<PAGE>
Prospectus dated July 2, 1999 Filed Pursuant to Rule 424(b)(3)
Registration No. 333-78801
[Pinnacle Banc Group, Inc. Logo] [Old Kent Logo]
PROSPECTUS AND PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS OF
PINNACLE BANC GROUP, INC.
IN CONNECTION WITH AN OFFERING OF UP TO
5,569,432 SHARES OF COMMON STOCK OF
OLD KENT FINANCIAL CORPORATION
The Board of Directors of Pinnacle Banc Group, Inc. is furnishing this
prospectus and proxy statement to you as a stockholder of Pinnacle to
solicit your proxy to vote at a special meeting of Pinnacle stockholders to
be held on August 10, 1999 and at any adjournment or postponement of that
meeting. At the special meeting, Pinnacle stockholders will vote upon
approval and adoption of an Agreement and Plan of Merger with Old Kent
Financial Corporation.
If the merger is completed as proposed, Old Kent will acquire Pinnacle.
Old Kent will issue 0.75285 shares of Old Kent common stock in exchange for
each share of Pinnacle common stock. Old Kent will also pay cash for
fractional shares.
The Board of Directors of Pinnacle has received the written opinion of
Donaldson, Lufkin & Jenrette Securities Corporation, Pinnacle's financial
advisor, that the consideration to be received by the holders of Pinnacle
common stock in the merger is fair, from a financial point of view, to
Pinnacle's stockholders.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS UNANIMOUSLY
DETERMINED THE MERGER TO BE ADVISABLE AND IN THE BEST INTERESTS OF PINNACLE
STOCKHOLDERS. THE BOARD OF DIRECTORS OF PINNACLE UNANIMOUSLY RECOMMENDS
THAT YOU VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
The merger cannot be completed unless, among other conditions, Pinnacle
stockholders approve and adopt the Merger Agreement by at least a two-
thirds vote of the shares outstanding and Old Kent obtains regulatory
approval of the merger.
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU EXPECT TO ATTEND THE
SPECIAL MEETING IN PERSON, PLEASE SIGN AND DATE THE ENCLOSED PROXY CARD AND
MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE.
<PAGE>
Old Kent's common stock is quoted on the New York Stock Exchange under
the symbol "OK." Old Kent common stock is not a savings account, deposit,
or other obligation of any bank or nonbank subsidiary of Old Kent and is
not insured by the Federal Deposit Insurance Corporation or any other
governmental agency.
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Neither the Securities and Exchange Commission nor any state securities
regulator has approved or disapproved of these securities nor passed upon
the adequacy or accuracy of this prospectus and proxy statement. Any
representation to the contrary is a criminal offense.
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July 2, 1999
<PAGE>
TABLE OF CONTENTS
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
The Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Recent Developments in Old Kent's Business. . . . . . . . . . . . . .4
SELECTED FINANCIAL DATA (UNAUDITED). . . . . . . . . . . . . . . . . . . .5
Historical Selected Financial Data. . . . . . . . . . . . . . . . . .5
Unaudited Pro Forma Combined Condensed Financial Information. . . . .6
Comparative Per Share Information . . . . . . . . . . . . . . . . . .7
Historical Trading Range of Old Kent Common Stock . . . . . . . . . .8
THE SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Date, Time and Place of the Special Meeting . . . . . . . . . . . . .8
Purpose of the Special Meeting. . . . . . . . . . . . . . . . . . . .8
Stockholder Record Date for the Special Meeting . . . . . . . . .
8
Vote of Pinnacle Stockholders Required for Approval and
Adoption of the Merger Agreement. . . . . . . . . . . . . . . . . .9
Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
THE MERGER AND MERGER AGREEMENT. . . . . . . . . . . . . . . . . . . . . 10
What You Will Receive . . . . . . . . . . . . . . . . . . . . . . . 10
Structure of the Merger . . . . . . . . . . . . . . . . . . . . . . 11
Background of the Merger. . . . . . . . . . . . . . . . . . . . . . 11
Merger Recommendation and Reasons for the Merger . . . . . . . . 12
Opinion of Pinnacle's Financial Advisor . . . . . . . . . . . . . . 13
Stock Price Condition . . . . . . . . . . . . . . . . . . . . . . . 20
Regulatory Approvals. . . . . . . . . . . . . . . . . . . . . . . . 20
Effective Time of the Merger. . . . . . . . . . . . . . . . . . . . 20
Bank Consolidation. . . . . . . . . . . . . . . . . . . . . . . . 20
Distribution of Old Kent Common Stock . . . . . . . . . . . . . . . 21
Exclusive Commitment to Old Kent. . . . . . . . . . . . . . . . . . 22
Conduct of Pinnacle Pending the Completion of the Merger. . . . . . 22
Insurance and Indemnification . . . . . . . . . . . . . . . . . . . 25
Management of Old Kent After the Merger . . . . . . . . . . . . . . 25
Conditions to Closing the Merger. . . . . . . . . . . . . . . . . . 25
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Description of Old Kent Capital Stock . . . . . . . . . . . . . . . 28
Stock Option Agreement. . . . . . . . . . . . . . . . . . . . . . . 29
Comparison of Rights of Old Kent's and Pinnacle's Stockholders . . .32
Restrictions on Pinnacle Affiliates . . . . . . . . . . . . . . . . 38
Material Federal Income Tax Consequences. . . . . . . . . . . . . . 39
Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . . . 40
DISSENTER'S RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
<PAGE>
VOTING AND MANAGEMENT INFORMATION . . . . . . . . . . . . . . . . . . 42
Voting Securities and Principal Stockholders of Pinnacle . . . . 42
Interests of Certain Persons in the Merger . . . . . . . . . . . . .44
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Independent Public Accountants. . . . . . . . . . . . . . . . . . . 45
Stockholder Proposals . . . . . . . . . . . . . . . . . . . . . . . 45
Legal Opinions. . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Sources of Information. . . . . . . . . . . . . . . . . . . . . . . 46
WHERE YOU CAN FIND MORE INFORMATION. . . . . . . . . . . . . . . . . . . 46
FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . 47
AGREEMENT AND PLAN OF MERGER . . . . . . . . . . . . . . . . . Appendix A
STOCK OPTION AGREEMENT . . . . . . . . . . . . . . . . . . . . . Appendix B
OPINION OF DONALDSON, LUFKIN & JENRETTE SECURITIES
CORPORATION. . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix C
OLD KENT'S 1998 ANNUAL REPORT. . . . . . . . . . . . . . . . . . Appendix D
EXCERPTS FROM OLD KENT'S 1999 FIRST QUARTER REPORT . . . . . . . Appendix E
SECTIONS 11.65 AND 11.70 OF THE ILLINOIS BUSINESS CORPORATION
ACT (DISSENTER'S RIGHTS) . . . . . . . . . . . . . . . . . . . Appendix F
<PAGE>
SUMMARY
This summary highlights selected information from this prospectus and
proxy statement and may not contain all of the information that is
important to you. To best understand Old Kent's acquisition of Pinnacle
and for a more complete description of the legal terms of the merger, you
should read carefully this entire document and the documents that are
incorporated by reference in this document. In this prospectus and proxy
statement, "you" and "your" refer to each stockholder of Pinnacle.
On June 21, 1999, Old Kent's Board of Directors declared a 5% stock
dividend on Old Kent common stock, payable July 19, 1999, to Old Kent's
shareholders of record on June 29, 1999 (the "Old Kent stock dividend").
The Old Kent stock dividend resulted in an adjustment to the amount of
Old Kent common stock that Pinnacle stockholders would be entitled to
receive in the merger. Share and per share data in this prospectus
and proxy statement have been adjusted to reflect the Old Kent stock
dividend except as otherwise indicated. However, the text of the Merger
Agreement attached as Appendix A, the section "The Merger and Merger
Agreement--Opinion of Pinnacle's Financial Advisor," and data in earlier
dated documents incorporated by reference in this prospectus and proxy
statement have not been so adjusted.
THE COMPANIES
OLD KENT FINANCIAL CORPORATION
111 Lyon Street N.W.
Grand Rapids, Michigan 49503
(616) 771-5000
Old Kent Financial Corporation is a financial services organization
that operates as a bank holding company headquartered in Grand Rapids,
Michigan. Old Kent's principal markets for financial services
presently are the Michigan and Northeastern Illinois communities in
which Old Kent Bank is located and the areas immediately surrounding
those communities. At March 31, 1999, Old Kent had, on a consolidated
basis, assets of $15.9 billion, deposits of $12.5 billion, a net loan
portfolio of $9.1 billion, and shareholders' equity of $1.1 billion.
Old Kent's principal banking subsidiary, Old Kent Bank, serves more
than 100 communities through over 230 banking offices in Michigan,
Illinois, and Indiana. Old Kent also has one other bank subsidiary
and seven non-bank subsidiaries. Subsidiaries of Old Kent Bank
include Old Kent Mortgage Company, an originator of residential
mortgages; Old Kent Insurance Group, Inc., an insurance agency; Old
Kent Securities Corporation, a securities brokerage firm, and Lyon
Street Asset Management Company, an investment advisor.
-1-
<PAGE>
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.
PINNACLE BANC GROUP, INC.
2215 York Road, Suite 306
Oak Brook, Illinois 60523
(630) 574-3350
Pinnacle Banc Group, Inc. is a multi-bank holding company that engages
in the business of banking through the ownership of its subsidiary
banks, Pinnacle Bank and Pinnacle Bank of the Quad-Cities. Pinnacle's
subsidiaries have 13 banking locations in the metropolitan areas of
Chicago and three locations in the Quad Cities area of Western
Illinois. At March 31, 1999, Pinnacle had total consolidated assets of
$1.045 billion, total loans of $551 million, total deposits of $872
million, and total stockholders' equity of $109 million.
Pinnacle Bank and Pinnacle Bank of the Quad-Cities are full service
commercial banks encompassing most of the usual functions of
commercial and savings banking including commercial, consumer, and
real estate lending; installment credit lending; collections; safe
deposit operations; and other services tailored for individual
customer needs. Both banks also offer a full range of deposit services
to individuals and businesses, including demand, savings and time
deposits, as well as trust services. Each bank provides
nondeposit-based products, including mutual funds and annuities
through an affiliation with an independent broker.
THE MERGER
WHAT YOU WILL RECEIVE (SEE PAGE 10)
If the merger is completed as planned, you will receive 0.75285 shares
of Old Kent common stock for each share of Pinnacle common stock that
you own. This number has been adjusted to reflect the Old Kent stock
dividend and will be further adjusted if either Old Kent or Pinnacle
declares a stock split, stock dividend, or other stock distribution
before the completion of the merger. No fractional shares will be
issued. Instead, you will receive a check in payment for any
fractional shares based on the market value of the Old Kent common
stock.
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<PAGE>
EXAMPLE: IF YOU OWN 100 SHARES OF PINNACLE STOCK, YOU WILL RECEIVE 75
SHARES OF OLD KENT COMMON STOCK. IN ADDITION, YOU WILL RECEIVE A
CHECK EQUAL TO 0.285 (YOUR FRACTIONAL SHARE) MULTIPLIED BY THE AVERAGE
CLOSING PRICE OF OLD KENT COMMON STOCK FOR THE TEN TRADING DAY PERIOD
ENDING 11 BUSINESS DAYS BEFORE THE CLOSING OF THE MERGER.
You should not send in your stock certificates until instructed to do
so by Old Kent after the merger is completed.
RECOMMENDATION TO PINNACLE STOCKHOLDERS TO APPROVE THE MERGER
After careful consideration, your Board of Directors unanimously
determined the merger to be advisable to, and in the best interests
of, Pinnacle stockholders. The Board of Directors of Pinnacle
unanimously recommends that you vote FOR the proposal to approve and
adopt the Merger Agreement.
PINNACLE'S FINANCIAL ADVISOR'S OPINION THAT THE CONSIDERATION IS FAIR
(SEE PAGE 13)
In deciding to approve the merger, Pinnacle's Board of Directors
considered the opinion of its financial advisor, Donaldson, Lufkin &
Jenrette Securities Corporation, that the consideration to be received
by the holders of Pinnacle common stock is fair to Pinnacle's
stockholders from a financial point of view. Donaldson, Lufkin &
Jenrette's written opinion is attached as Appendix C to this
prospectus and proxy statement. You are encouraged to read it.
TIME AND LOCATION OF THE PINNACLE STOCKHOLDER MEETING (SEE PAGE 8)
Pinnacle will hold a special meeting of its stockholders to vote on
the approval and adoption of the Merger Agreement. The special
meeting of Pinnacle stockholders will be held:
Tuesday, August 10, 1999
10:00 a.m. local time
Drake Oak Brook Office Plaza
2215 York Road
Oak Brook, Illinois
To adopt the Merger Agreement, at least two-thirds of the 7,399,343
shares of Pinnacle common stock outstanding as of July 1, 1999 must
vote FOR approval and adoption of the Merger Agreement.
As of July 1, 1999, Pinnacle's directors, executive officers,
and their affiliates beneficially owned 43% of Pinnacle common stock
(excluding stock options). They are expected to vote in favor of
approval and adoption of the Merger Agreement.
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<PAGE>
As of April 19, 1999, neither Old Kent nor any of Old Kent's directors,
executive officers, or their affiliates owned any Pinnacle common
stock. No approval of Old Kent's stockholders is required to complete
the merger.
PROCEDURE FOR CASTING YOUR VOTE (SEE PAGE 9)
Please mail your signed proxy card in the enclosed return envelope as
soon as possible so that your shares of Pinnacle common stock may be
represented at the special meeting. If you do not include
instructions on how to vote your properly executed proxy, your shares
will be voted FOR approval and adoption of the Merger Agreement.
PROCEDURE FOR CASTING YOUR VOTE IF YOUR SHARES ARE HELD BY A BROKER IN
STREET NAME
If your shares are held by your broker or other nominee in street
name, your broker may vote your shares only if you provide
instructions on how you want to vote. If you do not provide your
broker with voting instructions, your shares will not be voted at the
special meeting and it will have the same effect as voting against
approval and adoption of the Merger Agreement.
PROCEDURE FOR CHANGING YOUR VOTE (SEE PAGE 10)
If you want to change your vote, just send the Secretary of Pinnacle a
later-dated, signed proxy card before the special meeting or attend
the special meeting in person. You may also revoke your proxy by
sending written notice to the Secretary of Pinnacle before the special
meeting.
PINNACLE'S RIGHT TO TERMINATE THE MERGER IF OLD KENT'S STOCK PRICE
FALLS BY A CERTAIN RELATIVE AMOUNT (SEE PAGE 20)
Pinnacle will have the right to terminate the Merger Agreement if,
after Old Kent and Pinnacle have scheduled a closing of the merger,
the "Final Old Kent Price" of Old Kent's common stock as reported on
the New York Stock Exchange is less than $36.43 per share AND the
price of Old Kent common stock has declined by 15% or more relative to
the stock prices of an index of bank holding company stocks identified
in the Merger Agreement. The "Final Old Kent Price" of Old Kent's
common stock is determined by taking the average of the per share
closing prices on the ten trading days ending on the 11th business day
prior to the date of the scheduled closing.
For information regarding other circumstances in which Old Kent or
Pinnacle may have the right to terminate the Merger Agreement, see the
discussion under the caption "Termination" on page 27.
-4-
<PAGE>
BANK REGULATORS MUST APPROVE THE MERGER (SEE PAGE 20)
The Board of Governors of the Federal Reserve System, referred to as
the Federal Reserve Board, must approve the merger. Old Kent filed its
application for approval with the Federal Reserve Board on June 10, 1999.
CONDITIONS TO COMPLETION OF THE MERGER (SEE PAGE 25)
There are a number of conditions that must be met before Old Kent and
Pinnacle will be required to complete the merger. These conditions
include the following, among others:
- Pinnacle's stockholders must approve and adopt the Merger Agreement
by a vote of two-thirds of the shares outstanding;
- The Federal Reserve Board must approve the merger;
- Old Kent's tax counsel must provide a tax opinion that the merger
will be a tax-free reorganization; and
- Old Kent's independent public accountant must advise Old Kent that
the merger should qualify to be treated as a pooling-of-interests
for accounting purposes.
Some of these and other conditions to the merger may be waived by the
party for whose benefit they are provided.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (SEE PAGE 39)
The merger is structured so that you are not expected to recognize any
gain or loss for federal income tax purposes in the merger. HOWEVER,
DUE TO THE COMPLEXITIES OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS,
YOU ARE STRONGLY RECOMMENDED TO CONSULT YOUR OWN TAX ADVISORS
CONCERNING THE TAX CONSEQUENCES TO YOU OF THE MERGER.
YOUR RIGHT TO DISSENT (SEE PAGE 40)
You have the right to dissent from the merger and obtain an estimated
fair market value for your Pinnacle stock in cash upon the
consummation of the merger. If you dissent and you do not agree with
Old Kent as to the fair value of your Pinnacle stock, then the
Illinois Business Corporation Act provides for a judicial
determination of such value. However, to exercise your dissenter's
rights, certain procedures set forth in Section 11.65 and 11.70 of the
Illinois Business Corporation Act must be followed closely. For your
reference, a copy of these sections are attached as Appendix F.
-5-
<PAGE>
INTERESTS OF PINNACLE'S OFFICERS AND DIRECTORS IN THE MERGER
(SEE PAGE 44)
Certain directors and officers of Pinnacle, Pinnacle Bank, and
Pinnacle Bank of the Quad Cities may be deemed to have certain
interests in the merger in addition to their interests generally as
stockholders of Pinnacle. Such interests include the right of certain
executive officers to receive change-in-control payments pursuant to
the terms of their existing employment agreements, the right of
directors and officers to receive continuing indemnification and
insurance coverage, and the right of officers to receive severance
benefits.
In addition, under the terms of Pinnacle's stock option plan as
amended by the Merger Agreement, any unvested options will vest upon
the completion of the merger. Those options will convert into options
to purchase shares of Old Kent common stock on equivalent terms. The
number of shares of Pinnacle common stock subject to the unvested
options held by senior officers and directors totaled 55,341 as of
July 1, 1999.
ACCOUNTING TREATMENT OF THE MERGER (SEE PAGE 40)
Old Kent and Pinnacle expect the merger to qualify as a "pooling-of-
interests" for accounting and financial reporting purposes.
COMPARATIVE MARKET PRICES OF OLD KENT AND PINNACLE STOCK
Old Kent common stock is traded on the New York Stock Exchange under
the symbol "OK." Pinnacle common stock is traded on The Nasdaq Stock
Market under the symbol "PINN".
The following table sets forth the closing prices per share of Old
Kent common stock and of Pinnacle common stock on (1) March 18,1999,
the business day preceding public announcement that Old Kent and
Pinnacle had entered into the Merger Agreement, and (2) June 24, 1999,
the last full trading day for which closing prices were available at
the time of the printing of this prospectus and proxy statement.
In addition, the following table sets forth the equivalent price per
share of Old Kent common stock and shares of Pinnacle common stock on
the dates indicated. The equivalent price per share is equal to the
closing price of a share of Old Kent common stock on that date
multiplied by 0.75285, the number of shares of Old Kent common stock to
be issued in exchange for each share of Pinnacle common stock.
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<PAGE>
<TABLE>
<CAPTION>
OLD KENT PINNACLE
COMMON STOCK COMMON STOCK EQUIVALENT
DATE CLOSING PRICE CLOSING PRICE PER SHARE
<S> <C> <C> <C>
Mar. 18, 1999 $42.86<F*> $27.19 $32.27
June 24, 1999 $42.50 $31.13 $32.00
<FN>
- ------------------
<F*> Adjusted to reflect the Old Kent stock dividend.
</FN>
</TABLE>
This equivalent price per share reflects the approximate market value
of the Old Kent common stock you would receive for each share of your
Pinnacle common stock if the merger were completed on either of these
dates.
RECENT DEVELOPMENTS IN OLD KENT'S BUSINESS
On February 24, 1999, Old Kent signed an agreement with CFSB Bancorp,
Inc. under which Old Kent will acquire CFSB. As a result of the CFSB
merger, outstanding shares of CFSB's common stock will be converted
into a total of approximately 5,377,353 shares of Old Kent common
stock. It is anticipated that the CFSB merger will be completed on
July 9, 1999 and treated as a pooling-of-interests for accounting and
financial reporting purposes.
As of March 31, 1999, CFSB had (on a consolidated basis) approximate
total assets of $889 million, total net loans of $790 million, total
deposits of $580 million, and total stockholders' equity of $71
million. CFSB provides banking services in the greater Lansing,
Michigan area through 16 offices in Ingham, Clinton, Eaton, and Ionia
counties.
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<PAGE>
<TABLE>
SELECTED FINANCIAL DATA (UNAUDITED)
The following financial information is provided to aid you in your analysis of the financial
aspects of the merger. This information is derived from Old Kent's and Pinnacle's audited financial
statements for 1994 through 1998 and their unaudited financial statements for the three months ended
March 31, 1999. This information is only a summary. You should read it in conjunction with the
historical financial statements (and related notes) contained in or incorporated by reference in Old
Kent's and Pinnacle's annual reports on Form 10-K and other information filed with the Securities
and Exchange Commission, which is incorporated by reference in this prospectus and proxy statement.
Old Kent's 1998 Annual Report and excerpts from Old Kent's 1999 First Quarter Report have been
attached as Appendix D and Appendix E, respectively, for your convenience. See "Where You Can Find
More Information" below.
HISTORICAL SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED -------------------------------------------------------------------------
MARCH 31, 1999 1998 1997 1996 1995 1994
-------------- ---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
OLD KENT FINANCIAL CORPORATION
Income Statement Data:
Net interest income $ 148,618 $ 587,882 $ 582,708 $ 551,873 $ 536,390 $ 518,505
Provision for credit losses 6,866 46,828 46,977 35,636 21,666 22,465
Net income 58,603 198,798 198,418 179,393 162,044 157,499
Balance Sheet Data (period end):
Assets $15,911,816 $16,588,858 $15,706,615 $14,556,841 $13,891,172 $13,349,745
Deposits 12,490,645 12,939,418 11,928,907 11,775,994 11,019,312 11,123,954
Loans 9,306,484 8,883,716 9,144,497 8,715,751 7,961,051 7,333,613
Long-term debt(1) 200,000 200,000 200,000 100,000 100,000 0
Shareholders' equity 1,098,996 1,135,110 1,225,595 1,180,197 1,189,754 1,053,461
PINNACLE BANC GROUP, INC.
Income Statement Data:
Net interest income $ 8,564 $ 32,440 $ 33,358 $ 27,156 $ 27,558 $ 26,280
Provision for credit losses 0 0 0 0 0 900
Net income 2,021 14,681 14,429 7,127 12,493 2,255
Balance Sheet Data (period end):
Assets $ 1,044,645 $ 1,146,065 $ 1,034,811 $ 1,048,376 $ 818,697 $ 684,892
Deposits 872,007 883,806 846,469 877,552 712,805 599,879
Loans 550,938 541,356 510,207 525,069 309,600 248,404
Notes Payable 24,250 20,750 20,000 32,800 20,600 5,400
Shareholders' equity 108,928 117,376 115,458 100,824 78,961 68,836
</TABLE>
(See footnotes beginning on the following page.)
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<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
Old Kent and Pinnacle expect that the merger will be accounted for as a
pooling-of-interests. This means that, for accounting and financial
reporting purposes, Old Kent will treat the companies as if they had always
been combined. For a more detailed description of pooling-of-interests
accounting, see "The Merger and Merger Agreement--Accounting Treatment"
below.
