY> 1.86
<EPS-DILUTED> 1.84
<YIELD-ACTUAL> 4.11
<LOANS-NON> 57,120
<LOANS-PAST> 15,083
<LOANS-TROUBLED> 2,664
<LOANS-PROBLEM> 59,784
<ALLOWANCE-OPEN> 160,952
<CHARGE-OFFS> 56,304
<RECOVERIES> 16,664
<ALLOWANCE-CLOSE> 167,665
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99
OLD KENT THRIFT PLAN
PERFORMANCE TABLE
The following table illustrates the comparative investment
performance of the five investment options offered under the Old Kent Thrift
Plan. The performance of some or all of these options also serves as a measure
for determining benefits under the Executive Thrift Plan and the Deferred
Compensation Plan. The table shows the value of a hypothetical initial
investment of $1,000 invested on December 31, 1995, and its value as of December
31 of each subsequent year shown below:
<TABLE>
<CAPTION>
Initial
Investment 12/31/96 12/31/97 12/31/98
on 12/31/95 Value Value Value
<S> <C> <C> <C> <C>
Savings Fund $1,000 $1,055 $1,115 $1,176
Diversified Equity $1,000 $1,174 $1,422 $1,637
Fund
Short Term Bond $1,000 $1,047 $1,119 $1,194
Fund
Old Kent Common $1,000 $1,259 $2,247 $2,822
Stock Fund
Balanced Fund $1,000 $1,099 $1,269 $1,439
</TABLE>
This document constitutes part of a prospectus covering securities that have
been registered under the Securities Act of 1933.