The following unaudited pro forma financial information reflects the
pooling-of-interests method of accounting and is intended to give you a
picture of what Old Kent and Pinnacle might have looked like had they been
combined at the dates and for the periods presented. It does not reflect
Old Kent's pending acquisition of CFSB. The pro forma income statement and
balance sheet were prepared by adding or combining the historical accounts
of each company. The companies may have performed differently if they had
been combined. You should not rely on the pro forma information as showing
the historical results that Old Kent and Pinnacle would have had if
combined or the future results that they will report after the merger.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER 31,
MARCH 31, 1999 1998 1997 1996
-------------- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Income Statement Data:
Net interest income $ 157,182 $ 620,322 $ 616,066 $ 579,029
Provision for credit losses 6,866 46,828 46,977 35,636
Net income 60,624 213,479 212,847 186,520
Balance Sheet Data (period end)<F2>:
Assets $16,956,461 $17,734,923 $16,741,426 $15,605,217
Deposits 13,362,652 18,823,224 12,775,376 12,653,546
Loans 9,857,422 9,425,072 9,654,704 9,240,820
Notes Payable 24,250 20,750 20,000 32,800
Long-term debt<F1> 200,000 200,000 200,000 100,000
Shareholders' equity 1,207,924 1,252,486 1,341,053 1,281,021
<FN>
_______________________
<F1> Includes $100 million guaranteed preferred beneficial interests in Old Kent's junior subordinated
debentures, for the three months ended March 31, 1999 and the years ended 1998 and 1997.
<F2> The pro forma combined balance sheet data assumes the issuance of 5,570,595 shares of Old Kent common
stock in exchange for all of the outstanding shares of Pinnacle common stock, assuming an exchange
ratio of 0.75285 shares of Old Kent common stock for each share of Pinnacle common stock.
</FN>
</TABLE>
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<PAGE>
Under the "risk-based" capital guidelines presently in effect for
banks and bank holding companies, minimum capital levels are based on the
perceived risk in the various asset categories. Certain off-balance-sheet
instruments, such as loan commitments and letters of credit, require
capital allocations. Bank holding companies are required to maintain
minimum risk-based capital ratios. Old Kent's and Pinnacle's ratios are
above the regulatory minimum guidelines and each of their subsidiary banks
met the regulatory criteria to be categorized as "well-capitalized"
institutions at March 31, 1999. The "well-capitalized" classification may
permit financial institutions to minimize the cost of Federal Deposit
Insurance Corporation insurance assessments by being charged a lesser rate
than those that do not meet this definition. Designation as a "well-
capitalized" institution does not constitute a recommendation by federal
bank regulators. The following table shows capital ratios and requirements
as of March 31, 1999:
<TABLE>
<CAPTION>
RISK-BASED CAPITAL
---------------------------
LEVERAGE TIER 1 TOTAL
-------- ------ -----
<S> <C> <C> <C> <C>
Old Kent's capital ratios 6.65 % 9.23 % 11.35 %
Pinnacle's capital ratios 7.87 15.20 16.45
Pro forma combined capital ratios 6.72 9.50 11.58
Regulatory capital ratios - "well-capitalized" definition 5.00 6.00 10.00
Regulatory capital ratios - minimum requirement 3.00 4.00 8.00
</TABLE>
COMPARATIVE PER SHARE INFORMATION
The following summarizes the per share information for Old Kent and
Pinnacle on a historical, unaudited pro forma combined, and equivalent pro
forma basis. The Pinnacle per share "Equivalent pro forma" values are
calculated by multiplying the comparable Old Kent pro forma per share
amounts by 0.75285. Pinnacle stockholders will receive 0.75285 shares of Old
Kent common stock in exchange for each share of Pinnacle common stock.
The pro forma data does not show the results of future operations or
the actual results that would have occurred had the merger occurred at the
beginning of the period presented. The pro forma financial data have been
included in accordance with the rules of the Securities and Exchange
Commission and are provided for comparative purposes only. The information
presented below has been restated to reflect stock dividends and stock
splits.
-10-
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED -------------------------------
MARCH 31, 1999 1998 1997 1996
-------------- ---- ---- ----
<S> <C> <C> <C> <C>
OLD KENT COMMON STOCK
Earnings per share - Basic<F1>:
Historical . . . . . . . . $ 0.54 $ 1.77 $ 1.68 $ 1.48
Pro forma<F2>. . . . . . . 0.53 1.81 1.72 1.48
Earnings per share - Diluted<F1>:
Historical . . . . . . . . $ 0.53 $ 1.75 $ 1.67 $ 1.47
Pro forma<F2>. . . . . . . 0.52 1.79 1.71 1.47
Cash dividends declared per share:
Historical . . . . . . . $ 0.19 $ 0.688 $ 0.610 $ 0.549
Book value per share - End of period:
Historical . . . . . . . . $ 10.14 $ 10.35 $ 10.59 $ 10.04
Pro forma<F3>. . . . . . . 10.60 10.86
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED -------------------------------
MARCH 31, 1999 1998 1997 1996
-------------- ---- ---- ----
<S> <C> <C> <C> <C>
PINNACLE COMMON STOCK
Earnings per share - Basic<F1>:
Historical . . . . . . . . $ 0.27 $ 1.96 $ 1.91 $ 1.05
Equivalent pro forma<F4> 0.40 1.36 1.29 1.11
Earnings Per Share - Diluted<F1>:
Historical $ 0.27 $ 1.95 $ 1.91 $ 1.04
Equivalent pro forma<F4> 0.39 1.35 1.28 1.10
Cash dividends declared per share:
Historical $ 0.25 $ 0.92 $ 0.88 $ 0.83
Equivalent pro forma<F4> 0.14 0.52 0.46 0.41
Book value per share - End of period:
Historical $ 14.72 $ 15.73 $ 15.39 $ 13.23
Equivalent pro forma<F4> 7.98 8.18
-11-
<PAGE>
<FN>
_________________
<F1> Earnings per share were calculated using income from continuing
operations. In calculating pro forma earnings per share, no
adjustments to the pro forma amounts have been made to reflect
potential expense reductions or revenue enhancements that may result
from the merger or the effect of repurchases of Old Kent common stock
or Pinnacle common stock subsequent to the stated period.
<F2> Gives effect to the merger as if it had occurred at the beginning of
each period presented.
<F3> Gives effect to the merger as if it had occurred at the end of the
period. The March 31, 1999 pro forma book value per share does not
include the impact of an anticipated $16 million of restructuring and
merger-related charges.
<F4> The equivalent pro forma computations assume that for each share of
Pinnacle common stock outstanding, Pinnacle stockholders would receive
0.75285 shares of Old Kent common stock.
</FN>
</TABLE>
As of June 17, 1999, there were 102,519,251 shares of Old Kent common
stock issued and outstanding(which is equivalent to approximately 107,645,214
shares after giving effect to the Old Kent stock dividend) held by
approximately 15,808 holders of record. As of July 1, 1999, there were
7,399,343 shares of Pinnacle common stock issued and outstanding held by
approximately 550 holders of record and approximately 2,300 beneficial
stockholders.
HISTORICAL TRADING RANGE OF OLD KENT COMMON STOCK
Old Kent common stock is traded on the New York Stock Exchange under
the symbol "OK." The following table sets forth the range of closing
prices for Old Kent common stock for the periods indicated, adjusted for
stock dividends and a stock split. (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).
-12-
<PAGE>
<TABLE>
<CAPTION>
1999 1998 199
---------------- ----------------- -----------------
HIGH LOW HIGH LOW HIGH LOW
---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $45.00 $39.52 $37.19 $32.66 $22.57 $20.35
Second Quarter $46.31 $40.24 37.58 33.95 25.10 20.09
Third Quarter 37.86 27.50 31.07 24.31
Fourth Quarter 44.29 27.74 38.21 27.94
</TABLE>
THE SPECIAL MEETING
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The special meeting of stockholders of Pinnacle is scheduled to be
held as follows:
August 10, 1999
10:00 a.m., local time
Drake Oak Brook Office Plaza
2215 York Road
Oak Brook, Illinois
PURPOSE OF THE SPECIAL MEETING
The special meeting is being held so that stockholders of Pinnacle
may consider and vote upon a proposal to approve and adopt the Merger
Agreement between Pinnacle, Old Kent and a wholly owned subsidiary of
Old Kent and to transact any other business that properly comes before
the special meeting or any adjournment of the meeting. Approval and
adoption of the Merger Agreement will also constitute approval of the
merger and the other transactions contemplated by the Merger Agreement.
If there is an affirmative vote of at least two-thirds of Pinnacle's
common stock outstanding approving and adopting the Merger Agreement and
Old Kent acquires Pinnacle, then you will receive 0.75285 of a share of
Old Kent common stock for each share of Pinnacle common stock you hold
plus cash (without interest) in lieu of a fractional share of Old Kent
common stock.
-13-
<PAGE>
STOCKHOLDER RECORD DATE FOR THE SPECIAL MEETING
Pinnacle's Board of Directors has fixed the close of business on
July 1, 1999, as the record date for determination of Pinnacle
stockholders entitled to notice of and entitled to vote at the special
meeting. On the record date, there were 7,399,343 shares of Pinnacle
common stock outstanding, held by approximately 550 holders of record
and approximately 2,300 beneficial stockholders.
VOTE OF PINNACLE STOCKHOLDERS REQUIRED FOR APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT
A majority of the outstanding shares of Pinnacle common stock
entitled to vote at the special meeting must be represented, either in
person or by proxy, to constitute a quorum at the special meeting. The
affirmative vote of the holders of at least two-thirds of Pinnacle's
common stock outstanding and entitled to vote at the special meeting is
required to approve and adopt the Merger Agreement. You are entitled to
one vote for each share of Pinnacle common stock held by you on the
record date.
As of the record date for the special meeting, directors and
executive officers of Pinnacle and their affiliates beneficially owned
approximately 3,203,089 shares of Pinnacle common stock (excluding
options), which stock represented approximately 43% of all outstanding
shares of Pinnacle common stock entitled to vote at the special meeting.
PROXIES
All shares of Pinnacle common stock represented by properly
executed proxies received before or at the special meeting will, unless
the proxies are revoked, be voted in accordance with the instructions
indicated on the proxy cards. If a properly executed proxy is returned
and no instructions are indicated, the Pinnacle common stock represented
by the proxy will be considered present at the special meeting for
purposes of determining a quorum and for purposes of calculating the
vote, and will be voted FOR the approval and adoption of the Merger
Agreement. You are urged to mark the box on the proxy to indicate how
to vote your shares.
If a properly executed proxy is returned and the stockholder has
specifically abstained from voting on the approval and adoption of the
Merger Agreement, the Pinnacle common stock represented by the proxy
will be considered present at the special meeting for purposes of
determining a quorum and for purposes of calculating the vote, but will
not be considered to have been voted in favor of the approval and
adoption of the Merger Agreement. Similarly, if an executed proxy is
returned by a broker holding shares of Pinnacle common stock in street
name that indicates that the broker does not have discretionary
-14-
<PAGE>
authority to vote on the approval and adoption of the Merger Agreement,
the shares will be considered present at the meeting for purposes of
determining the presence of a quorum and calculating the vote, but will
not be considered to have been voted for the approval and adoption of
the Merger Agreement. Your broker will vote your shares only if you
provide instructions on how to vote by following the information
provided to you by your broker.
Because the approval and adoption of the Merger Agreement requires
the affirmative vote of at least two-thirds of Pinnacle's common stock
outstanding as of the record date, abstentions, failures to vote and
broker non-votes will have the same effect as a vote against the
approval and adoption of the Merger Agreement.
Pinnacle does not expect that any matter other than the approval
and adoption of the Merger Agreement will be brought before the special
meeting. If, however, other matters are properly presented, the persons
named as proxies will (subject to applicable law) vote in accordance
with their judgment with respect to those matters. You may revoke your
proxy at any time before it is voted by:
- Notifying in writing the Secretary of Pinnacle;
- Granting a subsequent proxy; or
- Appearing in person and voting at the special meeting.
Attendance at the special meeting will not in and of itself constitute
revocation of a proxy.
Proxies to vote at the special meeting are being solicited by
Pinnacle's Board of Directors. In addition, officers and employees of
Pinnacle and its subsidiaries, and if requested by Pinnacle, officers
and employees of Old Kent and its subsidiaries, may solicit proxies
personally or by telephone or other electronic means. Such individuals
will not receive any additional compensation for doing so. Pinnacle and
Old Kent will each, respectively, bear their own costs of soliciting
proxies.
YOU SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH YOUR PROXIES. A
TRANSMITTAL FORM WITH INSTRUCTIONS FOR THE EXCHANGE OF YOUR PINNACLE
STOCK CERTIFICATES WILL BE MAILED TO YOU AS SOON AS PRACTICABLE AFTER
COMPLETION OF THE MERGER.
THE MERGER AND MERGER AGREEMENT
THE MERGER AGREEMENT, ATTACHED AS APPENDIX A, AND THE STOCK OPTION
AGREEMENT, ATTACHED AS APPENDIX B, ARE INCORPORATED IN THIS PROSPECTUS
-15-
<PAGE>
AND PROXY STATEMENT BY REFERENCE AND SHOULD BE CAREFULLY CONSIDERED.
CERTAIN PROVISIONS OF THE MERGER AGREEMENT AND THE STOCK OPTION
AGREEMENT HAVE BEEN SUMMARIZED IN THIS PROSPECTUS AND PROXY STATEMENT
FOR YOUR INFORMATION. HOWEVER, THE MERGER AGREEMENT AND THE STOCK
OPTION AGREEMENT, NOT THIS SUMMARY, ARE THE DEFINITIVE STATEMENTS OF THE
TERMS OF THE MERGER.
WHAT YOU WILL RECEIVE
If Pinnacle stockholders approve and adopt the Merger Agreement and
the merger is completed, Old Kent will acquire Pinnacle and as a result,
will own all the assets of Pinnacle, including Pinnacle Bank and
Pinnacle Bank of the Quad Cities (these banks are collectively referred
to as the "Pinnacle Banks"). In exchange, you will receive 0.75285 shares
of Old Kent common stock for each of your shares of Pinnacle (the
"Exchange Ratio"), unless you properly exercise your dissenter's rights
(see "Dissenter's Rights" below). Old Kent will not issue fractional
shares of Old Kent common stock in the merger. Instead, if you would
otherwise be entitled to receive a fraction of a share of Old Kent
common stock, you will receive an amount of cash determined by
multiplying the amount of the fractional share by the Final Old Kent
Price (defined as the average closing price of Old Kent common stock for
the ten trading day period ending on the 11th business day prior to the
date of the scheduled closing of the merger).
Attached to each share of Old Kent common stock that you will
receive in the merger will be a fraction of an associated Old Kent
Series C Preferred Stock Purchase Right (a "Right"). Each Right
represents a right to purchase 1/100 of a share of Old Kent's Series C
Preferred Stock. However, until the occurrence of certain events
generally involving a change of control of Old Kent, the Rights are not
exercisable, are evidenced by the certificates representing the Old Kent
common stock, and may be transferred only with such shares of Old Kent
common stock. In this prospectus and proxy statement, the term "Old
Kent common stock" includes both Old Kent's common stock and these
Rights. See "--Description of Old Kent Capital Stock" and "--Comparison
of Rights of Old Kent's and Pinnacle's Stockholders" below for a more
detailed discussion of the Rights.
The Exchange Ratio is subject to certain upward or downward
adjustments based upon the occurrence of certain events between the date
of this prospectus and proxy statement and the completion of the merger
that result in or would result in changes in the number of shares of Old
Kent or Pinnacle common stock outstanding. The purpose of any such
adjustment is to prevent dilution of the interests of the respective
stockholders of Old Kent and Pinnacle. The Exchange Ratio has been adjusted
to 0.75285 to reflect the 5% stock dividend. If another stock dividend is
declared and the record date of the stock dividend occurs prior to the
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<PAGE>
Effective Time (see "-- Effective Time of Merger" below), the Exchange Ratio
will be adjusted by (1) multiplying it by the total number of shares of Old
Kent common stock that are outstanding as of the record date for such stock
dividend plus the additional number of shares to be issued as part of
the stock dividend, and (2) dividing it by the total number of shares of
Old Kent common stock outstanding as of the stock dividend's record
date. Old Kent and Pinnacle do not expect that any other events
necessitating an adjustment to the Exchange Ratio will occur.
The Merger Agreement also provides that the Exchange Ratio may be
adjusted for other transactions such as a recapitalization,
reclassification, subdivision, or combination that would substantially
change the number and value of outstanding shares of Old Kent common
stock, a distribution of warrants or rights with respect to Old Kent
common stock, or any other transaction that would have a substantially
similar effect. If one of these types of transactions occurs, Pinnacle
stockholders will be entitled to adjustment in the consideration and
Exchange Ratio such that it is equitable under the circumstances.
STRUCTURE OF THE MERGER
To facilitate the consummation of the acquisition of Pinnacle, Old
Kent has formed a wholly owned subsidiary solely for purposes of the
transaction. The subsidiary will be merged into Pinnacle and Pinnacle
will thereafter become a wholly owned subsidiary of Old Kent in
accordance with the Merger Agreement, the Michigan Business Corporation
Act, and the Illinois Business Corporation Act. Following the merger,
Old Kent will immediately liquidate and dissolve Pinnacle so that the
assets of Pinnacle will be owned directly by Old Kent and the Pinnacle
Banks will be consolidated with and into Old Kent Bank.
BACKGROUND OF THE MERGER
From time to time since Pinnacle became a publicly-held company in
1988, Pinnacle's Board of Directors and management have reviewed
Pinnacle's strategic alternatives for enhancing profitability and
maximizing stockholder value, particularly in view of the changes and
ongoing consolidation that has occurred in the financial services
industry. On a regular basis, Pinnacle has consulted with its financial
consultants and legal advisors regarding the state of the financial
institutions mergers and acquisitions market. In recent years, however,
Pinnacle has been focused on maximizing stockholder value through
implementing its strategic plan of both external growth through
acquisition and internal growth through increased efficiency and
productivity.
In late 1997, as market multiples in combinations for financial
institutions continued to increase, management evaluated Pinnacle's
-17-
<PAGE>
future growth and profitability prospects, in comparison to the
stockholder value that could be generated through being acquired by or
merged with a larger banking entity. As part of this evaluation,
management engaged in discussions with Donaldson, Lufkin and Jenrette
Securities Corporation ("DLJ") for the purpose of obtaining assistance
in regards to Pinnacle's strategic options, including expansion of the
company through acquisitions, a merger with a similarly sized financial
institution, or a transaction with a larger banking entity.
On several occasions beginning in late 1997 and continuing in 1998,
DLJ and Pinnacle's legal advisors addressed management on the issues of
strategic alliances for Pinnacle, including stock-for-stock mergers and
sales of control, and contrasted these options with the alternative of
Pinnacle remaining independent. Pinnacle's stock price and financial
performance were reviewed, as was its strategic plan, and these were
compared to the performance of various peer groups. An analysis of
other financial institution merger transactions was made with a specific
focus on bank and thrift transactions in the Midwest. The financial
multiples in these transactions were applied to a hypothetical
transaction involving Pinnacle and its likely partners in a combination.
At each quarterly meeting of the Board of Directors, Pinnacle's Chief
Executive Officer, John J. Gleason, Jr., reported to the Board on the
current corporate activities, including current projections for earnings
growth, possible acquisition candidates, and the fact that options for
enhancing stockholder value were being explored.
During this process of exploring Pinnacle's options to enhance
stockholder value, management and DLJ identified several financial
institutions in the Midwest, including Old Kent, that they believed
would have the most significant strategic interest in Pinnacle and
financial capacity to offer favorable terms to merge with or acquire
Pinnacle. Management determined that it would be advisable for DLJ to
contact these financial institutions on a confidential basis to explore
their interest in a combination with Pinnacle. This process continued
into early 1999.
On February 4, 1999, Mr. J. Gleason, Jr. and William P. Gleason,
Pinnacle's President, met with representatives of Old Kent and DLJ to
discuss the current and future prospects of Pinnacle and Old Kent,
including a general discussion of Old Kent's strategic objectives in
regards to expansion in the Chicago area and the possible role of
Pinnacle in such expansion. On February 24, 1999, Old Kent indicated
to DLJ an interest in pursuing discussions with Pinnacle and
confidential information was provided to Old Kent on March 3, 1999.
During the period from March 3, 1999 to March 9, 1999, Pinnacle,
with the assistance of its legal and financial advisors, entered into
prolonged and serious negotiations with Old Kent and its representatives
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<PAGE>
with respect to a business combination transaction. Old Kent and
Pinnacle discussed an exchange ratio for each share of Pinnacle common
stock in a stock-for-stock exchange that, based on the then trading
value of Old Kent stock, approximated $33.00 for each share of Pinnacle
common stock. The specific pricing criteria would be agreed upon in the
ongoing negotiations over the succeeding days. Old Kent undertook a
comprehensive due diligence of Pinnacle commencing on March 15 and
ending on March 17, 1999.
On March 17, 1999, Pinnacle's Board of Directors held a special
meeting. During this meeting, Mr. J. Gleason, Jr. explained to the
Board of Directors that Pinnacle was in discussions with Old Kent with
respect to a potential business combination transaction. Mr. J. Gleason,
Jr. explained the sequence of events that lead up to such discussions
and the status of such discussions. At this meeting, DLJ provided the
Board with a comprehensive analysis of the proposed transaction with Old
Kent. The proposed combination with Old Kent was contrasted with
Pinnacle's future prospects on a stand-alone basis. An extensive
discussion ensued regarding the Old Kent proposal, Pinnacle's future
prospects on a stand-alone basis, and other available options.
Pinnacle's legal advisors then reviewed with the Board the proposed
Merger Agreement, including the Stock Option Agreement, and the other
legal issues to be considered in connection with the merger. The Board
of Directors decided not to take a vote on the merger at this meeting,
but rather to reconvene the next day so as to allow further discussions
and give the directors time to analyze the proposed merger and its
implications.
On March 18, 1999, the Board of Directors reconvened and further
discussed the Old Kent proposal, Pinnacle's future prospects on a stand-
alone basis, and other available options. DLJ further elaborated on its
presentation given the prior day and concluded by stating to the Board
that it would render an opinion that the consideration to be received by
Pinnacle's stockholders in the proposed merger with Old Kent was fair to
Pinnacle stockholders from a financial point of view. See - "Opinion of
Pinnacle's Financial Advisor" for a more complete description of the
basis for this opinion. After such discussions, Pinnacle's Board of
Directors unanimously approved the proposed Merger Agreement and the
acquisition by Old Kent. Pinnacle's Board of Directors authorized
Pinnacle's executive officers to negotiate the final outstanding terms
of the Merger Agreement. Through the late evening hours of March 18,
1999, the final terms of the Merger Agreement were negotiated and
finalized and the Merger Agreement was executed. A joint press release
regarding the merger was issued prior to the opening of the stock market
on Friday, March 19, 1999.
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<PAGE>
On April 20, 1999, Old Kent and Pinnacle amended and restated the
Merger Agreement to modify the structure of the merging entities. In so
doing, Old Kent and Pinnacle reaffirmed and ratified all of the
ancillary agreements to the original Merger Agreement, including the
Stock Option Agreement and amendments to the employment agreements of
Messrs. J. Gleason Jr., W. Gleason, and Glenn M. Mazade. However, Old
Kent and Pinnacle agreed that if any of the conditions to Pinnacle's and
Old Kent's obligations under the amended and restated Merger Agreement
cannot be fulfilled prior to the closing but would be capable of
fulfillment under the terms of the original Merger Agreement, then the
amended and restated Merger Agreement will be null and void and the
original Merger Agreement will be reinstated according to its original
terms. The amendment and restatement of the Merger Agreement did not
affect the amount of Old Kent stock you will receive in the merger or
its tax-free nature to Pinnacle's stockholders.
MERGER RECOMMENDATION AND REASONS FOR THE MERGER
PINNACLE
In approving the Merger Agreement, Pinnacle's Board of Directors
considered the form and the value of the consideration to be paid to
Pinnacle's stockholders by Old Kent, Pinnacle's current performance and
future prospects on a stand-alone basis, and certain related factors.
Pinnacle's Board of Directors believes that the merger with Old Kent
will be beneficial to Pinnacle's stockholders, as well as to its
customers, and will enhance the services provided to the communities
served by Pinnacle. Pinnacle's Board believes the merger will benefit
Pinnacle's stockholders by giving them the opportunity to participate in
the future growth and success of a much larger bank holding company that
has a 40-year history of consecutive annual increases in per share
earnings and dividends. Pinnacle's customers will have greater access
and more convenience through the larger number of branches and will be
provided with the opportunity to utilize certain banking products and
services not currently offered by Pinnacle. Pinnacle's Board of
Directors also considered the opinion of DLJ that the consideration
offered under the Merger Agreement was fair to Pinnacle's stockholders
from a financial point of view. Pinnacle's Board of Directors believes
that these factors, combined with Old Kent's financial strength,
indicate that Old Kent is likely to have the resources and ability to
respond to the ongoing changes in the highly-competitive financial
services industry.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS
UNANIMOUSLY DETERMINED THE MERGER TO BE ADVISABLE AND IN THE
BEST INTERESTS OF PINNACLE STOCKHOLDERS. THE BOARD OF
DIRECTORS OF PINNACLE UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
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<PAGE>
OLD KENT
While Old Kent's presence has historically centered on Michigan,
opportunities to expand by acquisition have consistently been reviewed
and prospective acquisition opportunities have been evaluated. As part
of its evaluation of expansion opportunities in Illinois, Old Kent was
familiar with Pinnacle and the banking market served through Pinnacle
Bank and Pinnacle Bank of the Quad Cities. In particular, the suburban
Chicago banking market has been viewed by Old Kent as an attractive
market extension because of the economic and demographic characteristics
of the area. Old Kent believes the proposed merger will enable Old Kent
to improve its geographic diversification by further expanding Old
Kent's presence in the metropolitan Chicago, Illinois area. In
addition, Old Kent believes that the merger will permit the achievement
of certain economies of scale with respect to Old Kent's business
conducted in Illinois and elsewhere.
OPINION OF PINNACLE'S FINANCIAL ADVISOR
BECAUSE THIS SECTION DESCRIBES AN HISTORICAL ANALYSIS AND PRESENTA-
TION, THE STOCK PRICES AND EXCHANGE RATIOS DESCRIBED IN THIS SECTION
ARE THE ACTUAL VALUES AT THE RELEVANT DATE. THESE VALUES HAVE NOT BEEN
ADJUSTED FOR THE OLD KENT STOCK DIVIDEND.
At a meeting of Pinnacle's Board of Directors on March 18, 1999, at
which the terms of the proposed merger were discussed and considered,
DLJ rendered an oral opinion to the Pinnacle Board, which it
subsequently confirmed in writing, that, as of the date of such opinion,
based upon and subject to certain assumptions, limitations and
qualifications, the consideration to be received by the holders of
Pinnacle common stock was fair to the holders of Pinnacle common stock
from a financial point of view. DLJ has delivered a written opinion to
the Pinnacle Board dated the date of this prospectus and proxy
statement stating that, as of the date of this prospectus and proxy
statement and subject to the assumptions, limitations, and qualifications
set forth in such opinion, the consideration to be received by the holders
of Pinnacle common stock is fair to the holders of Pinnacle common stock
from a financial point of view.
THE FULL TEXT OF DLJ'S OPINION DATED THE DATE HEREOF IS INCLUDED AS
APPENDIX C TO THIS PROSPECTUS AND PROXY STATEMENT. PINNACLE
STOCKHOLDERS ARE URGED TO READ THE DLJ OPINION IN ITS ENTIRETY FOR
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED, AND LIMITS OF
THE REVIEW UNDERTAKEN BY DLJ. THE SUMMARY OF THE DLJ OPINION SET FORTH
IN THIS PROSPECTUS AND PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
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<PAGE>
DLJ's opinion is limited to the fairness, from a financial point of
view, of the consideration to be received by the holders of Pinnacle
common stock and does not address Pinnacle's underlying business
decision to proceed with the merger. The opinion is directed only to
the consideration to be received by the holders of Pinnacle common stock
and does not constitute a recommendation to any holder of Pinnacle
capital stock as to how such holder should vote with respect to the
Merger Agreement. DLJ's opinion is based on the economic, market,
financial, and other conditions as they existed on the date of the
opinion, and on the information made available to DLJ as of the date of
the opinion. Although subsequent developments may affect DLJ's opinion,
DLJ is not obligated to update, revise, or reaffirm its opinion.
The Pinnacle Board of Directors selected DLJ as its financial
advisor because it is a nationally recognized investment banking firm
that has substantial experience in transactions similar to the merger
and is familiar with Pinnacle and the financial services industry in
general. DLJ, as part of its investment banking services, is regularly
engaged in the valuation of businesses and their securities in
connection with mergers, acquisitions, underwritings, sales and
distributions of listed and unlisted securities, private placements, and
valuations for corporate and other purposes.
In arriving at its opinion, DLJ reviewed the financial terms and
provisions of the Merger Agreement. DLJ also reviewed financial and
other information that was publicly available or furnished by Pinnacle
and Old Kent including information provided during discussions with
their respective managements. Included in the information provided
during discussions with Pinnacle's management were certain financial
projections of Pinnacle for the period beginning January 1, 1999 and
ending December 31, 2003 (net income was projected by Pinnacle assuming
a redeployment of Pinnacle's investment portfolio into a portfolio of
mortgage-backed securities). DLJ used estimates published by
Institutional Brokerage Estimating Services ("I/B/E/S") for financial
projections of Old Kent for the period beginning January 1, 1999 and
ending December 31, 2003. In addition, DLJ compared certain financial
and securities data of Pinnacle and Old Kent with various other
companies whose securities are traded in public markets, reviewed the
historical stock prices and trading volumes of Pinnacle common stock and
Old Kent common stock, reviewed prices and premiums paid in certain
other business combinations and conducted such other financial studies,
analyses and investigations as deemed appropriate for purposes of this
opinion.
In rendering its opinion, DLJ relied upon and assumed without
independent verification the accuracy and completeness of all of the
financial and other information that was available from public sources,
that was provided to DLJ by Pinnacle and Old Kent or their respective
representatives, or that was otherwise reviewed by DLJ. In particular,
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<PAGE>
DLJ relied upon information provided by the management of Old Kent
concerning the operating synergies expected to be achievable following
the merger and upon discussion of such synergies with the management of
Pinnacle. With respect to the financial projections used in DLJ's
analysis, DLJ assumed that they were reasonably prepared on the basis
reflecting the best currently available estimates and judgments of the
management of Pinnacle and Old Kent as to the future operating and
financial performance of Pinnacle and Old Kent, respectively.
Additionally, DLJ relied as to legal matters involving the merger on
advice of counsel to Pinnacle.
DLJ is not an expert in the evaluation of loan portfolios or
allowances for loan and real estate owned losses. DLJ relied upon
Pinnacle's management's valuation of the loan portfolio and loan
allowances. DLJ did not independently verify and assumed that the
aggregate allowances for loan losses set forth in the balance sheets of
each of Pinnacle and Old Kent at December 31, 1998 are adequate to cover
such losses and complied fully with applicable law, regulatory policy
and sound banking practice as of the date of such financial statements.
DLJ was not retained to and DLJ did not conduct a physical inspection of
any of the properties or facilities of Pinnacle or Old Kent, and did not
make any independent evaluation or appraisal of the assets, liabilities
or prospects of Pinnacle or Old Kent, was not furnished with any such
evaluation or appraisal, and did not review any individual credit files.
In rendering its opinion, DLJ was advised by Pinnacle and Old Kent and
assumed that there were no other factors that would delay or subject to
adverse conditions any necessary regulatory or governmental approval for
the merger, and that all conditions to the merger will be satisfied and
not waived.
The following is a brief summary of the analysis presented by DLJ
to the Pinnacle Board of Directors in connection with DLJ's written
opinion to the Pinnacle Board dated as of March 18, 1999. For purposes
of this summary, "Pinnacle Peer Group" means F&M Bancorporation, Inc.,
First Merchants Corporation, Independent Bank Corporation, Irwin
Financial Corporation, National City Bancshares, Inc., Old Second
Bancorp, Inc., and Shoreline Financial Corporation, and "Old Kent Peer
Group" means Associated Banc-Corp, AmSouth Bancorporation, First
American Corporation, Fifth Third Bancorp, Firstar Corporation, First
Tennessee National Corporation, Huntington Bancshares Incorporated, and
Zions Bancorporation. In connection with its analysis, DLJ used pro
forma data reflecting Old Kent's pending acquisition of CFSB Bancorp,
Inc. In connection with its written opinion dated the date of this
prospectus and proxy statement, DLJ performed procedures to update
certain of its analyses and reviewed the assumptions on which such
analyses were based and the factors considered in connection therewith.
In updating in opinion, DLJ did not utilize any methods of analysis in
addition to those described below.
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HISTORICAL FINANCIAL PERFORMANCE. DLJ analyzed the historical
financial performance of Pinnacle and Old Kent from 1994 through 1998,
including analyses of each company's return on average assets ("ROAA");
return on average equity ("ROAE"); net interest margin; non-interest
income/total revenues ratio; efficiency ratio; EPS growth rate;
nonperforming assets ("NPAs")/total loans and other real estate owned
("OREO") ratio; and leverage ratio. Pinnacle's average performance or
compounded annual growth for 1994 through 1998 for each of the foregoing
indicators of financial performance was: ROAA 1.10%; ROAE 12.0%; net
interest margin -- 3.75%; non-interest income/total revenues ratio --
19.5%; efficiency ratio -- 61.5%; NPAs/total loans and OREO -- 1.40%;
and leverage ratio -- 7.4%. Old Kent's average performance or
compounded annual growth for 1994 through 1998 for each of the foregoing
indicators of financial performance was: ROAA 1.26%; ROAE 15.7%; net
interest margin -- 4.31%; non-interest income/total revenues ratio --
27.8%; efficiency ratio -- 57.9%; EPS growth rate -- 8.7%; NPAs/total
loans and OREO -- 0.74%; and leverage ratio -- 7.6%. Additionally, DLJ
analyzed the fiscal year 1998 and fourth quarter 1998 historical
financial performance of Old Kent and the Old Kent Peer Group, including
analyses of net interest margin, non-interest income/total revenue
ratio, non-interest expense/average earning assets ratio, efficiency
ratio, ROAA (core income basis); ROAE (core income basis); NPAs and
loans 90 days and over delinquent/total loans and OREO, net charge-
offs/average loans, loan loss reserves/total loans, and loan loss
reserves/non-performing loans and loans 90 days and over delinquent.
STOCK TRADING HISTORY. DLJ examined the history of trading prices
and volume for Pinnacle common stock and Old Kent common stock from
January 2, 1996 through March 17, 1999 and the relationship between the
movements of such trading prices to movements of the Standard & Poor's
Regional Bank Index and of the trading prices of the common stocks of
the companies in the Pinnacle Peer Group and the Old Kent Peer Group.
Additionally, DLJ examined the history of price to earnings per share
ratios and price to book value per share ratios for Pinnacle common
stock and Old Kent common stock and the relationship between the
movements of such ratios to each of the Pinnacle Peer Group and Old Kent
Peer Group, respectively, from January 2, 1996 through March 17, 1999.
DLJ computed implied values per share of Pinnacle common stock and
Old Kent common stock by applying the average price/LTM earnings,
price/book value and price/tangible book value multiples of Pinnacle
common stock and Old Kent common stock for the three years ended
December 31, 1998 to the earnings per share, book value per share and
tangible book value per share of Pinnacle common stock and Old Kent
common stock, respectively, at or for the twelve months ended December
31, 1998. The implied values of Pinnacle common stock derived from
Pinnacle's historical trading multiples ranged from $23.57 to $29.35 per
share. The value of the per share consideration of Pinnacle common
stock based on the exchange ratio derived from the closing price of Old
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Kent common stock on March 17, 1999, was $31.37. The implied value of
Old Kent common stock derived from Old Kent's historical trading multiples
ranged from $31.25 to $32.50. The closing price of Old Kent common stock on
March 17, 1999 was $43.75.
DLJ also noted that the annualized historical returns on Pinnacle
common stock (assuming reinvestment of dividends) for the five-, three-
and one-year periods ending on March 17, 1999 were 8.1%, 11.6% and
(17.7)%, respectively. The annualized historical returns on Old Kent
common stock (assuming reinvestment of dividends) for the five-, three-
and one-year periods ending on March 17, 1999 were 31.4%, 39.4% and
20.8%, respectively.
COMPARISON WITH SELECTED COMPANIES. DLJ compared selected
financial ratios (at or for the twelve months ended December 31, 1998)
and trading multiples (as of March 17, 1999) for Pinnacle and Old Kent
to the corresponding ratios and multiples of the Pinnacle Peer Group and
the Old Kent Peer Group, respectively. DLJ also calculated implied
values for Pinnacle common stock and Old Kent common stock based on the
median trading multiples for the Pinnacle Peer Group and the Old Kent
Peer Group. In connection with this analysis, DLJ used median projected
earnings estimates as published by I/B/E/S for Old Kent, the Pinnacle
Peer Group and the Old Kent Peer Group. I/B/E/S is a data service which
monitors and publishes a compilation of earnings estimates produced by
selected research analysts on companies of interest to investors.
Additionally, in connection with this analysis, DLJ used Pinnacle
management estimates for Pinnacle's last twelve months and projected
earnings; these estimates were computed assuming a "redeployment" of
Pinnacle's investment portfolio into a portfolio of mortgage-backed
securities. Unless otherwise noted, all reference to Pinnacle's EPS are
assumed to be computed on this "redeployed" basis.
The trading multiples used in calculating the implied values of
Pinnacle common stock were market prices as a multiple of: (1) EPS for
the twelve months ended December 31, 1998 (which was 18.2x for Pinnacle
as compared to an average of 16.2x for the Pinnacle Peer Group);
(2) 1999 estimated EPS (which was 18.0x for Pinnacle using the I/B/E/S
1999 earnings estimate as compared to an average of 14.9x for the
Pinnacle Peer Group); (3) 2000 estimated EPS (which was 24.5x for
Pinnacle using the I/B/E/S 2000 earnings estimate as compared to an
average of 13.4x for the Pinnacle Peer Group); (4) book value (which was
1.72x for Pinnacle as compared to an average of 2.24x for the Pinnacle
Peer Group); and (5) tangible book value (which was 2.08x for Pinnacle
as compared to an average of 2.68x for the Pinnacle Peer Group).
The implied values of Pinnacle common stock derived from the
Pinnacle Peer Group's earnings multiples ranged from $22.78 to $24.04
per share. The implied values of Pinnacle common stock derived from the
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Pinnacle Peer Group's book value multiples ranged from $34.78 to $35.31
per share.
The trading multiples used in calculating the implied values of Old
Kent common stock were market price as a multiple of: (1) EPS for the
twelve months ended December 31, 1998 (which was 23.6x for Old Kent as
compared to an average of 28.6x for the Old Kent Peer Group); (2) 1999
estimated EPS (which was 19.4x for Old Kent as compared to an average of
21.0x for the Old Kent Peer Group); and (3) book value (which was 3.99x
for Old Kent as compared to an average of 4.26x for the Old Kent Peer
Group). In connection with this analysis, DLJ used pro forma data
reflecting Old Kent's pending acquisition of CFSB Bancorp assuming no
cost savings from this acquisition.
The implied values of Old Kent common stock derived from the Old
Kent Peer Group's earnings multiples ranged from $46.85 to $53.17 per
share. The implied values of Old Kent common stock derived from the Old
Kent Peer Group's book value multiples ranged from $46.71 to $51.86 per
share.
DISCOUNTED CASH FLOW ANALYSIS. Using discounted cash flow
analysis, DLJ estimated the future dividend streams that Pinnacle could
produce over the period from January 1, 1999 through December 31, 2003,
if Pinnacle performed in accordance with forecasts provided by
management of Pinnacle and assuming a minimum required tangible equity
level of 6.0% of tangible total assets, 7.0% cost of debt, and a 37.5%
marginal tax rate. DLJ also estimated the terminal value of Pinnacle
common stock as of December 31, 2003 by applying multiples of 19.0x to
22.0x to Pinnacle's projected 2003 earnings. DLJ selected the range of
terminal multiples on the basis of past and current trading multiples
for Pinnacle and other comparable commercial banks. The dividend
streams and terminal value were discounted to present values as of
December 31, 1998 using discount rates ranging from 12.0% to 14.0%,
which reflect different assumptions regarding the required rates of
return of holders and prospective buyers of Pinnacle common stock. The
range of present values per fully diluted share of Pinnacle common stock
resulting from this analysis was $28.37 to $33.75. DLJ also performed a
discounted cash flow analysis with cost savings assumptions resulting
from the merger of 15.0% in 1999 and 30% through 2003 of Pinnacle's non-
interest expense base. Assuming a discount rate of 13.0%, the analysis
resulted in a range of present values per fully diluted share of
Pinnacle common stock of $30.44 to $37.07. The analysis reflects a per-
share accretion to the holders of Pinnacle common stock of $2.07 to
$3.32.
Using discounted cash flow analysis, DLJ estimated the future
dividend streams that Old Kent could produce over the period January 1,
1999 through December 31, 2003, if Old Kent performed in accordance with
I/B/E/S earnings estimates and I/B/E/S long term growth estimates and
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assuming a minimum required tangible equity level of 6.0% of tangible
total assets, 7.0% cost of debt, and a 37.5% marginal tax rate. DLJ
also estimated the terminal value of the Old Kent common stock as of
December 31, 2003 by applying multiples of 19.0x to 22.0x to Old Kent's
projected 2003 earnings. DLJ selected the range of terminal multiples
on the basis of past and current trading multiples for Old Kent and
other comparable commercial banks. The dividend streams and terminal
value were discounted to present values as of December 31, 1998 by using
discount rates ranging from 12.0% to 14.0%, which reflect different
assumptions regarding the required rates of return of holders and
prospective buyers of Old Kent common stock. The range of present
values per fully diluted share of Old Kent common stock resulting from
this analysis was $40.98 to $49.87.
DLJ performed a pro forma discounted cash flow analysis for the
combined company to reflect the effects of the merger on the holders of
Old Kent common stock. The analysis resulted in a range of pro forma
values per fully diluted share for holders of Old Kent common stock of
$42.46 to $51.70, which reflects a per-share accretion to the holders of
Old Kent common stock of $1.48 to $1.82.
ANALYSIS OF SELECTED MERGERS. As part of its analyses, DLJ
reviewed nine regional mergers and acquisitions of commercial banks
announced from January 1, 1997 to March 17, 1999 in which the total
assets of the acquired company were between $500 million and $2.0
billion. The nine transactions involved the following pairs of
institutions (acquiror / acquiree): Old Kent Financial Corporation /
CFSB Bancorp, Inc., Anchor BanCorp Wisconsin Inc. / FCB Financial Corp.,
Mercantile Bancorporation Inc. / First Financial Bancorporation, Old
Kent Financial Corporation / First Evergreen Corporation, Union Planters
Corporation / AMBANC Corp., St. Paul Bancorp, Inc. / Beverly
Bancorporation, Inc., First Midwest Bancorp, Inc. / Heritage Financial
Services, Inc., Marshall & Ilsley Corporation / Advantage Bancorp, Inc.,
and Citizens Banking Corporation / CB Financial Corporation. For each
transaction, DLJ calculated the multiple of the offer value to the
acquired company's (1) market price per share one month prior to the
announcement of the merger ("Market Price"); (2) EPS for the last twelve
months preceding announcement of the Merger ("LTM EPS"), (3) LTM EPS
adjusted to exclude gains on sale of securities ("Adjusted LTM EPS");
(4) estimated EPS for the fiscal year following the year in which the
announcement of the transaction occurred ("Forward EPS"); (5) book value
per share; and (6) tangible book value per share. DLJ also calculated
the offer value as a percentage of the acquired company's (i) total
assets and (ii) total loans, and calculated the tangible book premium of
the offer value as a percentage of (i) total deposits and (ii) total
loans.
The calculations for the foregoing nine transactions yielded a
range of multiples of offer value to (1) Market Price of 1.12x to 1.46x
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with a median of 1.24x compared to 1.16x for the merger; (2) LTM EPS of
20.5x to 26.7x, with a median of 24.3x compared to 21.2x for the merger;
(3) Adjusted LTM EPS of 20.5x to 27.9x, with a median of 25.2x compared
to 32.3x for the merger; (4) Forward EPS of 18.8x to 23.6x, with a
median of 21.7x compared to 20.2x for the merger; (5) book value of
1.70x to 3.38x, with a median of 2.43x compared to 1.99x for the merger;
(6) tangible book value of 1.92x to 3.94x, with a median of 2.48x
compared to 2.42x for the merger. The foregoing nine transactions
yielded a range of offer values as a percentage of the acquired
company's (1) total assets of 16.8% to 32.7% with a median of 27.1%
compared to 20.3% for the merger; and (2) total loans of 21.6% to 70.3%
with a median of 39.9% compared to 43.1% for the merger. The foregoing
nine transactions yielded a range of percentages of tangible book value
premium of the offer value to (1) total deposits of 9.4% to 30.8% with a
median of 20.2% compared to 15.4% for the merger; and (2) total loans of
10.5% to 43.4% with a median of 24.3% compared to 25.2% for the merger.
DLJ used these comparable transaction multiples and percentages to
calculate implied values for Pinnacle common stock in the merger based
on the median multiples and percentages of the nine regional
transactions set forth above. In calculating the implied median
valuation, DLJ used the closing price per share of Pinnacle common stock
on March 17, 1999, Pinnacle's LTM EPS, Pinnacle's Adjusted LTM EPS,
Pinnacle's Forward EPS, Pinnacle's book value per share, tangible book
value per share and total assets, total loans, and total deposits as of
December 31, 1998. DLJ calculated that the implied value per share of
Pinnacle common stock, based on the relevant multiples from the nine
comparable transactions set forth above, was $33.36 based on Pinnacle's
market price per share on March 17, 1999, $35.90 based on Pinnacle's LTM
EPS, $24.40 based on Pinnacle's Adjusted LTM EPS, $33.69 based on
Pinnacle's Forward EPS, $38.30 based on Pinnacle's book value per share,
$32.11 based on Pinnacle's tangible book value per share, $41.44 based
on Pinnacle's total assets, $28.72 based on Pinnacle's total loans,
$36.59 based on the tangible book value premium of the offer value over
Pinnacle's total deposits, and $30.36 based on the tangible book value
premium of the offer value over Pinnacle's total loans.
DLJ analyzed premiums offered in six recent announced or completed
acquisitions of commercial banking institutions by Old Kent. The
institutions acquired by Old Kent were CFSB Bancorp Inc., First
Evergreen Corp., Seaway Financial Corp., First National Bancorp,
Edgemark Financial, and University Financial Corp. The aggregate value
of such transactions ranged from $13.2 million to $482.3 million
compared to approximately $233.1 million for the merger. The foregoing
six transactions yielded a range of multiples of offer value to (1)
Market Price of 1.21x to 1.31x, with a median of 1.22x, compared to
1.16x for the merger; (2) LTM EPS of 11.9x to 26.7x, with a median of
17.9x, compared to 21.2x for the merger; (3) Adjusted LTM EPS of 11.9x
to 27.9x, with a median of 17.8x, compared to 32.3x for the merger; (4)
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Forward EPS of 18.8x to 18.8x, with a median of 18.8x, compared to 20.2x
for the merger; (5) book value of 0.95x to 3.34x, with a median of
2.08x, compared to 1.99x for the merger; (6) tangible book value of
1.17x to 4.09x, with a median of 2.33x, compared to 2.42x for the
merger. The foregoing six transactions yielded a range of offer values
as a percentage of the acquired company's (1) total assets of 4.8% to
27.1%, with a median of 19.3%, compared to 20.3% for the merger;
(2) total loans of 17.9% to 70.3%, with a median of 30.5%, compared to
43.1% for the merger. The foregoing six transactions yielded a range of
tangible book value premium of the offer value to (1) total deposits of
7.9% to 28.9%, with a median of 11.1%, compared to 15.4% for the merger;
and (2) total loans of 11.4% to 41.9%, with a median of 18.1%, compared
to 25.2% for the merger.
No company used in the above analyses as a comparison is identical
to Pinnacle, nor is any transaction used in the above analyses as a
comparison identical to the merger. Accordingly, an analysis of the
results of the foregoing is not mathematical; rather, it involves
complex considerations and judgments concerning differences in financial
and operating characteristics of the companies and other facts that
could affect the public trading value of the companies to which they are
being compared.
PRO FORMA MERGER ANALYSIS. DLJ conducted an analysis of the pro
forma impact of the merger on the combined entity based on an exchange
ratio of 0.717 and with estimated cost savings of 7.5% in 1999 and 30.0%
in 2000. DLJ estimated that the merger would be approximately (1) 1.6%
accretive to Old Kent's 1999 estimated EPS; (2) 2.9% accretive to Old
Kent's 2000 estimated EPS; (3) 4.8% accretive to Old Kent's book value;
(4) 3.8% accretive to Old Kent's tangible book value; and (5) 42.6%
dilutive to Pinnacle's dividend per share.
The summary set forth above describes the material elements of the
presentation made by DLJ to the Pinnacle Board on March 18, 1999. The
preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant methods of financial analysis and the
application of these methods to the particular circumstances and
therefore, such an opinion is not readily susceptible to summary
description. Each of the analyses conducted by DLJ was carried out in
order to provide a different perspective on the transaction and add to
the total mix of information available. DLJ did not form a conclusion
as to whether any individual analysis, considered in isolation,
supported or failed to support an opinion as to fairness from a
financial point of view. Rather, in reaching its conclusion, DLJ
considered the results of the analyses in light of each other and
ultimately reached its opinion based on the results of all analyses
taken as a whole. DLJ did not place particular reliance or weight on
any individual analysis, but instead concluded that its analyses, taken
as a whole, supported its determination. Accordingly, notwithstanding
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the separate factors summarized above, DLJ believes that its analyses
and the factors considered by it, without considering all analyses and
factors, could create an incomplete or misleading view of the evaluation
process underlying its opinions.
In performing its analyses, DLJ made numerous assumptions with
respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of
Pinnacle and Old Kent. The analyses performed by DLJ are not
necessarily indicative of actual value or actual future results, which
may be significantly more or less favorable than suggested by such
analyses. Such analyses were prepared solely as part of DLJ's analysis
of the fairness, from a financial point of view, of the consideration to
be received by the holders of Pinnacle common stock. The analyses do
not purport to be appraisals or to reflect the prices at which a company
or its securities may actually be bought or sold. DLJ used in its
analyses various projections prepared in consultation with the
management of Pinnacle and Old Kent. Neither Pinnacle nor Old Kent
publicly discloses internal management projections of the type prepared
in consultation with DLJ in connection with its review. Such
projections were not prepared for, or with a view toward, public
disclosure. In addition, such projections were based on numerous
variables and assumptions that are inherently uncertain, including,
without limitation, factors related to general economic and competitive
conditions, many of which are beyond the control of the managements of
Pinnacle and Old Kent. Accordingly, actual results could vary
significantly from those set forth in such projections.
Pursuant to the terms of a letter agreement dated March 17, 1999,
for DLJ's services in connection with the merger, including the rendering of
its opinions, Pinnacle (1) paid DLJ $500,000 at the time DLJ delivered its
opinion to the Board of Directors of Pinnacle, which payment was not
conditioned on the conclusions reached in the opinion and (2) is obligated
to pay DLJ upon consummation of the merger additional cash compensation
in an amount equal to 0.95% of the aggregate value of outstanding Pinnacle
common stock (treating any shares issuable upon exercise of options, warrants
or other rights of conversion as outstanding) less the amounts paid to
Pinnacle described in the immediately preceding clause (1) of this paragraph.
Pinnacle has also agreed under the letter agreement to reimburse DLJ
for all reasonable out-of-pocket expenses, including reasonable fees and
expenses of counsel, and has agreed to indemnify DLJ against certain
expenses and liabilities incurred in connection with its engagement,
including liabilities under federal securities law.
In the past, DLJ has provided other financial advisory services to
Pinnacle. Pursuant to the terms of a prior letter agreement dated October 29,
1997, Pinnacle engaged and paid to DLJ a retainer fee of $75,000 to review
and analyze financial and structural alternatives available to Pinnacle with a
view to meeting Pinnacle's long term strategic objectives.
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DLJ, in the ordinary course of its business, actively trades equity
securities of Pinnacle and Old Kent for its own account or for the
accounts of customers and thus may hold long or short positions in such
securities at any time.
DLJ has performed investment banking and other services for
Pinnacle and Old Kent in the past and has been compensated for such
services. These relationships are considered by Pinnacle to be in the
ordinary course of business and to be immaterial to DLJ's engagement
relative to the merger.
STOCK PRICE CONDITION
Pinnacle has the right to terminate the Merger Agreement and not
complete the merger if (1) the Final Old Kent Price is less than $36.43,
and (2) the number determined by dividing the Final Old Kent Price by
$42.86 is less than the number obtained by subtracting 0.15 from the
quotient obtained by dividing the average of the average closing prices
per share of each of the common stocks for the 26 bank holding companies
(as specified in Exhibit B of the Merger Agreement attached as Appendix
A to this prospectus and proxy statement) (the "Index Companies") by the
average of the closing prices per share of each of the common stocks of
those same companies as of March 18, 1999. In other words, if the
average of the per share closing prices of Old Kent common stock on the
ten trading days ending on the 11th business day prior to the date of
the scheduled closing of the merger is less than $36.43 and there is a
decline of approximately 15% in the trading price of Old Kent relative
to the Index Companies as calculated above, Pinnacle has the right (but
not the obligation) to terminate the Merger Agreement. You should note
that this right to terminate the Merger Agreement is only available to
Pinnacle after the Final Old Kent Price has been determined, which will
only be determinable once the closing of the merger is scheduled. In
addition, these Old Kent prices -- the $36.43 Old Kent "floor price" and
the $42.86 "initial price" -- may be adjusted if, between the date of
this prospectus and proxy statement and the completion of the merger,
the number of shares of Old Kent common stock changes as a result of a
stock split, stock dividend, or other stock distribution.
Old Kent and Pinnacle have agreed to schedule the closing of the
merger on a mutually agreed upon date. If they cannot agree upon a
date, either party may schedule the closing by giving the other party
ten business days' prior written notice of the desired closing date.
However, neither party may give such notice unless and until (1) all
applicable government approvals of the merger have been obtained
(including the expiration of any applicable waiting periods), and
(2) the Pinnacle stockholders have adopted the Merger Agreement.
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REGULATORY APPROVALS
Before Old Kent and Pinnacle may complete the merger, Old Kent must
receive the approval of the Federal Reserve Board. In addition, if and
when the Federal Reserve Board approves the merger, Old Kent and
Pinnacle must wait an additional 30 days before completing the merger to
allow the U.S. Department of Justice to take further action to delay or
block the merger. However, if the Department of Justice does not issue
adverse comments during the first 15 days of this period, Old Kent and
Pinnacle may complete the merger at that time. Old Kent filed its
application to approve the merger with the Federal Reserve Board on
June 10, 1999. While Old Kent expects to receive the Federal Reserve
Board's approval, no assurance can be made as to whether or when the
approval will be given.
EFFECTIVE TIME OF THE MERGER
The "Effective Time" of the merger -- that is, the date and time
following the closing that the merger is legally completed -- will be as
of the time and date to be elected by Old Kent and specified in the
Certificates of Merger filed with the states of Michigan and Illinois,
but not later than the first business day of the next month following
the month in which the closing occurs. Old Kent and Pinnacle anticipate
that the closing will occur September 3, 1999 and the Effective Time
will be September 7, 1999.
BANK CONSOLIDATION
Old Kent anticipates that shortly after the Effective Time, when
Pinnacle Bank, Pinnacle Bank of the Quad Cities, and Old Kent Bank are
wholly owned subsidiaries of Old Kent, Old Kent will consolidate (I.E.,
merge) Pinnacle Bank and Pinnacle Bank of the Quad Cities into Old
Kent Bank. Pinnacle has agreed to assist Old Kent prior to the
Effective Time in connection with obtaining any necessary regulatory
approvals for this bank consolidation. However, such approvals are not
required prior to the completion of the acquisition of Pinnacle by Old
Kent.
DISTRIBUTION OF OLD KENT COMMON STOCK
As of the Effective Time, you will cease to be a stockholder of
Pinnacle. Certificates that represented your shares of Pinnacle common
stock outstanding immediately prior to the Effective Time (referred to
as "Old Certificates") will then represent the right to receive (1)
shares of Old Kent common stock having all of the voting and other
rights of shares of Old Kent common stock, and (2) cash in lieu of
fractional shares; provided, each outstanding share of Pinnacle common
stock as to which a legally sufficient demand has been made in
accordance with 11.70 of the Illinois Business Corporation Act (a copy
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of which is attached as Appendix F and incorporated in this prospectus
and proxy statement by reference) and that has not been voted in favor
of approval of the Plan of Merger, will, after the Effective Time,
represent only the rights of a dissenting stockholder under the Illinois
Business Corporation Act, including the right to obtain payment from Old
Kent for the estimated fair value of the shares, plus accrued interest.
(See "Dissenter Rights" below).
If Old Kent declares a dividend on Old Kent common stock payable to
stockholders of record of Old Kent as of a record date at or after the
Effective Time you will be entitled to receive that dividend. However,
you will not actually receive dividends payable to holders of record of
Old Kent common stock after the Effective Time until you physically
exchange your Old Certificates for new Old Kent common stock
certificates. Upon physical exchange of your Old Certificates, you will
be entitled to receive from Old Kent an amount equal to all such
dividends (without interest and less the amount of any taxes, if any,
that may have been imposed or paid) declared and paid with respect to
those shares.
As soon as practicable after the Effective Time, Old Kent will
cause Old Kent Bank or such other bank or trust company as Old Kent may
designate (the "Exchange Agent") to send you transmittal materials to be
used to exchange Old Certificates for stock certificates representing
shares of Old Kent common stock. The transmittal materials will contain
instructions with respect to the surrender of Old Certificates. In
addition, Old Kent will deliver to the Exchange Agent that number of
shares of Old Kent common stock issuable in the merger and the amount of
cash payable for fractional shares in the merger.
Promptly after you deliver your Old Certificates to the Exchange
Agent, the Exchange Agent will deliver new Old Kent stock certificates
to you. The Exchange Agent will deliver certificates in the name and to
the address appearing on Pinnacle's stock records as of the Effective
Time or in such other name or to such other address as you may specify
in the transmittal documents received by the Exchange Agent. The
Exchange Agent will not be required to issue and deliver certificates to
you until it has received all of your Old Certificates (or an affidavit
of loss and indemnity bond for such certificate or certificates),
together with properly executed transmittal materials. Such Old
Certificates, transmittal materials, and affidavits must be in a form
and condition reasonably acceptable to Old Kent and the Exchange Agent.
The Exchange Agent will have discretion to determine reasonable rules
and procedures relating to the issuance and delivery of certificates of
Old Kent common stock and the payment for fractional shares.
After the Effective Time, Old Kent will not transfer on the stock
transfer books of Pinnacle any shares of Pinnacle common stock that were
issued and outstanding immediately prior to the Effective Time. If,
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after the Effective Time, a former Pinnacle stockholder properly
presents Old Certificates to the Exchange Agent for transfer, the
Exchange Agent will cancel and exchange the Old Certificates for stock
certificates representing shares of Old Kent common stock as provided in
the Merger Agreement. After the Effective Time, ownership of shares
represented by Old Certificates may be transferred only on the stock
transfer records of Old Kent.
EXCLUSIVE COMMITMENT TO OLD KENT
BOARD RECOMMENDATION
In the Merger Agreement, the Board of Directors of Pinnacle has
agreed, except in the case of a "Fiduciary Event" that has occurred and
is continuing, to recommend the approval and adoption of the Merger
Agreement to Pinnacle's stockholders. A "Fiduciary Event" will be
deemed to have occurred if and when Pinnacle's Board of Directors has:
- Received in writing a "Superior Proposal" (see below) that is then
still pending;
- Determined in good faith (based upon the advice of legal counsel)
that the failure to withdraw, modify, or change its recommendation
would cause the Pinnacle Board of Directors to breach its
fiduciary duties to Pinnacle's stockholders under applicable law;
and
- Determined to accept and recommend the Superior Proposal to
Pinnacle's stockholders.
A "Superior Proposal" is defined to mean any bona fide unsolicited
offer, proposal, solicitation, or expression of interest in Pinnacle
made by a third party on terms that the Pinnacle Board of Directors
determines in good faith, based on the written advice of DLJ or another
financial advisor of nationally recognized reputation, to be more
financially favorable to Pinnacle's stockholders than the Merger
Agreement.
The withdrawal, modification, or change of the Pinnacle Board's
recommendation of the acquisition by Old Kent, if a Fiduciary Event has
occurred, will not be a breach of the Merger Agreement, provided that
Pinnacle provides Old Kent at least two business days advance notice.
However, Old Kent will retain its rights under the Stock Option
Agreement (see "--Stock Option Agreement" below).
NO NEGOTIATIONS WITH THIRD PARTIES
In addition to the Pinnacle Board of Director's commitment to
recommend the acquisition by Old Kent to its stockholders, Pinnacle has
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agreed that it (along with its directors, officers, employees,
attorneys, investment bankers, and other representatives) will not
directly or indirectly solicit or otherwise encourage any other party to
make any proposal involving the sale of Pinnacle or any of Pinnacle's
subsidiaries. Further, Pinnacle has agreed not to negotiate with any
other party regarding a possible sale of Pinnacle, except only in the
event of what would otherwise constitute a Fiduciary Event but for the
fact that Pinnacle's Board has yet to accept and recommend the Superior
Proposal. Finally, again except as otherwise required by law, or if a
Fiduciary Event has occurred and continues, or in the case of what would
otherwise be a Fiduciary Event but for the fact that Pinnacle's Board
has yet to accept and recommend the Superior Proposal, Pinnacle has
agreed that it (along with its directors, officers, employees,
attorneys, investment bankers, and other representatives) will not
provide any non-public information about itself or any of Pinnacle's
subsidiaries to any party other than Old Kent. When Pinnacle is
required to disclose information to a party other than Old Kent as
required by law or by the Merger Agreement, Pinnacle must obtain a
confidentiality agreement with similar restrictions as the
confidentiality agreement between Old Kent and Pinnacle, and Pinnacle
can only provide information that has been previously disclosed to Old
Kent.
CONDUCT OF PINNACLE PENDING THE COMPLETION OF THE MERGER
In the Merger Agreement, Pinnacle made certain covenants to Old
Kent. These covenants, which remain in effect until the Effective Time
or until the Merger Agreement has been terminated, are summarized next.
ORDINARY COURSE OF BUSINESS
Pinnacle has agreed to conduct its business and manage its property
only in the usual, regular, and ordinary course in substantially the
same manner as prior to the execution of the Merger Agreement. In
particular, Pinnacle has agreed, among other things, to: (1) refrain
from taking any action that would be inconsistent with or contrary to
the Merger Agreement; (2) comply in all material respects with all laws,
regulations and court and administrative codes; (3) make no change in
its articles of incorporation, bylaws, or capital stock (except as
contemplated by the Stock Option Agreement); (4) use all reasonable
efforts to preserve its business organization intact; (5) charge off
loans and maintain its allowance for loan losses in accordance with its
prior practices and regulatory and accounting standards; (6) except to
reelect incumbent directors; not increase the number of directors or
fill any other vacancy on the Board of Directors or elect or appoint any
person to an executive office; (7) take no action to increase, or agree
to increase, the salary, severance, or other compensation payable to, or
fringe benefits of, or pay or agree to pay any bonus to, any officer or
director, or any other class or group of employee as a class or group,
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except for: (a) increases, agreements, or payments that are reasonable
in amount, consistent with the prior year, announced or made only after
first advising Old Kent, and which will not exceed eight percent 8% in
any individual instance or an average of 4% for all employees
collectively; (b) previously planned salary increases that have been
disclosed in writing to Old Kent prior to March 18, 1999; and (c)
incentive compensation plan awards, as mutually agreed by Pinnacle and
Old Kent; each of which will be paid or become effective, as the case
may be, not later than the Effective Time; (8) refrain from introducing
or changing any pension, profit-sharing, employee benefit plan, fringe
benefit plan or any other similar type of plan; (9) make no
contribution to any pension plan other than profit sharing contributions
to the Pinnacle Banc Group, Inc. Profit Sharing Plan and Trust and
matching employer contributions to the plan as mutually agreed by
Pinnacle and Old Kent; (10) take no action to enter into any employment
agreement that is not terminable by Pinnacle or any of Pinnacle's
subsidiaries without cost or penalty upon 60 days' or less notice,
except as contemplated by the Merger Agreement; (11) notify Old Kent of
the threat or commencement of any lawsuit or other proceeding against or
relating to Pinnacle or Pinnacle's subsidiaries, their directors,
officers, or employees in their capacities as such, or the merger or the
Merger Agreement; (12) neither make nor renew any charitable
contributions, gifts, commitments, or pledges of cash or other assets
except for contributions that, in the aggregate, will have a fair market
value not greater than $100,000 prorated for the year 1999 through the
Effective Time; (13) take no action to pay, agree to pay, or incur any
liability, except for liabilities already accruing on Pinnacle's books
as the date of the Merger Agreement, for the purchase or lease of any
item of real property, fixtures, equipment or other capital asset in
excess of $50,000 individually or in excess of $100,000 in the aggregate
with respect to Pinnacle, except for prior commitments disclosed in
Pinnacle's disclosure statement; (14) refrain from entering any new
service agreements that are not terminable by Pinnacle without penalty
upon 60 days or less notice, except for contracts for services which do
not exceed $50,000 in aggregate excepting contracts for services
relating to the merger; and (15) take no action to open, enlarge or
materially remodel any bank or other facility and not lease, purchase or
otherwise acquire any real property for use as a branch bank, or apply
for regulatory approval of any new branch bank, excepting prior
commitments made by Pinnacle that are disclosed in Pinnacle's disclosure
statement.
DIVIDENDS
Pinnacle will not pay or make any dividend or purchase or redeem
any shares of common stock other than the regular quarterly cash
dividends in an amount not to exceed $0.25 per quarter per share of
Pinnacle common stock, in a manner consistent with past practice. Old
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Kent and Pinnacle have agreed that they will cooperate to assure that,
during any calendar quarter, there will not be a duplication of payment
of dividends to stockholders of Pinnacle.
If Pinnacle's payment of the cash dividend is not made or is
reduced because it would disqualify the merger from being treated as a
pooling-of-interests for accounting purposes, Old Kent and Pinnacle have
agreed to make an equitable adjustment to the Exchange Ratio to the
extent that a portion of the dividend cannot be paid.
ENVIRONMENTAL INVESTIGATION
Pinnacle has agreed to permit Old Kent to conduct an environmental
assessment of each parcel of Pinnacle's currently owned real property,
any other real estate formerly owned by Pinnacle or its subsidiaries,
and any real estate acquired by Pinnacle's subsidiaries in satisfaction
of a debt previously contracted.
If Old Kent discovers any facts or conditions that, in its
reasonable discretion, it believes could potentially pose a current or
future risk of a material liability, interfere with use, or cause
material diminution of value of the property, then Old Kent will
identify that risk to Pinnacle, identify the facts or conditions
underlying that risk, and provide Pinnacle with a copy of the
environmental assessment for that property. In addition, Old Kent will
obtain an estimate of the proposed scope of work and maximum foreseeable
cost of any further environmental investigation, remediation, or other
follow-up work it reasonably deems necessary or appropriate to assess
and, if necessary or appropriate, clean-up the environmental risk.
All work plans for any investigation and clean-up must be mutually
satisfactory to both Old Kent and Pinnacle.
If Old Kent and Pinnacle are unable to agree upon a course of
action to promptly complete any investigation and clean-up and/or a
mutually acceptable modification to the Merger Agreement, and Old Kent
cannot be reasonably assured that the after-tax cost of the sum of
(1) the actual cost of all investigative and remedial or other
corrective actions or measures undertaken by Pinnacle, (2) the estimated
cost of all investigative and remedial or other corrective actions or
measures not undertaken by Pinnacle but required by law or necessary to
avoid future exposure to material liability, and (3) all decreases in
the value of such properties, in the aggregate, will not exceed
$1,000,000 on an after federal income tax basis; then Old Kent may
terminate the Merger Agreement.
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DATA PROCESSING CONTRACTS
Pinnacle and its subsidiaries may not enter into any new data
processing agreement without the consent of Old Kent and Old Kent must
not unreasonably withhold its consent if the agreement is necessary for
Pinnacle to conduct business in the ordinary course. Pinnacle has
agreed to advise Old Kent of all anticipated renewals or extensions of
existing data processing service agreements, data processing software
license agreements, data processing hardware lease agreements with
independent vendors and to cooperate with Old Kent in negotiating with
those vendors the length of any extension or renewal term of those
agreements. Unless Old Kent otherwise agrees, any extension or renewal
must not exceed one year from the date of renewal. Pinnacle has agreed
to send to each vendor, as and when due, such notices of nonrenewal as
may be necessary or appropriate under the terms of the applicable
agreements to prevent those agreements from automatically renewing for a
term of more than one year from the date of renewal, except as otherwise
agreed between Pinnacle and Old Kent.
401(k) PLAN AND PROFIT SHARING
Pursuant to the Merger Agreement, upon the request of Old Kent the
existing 401(k) and profit sharing plan of Pinnacle will be terminated
as close as practicable to the Effective Time at a mutually agreed upon
date no earlier than 30 days before the Effective Time.
PINNACLE'S STOCK OPTION PLAN
Subject to stockholder approval and adoption of the Merger
Agreement, the Merger Agreement will amend the Pinnacle Banc Group, Inc.
1990 Incentive Stock Option Plan such that all unexercised options under
this plan will become options to purchase Old Kent common stock and will
not terminate as of the Effective Time of the merger. Old Kent will
assume all outstanding options to purchase shares of Pinnacle common
stock at the completion of the merger. As a result, such options will
then represent the right to purchase shares of Old Kent common stock.
The number of shares of Old Kent common stock that may be purchased
pursuant to existing Pinnacle options will equal the number of shares of
Pinnacle common stock that may be purchased immediately prior to the
completion of the merger multiplied by the Exchange Ratio. The exercise
price will equal the per share exercise price immediately prior to the
completion of the merger divided by the Exchange Ratio, rounded to the
nearest whole cent. Any options that are not fully vested at the
completion of the merger will become fully vested and nonforfeitable as
of the completion of the merger pursuant to the terms of Pinnacle's
stock option plan as interpreted by the Merger Agreement. Except for
those changes, the terms of existing options will not be changed.
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INSURANCE AND INDEMNIFICATION
Old Kent has agreed to honor any and all rights to indemnification
and advancement of expenses now existing in favor of the directors and
officers of Pinnacle and its subsidiaries under their Articles of
Incorporation or Bylaws. These enforceable contractual rights will
remain in effect following the merger and will continue with respect to
acts or omissions occurring before the Effective Time with the same
force and effect as prior to the Effective Time.
In addition, Old Kent has agreed to use all reasonable efforts to
cause the officers and directors of Pinnacle and the Pinnacle Banks to
be covered for a period of at least two years from the Effective Time by
the directors' and officers' liability insurance policy maintained by
Pinnacle and its subsidiaries, with respect to acts or omissions
occurring prior to the Effective Time that were committed by such
officers and directors in their capacity as such. Old Kent may
substitute for Pinnacle's current coverage for new coverage under
policies offering at least comparable coverage and amounts containing
terms and conditions that are not materially less advantageous than
Pinnacle's current policy. However, in no event will Old Kent be
required to pay more than $70,000 per annum to either maintain or
procure insurance coverage pursuant to the Merger Agreement. If Old
Kent does not advise Pinnacle in writing prior to commencement of ten
consecutive trading day ends on the 11th day prior to the date of the
closing that it has procured such coverage for at least two years or
agrees to do so without regard to the $70,000 limit, Pinnacle will be
permitted, in lieu of receiving the foregoing insurance coverage, to
purchase tail coverage for past acts and omissions for a single premium
amount not in excess of the $70,000 limit.
MANAGEMENT OF OLD KENT AFTER THE MERGER
Upon completion of the merger, Old Kent's directors and executive
officers, and Old Kent Bank's directors will remain the same. Upon the
consolidation of the Pinnacle Banks into Old Kent Bank, Old Kent
anticipates that some of the executive officers of Pinnacle and Pinnacle
Banks will become officers of Old Kent Bank.
CONDITIONS TO CLOSING THE MERGER
MUTUAL CONDITIONS TO CLOSE
The obligations of each Old Kent and Pinnacle to complete the
merger are subject to the fulfillment of certain conditions, including
the following:
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- The stockholders of Pinnacle must have adopted the Merger
Agreement;
- Each company's representations and warranties to the other in the
Merger Agreement must be true as of March 18, 1999 (the date the
Merger Agreement was signed) and as of the closing, except where
the failure of such representations and warranties to be true,
individually or in the aggregate, does not or would not result in a
"Material Adverse Effect" (as defined below) on the breaching
party;
- Each company must have performed in all material respects all of
the agreements, conditions, and covenants to be completed at or
prior to the closing made by that company in the Merger Agreement;
- The Federal Reserve Board must have approved or consented to the
merger without imposing any non-standard conditions to approval
that are not reasonably satisfactory to Old Kent;
- Old Kent and Pinnacle must not be subject to any order, decree, or
injunction by any court or governmental authority that enjoins or
prohibits the consummation of the merger;
- The registration statement of which this prospectus and proxy
statement is a part must have been declared effective by the
Securities and Exchange Commission and must not be subject to a
stop order or threatened stop order; and
- Each company's legal counsel must provide an opinion to the other
company with respect to certain legal matters.
The term "Material Adverse Effect" is defined to mean any change or
effect that, individually or when taken together with all other such
changes or effects that have occurred prior to the date of determination
of the occurrence of the Material Adverse Effect, is or is reasonably
likely to have a material negative impact on the business, assets,
financial condition, results of operations, or value of Old Kent and its
subsidiaries, taken as a whole, or, as the case may be, Pinnacle and the
Pinnacle Banks, taken as a whole; or the ability of Old Kent or
Pinnacle, as the case may be, to satisfy the applicable closing
conditions or consummate the merger or perform its obligations under the
Stock Option Agreement. Notwithstanding the above: (1) changes in GAAP
that are generally applicable to financial institutions and their
holding companies other than any material change to pooling-of-interests
rules; (2) actions and omissions of a party taken with the prior written
consent of the other party, (3) changes in economic conditions
(including change in the level of interest rates) generally affecting
financial institutions, and (4) fees, charges, and expenses reasonably
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related to the merger (such as any additional insurance coverages,
employment and consulting services, legal, accounting, and investment
banking fees and expenses, and severance and retention provisions); will
not be included in any determination of a Material Adverse Effect.
OLD KENT'S CONDITIONS TO CLOSE
In addition, Old Kent's obligation to complete the merger is
subject to the fulfillment of certain other conditions, including the
following:
- There must not be any investigation, lawsuit, or other proceeding
pending or threatened against or relating to Pinnacle or any of
Pinnacle's subsidiaries (or their officers or directors, in their
capacity as such) or any of their properties or business that may
result in a liability to Pinnacle that could have a Material
Adverse Effect on Pinnacle;
- Pinnacle must have obtained the consent or waiver of any material
rights of the other party under certain designated contracts and
under any other agreements containing a provision triggered by a
change of control of Pinnacle and the result of which could have a
Material Adverse Effect on Pinnacle;
- Old Kent must have received a tax opinion from Warner Norcross &
Judd LLP to the effect that, among other matters, Old Kent will
not recognize gain or loss on its receipt of assets of Pinnacle in
exchange for the shares of Old Kent common stock to be issued in
the merger (see "--Material Federal Income Tax Consequences"
below);
- Old Kent must have received a letter from its independent public
accountants to the effect that the merger should qualify as a
transaction to be accounted for as a pooling-of-interests; and
- Old Kent must have received certificates, signed by Pinnacle and
its transfer agent, certifying the total number of shares of
Pinnacle stock issued and outstanding after the close of business
on the day before the closing and the number of shares of Pinnacle
common stock that are issuable on or after the closing date
PINNACLE'S CONDITIONS TO CLOSE
In addition, Pinnacle's obligation to complete the merger is
subject to the fulfillment of certain other conditions, including the
following:
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- Pinnacle must have received a tax opinion from Warner Norcross &
Judd LLP (see "--Material Federal Income Tax Consequences" below);
- Pinnacle's financial advisor, DLJ, must have delivered an opinion
that as of the date of this prospectus and proxy statement, the
consideration to be received by the holders of Pinnacle common stock
is fair to Pinnacle's stockholders from a financial point of view and
such opinion must not have been subsequently withdrawn;
- The Old Kent common stock to be issued in the merger must have
been authorized for listing on the New York Stock Exchange; and
- Pinnacle must have received a certificate from the Exchange Agent
certifying the receipt of certificates for shares of Old Kent
common stock to be issued and sufficient cash to make payments in
lieu of fractional shares as contemplated by the Merger Agreement.
TERMINATION
Prior to the Effective Time, the Merger Agreement may be
terminated by Old Kent or Pinnacle by mutual consent, or by either of
them if the merger has not been completed on or before January 31, 2000.
OLD KENT
In addition, Old Kent may terminate the Merger Agreement and
abandon the merger on its own action upon the occurrence of certain
events specified in the Merger Agreement, including among others, the
following:
- Any of the conditions on Old Kent's obligation to complete the
merger have not been met or waived by Old Kent at such time as
such condition can no longer be satisfied, notwithstanding Old
Kent's best efforts to comply with its covenants;
- Certain environmental risks exist that, in the aggregate could
amount to an after-tax liability or loss of value exceeding
$1,000,000 and Old Kent has given the requisite notice to Pinnacle
(see "-- Conduct of Pinnacle Pending the Completion of the Merger
-- ENVIRONMENTAL INVESTIGATION" above);
- Old Kent's independent public accountants have advised Old Kent
that the merger is unlikely to qualify for pooling-of-interests
accounting treatment provided that Old Kent will not have
willfully taken any action to disqualify the merger as a pooling-
of-interests for accounting and financial reporting purposes;
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- Pinnacle's stockholders fail to adopt the Merger Agreement at the
special meeting;
- After a Fiduciary Event has occurred; or
- An event that caused or is reasonably likely to cause a Material
Adverse Effect on Pinnacle.
PINNACLE
In addition, Pinnacle may terminate the Merger Agreement and
abandon the merger on its own action upon the occurrence of certain
events specified in the Merger Agreement, including among others, the
following:
- Any of the conditions to Pinnacle's obligation to complete the
merger have not been met or waived by Pinnacle at such time as
such condition can no longer be satisfied, notwithstanding
Pinnacle's best efforts to comply with its covenants;
- The Final Old Kent Price is less than $36.43 and there is a
specified decline in the trading price of Old Kent relative to a
group of Index Companies set forth in the Merger Agreement (see "-
-Stock Price Condition" above);
- Pinnacle's stockholders fail to adopt the Merger Agreement at the
special meeting and Pinnacle's Board of Directors has advised Old
Kent that it does not believe that such vote can be obtained
through further reasonable efforts; or
An event that caused or is reasonably likely to cause a Material
Adverse Effect on Old Kent.
EFFECT OF TERMINATION
If either Old Kent or Pinnacle terminates the Merger Agreement in
accordance with its terms, neither Old Kent, Pinnacle, nor any of their
respective subsidiaries, officers or directors will be liable to the
others. However, the Stock Option Agreement (unless it is terminated in
accordance with its terms) and certain provisions regarding
confidentiality and expenses will survive the termination of the Merger
Agreement. In addition, neither company will be released from liability
to the other for any liabilities or damages arising out of its breach of
any provision in the Merger Agreement.
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DESCRIPTION OF OLD KENT CAPITAL STOCK
Old Kent's authorized capital stock consists of 300,000,000 shares
of Old Kent common stock, $1.00 par value, and 25,000,000 shares of
preferred stock, no par value, of which 3,000,000 shares are designated
Series A Preferred Stock, 500,000 shares are designated Series B
Preferred Stock, and 1,000,000 are designated Series C Preferred Stock.
The 1,000,000 shares of Series C Preferred Stock are reserved for
issuance pursuant to Series C Preferred Stock Purchase Rights governed
by a Rights Agreement, dated January 20, 1997, and as amended
December 30, 1998, between Old Kent and Old Kent Bank (the "Old Kent
Rights Agreement"). As of June 17, 1999, Old Kent had outstanding
102,519,251 shares of Old Kent common stock and no shares of preferred
stock. After giving effect to the Old Kent stock dividend and Old Kent's
acquisition of CFSB, Old Kent will have approximately 113,022,567 shares
of its common stock outstanding.
COMMON STOCK. Old Kent stockholders are entitled to dividends out
of funds legally available for that purpose when, as and if declared by
the Old Kent Board of Directors. The dividend rights of Old Kent common
stock are subject to the rights of Old Kent preferred stock that have
been or may be issued. Each holder of Old Kent common stock is entitled
to one vote for each share held on each matter presented for stockholder
action. Old Kent common stock has no preemptive rights, cumulative
voting rights, conversion rights, or redemption provisions.
In the case of any liquidation, dissolution, or winding up of the
affairs of Old Kent, Old Kent stockholders will be entitled to receive,
pro rata, any assets distributable to common stockholders in respect of
the number of shares held by them. The liquidation rights of Old Kent
common stock are subject to the rights of holders of any Old Kent
preferred stock that have been or may be issued.
PREFERRED STOCK PURCHASE RIGHTS. Each share of Old Kent common
stock has, and each share of Old Kent common stock to be issued in the
merger will have, attached to it the number of Series C Preferred Stock
Purchase Rights represented by each share of Old Kent common stock, as
long as the Old Kent Rights are not separately transferable. As of the
date of this prospectus and proxy statement, each share of Old Kent
common stock represents 0.4317 of an Old Kent Right. The number of Old
Kent Rights represented by each share of Old Kent common stock is
subject to adjustment upon the occurrence of certain events set forth in
the Old Kent Rights Agreement. See "--Comparison of Rights of Old
Kent's and Pinnacle's Stockholders" below for a more detailed discussion
of Old Kent Rights.
PREFERRED STOCK. Old Kent is authorized to issue shares of
preferred stock from time to time in one or more series. Preferred
stock may have such designations, powers, preferences, and relative
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participating, optional, or other rights and such qualifications,
limitations, or restrictions as may be provided for the issue of such
series by resolution adopted by the Old Kent Board of Directors. Such
preferred stock may have priority over Old Kent common stock as to
dividends and as to distribution of Old Kent's assets upon any
liquidation, dissolution, or winding up of Old Kent. Such preferred
stock may be redeemable for cash, property, or rights of Old Kent, may
be convertible into shares of Old Kent common stock, and may have voting
rights entitling the holder to not more than one vote per share on each
matter submitted for stockholder action. For more information on the
Preferred Stock, see "-- Comparison of Rights of Old Kent's and
Pinnacle's Stockholders -- ANTI-TAKEOVER PROVISIONS -- IN GENERAL"
below.
STOCK OPTION AGREEMENT
As an inducement and condition to Old Kent's willingness to enter
into the Merger Agreement, Pinnacle entered into the Stock Option
Agreement with Old Kent. The Stock Option Agreement is attached as
Appendix B to this prospectus and proxy statement and incorporated into
this document.
Pursuant to the Stock Option Agreement, Pinnacle has granted Old
Kent an unconditional, irrevocable option to purchase up to 1,479,128
shares of Pinnacle common stock (or, up to 19.99% of the number of
outstanding shares of Pinnacle common stock) (the "Option"). The
exercise price of the Option is $27.1875 per share, subject to
adjustment under specified circumstances described below, or, if lower,
the price at which Pinnacle agrees to issue any stock to any other
person or company. The exercise price, as so adjusted, is referred to
as the "Option Price."
The Option will become exercisable in whole or in part if, but only
if, both an "Initial Triggering Event" and a "Subsequent Triggering
Event" (as each of those terms are defined below) occur with respect to
Pinnacle prior to the expiration of the Option. The purchase of any
shares of Pinnacle common stock pursuant to the Option is subject to
compliance with applicable law, including without limitation the receipt
of necessary approvals under the Bank Holding Company Act of 1956.
Under the Stock Option Agreement, an "Initial Triggering Event"
occurs at the earliest of any of the following events or transactions:
- Pinnacle or Pinnacle Banks, without Old Kent's prior written
consent, enters into an agreement to engage in an "Acquisition
Transaction" (as defined below) with a third party, or the Board of
Directors of Pinnacle recommends that the stockholders of Pinnacle
adopt or accept any Acquisition Transaction other than the Merger
Agreement;
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- A third party acquires beneficial ownership (or the right to
acquire beneficial ownership) of 10% or more of the outstanding
shares of Pinnacle common stock;
- The stockholders of Pinnacle have voted and failed to approve the
Merger Agreement at the special meeting (or the special meeting was
not held in violation of the Merger Agreement or was canceled prior
to the termination of the Merger Agreement) and prior to the
special meeting (or if the special meeting was canceled, prior to
such cancellation), it was publicly announced or the stockholders
of Pinnacle have been advised that a third party made, or disclosed
an intention to make, a proposal to engage in an Acquisition
Transaction with respect to Pinnacle;
- Pinnacle's Board of Directors has not recommended or withdraws or
modifies (or publicly announces its intention to withdraw or
modify) in any manner adverse to Old Kent its recommendation that
the stockholders of Pinnacle approve the Merger Agreement in
anticipation of engaging in an Acquisition Transaction with a third
party, or Pinnacle authorizes, recommends, or proposes (or publicly
announces or advises its stockholders its intention to authorize,
recommend or propose) an agreement to engage in an Acquisition
Transaction with a third party;
- A third party files with the Securities and Exchange Commission a
registration statement or tender offer materials with respect to a
potential exchange or tender offer that would constitute an
Acquisition Transaction (or files a preliminary proxy statement
with the Securities and Exchange Commission with respect to a
potential vote by its stockholders to approve the issuance of
shares to be offered in such an exchange or tender offer);
- Pinnacle willfully breaches any of its obligations contained in the
Merger Agreement in anticipation of engaging in an Acquisition
Transaction with a third party and, following such breach, Old Kent
would be entitled to terminate the Merger Agreement (whether
immediately or after the giving of notice or passage of time or
both);
- A third party files an application or notice with any federal or
state governmental authority or regulatory or administrative agency
for approval to engage in an Acquisition Transaction; or
- A Fiduciary Event exists (for the definition of Fiduciary Event,
see "-- Exclusive Commitment to Old Kent -- BOARD RECOMMENDATION"
above).
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The term "Acquisition Transaction" is defined to include any of the
following transactions: (1) a merger, consolidation or any similar
transaction involving Pinnacle or Pinnacle Banks (other than a merger,
consolidation, or similar transaction in which the Pinnacle
stockholders--as of a time immediately prior to the transaction--own at
least 50% of the outstanding Pinnacle common stock immediately after the
transaction); (2) a purchase, lease, or other acquisition of all or
substantially all of the assets or deposits of Pinnacle or Pinnacle
Banks; (3) a purchase or other acquisition of securities representing
10% or more of the voting power of Pinnacle or Pinnacle Banks; or (4)
any substantially similar transaction. Anticipation of engaging in an
Acquisition Transition includes, without limitation, any action taken by
Pinnacle's officers or board of directors after any written or oral,
authorized or unauthorized, proposal or expression of interest has been
communicated to any member of Pinnacle's management or board of
directors concerning an Acquisition Transaction that in any way would
involve Pinnacle and such proposal or expression of interest has not
been withdrawn at the time of the action.
Under the Stock Option Agreement, a "Subsequent Triggering Event"
generally occurs at the earlier of the following events:
- The acquisition by a third party of beneficial ownership of 25% or
more of the then-outstanding Pinnacle common stock; or
- Pinnacle or Pinnacle Banks, without having received the prior
written consent of Old Kent, enters into an agreement to engage in
an Acquisition Transaction with a third party; except that for a
purchase or other acquisition of Pinnacle's voting securities to
constitute an Acquisition Transaction, the third party must agree
to acquire more than 25% of the voting power of Pinnacle's
securities.
The Option will expire upon the earliest of: (1) the Effective
Time of the merger; (2) the termination of the Merger Agreement in
accordance with its terms, assuming that the termination occurs prior to
the occurrence of an Initial Triggering Event; or (3) 18 months after
the termination of the Merger Agreement if such termination follows an
Initial Triggering Event. Old Kent may not exercise the Option at any
time when it is in material breach of the Merger Agreement such that
Pinnacle would be entitled to terminate the Merger Agreement pursuant to
its terms. The Stock Option Agreement automatically terminates if
Pinnacle terminates the Merger Agreement as a result of a material
breach by Old Kent or Old Kent fails to obtain the consent or approval
of any federal or state governmental authority necessary to complete the
merger.
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If the Option becomes exercisable, Old Kent may exercise it in
whole or in part within six months following the applicable Subsequent
Triggering Event. Old Kent's right to exercise the Option and certain
other rights under the Stock Option Agreement are subject to an
extension in order to obtain required regulatory approvals and comply
with applicable regulatory waiting periods and to avoid liability under
Section 16(b) of the Exchange Act. The Option Price and the number of
shares issuable under the Option would be adjusted in the event of
specified changes in the capital stock of Pinnacle. In addition,
Pinnacle has granted Old Kent certain registration rights with respect
to the shares of Pinnacle common stock issued or issuable pursuant to
the Option.
The Stock Option Agreement also provides that at any time after the
occurrence of a "Repurchase Event" (as defined below), upon a request
delivered by Old Kent before the expiration of the option, Pinnacle must
repurchase the Option and all or any part of the shares received upon
the full or partial exercise of the Option ("Option Shares"). The
repurchase of the Option by Pinnacle from Old Kent will be at a price
per share equal to the amount by which the "Market/Offer Price" (as
defined below) exceeds the Option Price (multiplied by the number of
shares for which the Option may be exercised). A repurchase of Option
Shares will be at a price per share equal to the Market/Offer Price.
The term "Market/Offer Price" means the highest of: (1) the price
per share at which a tender or exchange offer has been made for Pinnacle
common stock; (2) the price per share of Pinnacle common stock to be
paid by any third party pursuant to an agreement with Pinnacle; (3) the
highest sale price per share of Pinnacle common stock within the
six-month period immediately preceding the date that notice to
repurchase is given; or (4) in the event of a sale of all or
substantially all of Pinnacle's assets or deposits, the sum of the price
paid for such assets or deposits and the current market value of the
remaining assets (as determined by a nationally recognized investment
banking firm), divided by the number of shares of Pinnacle common stock
outstanding at the time of such sale.
The term "Repurchase Event" means the acquisition by any third
party of beneficial ownership of 50% or more of the outstanding shares
of Pinnacle common stock or the completion of an Acquisition Transaction
where the purchasing entity acquires 50% or more of the voting power of
Pinnacle or Pinnacle Banks.
The Stock Option Agreement also provides that Old Kent may, at any
time following a Repurchase Event that occurs prior to the expiration of
the Option, surrender the Option (and any Option Shares obtained upon
the exercise of the Option that are still held by Old Kent) for a
surrender fee equal to $7,517,668 plus, if applicable, Old Kent's
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purchase price with respect to any Option Shares, and minus any net cash
received pursuant to the sale of Option Shares to any third party (less
the purchase price of such Option Shares) (the "Surrender Fee"). Old
Kent may not exercise its right to surrender the Option and receive the
Surrender Fee if Pinnacle has previously repurchased any Option Shares.
If, prior to the expiration of the Option: (1) Pinnacle enters into
a transaction in which Pinnacle is not the surviving corporation, (2)
certain fundamental changes in the capital stock of Pinnacle occur, or
(3) Pinnacle sells all or substantially all of its or certain of
Pinnacle Banks' assets; the Option will be converted into a substitute
option (the "Substitute Option"), with terms similar to those of the
Option, to purchase capital stock of the entity that is the effective
successor to Pinnacle.
The Stock Option Agreement provides that neither Old Kent nor
Pinnacle may assign any of its rights or obligations under it without
the written consent of the other party, except that if a Subsequent
Triggering Event occurs prior to the expiration of the Option, Old Kent
may, subject to certain limitations, assign its rights and obligations
under the Stock Option Agreement.
Arrangements such as the Stock Option Agreement are customarily
entered into in connection with mergers and acquisitions between
financial institutions such as Old Kent and Pinnacle in an effort to
increase the likelihood that the transactions will be consummated in
accordance with their terms and to compensate the grantee (E.G., Old
Kent) of such an option for its efforts undertaken and the expenses,
losses, and opportunity costs incurred where the transaction is not
consummated under certain circumstances involving an acquisition or
potential acquisition of the issuer of the option (E.G., Pinnacle) by a
third party. Old Kent and Pinnacle entered into the Stock Option
Agreement to accomplish these objectives.
The existence of the Option could significantly increase the cost
to a potential third party purchaser of acquiring Pinnacle compared to
the cost had Old Kent and Pinnacle not entered into the Stock Option
Agreement. In addition, the provisions of the Stock Option Agreement
may prevent a potential third party purchaser from accounting for an
acquisition of Pinnacle using the pooling-of-interests method of
accounting. As a result, the Stock Option Agreement may have the effect
of discouraging or precluding offers by third parties to acquire
Pinnacle, even if such a third party was prepared to offer to pay
consideration to Pinnacle's stockholders that has a higher current
market price than the shares of Old Kent common stock to be received by
Pinnacle stockholders pursuant to the Merger Agreement.
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To the best knowledge of Old Kent and Pinnacle, as of the date of
this prospectus and proxy statement, no event giving rise to the right
to exercise the Option has occurred.
COMPARISON OF RIGHTS OF OLD KENT'S AND PINNACLE'S STOCKHOLDERS
If the merger is completed, you will become a stockholder of Old
Kent. As an Old Kent stockholder, your rights will be governed by Old
Kent's Restated Articles of Incorporation and Bylaws. Old Kent's
organizational documents differ in certain material respects from
Pinnacle's Articles of Incorporation and Bylaws. In addition, as a
stockholder of Old Kent (a Michigan corporation), your rights will also
be governed by the Michigan Business Corporation Act ("MBCA"), rather
than the Illinois Business Corporation Act (the "IBCA"), which act governs
your rights as a stockholder of Pinnacle (an Illinois corporation).
The following comparison of the MBCA, the Old Kent Restated
Articles of Incorporation, and Bylaws, on the one hand, and the IBCA,
the Pinnacle Articles of Incorporation and Bylaws, on the other, is not
intended to be complete and is qualified in its entirety by reference to
the Old Kent Restated Articles of Incorporation, the Old Kent Bylaws,
the Pinnacle Articles of Incorporation, and the Pinnacle Bylaws. Copies
of these documents are available upon request. See "Where You Can Find
More Information" below.
ANTI-TAKEOVER PROVISIONS -- IN GENERAL
Old Kent's Restated Articles of Incorporation and Bylaws contain
certain provisions that could prevent or delay the acquisition of Old
Kent by means of a tender offer, a proxy contest, or otherwise. These
provisions could also limit stockholders' participation in certain types
of business combinations or other transactions that might be proposed in
the future, regardless of whether such transactions were favored by a
majority of stockholders, and could enhance the ability of officers and
directors to retain their positions. Pinnacle's Articles of
Incorporation and Bylaws do not contain similar types of provisions.
The material differences in the companies' organizational documents with
respect to such anti-takeover provisions are discussed separately below
under separate sections, such as "-- SIZE AND CLASSIFICATION OF THE
BOARD OF DIRECTORS," "-- REMOVAL OF DIRECTORS," "-- STOCKHOLDER
NOMINATIONS," and "-- STOCKHOLDER RIGHTS PLAN."
SIZE AND CLASSIFICATION OF THE BOARD OF DIRECTORS
Pursuant to Old Kent's Restated Articles of Incorporation, Old
Kent's Board of Directors is divided into three classes, as nearly equal
in number as possible, with the term of office of one class expiring
each year. The number of directors is fixed by a resolution of the
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Board of Directors receiving at least 75% approval of the entire board,
but in no event may the number of directors be less than three. The
current number of directors of Old Kent is 18. As a result of the
classification of Old Kent's Board of Directors, it would normally take
at least two annual meetings of stockholders to effect a change in a
majority of the Board of Directors of Old Kent.
While permissible under the IBCA, neither Pinnacle's Articles of
Incorporation nor Bylaws provide for the classification of directors
into different classes. Instead, each director is elected and holds
office until the next annual meeting of stockholders or until his or her
successor is elected. The current number of directors of Pinnacle is
16.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
Old Kent's Restated Articles of Incorporation provide that a
director of Old Kent will not be liable to Old Kent or its stockholders
for monetary damages in breach of the director's fiduciary duties to the
fullest extent provided by law. The MBCA provides that a corporation
cannot limit the liability of a director for: (1) the amount of a
financial benefit received by a director to which he or she is not
entitled; (2) the intentional infliction of harm on the corporation or
its stockholders; (3) an illegal dividend or distribution; or (4) an
intentional criminal act.
The IBCA permits a corporation to include a provision in its
articles or bylaws that limits the personal liability of a director to
the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director. Pinnacle's Articles of Incorporation were
amended to provide that a director of Pinnacle will not be personally
liable to Pinnacle or its stockholders for monetary damages for a breach
of the director's fiduciary duty; provided, however, that Pinnacle's
Articles of Incorporation do not eliminate or limit the liability of a
director for any of the following: (1) an act or omission that is
grossly negligent; (2) a breach of the director's duty of loyalty to
Pinnacle or its stockholders; (3) acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law; (4) a
transaction from which the director derived an improper personal
benefit; or (5) an act or omission occurring before the effective date
of this amendment. Under Pinnacle's Bylaws, any indemnification must
meet the standard above and be approved by (1) the Board of Directors by
a majority vote of quorum consisting of noninterested parties, (2) a
quorum of disinterested directors who obtain an independent legal
counsel's written legal opinion, or (3) the stockholders.
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REMOVAL OF DIRECTORS
Under Old Kent's Restated Articles of Incorporation, a director
may be removed at any time prior to the expiration of his or her term,
but only for "cause." Except as may be provided otherwise by law,
cause for removal will exist if: (1) the director whose removal is
proposed has been convicted of a felony by a court of competent
jurisdiction and such conviction is no longer subject to direct appeal;
(2) the director has been determined by a court of competent
jurisdiction to be liable for negligence or misconduct in the
performance of his or her duty to the corporation in a matter of
substantial importance to the corporation and such determination is no
longer subject to a direct appeal; (3) the director has become mentally
incompetent, whether or not so determined by a court, which mental
incompetency directly affects his or her ability as a director of Old
Kent; (4) the director's actions or failure to act are deemed by the
Board of Directors to be in derogation of the director's duties; or (5)
the director's removal is required or recommended by the Federal Reserve
Board. Removal for cause, as cause is defined in (1) or (2) above, must
be approved by vote of a majority of the total number of directors or by
majority vote of stockholders. Removal for cause, as cause is defined
in (3), (4), or (5) above, must be approved by at least 75% of the total
number of directors.
Pinnacle's Bylaws provide that one or more directors may be removed
with or without cause upon a majority vote of all the shares of stock
outstanding and entitled to vote at a meeting of the stockholders called
for that purpose.
STOCKHOLDER NOMINATIONS
Under Old Kent's Restated Articles of Incorporation, director
nominations at any annual meeting of stockholders or at any special
meeting of stockholders called for election of directors (referred to as
an "Election Meeting") may be made by the Board of Directors or by a
stockholder of record under certain limited circumstances described
below. Nominations made by the Board of Directors are made at a meeting
of the Board of Directors, or by written consent of directors in lieu of
a meeting, at least 20 days prior to the date of an Election Meeting.
A stockholder of record may make a nomination at an Election
Meeting if, and only if, such stockholder has delivered a notice to the
Secretary of Old Kent setting forth with respect to each proposed
nominee: (1) the name, age, business address, and residence address of
the nominee; (2) the principal occupation or employment of the nominee;
(3) the number of shares of capital stock of Old Kent that are
beneficially owned by the nominee; (4) a statement that the nominee is
willing to be nominated; and (5) such other information concerning the
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nominee as would be required under the rules of the Securities and
Exchange Commission in a proxy statement soliciting proxies for the
election of such nominee. The notice must be delivered not less than
120 days prior to the date of the Election Meeting in the case of an
annual meeting and not more than seven days following the date of notice
of the Election Meeting in the case of a special meeting.
Neither Pinnacle's Articles of Incorporation nor Pinnacle's Bylaws
establish procedures regarding the nominations of directors by a
stockholder.
STOCKHOLDER RIGHTS PLAN
Old Kent has approved a Series C Preferred Stock Purchase Rights
Plan. As part of that plan, one Series C Preferred Stock Purchase Right
attaches to each share of common stock of Old Kent. Each Right entitles
the registered holder to purchase from Old Kent one-hundredth of a share
(a "Unit") of Series C Preferred Stock at a price of $160 per Unit (the
"Purchase Price"), subject to adjustment. In addition to the following
summary, the description and terms of the Rights are set forth in a
Rights Agreement (the "Rights Agreement") between Old Kent and Old Kent
Bank, as Rights Agent (the "Rights Agent"). See "Where You Can Find
More Information" below.
Until the earlier to occur of (1) ten days following a public
announcement that a person or group of affiliated or associated persons
acquired, or obtained the right to acquire, beneficial ownership of 15%
or more of the outstanding shares of Old Kent common stock (such person
being referred to as an "Acquiring Person" and the date upon which such
person becomes an Acquiring Person being referred to as the "Stock
Acquisition Date"); (2) ten business days following the commencement or
announcement of an intention to commence a tender or
exchange offer, the consummation of which would result in beneficial
ownership by a person of 15% or more of the outstanding shares of Old
Kent common stock; or (3) ten business days after Old Kent's Board of
Directors determines, pursuant to certain criteria set forth in the
Rights Agreement, that a person beneficially owning 10% or more of the
outstanding shares of common stock is an "Adverse Person" (the earlier
of such dates being called the "Distribution Date"), the Rights will be
evidenced with respect to any of the common stock certificates then
outstanding by such common stock certificates. The Rights Agreement
provides that, until the Distribution Date, the Rights will be
transferred with and only with such common stock certificates. Until
the Distribution Date (or, if earlier, the redemption or expiration of
the Rights), the surrender for transfer of any certificates for common
stock will also constitute the transfer of the Rights associated with
the common stock represented by such certificates. As soon as
practicable following the Distribution Date, separate certificates
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evidencing the Rights (the "Rights Certificates") will be mailed to
holders of record of the common stock as of the close of business on the
Distribution Date and such separate Rights Certificates alone will
evidence the Rights. Except as otherwise determined by the Old Kent
Board of Directors, only shares of common stock issued prior to the
Distribution Date will be issued with Rights.
The Rights are not exercisable until the Distribution Date. The
Rights will expire on February 13, 2007, unless earlier redeemed by Old
Kent as described below.
The Purchase Price payable, and the number of 1/100th of a share of
preferred stock or other securities or property issuable, upon exercise
of the Rights is subject to adjustment from time to time to prevent
dilution (1) in the event of a stock dividend on, or a subdivision,
combination or reclassification of, the preferred stock; (2) upon the
grant to holders of the preferred stock of certain rights or warrants to
subscribe for preferred stock or convertible securities at less than the
current market price of the preferred stock; or (3) upon the
distribution to holders of the preferred stock of evidences of
indebtedness or assets (excluding regular periodic cash dividends out of
earnings or retained earnings at a rate not in excess of 125% of the
rate of the last cash dividend theretofore paid or dividends payable in
preferred stock) or of subscription rights or warrants (other than those
referred to above).
With certain exceptions, no adjustment in the Purchase Price will
be required until cumulative adjustments require an adjustment of at
least 1% in such Purchase Price. No fractional shares of preferred
stock (other than fractions that are integral multiples of 1/100th of a
share of preferred stock) will be issued and in lieu thereof, an
adjustment in cash will be made based on the market price of the
preferred stock on the last trading date prior to the date of exercise.
If, at any time following the Stock Acquisition Date, Old
Kent were acquired in a merger or other business combination
transaction or if 50% or more of its assets or earning power
were sold, proper provision will be made so that each holder of a Right
will thereafter have the right to receive, upon the exercise thereof at
the then current exercise price of the Right, that number of shares of
common stock of the acquiring company that at the time of such
transaction would have a market value of two times the exercise price of
the Right. Alternatively, in the event that, any time following the
Distribution Date, Old Kent were the surviving corporation in a merger
with an Acquiring Person and its common stock was not changed or
exchanged, or an Acquiring Person were to engage in self-dealing
transactions with Old Kent, or an Acquiring Person becomes the
beneficial owner of more than 15% of the then outstanding shares of Old
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Kent common stock, or a person had been or was designated as an Adverse
Person by Old Kent's Board of Directors in accordance with the criteria
set forth in the Rights Agreement, proper provision will be made so that
each holder of a Right, other than the Acquiring Person, Adverse Person
and certain related parties (whose Rights will thereafter be void), will
thereafter have the right to receive upon exercise of a Right that
number of shares of Old Kent common stock having a market value of two
times the exercise price of such Right.
At any time prior to the designation of a person as an Adverse
Person under the Rights Plan or the close of business on the 10th day
after the Stock Acquisition Date, Old Kent may redeem the Rights in
whole, but not in part, at a price of $.01 per Right (the "Redemption
Price"). Immediately upon the action of the Board of Directors of Old
Kent electing to redeem the Rights, Old Kent will make announcement
thereof, and upon such election, the right to exercise the Rights will
terminate and the only right of the holders of Rights will be to receive
the Redemption Price. In certain circumstances, the redemption period
may be reinstated following its expiration.
Until a Right is exercised, the holder thereof, as such, will have
no rights as a stockholder of Old Kent, including, without limitation,
the right to vote or to receive dividends. While the distribution of
the Rights will not be taxable to stockholders or to Old Kent,
stockholders will recognize taxable income if the Rights are redeemed
and may, depending on the circumstances, recognize taxable income when
the Rights become exercisable or are exercised.
Other than those provisions relating to the principal economic
terms of the Rights, any of the provisions of the Rights Agreement may
be amended by the Board of Directors of Old Kent prior to the
Distribution Date. After the Distribution Date, the provisions of the
Rights Agreement may be amended by the Old Kent Board in order to cure
any ambiguity, to make changes that do not adversely affect the
interests of holders of Rights (excluding the interests of any Acquiring
Person or Adverse Person), or to shorten or lengthen any time period
under the Rights Agreement, except that no amendment to adjust the time
period governing redemption may be made at a time when the Rights are
not redeemable.
A copy of the Rights Agreement has been filed with the Securities
and Exchange Commission as an Exhibit to a Registration Statement on
Form 8-A/A. See "Where You Can Find More Information" below. This
summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement, which is
incorporated by reference in this prospectus and proxy statement.
Pinnacle has not adopted a similar stockholder rights plan.
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STATE ANTI-TAKEOVER LAWS
Certain provisions of the MBCA establish a statutory scheme similar
to the supermajority and fair price provisions found in many corporate
charters (the "Fair Price Act"). The Fair Price Act provides that a
supermajority vote of 90% of the stockholders and no less than
two-thirds of the votes of noninterested stockholders must approve a
"business combination." The Fair Price Act defines a "business
combination" to encompass any merger, consolidation, share exchange,
sale of assets, stock issue, liquidation, or reclassification of
securities involving an "interested stockholder" or certain
"affiliates." An "interested stockholder" is generally any person who
owns 10% or more of the outstanding voting shares of the corporation.
An "affiliate" is a person who directly or indirectly controls, is
controlled by, or is under common control with a specified person.
The supermajority vote required by the Fair Price Act does not
apply to business combinations that satisfy certain conditions. These
conditions include, among others: (1) the purchase price to be paid for
the shares of the corporation in the business combination must be at
least equal to the highest of either (a) the market value of the shares
or (b) the highest per share price paid by an interested stockholder
within the preceding two-year period or in the transaction in which the
stockholder became an interested stockholder, whichever is higher; and
(2) once becoming an interested stockholder, the person may not become
the beneficial owner of any additional shares of the corporation except
as part of the transaction that resulted in the interested stockholder
becoming an interested stockholder or by virtue of proportionate stock
splits or stock dividends. The requirements of the Fair Price Act do
not apply to business combinations with an interested stockholder that
the Board of Directors has approved or exempted from the requirements of
the Fair Price Act by resolution prior to the time that the interested
stockholder first became an interested stockholder.
The MBCA also regulates the acquisition of "control shares" of
large public Michigan corporations (the "Control Share Act"). The
Control Share Act applies to Old Kent and its stockholders. The Control
Share Act establishes procedures governing "control share acquisitions."
A control share acquisition is defined as an acquisition of shares by an
acquiror which, when combined with other shares held by that person or
entity, would give the acquiror voting power at or above any of the
following thresholds: 20%, 33 %, and 50%. Under the Control Share
Act, an acquiror may not vote "control shares" unless the corporation's
disinterested stockholders (defined to exclude the acquiring person,
officers of the target corporation and directors of the target
corporation who are also employees of the corporation) vote to confer
voting rights on the control shares. The Control Share Act does not
affect the voting rights of shares owned by an acquiring person prior to
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the control share acquisition. The Control Share Act entitles
corporations to redeem control shares from the acquiring person under
certain circumstances. In other cases, the Control Share Act confers
dissenters' right upon all of a corporation's stockholders except the
acquiring person.
Section 11.75 of the IBCA prohibits a "business combination"
(generally including mergers, sales and leases of assets, issuances of
securities and similar transactions) by Pinnacle or a subsidiary with an
"interested stockholder" (generally, the beneficial owner of 15% or more
of Pinnacle' voting stock) within three years after the person or entity
becomes an interested stockholder, unless (1) prior to the person or
entity becoming an interested stockholder, the business combination or
the transaction pursuant to which such person or entity became an
interested stockholder was approved by the Pinnacle Board of Directors,
(2) upon the consummation of the transaction in which the person or
entity became an interested stockholder, the interested stockholder
holds at least 85% of the voting stock of Pinnacle (excluding, for
purposes of determining the number of shares outstanding, shares held by
persons who are both officers and directors of Pinnacle and shares held
by certain employee benefit plans), or (3) the business combination is
approved by the Pinnacle Board and by the holders of at least two-thirds
of the outstanding voting stock of Pinnacle, excluding shares held by
the interested stockholder. The Pinnacle Board of Directors approved the
merger into Old Kent and, therefore, it is not subject to the
limitations described in this paragraph.
STATE DISSENTER'S RIGHTS
Under the MBCA, a stockholder who does not vote in favor of certain
corporate actions may have the right to obtain an appraisal of those
shares in certain circumstances, and the right to receive cash in
exchange for those shares (referred to as "rights of dissent"). The
MBCA recognizes rights of dissent in connection with certain amendments
to the articles of incorporation, mergers, consolidations, sales, or
other dispositions of all or substantially all of the assets of a
corporation, certain acquisitions for stock, and approval of a control
share acquisition. Under Michigan law, rights of dissent are generally
not available to Old Kent stockholders in connection with mergers,
consolidations, or sales of assets because shares of Old Kent common
stock are held of record by more than 2,000 persons.
However, Old Kent's Restated Articles of Incorporation provide that
any Old Kent stockholder may dissent from any plan of merger or
consolidation to which Old Kent is a party or any sale, lease, exchange,
or other disposition of all or substantially all of the assets of Old
Kent not in the usual or regular course of business, in the manner, with
the rights and subject to the requirements applicable to dissenting
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stockholders as provided in the MBCA, without regard to the exception to
a stockholder's right to dissent provided in the MBCA. However, this
right of dissent does not apply to any corporate action that is approved
by an affirmative vote of at least 50% of the entire Board of Directors
and an affirmative vote of 50% of the Board's "Continuing Directors."
The term "Continuing Director" means a member of the Board of Directors
of Old Kent who was either: (1) first elected or appointed as a
director prior to April 17, 1989; or (2) subsequently elected or
appointed as a director if such director was nominated or appointed by a
majority of the then Continuing Directors.
Like the MBCA, the IBCA also provides right to dissent under
certain circumstances, including mergers and consolidations.
Specifically, Section 11.65 of the IBCA (a copy of which is attached as
Appendix F and incorporated in this prospectus and proxy statement by
reference) provides that a Pinnacle stockholder is entitled to dissent
from, and obtain payment for shares from Old Kent in the event of any of
the following: consummation of a merger, consolidation, share exchange,
sales of substantially all the assets of Pinnacle, or an amendment to
Pinnacle's Articles of Incorporation that would materially and adversely
affect the Pinnacle stockholder. Section 11.65 of the IBCA also
provides that a Pinnacle stockholder who is entitled to dissent and
obtain payment for the shares may not challenge the corporate action
creating the entitlement unless the action is fraudulent with respect to
the Pinnacle stockholder or Pinnacle or a breach of a fiduciary duty
owed to the Pinnacle stockholder. Unlike the MBCA, however, there is no
exception to these rights of dissent for stock of a corporation where
the shares are held by more than 2,000 stockholders. See "Dissenter's
Rights" below for the procedure to dissent.
EVALUATION OF PROPOSED OFFERS
Old Kent's Restated Articles of Incorporation provide that Old
Kent's Board of Directors can not approve, adopt, or recommend any
proposal of any party other than Old Kent to make a tender or exchange
offer for any equity security of Old Kent, or engage in any merger or
consolidation of Old Kent with or into another entity, any sale,
exchange, lease, mortgage, pledge, transfer, or other disposition of all
or substantially all of Old Kent's assets, any liquidation or
dissolution of Old Kent or any reorganization or recapitalization of Old
Kent that would result in a change of control of Old Kent, unless it has
first evaluated the proposal and determined, in its judgment, that the
proposal would be in substantial compliance with all applicable laws.
If Old Kent's Board of Directors determines, in its judgment, that a
proposal would be in substantial compliance with all laws, the Board of
Directors must then evaluate the proposal and determine whether the
proposal is in the best interests of Old Kent and its stockholders. In
evaluating a proposed offer to determine whether it would be in the best
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interests of Old Kent and its stockholders, the Board of Directors, in
exercising its judgment, may consider all facts that it deems relevant
including, without limitation: (1) the fairness of the consideration to
be received by Old Kent's stockholders under the proposed offer; (2) the
possible economic and social impact of the proposed offer and its
consummation on Old Kent and its subsidiaries and their employees,
customers, and depositors; (3) the possible economic and social impact
of the proposed offer and its consummation on the communities in which
Old Kent and its subsidiaries operate or are located; (4) the business,
financial condition, safety, soundness, and earning prospects of the
offering party; (5) the competence, experience, and integrity of the
offering party and its management; and (6) the intentions of the
offering party regarding the use of the assets of Old Kent to finance
the transaction.
Pinnacle's Articles of Incorporation do not include a similar
provision. However, the IBCA provides that in discharging their duties,
directors may, in considering the best long term and short term
interests of Pinnacle, consider the effects of Old Kent's acquisition of
Pinnacle upon Pinnacle's employees, suppliers and customers, and the
communities that Pinnacle serves, and all other pertinent factors.
OLD KENT'S QUOTATION ON THE NEW YORK STOCK EXCHANGE
Old Kent common stock is quoted on the New York Stock Exchange.
Pinnacle common stock is listed on The Nasdaq Stock Market.
RESTRICTIONS ON PINNACLE AFFILIATES
All shares of Old Kent common stock received by Pinnacle
stockholders in the merger will be freely transferable, except that
shares of Old Kent common stock received by persons who are deemed to be
"affiliates" (as such term is defined under the Securities Act of 1933,
as amended (the "Securities Act")) of Pinnacle prior to the merger may
only be resold in transactions permitted by the resale provisions of
Rule 145 under the Securities Act or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of Pinnacle
generally include individuals or entities that control, are controlled
by, or are under common control with, Pinnacle and may include certain
officers, directors, and principal stockholders of Pinnacle.
This prospectus and proxy statement covers Old Kent common stock to
be issued in connection with the merger; it does not cover any resales
of the Old Kent common stock to be received by affiliates upon
completion of the merger, and no person is authorized to make any use of
this prospectus and proxy statement in connection with any such resale.
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Pursuant to the Merger Agreement, each Pinnacle affiliate executed
a written agreement to the effect that such persons will not offer or
sell or otherwise dispose of any of the shares of Old Kent common stock
issued to such persons in the merger in violation of the Securities Act.
These agreements further provide that each Pinnacle affiliate will not
offer, sell or otherwise dispose of such Old Kent common stock or their
shares of Pinnacle common stock during any period in which such a
transfer would disqualify the merger from pooling-of-interests
accounting treatment. In addition, pursuant to the Merger Agreement,
Old Kent has agreed to use all reasonable efforts to cause its
affiliates to execute written agreements prohibiting such affiliates
from transferring Old Kent common stock during any period in which such
transfer would disqualify the merger from pooling-of-interests
accounting treatment. The pooling-of-interests prohibitions on transfer
under these agreements will end when Old Kent has published an earnings
statement covering 30 days of post-merger operations.
Subject to the terms and conditions of the Merger Agreement, each
affiliate of Pinnacle has agreed that he or she will use his or her best
efforts to cause the Merger Agreement to be adopted by the stockholders
of Pinnacle and consummated according to its terms. Each affiliate has
also agreed not to solicit, negotiate, discuss, accept, or approve any
offers or proposals from, or enter into any agreement with, any third
party concerning a tender offer, merger, consolidation, share exchange,
or other business combination involving Pinnacle or concerning the
offer, sale, or disposition of any material assets of Pinnacle.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following general discussion summarizes the material federal
income tax consequences of the merger and is based on the Internal
Revenue Code, the regulations promulgated under the Internal
Revenue Code, existing administrative interpretations, and court
decisions. Future legislation, regulations, administrative
interpretations, or court decisions could significantly change such
authorities either prospectively or retroactively. This summary does not
address all aspects of federal income taxation that may be important to
you in light of your particular circumstances or if you are subject to
special rules, such as rules regarding stockholders who are not citizens
or residents of the United States, or who are financial institutions, or
tax-exempt organizations. This discussion also assumes that you hold
your shares of Pinnacle common stock as capital assets within the
meaning of Section 1221 of the Internal Revenue Code, and will not
exercise dissenter's rights with respect to your Pinnacle common stock.
It is a condition to the obligations of Pinnacle to complete the
merger that it receive a tax opinion from Warner Norcross & Judd LLP,
Old Kent's counsel, regarding material federal income tax consequences
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of the merger. It is also a condition to the obligations of Old Kent to
complete the merger that it receive a tax opinion from Warner Norcross &
Judd LLP regarding material federal income tax consequences of the
merger. Although Warner Norcross & Judd LLP has provided a tax opinion
that is filed as an exhibit to the registration statement of which this
prospectus and proxy statement is a part, that opinion is for the
limited purposes of confirming this tax discussion, is not for the
benefit of Pinnacle stockholders, and does not satisfy the conditions to
the closing of the merger.
Old Kent and Pinnacle believe, based on the tax opinion of Warner
Norcross & Judd LLP, that the merger will have the following federal
income tax consequences:
- You will not recognize any gain or loss for federal income tax
purposes if you exchange your Pinnacle common stock for Old Kent
common stock pursuant to the merger, except to the extent of cash
received in lieu of fractional shares;
- Your tax basis in the Old Kent common stock received as a result of
the merger will be the same as your tax basis in your Pinnacle
common stock surrendered in the exchange; and
- The holding period of the Old Kent common stock held by you as a
result of the exchange will include the period during which you
held your Pinnacle common stock.
In addition: (1) the merger will constitute a "reorganization"
within the meaning of Section 368(a)(1) of the Code and Old Kent and
Pinnacle will each be a "party to a reorganization" within the meaning
of Section 368(b); (2) the basis of the Pinnacle assets in the hands of
Old Kent will be the same as the basis of those assets in the hands of
Pinnacle immediately prior to the reorganization; (3) no gain or loss
will be recognized to Old Kent on the receipt by Old Kent of the assets
of Pinnacle in exchange for Old Kent common stock and the assumption by
Old Kent of the liabilities of Pinnacle; and (4) the holding period of
the assets of Pinnacle in the hands of Old Kent will include the holding
period during which such assets were held by Pinnacle.
The tax opinion will assume the absence of changes in existing
facts and will rely on assumptions, representations, and covenants,
including those contained in certificates of officers of Old Kent and
Pinnacle. The tax opinion neither binds nor precludes the IRS from
adopting a contrary position. An opinion of counsel sets forth such
counsel's legal judgment and has no binding effect or official status of
any kind and no assurance can be given that contrary positions will not
be successfully asserted by the IRS or adopted by a court if the issues
are litigated.
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Opinions of tax counsel do not guarantee favorable tax treatment.
There is a risk that the Internal Revenue Service might determine that
Old Kent, Pinnacle, and/or you must recognize gain or loss for federal
income tax purposes in the merger. ACCORDINGLY, YOU ARE STRONGLY URGED
TO CONSULT WITH YOUR TAX ADVISOR TO DETERMINE THE PARTICULAR UNITED
STATES FEDERAL, STATE, LOCAL, OR FOREIGN INCOME OR OTHER TAX
CONSEQUENCES OF THE MERGER TO YOU.
ACCOUNTING TREATMENT
It is a condition to the completion of the merger that Old Kent
receive from Pinnacle a letter to Pinnacle from its independent public
accountants, dated as of the date of the closing, to the effect that
Pinnacle is eligible to participate in a business combination to be
treated as a pooling-of-interests. Old Kent must also receive from its
independent public accountants a letter, dated as of the date of the
closing, to the effect that the merger, if consummated as contemplated,
should qualify as a transaction to be accounted for as a pooling-of-
interests.
Under the pooling-of-interest accounting method, the assets and
liabilities of Pinnacle will be carried forward to Old Kent at their
historical recorded bases. Results of operations of Old Kent will
include the results of both Old Kent and Pinnacle for the entire fiscal
year in which the merger occurs. The reported balance sheet amounts and
results of operations of the separate corporations for prior periods
will be combined, reclassified, and conformed, as appropriate, to
reflect the combined financial position and results of operations for
Old Kent.
DISSENTER'S RIGHTS
Under Illinois law, you are entitled to exercise dissenter's rights
and obtain payment for your shares as a result of the Old Kent's
acquisition of Pinnacle, provided that you comply with the provisions of
Sections 11.65 and 11.70 of the IBCA (a copy is attached as Appendix F
and incorporated in this prospectus and proxy statement by reference).
If you comply with the provisions of Section 11.70 of the IBCA, then
upon consummation of the merger, you are entitled to receive payment
from the surviving corporation for the fair value of your shares plus
accrued interest. If you can not agree with the surviving corporation
and its successor on the fair value of your shares or the accrued
interest, then the IBCA provides for a judicial determination of these
amounts. The value as determined by an Illinois court maybe more or
less than the value you are entitled to under the Merger Agreement. To
determine the fair value of the shares, the Illinois court will look at
the value of the shares immediately before the consummation of the
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merger, excluding any appreciation in anticipation of the merger, unless
such exclusion would be inequitable. If you desire to exercise
dissenter's rights, you should refer to the statute in its entirety and
should consult with legal counsel prior to taking any action to ensure
that you comply strictly with the applicable statutory provisions.
In summary, to exercise dissenter's rights, you must:
- Deliver to Pinnacle a written demand for payment of your shares
before the vote on the merger is taken;
- Not vote in favor of the merger (note that a vote, in person or by
proxy, against approval and adoption of the Merger Agreement will
not constitute a written demand for appraisal); and
- Continue to hold your shares of Pinnacle common stock through the
Effective Time of the merger.
Your failure to vote against the proposal to adopt the Merger Agreement
will not constitute a waiver of your dissenter's rights under the IBCA.
Conversely, a vote against approval and adoption of the Merger Agreement
will not satisfy your obligations if you are seeking an appraisal. You
must follow the procedures set forth in Section 11.70 of the IBCA.
Each outstanding share of Pinnacle common stock as to which a
legally sufficient demand in accordance with Section 11.70 of the IBCA
has been made and that was not voted in favor of approval of the merger
will, after the Effective Time of the merger, represent only the rights
of a dissenting stockholder under the IBCA. This includes the right to
obtain payment for the estimated fair value of those shares, plus
accrued interest, as provided under the IBCA.
Within ten days after the Effective Date or 30 days after you have
delivered your written demand for payment, whichever is later, the
surviving corporation will send to you a statement setting forth its
opinion as to the fair value of your shares, as well as certain
financial statements and a commitment to pay to you such estimated fair
value for your shares. If you do not agree with the opinion of the
surviving corporation as to the estimated fair value of the shares or
the amount of interest due, then within 30 days of your receipt of the
surviving corporation's valuation statement, you must notify the
surviving corporation as to what you estimate the fair value of your
shares to be and demand the difference between the your estimated fair
value and interest due and the amount of the payment committed to by the
surviving corporation.
If, within 60 days from delivery of the surviving corporation's
statement to the dissenting stockholders, you and the surviving
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corporation have not agreed in writing as to the fair value of the
shares or interest due, the surviving corporation will either pay the
difference in value demanded by you, with interest, or file a petition
in the circuit court requesting the court to determine the fair value of
the shares and interest due. The surviving corporation will be required
to then make all dissenters a party to such proceeding. If the
surviving corporation does not commence the action, you may commence an
action as permitted by law.
In a proceeding brought by the surviving corporation to determine
value, the court will determine the costs of the proceeding, including
the reasonable compensation and expenses of the appraisers appointed by
the court and excluding legal fees and experts for the respective
parties. If the fair value of the shares as determined by the court
materially exceeds the price that the surviving corporation estimated to
be the fair value of the shares or if no estimate was given, then all or
any part of the costs may be assessed against the surviving corporation.
If the amount that any dissenter estimated to be the fair value of the
shares materially exceeds the fair value of the shares as determined by
the court, then all or any part of the costs may be assessed against
that dissenter. The legal and expert fees may be awarded to the
dissenter if the court finds that the surviving corporation did not
substantially comply with the procedure to dissent in the statute. In
addition, legal fees can be assessed against either party if the court
finds that one party acted arbitrarily, vexatiously, or not in good
faith with respect to the dissenter's rights.
A share for which you have properly exercised your dissenter's
rights and followed the right to dissent procedures in the IBCA will not
be converted into, or represent, a right to receive the surviving
corporation common stock as provided under the Merger Agreement. Any of
these shares will not, after the Effective Time, be entitled to vote for
any purpose or receive any dividends or other distributions. If,
however, you, as the holder of such shares, fail to properly perfect,
effectively withdraw, waive or lose, or otherwise become ineligible to
exercise dissenting stockholder's rights under the IBCA, then at that
time these shares held by you will be converted into Old Kent common
stock as provided in the Merger Agreement.
VOTING AND MANAGEMENT INFORMATION
VOTING SECURITIES AND PRINCIPAL STOCKHOLDERS OF PINNACLE
Stockholders of record of shares of Pinnacle common stock as of the
close of business on July 1, 1999 are entitled to vote at the special
meeting of Pinnacle stockholders. As of July 1, 1999, Pinnacle
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had 7,399,343 shares of its common stock issued and outstanding. Each
share of Pinnacle common stock is entitled to one vote.
The following table sets forth information concerning the number of
shares of Pinnacle common stock held by each stockholder who is known to
Pinnacle's management to be the beneficial owner of more than 5% of the
outstanding shares as of July 1, 1999.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OLD KENT COMMON
OWNERSHIP OF PINNACLE COMMON STOCK <F1> STOCK <F2>
-------------------------------------------------------- ------------------------
SOLE SHARED TO BE
VOTING VOTING AND/OR RECEIVED PERCENT
NAME AND ADDRESS OF AND INVEST- INVESTMENT PERCENT IN THE OF
BENEFICIAL OWNER MENT POWER POWER<F3> TOTAL OF CLASS MERGER<F4> CLASS<F5>
------------------- ---------- ------------- ----- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
John J. Gleason
2215 York Road, Suite 306
Oak Brook, Illinois 60523 316,648 875,805 1,192,453 16.1% 897,738 *
Kenneth C. Whitener, Jr.
2215 York Road, Suite 306
Oak Brook, Illinois 60523 405,082 0 405,082 5.5% 304,966 *
</TABLE>
(Footnotes begin following the next table.)
The following table sets forth certain information concerning the
number of shares of Pinnacle common stock held as of July 1, 1999, by
each of Pinnacle's directors, each of Pinnacle's executive officers
whose compensation exceeded $100,000 in 1998, and all of Pinnacle's
directors and executive officers as a group:
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<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OLD KENT COMMON
OWNERSHIP OF PINNACLE COMMON STOCK <F1> STOCK <F2>
-------------------------------------------------------- ------------------------
SOLE SHARED TO BE
VOTING VOTING AND/OR RECEIVED PERCENT
AND INVEST- INVESTMENT PERCENT IN THE OF
NAME OF BENEFICIAL OWNER MENT POWER POWER<F3> TOTAL OF CLASS MERGER<F4> CLASS<F5>
------------------------ ---------- ------------- ----- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
DIRECTORS:
Richard W. Burke 28,861 38,335 67,196 <F*> 50,589 <F*>
Mark P. Burns 35,268 9,750 45,018 <F*> 33,892 <F*>
William J. Finn, Jr. 111,751 17,780 129,531 1.8% 97,517 <F*>
Samuel M. Gilman 42,840 0 42,840 <F*> 32,252 <F*>
Albert Giusfredi 105,679 0 105,679 1.4 79,560 <F*>
John J. Gleason 316,648 875,805 1,192,453 16.1 897,738 <F*>
John J. Gleason, Jr. 191,544 28,080 219,624 3.0 165,344 <F*>
William P. Gleason 92,423 45,114 137,537 1.9 103,545 <F*>
James L. Greene 109,161 131,015 240,176 3.2 180,817 <F*>
Donald G. King 215,680 0 215,680 2.9 162,375 <F*>
James A. Maddock 23,505 78,445 101,950 1.4 76,753 <F*>
James J. McDonough 59,894 19,931 79,825 1.1 60,096 <F*>
William C. Nickels 0 94,785 94,785 1.3 71,359 <F*>
John E. O'Neill 29,565 225 29,790 <F*> 22,427 <F*>
James R. Phillip, Jr. 47,480 30,684 78,164 1.1 58,846 <F*>
Kenneth C. Whitener, Jr. 405,082 0 405,082 5.5 304,966 <F*>
EXECUTIVE OFFICERS (WHO ARE NOT
DIRECTORS):
Glenn M. Mazade 13,949 0 13,949 <F*> 10,502 <F*>
Sara J. Mikuta 3,810 0 3,810 <F*> 2,868 <F*>
Directors and Officers
as a group (18 persons) 1,833,140 1,369,949 3,203,089 43.3 2,411,446 2.2%
<FN>
<F*> Less than 1%.
<F1> The numbers of shares stated are based on information
furnished by the persons listed and include shares personally
owned of record by each person and shares that, under
applicable regulations, are deemed to be otherwise
beneficially owned by each person. Under these regulations, a
beneficial owner of a security includes any person who,
directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise has or shares voting
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power or investment power with respect to the security.
Voting power includes the power to vote or direct the voting
of the security. Investment power includes the power to
dispose or direct the disposition of the security. A person
is also considered the beneficial owner of a security if the
person has a right to acquire beneficial ownership of the
security within 60 days.
<F2> Based on an assumed Exchange Ratio of 0.75285 shares of Old Kent
common stock for each share of Pinnacle common stock and does
not include any amounts of Old Kent common stock that the
individual may have owned prior to the merger.
<F3> These numbers include shares as to which the listed person or
entity is legally entitled to share voting or investment power
by reason of joint ownership, trust or other contract or
property right, and shares held by spouses, children, and
others over whom the listed person may have substantial
influence by reason of relationship. In some instances, the
listed person disclaims beneficial ownership of these shares.
Shares of Pinnacle stock held in fiduciary capacities by the
Pinnacle Banks are not included unless one of the fiduciaries
is identified above.
<F4> This column reflects the number of shares of Old Kent common
stock to be issued to the specified person in exchange for the
number of shares of Pinnacle common stock shown in the "Total"
column for such person.
<F5> This column reflects the percentage of the outstanding shares
of Old Kent common stock that the specified person will
receive in the merger. It does not include any shares of Old
Kent common stock that may have been previously owned by the
named individual. These percentages were computed with
reference to a total of 113,305,773 shares of Old Kent common
stock outstanding, representing the sum of 107,645,214 shares
outstanding as of June 17, 1999 (adjusted to reflect the Old Kent
stock dividend), and anticipated 5,659,432 shares to be issued by
Old Kent in the merger. The computation does not take fractional
or dissenting shares into account.
</FN>
</TABLE>
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Pinnacle's management and Board of Directors may
be deemed to have certain interests in the merger in addition to their
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interests as stockholders of Pinnacle generally. Pinnacle's Board of
Directors was aware of these interests and considered them, among other
matters, in unanimously approving the Merger Agreement.
CHANGE-IN-CONTROL PAYMENTS
Under to the terms of existing employment agreements between
Pinnacle and each of John J. Gleason, Jr., Vice Chairman and Chief
Executive Officer, William P. Gleason, President, and Glenn M. Mazade,
Executive Vice President and Chief Credit Officer, if their employment
is terminated in connection with or within one year after any change in
control of Pinnacle, each is entitled to receive a sum equal to $1.00
less than three times the average annual compensation he received during
the three-year period immediately prior to the date of change in
control, plus three times the value of the contributions that have been
made or credited by Pinnacle for the benefit of the executive under all
employee retirement plans maintained by Pinnacle for completed fiscal
year of Pinnacle immediately preceding the termination. In addition,
Pinnacle will continue to provide coverage for the executive under the
health program maintained by Pinnacle for a period of 12 months
following termination of the executive's employment. All benefits under
these existing employment agreements may not exceed the maximum amount
allowed under Section 280G of the Internal Revenue Code.
Old Kent, Pinnacle and Messrs. J. Gleason, W. Gleason, and Mazade
agreed to terminate their employment with Pinnacle upon the completion
of the merger. As a result of such termination, Messrs. J. Gleason Jr.,
W. Gleason, and Mazade will become entitled to receive severance
payments. Pursuant to their employment agreements, such payments would
amount to approximately $764,000 for Mr. J. Gleason, Jr.; $416,000 for
Mr. W. Gleason; and $338,000 for Mr. Mazade. In connection with the
execution of the Merger Agreement, Messrs. J. Gleason Jr., W. Gleason,
and Mazade also executed amendments to their respective employment
agreements to agree to more extensive non-competition commitments than
contained in their existing employment agreements. In consideration for
the additional commitments, Mr. J. Gleason Jr. will receive $262,500;
Mr. W. Gleason, $270,500, of which $83,000 is salary for continued
service for a period of 120 days following the Effective Time;
and Mr. Mazade, $120,750.
VESTING OF STOCK OPTIONS
Certain executive officers of Pinnacle hold options that, prior to
the closing, are not vested. Under the terms of Pinnacle's stock option
plan as amended and interpreted by the Merger Agreement, these unvested
options will vest immediately prior to the Effective Time of the merger,
will continue after the Effective Time of the merger, and will become
options to purchase Old Kent common stock on equivalent terms. The
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number of shares of Pinnacle common stock subject to the unvested
options held by executive officers totaled 55,341 as of July 1,
1999.
INDEMNIFICATION; DIRECTORS AND OFFICERS INSURANCE
Following the Effective Time, Old Kent has agreed to honor any and
all rights to indemnification and advancement of expenses in favor of
the directors and officers of Pinnacle and Pinnacle's subsidiaries under
their articles of incorporation or bylaws that, as enforceable contract
rights, will survive the merger and will, as contractual rights,
continue with respect to acts or omissions occurring before the
Effective Time with the same force and effect as prior to the Effective
Time. For the specific terms of indemnification and insurance, see "The
Merger and Merger Agreement--Insurance and Indemnification" above.
GENERAL INFORMATION
INDEPENDENT PUBLIC ACCOUNTANTS
The financial statements of Old Kent incorporated by reference in
this prospectus and proxy statement and elsewhere in the Registration Statement
of which this prospectus and proxy statement is a part, to the extent and for
the periods indicated in their reports, have been audited by Arthur Andersen
LLP, independent public accountants, and are incorporated by reference herein
in reliance upon the authority of said firm as experts in giving said reports.
The financial statements of Pinnacle incorporated by reference in
this prospectus and proxy statement and elsewhere in the Registration
Statement of which this prospectus and proxy statement is a part, to the
extent and for the periods indicated in their reports, have been audited
by Arthur Andersen, LLP, independent public accountants, and are
incorporated by reference herein in reliance upon the authority of said
firm as experts in giving said reports.
STOCKHOLDER PROPOSALS
If Pinnacle stockholders adopt the Merger Agreement and the merger
is completed, you will become a stockholder of Old Kent and there will
be no annual meeting of Pinnacle stockholders in 1999. If the merger is
not completed, proposals of Pinnacle stockholders intended to be
presented at the annual meeting of stockholders in 1999 must be received
by Pinnacle for consideration for inclusion in its proxy statement on or
before September 10, 1999.
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LEGAL OPINIONS
Certain legal matters in connection with the proposed merger will
be passed upon for Old Kent by its general counsel, Warner Norcross &
Judd LLP of Grand Rapids, Michigan, and for Pinnacle by its counsel,
Burke, Warren, MacKay & Serritella, P.C. of Chicago, Illinois.
As of March 8, 1999, partners in and attorneys employed by or
associated with Warner Norcross & Judd LLP and their associates were
beneficial owners of a total of approximately 418,968 shares of Old Kent
common stock (not adjusted to reflect the Old Kent stock dividend) having
an approximate aggregate market value of $19,220,157. As of March 8, 1999,
partners and attorneys employed by or associated with Burke, Warren,
MacKay & Serritella, P.C. and their associates were beneficial owners of a
total of 67,196 shares of Pinnacle common stock having an approximate
aggregate market value of $1,818,525 as of that date. Shares reported
as beneficially owned include all shares as to which such persons have
direct or indirect, sole or shared, power to direct voting or disposition,
including personal shares as well as shares held in fiduciary capacities.
SOURCES OF INFORMATION
Old Kent has supplied all information contained or incorporated by
reference in this prospectus and proxy statement relating to Old Kent.
Pinnacle has supplied all such information relating to Pinnacle and DLJ.
WHERE YOU CAN FIND MORE INFORMATION
Old Kent has filed a registration statement on Form S-4 to register
with the Securities and Exchange Commission the offering of Old Kent
common stock to be issued by Old Kent in the merger. This prospectus
and proxy statement is a part of that registration statement. As
allowed by Securities and Exchange Commission rules, this prospectus and
proxy statement does not contain all of the information contained in the
registration statement or the exhibits to the registration statement.
Old Kent and Pinnacle are subject to the informational requirements
of the Exchange Act. Accordingly, each files annual, quarterly and
current reports, proxy statements, and other information with the SEC.
You may read and copy any reports, statements, or other information that
Old Kent or Pinnacle files at the SEC's Public Reference Room at 450
Fifth Street N.W., Washington, D.C. You may call the SEC at
1-800-SEC-0330 for further information on the public reference rooms.
Old Kent's and Pinnacle's SEC filings are also available to the public
from commercial document retrieval services and at the web site
maintained by the Securities and Exchange Commission at
"http://www.sec.gov."
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The Securities and Exchange Commission allows Old Kent and Pinnacle
to incorporate by reference information into this prospectus and proxy
statement. This means that Old Kent and Pinnacle can disclose important
information by referring to another document filed separately with the
SEC. The information incorporated by reference is deemed to be part of
this prospectus and proxy statement, except for any information
superseded by information in this prospectus and proxy statement. This
prospectus and proxy statement incorporates by reference the documents
set forth below that Old Kent and Pinnacle have previously filed with
the SEC. These documents contain important information about Old Kent
and Pinnacle and their finances.
OLD KENT SEC FILINGS (FILE NO. 0-14591) PERIOD
Annual Report on Form 10-K Year ended December 31, 1998
Quarterly Report on Form 10-Q Quarter ended March 31, 1999
Current Reports on Form 8-K Filed on February 26, March 15,
March 22, April 20, and June 22,
1999
Registration Statement on Form 8-A/A Filed on December 31, 1998
Registration Statement on Form 8-B Filed on May 31, 1984
PINNACLE SEC FILINGS (FILE NO. 0-18283) PERIOD
Annual Report on Form 10-K Year ended December 31, 1998
Quarterly Report on Form 10-Q Quarter ended March 31, 1999
All documents subsequently filed by Old Kent and Pinnacle with the
Securities and Exchange Commission pursuant to Sections 13(a), 13(c),
14, and 15(d) of the Exchange Act between the date of this prospectus
and proxy statement and the date of the special meeting are also
incorporated by reference into this prospectus and proxy statement.
Documents incorporated by reference are available from Old Kent and
Pinnacle without charge (not including any exhibit to such a document
unless such exhibit is specifically incorporated by reference in this
prospectus and proxy statement). You may obtain documents incorporated
by reference in this prospectus and proxy statement by requesting them
in writing or by telephone from the appropriate party at the following
addresses:
Old Kent Financial Corporation Pinnacle Banc Group, Inc.
Attn: Mary E. Tuuk, Secretary Attn: John J. Gleason, Jr.,
111 Lyon Street N.W. Chief Executive Officer
Grand Rapids, Michigan 49503 2215 York Road, Suite 306
Tel: (616) 771-5000 Oak Brook, Illinois 60523
Tel: (630) 574-3550
-71-
<PAGE>
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY AUGUST 2, 1999
TO RECEIVE THEM BEFORE THE SPECIAL MEETING.
You should rely only on the information contained or incorporated
by reference in this prospectus and proxy statement to vote on the
merger. Neither Old Kent nor Pinnacle has authorized anyone to provide
you with information that is different from what is contained in this
prospectus and proxy statement.
This prospectus and proxy statement is dated July 2, 1999. You
should not assume that the information contained in this prospectus and
proxy statement is accurate as of any date other than such date, and
neither the mailing of this prospectus and proxy statement to you nor
the issuance of Old Kent common stock in the merger will create any
implication to the contrary.
FORWARD-LOOKING STATEMENTS
This prospectus and proxy statement and the documents incorporated
in this prospectus and proxy statement 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 and Pinnacle
themselves. 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 concerning
Year 2000 readiness 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 and Pinnacle have 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
-72-
<PAGE>
of the companies on which Old Kent and Pinnacle rely to make their
computer systems Year 2000 compliant; the ability to locate, correct,
and convert all relevant computer codes and data; the changes of the
national economy; and expected cost savings from the acquisition of
Pinnacle by Old Kent and other mergers and acquisitions in which Old
Kent is involved might not be fully realized within the expected time
frame. Neither Old Kent nor Pinnacle undertakes any obligation to
update, amend or clarify forward-looking statements, whether as a result
of new information, future events, or otherwise.
-73-
<PAGE>
A P P E N D I X A
AGREEMENT AND PLAN OF MERGER
BETWEEN
PINNACLE BANC GROUP, INC.,
OLD KENT FINANCIAL CORPORATION
AND
OKFC MERGER CORPORATION
Dated as of March 18, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I - THE TRANSACTION. . . . . . . . . . . . . . . . . . . . . . .A-1
1.1 MERGER OF MERGERSUB WITH AND INTO PINNACLE . . . . . . . . . .A-1
1.2 THE CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . .A-2
1.3 EFFECTIVE TIME OF THE MERGER . . . . . . . . . . . . . . . . .A-2
1.4 ADDITIONAL ACTIONS . . . . . . . . . . . . . . . . . . . . . .A-2
1.5 SURVIVING CORPORATION. . . . . . . . . . . . . . . . . . . . .A-2
1.6 BANK CONSOLIDATION . . . . . . . . . . . . . . . . . . . . . .A-3
ARTICLE II - CONVERSION AND EXCHANGE OF SHARES . . . . . . . . . . . . .A-3
2.1 CONVERSION OF SHARES . . . . . . . . . . . . . . . . . . . . .A-3
2.2 UPSET PROVISION. . . . . . . . . . . . . . . . . . . . . . . .A-4
2.3 ADJUSTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . .A-5
2.4 INCREASE IN OUTSTANDING SHARES OF PINNACLE COMMON STOCK. . . .A-7
2.5 CESSATION OF SHAREHOLDER STATUS. . . . . . . . . . . . . . . .A-7
2.6 SURRENDER OF OLD CERTIFICATES AND DISTRIBUTION OF OLD KENT
COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . .A-7
2.7 NO FRACTIONAL SHARES . . . . . . . . . . . . . . . . . . . . .A-8
2.8 STOCK OPTIONS. . . . . . . . . . . . . . . . . . . . . . . . .A-8
ARTICLE III - OLD KENT'S REPRESENTATIONS AND WARRANTIES. . . . . . . . A-10
3.1 AUTHORIZATION, NO CONFLICTS, ETC.. . . . . . . . . . . . . . A-10
3.2 ORGANIZATION AND GOOD STANDING . . . . . . . . . . . . . . . A-11
3.3 SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . . . A-11
3.4 CAPITAL STOCK. . . . . . . . . . . . . . . . . . . . . . . . A-11
3.5 OLD KENT COMMON STOCK. . . . . . . . . . . . . . . . . . . . A-12
3.6 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . A-12
3.7 ABSENCE OF UNDISCLOSED LIABILITIES . . . . . . . . . . . . . A-13
3.8 ABSENCE OF MATERIAL ADVERSE CHANGE . . . . . . . . . . . . . A-13
3.9 ABSENCE OF LITIGATION. . . . . . . . . . . . . . . . . . . . A-13
3.10 REGULATORY FILINGS. . . . . . . . . . . . . . . . . . . . . A-13
3.11 REGISTRATION STATEMENT, ETC.. . . . . . . . . . . . . . . . A-13
3.12 INVESTMENT BANKERS AND BROKERS. . . . . . . . . . . . . . . A-14
3.13 ACCOUNTING AND TAX TREATMENT. . . . . . . . . . . . . . . . A-14
3.14 AGREEMENTS WITH BANK REGULATORS . . . . . . . . . . . . . . A-14
3.15 EVENTS SINCE DECEMBER 31, 1998. . . . . . . . . . . . . . . A-14
3.16 RESERVE FOR LOAN LOSSES . . . . . . . . . . . . . . . . . . A-14
3.17 PUBLIC COMMUNICATIONS; SECURITIES OFFERING. . . . . . . . . A-15
3.18 YEAR 2000 COMPLIANCE. . . . . . . . . . . . . . . . . . . . A-15
3.19 TRUE AND COMPLETE INFORMATION . . . . . . . . . . . . . . . A-15
ARTICLE IV - PINNACLE'S REPRESENTATIONS AND WARRANTIES . . . . . . . . A-15
4.1 AUTHORIZATION, NO CONFLICTS, ETC.. . . . . . . . . . . . . . A-15
4.2 ORGANIZATION AND GOOD STANDING . . . . . . . . . . . . . . . A-16
4.3 SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . . . A-16
4.4 CAPITAL STOCK. . . . . . . . . . . . . . . . . . . . . . . . A-17
A-i
<PAGE>
4.5 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . A-18
4.6 ABSENCE OF UNDISCLOSED LIABILITIES . . . . . . . . . . . . . A-18
4.7 ABSENCE OF MATERIAL ADVERSE CHANGE . . . . . . . . . . . . . A-18
4.8 ABSENCE OF LITIGATION. . . . . . . . . . . . . . . . . . . . A-19
4.9 NO INDEMNIFICATION CLAIMS. . . . . . . . . . . . . . . . . . A-19
4.10 CONDUCT OF BUSINESS . . . . . . . . . . . . . . . . . . . . A-19
4.11 CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . A-19
4.12 REGULATORY FILINGS . . . . . . . . . . . . . . . . . . . . A-19
4.13 REGISTRATION STATEMENT, ETC.. . . . . . . . . . . . . . . . A-20
4.14 AGREEMENTS WITH BANK REGULATORS . . . . . . . . . . . . . . A-20
4.15 TAX MATTERS . . . . . . . . . . . . . . . . . . . . . . . . A-20
4.16 TITLE TO PROPERTIES . . . . . . . . . . . . . . . . . . . . A-21
4.17 CONDITION OF REAL PROPERTY. . . . . . . . . . . . . . . . . A-22
4.18 REAL AND PERSONAL PROPERTY LEASES . . . . . . . . . . . . . A-22
4.20 REQUIRED LICENSES, PERMITS, ETC.. . . . . . . . . . . . . . A-23
4.21 DATA PROCESSING AND OTHER MATERIAL CONTRACTS. . . . . . . . A-23
4.22 CERTAIN EMPLOYMENT MATTERS. . . . . . . . . . . . . . . . . A-23
4.23 EMPLOYEE BENEFIT PLANS. . . . . . . . . . . . . . . . . . . A-24
4.24 ENVIRONMENTAL MATTERS . . . . . . . . . . . . . . . . . . . A-25
4.25 DUTIES AS FIDUCIARY . . . . . . . . . . . . . . . . . . . . A-27
4.26 INVESTMENT BANKERS AND BROKERS. . . . . . . . . . . . . . . A-27
4.27 FAIRNESS OPINION. . . . . . . . . . . . . . . . . . . . . . A-27
4.28 PINNACLE-RELATED PERSONS. . . . . . . . . . . . . . . . . . A-27
4.29 CHANGE IN BUSINESS RELATIONSHIPS. . . . . . . . . . . . . . A-28
4.30 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . A-28
4.31 BOOKS AND RECORDS . . . . . . . . . . . . . . . . . . . . . A-28
4.32 LOAN GUARANTEES . . . . . . . . . . . . . . . . . . . . . . A-28
4.33 EVENTS SINCE DECEMBER 31, 1998. . . . . . . . . . . . . . . A-28
4.34 RESERVE FOR LOAN LOSSES . . . . . . . . . . . . . . . . . . A-29
4.35 LOAN ORIGINATION AND SERVICING. . . . . . . . . . . . . . . A-29
4.36 PUBLIC COMMUNICATIONS; SECURITIES OFFERING. . . . . . . . . A-29
4.37 NO INSIDER TRADING. . . . . . . . . . . . . . . . . . . . . A-29
4.38 YEAR 2000 COMPLIANCE. . . . . . . . . . . . . . . . . . . . A-30
4.39 SUBSIDIARIES AND JOINT VENTURES . . . . . . . . . . . . . . A-30
4.40 ACCOUNTING AND TAX TREATMENT. . . . . . . . . . . . . . . . A-30
4.41 TRUE AND COMPLETE INFORMATION . . . . . . . . . . . . . . . A-30
ARTICLE V - COVENANTS PENDING CLOSING. . . . . . . . . . . . . . . . . A-30
5.1 DISCLOSURE STATEMENTS; ADDITIONAL INFORMATION. . . . . . . . A-31
5.2 CHANGES AFFECTING REPRESENTATIONS. . . . . . . . . . . . . . A-31
5.3 PINNACLE'S CONDUCT OF BUSINESS PENDING THE EFFECTIVE TIME. . A-31
5.4 APPROVAL OF PLAN OF MERGER BY PINNACLE SHAREHOLDERS. . . . . A-34
5.5 REGULAR DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . A-35
5.6 DATA PROCESSING AND RELATED CONTRACTS. . . . . . . . . . . . A-35
5.7 AFFILIATES -- COMPLIANCE WITH ACCOUNTING AND SECURITIES
RULES. . . . . . . . . . . . . . . . . . . . . . . . . . . . A-35
5.8 INDEMNIFICATION AND INSURANCE. . . . . . . . . . . . . . . . A-36
5.9 EXCLUSIVE COMMITMENT . . . . . . . . . . . . . . . . . . . . A-36
A-ii
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5.10 REGISTRATION STATEMENT. . . . . . . . . . . . . . . . . . . A-37
5.11 OTHER FILINGS . . . . . . . . . . . . . . . . . . . . . . . A-38
5.12 MISCELLANEOUS AGREEMENTS AND CONSENTS . . . . . . . . . . . A-38
5.13 ACCESS AND INVESTIGATION. . . . . . . . . . . . . . . . . . A-38
5.14 CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . A-38
5.15 ENVIRONMENTAL INVESTIGATION . . . . . . . . . . . . . . . . A-39
5.16 EMPLOYMENT AMENDMENTS . . . . . . . . . . . . . . . . . . . A-40
5.17 TERMINATION OF PROFIT SHARING AND 401(K) PLAN . . . . . . . A-40
5.18 ACCOUNTING AND TAX TREATMENT. . . . . . . . . . . . . . . . A-40
5.19 PUBLIC ANNOUNCEMENTS. . . . . . . . . . . . . . . . . . . . A-40
ARTICLE VI - CONDITIONS PRECEDENT TO OLD KENT'S OBLIGATIONS. . . . . . A-40
6.1 RENEWAL OF REPRESENTATIONS AND WARRANTIES, ETC.. . . . . . . A-40
6.2 OPINION OF LEGAL COUNSEL . . . . . . . . . . . . . . . . . . A-41
6.3 REQUIRED REGULATORY APPROVALS. . . . . . . . . . . . . . . . A-41
6.4 SHAREHOLDER APPROVAL . . . . . . . . . . . . . . . . . . . . A-41
6.5 ORDER, DECREE, ETC.. . . . . . . . . . . . . . . . . . . . . A-41
6.6 PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . A-41
6.7 TAX MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . A-41
6.8 REGISTRATION STATEMENT . . . . . . . . . . . . . . . . . . . A-42
6.9 CERTIFICATE AS TO OUTSTANDING SHARES . . . . . . . . . . . . A-42
6.10 CHANGE OF CONTROL WAIVERS . . . . . . . . . . . . . . . . . A-42
6.11 POOLING ASSURANCES. . . . . . . . . . . . . . . . . . . . . A-42
ARTICLE VII - CONDITIONS PRECEDENT TO PINNACLE'S OBLIGATIONS . . . . . A-42
7.1 RENEWAL OF REPRESENTATIONS AND WARRANTIES, ETC.. . . . . . . A-42
7.2 OPINION OF LEGAL COUNSEL . . . . . . . . . . . . . . . . . . A-43
7.3 REQUIRED REGULATORY APPROVALS. . . . . . . . . . . . . . . . A-43
7.4 SHAREHOLDER APPROVAL . . . . . . . . . . . . . . . . . . . . A-43
7.5 ORDER, DECREE, ETC.. . . . . . . . . . . . . . . . . . . . . A-43
7.6 TAX MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . A-43
7.7 REGISTRATION STATEMENT . . . . . . . . . . . . . . . . . . . A-44
7.8 FAIRNESS OPINION . . . . . . . . . . . . . . . . . . . . . . A-44
7.9 LISTING OF SHARES . . . . . . . . . . . . . . . . . . . . . A-44
7.10 EXCHANGE AGENT CERTIFICATE. . . . . . . . . . . . . . . . . A-44
ARTICLE VIII - ABANDONMENT OF MERGER. . . . . . . . . . . . . . . . . A-44
8.1 MUTUAL ABANDONMENT . . . . . . . . . . . . . . . . . . . . . A-44
8.2 UPSET DATE . . . . . . . . . . . . . . . . . . . . . . . . . A-44
8.3 OLD KENT'S RIGHTS TO TERMINATE . . . . . . . . . . . . . . . A-45
8.4 PINNACLE'S RIGHTS TO TERMINATE . . . . . . . . . . . . . . . A-45
8.5 EFFECT OF TERMINATION. . . . . . . . . . . . . . . . . . . . A-46
ARTICLE IX - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . A-46
9.1 "MATERIAL ADVERSE EFFECT" DEFINED. . . . . . . . . . . . . . A-46
9.2 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES, AND AGREEMENTS . A-47
9.3 AMENDMENT. . . . . . . . . . . . . . . . . . . . . . . . . . A-47
9.4 EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . A-47
A-iii
<PAGE>
9.5 SPECIFIC ENFORCEMENT . . . . . . . . . . . . . . . . . . . . A-47
9.6 JURISDICTION; VENUE; JURY. . . . . . . . . . . . . . . . . . A-47
9.7 WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . A-47
9.8 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . A-48
9.9 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . A-48
9.10 ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . A-48
9.11 THIRD PARTY BENEFICIARIES . . . . . . . . . . . . . . . . . A-48
9.12 COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . A-49
9.13 FURTHER ASSURANCES; PRIVILEGES. . . . . . . . . . . . . . . A-49
9.14 HEADINGS, ETC.. . . . . . . . . . . . . . . . . . . . . . . A-49
9.15 CALCULATION OF DATES AND DEADLINES. . . . . . . . . . . . . A-49
9.16 SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . A-49
9.17 EFFECT OF AMENDMENT; TRANSACTIONS UNDER ORIGINAL AGREEMENT. A-49
DEFINITIONS
AMEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-5
BANK CONSOLIDATION . . . . . . . . . . . . . . . . . . . . . . . . . . .A-3
BANK CONSOLIDATION AGREEMENT . . . . . . . . . . . . . . . . . . . . . .A-3
BUSINESS COMBINATION . . . . . . . . . . . . . . . . . . . . . . . . . A-37
CALL REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-18
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-25
CERTIFICATES OF MERGER . . . . . . . . . . . . . . . . . . . . . . . . .A-2
CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-2
CONSTITUENT CORPORATION. . . . . . . . . . . . . . . . . . . . . . . . .A-1
CONTROL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-16
DESIGNATED CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . A-42
DLJ. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-27
EFFECTIVE TIME . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-2
EMPLOYEE BENEFIT PLAN. . . . . . . . . . . . . . . . . . . . . . . . . A-24
EMPLOYMENT AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . A-40
EMPLOYMENT-RELATED PAYMENTS. . . . . . . . . . . . . . . . . . . . . . A-23
ENVIRONMENTAL LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . A-26
ENVIRONMENTAL RISK . . . . . . . . . . . . . . . . . . . . . . . . . . A-39
ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-24
EX-DATE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-5
EXCHANGE ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-30
EXCHANGE AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-7
EXCHANGE RATIO . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-3
FDIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-11
FDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-12
FEDERAL BANK HOLDING COMPANY ACT . . . . . . . . . . . . . . . . . . . A-11
FEDERAL RESERVE BOARD. . . . . . . . . . . . . . . . . . . . . . . . . A-11
FIB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-14
FIDUCIARY EVENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . A-34
FINAL INDEX PRICE. . . . . . . . . . . . . . . . . . . . . . . . . . . .A-5
FINAL OLD KENT PRICE . . . . . . . . . . . . . . . . . . . . . . . . . .A-4
A-iv
<PAGE>
FLOOR OLD KENT PRICE . . . . . . . . . . . . . . . . . . . . . . . . . .A-4
GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-12
HAZARDOUS SUBSTANCE. . . . . . . . . . . . . . . . . . . . . . . . . . A-25
ILLINOIS ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
ILLINOIS BANK ACT. . . . . . . . . . . . . . . . . . . . . . . . . . . A-11
ILLINOIS BANK HOLDING COMPANY ACT. . . . . . . . . . . . . . . . . . . A-11
ILLINOIS COMMISSIONER. . . . . . . . . . . . . . . . . . . . . . . . . A-14
INDEX COMPANIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-5
INITIAL INDEX DATE . . . . . . . . . . . . . . . . . . . . . . . . . . .A-5
INITIAL INDEX PRICE. . . . . . . . . . . . . . . . . . . . . . . . . . .A-5
INITIAL OLD KENT PRICE . . . . . . . . . . . . . . . . . . . . . . . . .A-4
INSURANCE AMOUNT . . . . . . . . . . . . . . . . . . . . . . . . . . . A-36
INTERNAL REVENUE CODE. . . . . . . . . . . . . . . . . . . . . . . . . .A-1
IRS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-21
MATERIAL ADVERSE EFFECT. . . . . . . . . . . . . . . . . . . . . . . . A-46
MERGER.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
MERGERSUB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
MICHIGAN ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
MICHIGAN BANKING CODE. . . . . . . . . . . . . . . . . . . . . . . . . .A-3
NASDAQ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-5
NOTIFYING PARTY. . . . . . . . . . . . . . . . . . . . . . . . . . . . A-31
NYSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-4
OLD CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-7
OLD KENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
OLD KENT COMMON STOCK. . . . . . . . . . . . . . . . . . . . . . . . . .A-3
OLD KENT DISCLOSURE STATEMENT. . . . . . . . . . . . . . . . . . . . . A-10
OLD KENT RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . A-11
OLD KENT RIGHTS AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . A-11
OLD KENT'S FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . A-12
OPTION AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
OPTION PLAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-9
OPTION PLAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-8
PBGC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-25
PHASE I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-39
PHASE II AND III WORK. . . . . . . . . . . . . . . . . . . . . . . . . A-39
PINNACLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
PINNACLE AFFILIATE AGREEMENTS. . . . . . . . . . . . . . . . . . . . . A-36
PINNACLE BANK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
PINNACLE BANKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
PINNACLE COMMON STOCK. . . . . . . . . . . . . . . . . . . . . . . . . .A-3
PINNACLE DISCLOSURE STATEMENT. . . . . . . . . . . . . . . . . . . . . A-15
PINNACLE RETIREMENT PLAN . . . . . . . . . . . . . . . . . . . . . . . A-33
PINNACLE'S FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . A-18
PINNACLE'S LEASES. . . . . . . . . . . . . . . . . . . . . . . . . . . A-22
PINNACLE'S REAL PROPERTY . . . . . . . . . . . . . . . . . . . . . . . A-22
PINNACLE'S REPRESENTATIVES . . . . . . . . . . . . . . . . . . . . . . A-27
PINNACLE-RELATED PERSON. . . . . . . . . . . . . . . . . . . . . . . . A-27
PLAN OF MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
A-v
<PAGE>
PLAN OF MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-26
PRICING PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-4
PROPOSAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-37
PROSPECTUS AND PROXY STATEMENT . . . . . . . . . . . . . . . . . . . . A-13
REGISTRATION STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . A-13
SEC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-13
SECURITIES ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-35
SHAREHOLDERS' MEETING. . . . . . . . . . . . . . . . . . . . . . . . . A-34
STOCK DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . .A-5
SUPERIOR PROPOSAL. . . . . . . . . . . . . . . . . . . . . . . . . . . A-35
SURVIVING CORPORATION. . . . . . . . . . . . . . . . . . . . . . . . . .A-2
TAX RETURNS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-20
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-20
TRANSACTION DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . . . . A-13
UNEXERCISED OPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . .A-9
UNEXERCISED OPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . .A-9
UPSET CONDITION. . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-4
YEAR 2000 ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . A-30
YEAR 2000 PROBLEM. . . . . . . . . . . . . . . . . . . . . . . . . . . A-15
YEAR 2000 READY. . . . . . . . . . . . . . . . . . . . . . . . . . . . A-30
EXHIBITS
A Form of Stock Option Agreement (included as Appendix B)
B Index Companies
C Form of Disclosure Statement (omitted)
D Schedule of Additional Information (omitted)
E Form of Pinnacle's Affiliate Agreement (omitted)
F Form of Pinnacle's Counsel's Legal Opinion (omitted)
G Form of Old Kent's Counsel's Legal Opinion (omitted)
H Designated Contracts (omitted)
A-vi
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Amended and Restated Agreement and Plan of Merger (the "PLAN OF
MERGER") is made as of March 18, 1999, between Pinnacle Banc Group, Inc.,
an Illinois corporation, headquartered at 2215 York Road, Suite 306, Oak
Brook, Illinois 60523 ("PINNACLE"), Old Kent Financial Corporation, a
Michigan corporation, headquartered at 111 Lyon Street, N.W., Grand Rapids,
Michigan 49503 ("OLD KENT"), and OKFC Merger Corporation, a Michigan
corporation and wholly owned subsidiary of Old Kent headquartered at 111
Lyon Street, N.W., Grand Rapids, Michigan 49503 ("MERGERSUB").
Old Kent and Pinnacle desire that Pinnacle and its subsidiaries become
affiliated with Old Kent. The affiliation would be effected through the
merger of MergerSub with and into Pinnacle in accordance with this Plan of
Merger and in accordance with the Business Corporation Act of the State of
Michigan, as amended (the "MICHIGAN ACT"), and the Illinois Business
Corporation Act of 1983, as amended (the "ILLINOIS ACT"). The transactions
contemplated by, and described in, this Plan of Merger are referred to as
the "MERGER."
Old Kent has formed MergerSub solely for the purpose of effectuating
the Merger. As soon as reasonably practicable following the consummation
of the Merger, Old Kent intends to cause Pinnacle to be liquidated and
dissolved, and to cause Pinnacle's wholly owned subsidiaries, Pinnacle
Bank, Cicero, Illinois, and Pinnacle Bank of the Quad-Cities, Silvis,
Illinois (each a "PINNACLE BANK" and, together, the "PINNACLE BANKS"), to
be consolidated with and into Old Kent's wholly owned subsidiary, Old Kent
Bank.
It is intended that, for federal tax purposes, the Merger qualify as a
reorganization under the provisions of Section 368 of the Internal Revenue
Code of 1986, as amended (the "INTERNAL REVENUE CODE"). It is also
intended that, for accounting and financial reporting purposes, the Merger
shall be accounted for as a pooling-of-interests.
On March 18, 1999, Old Kent and Pinnacle entered to an Agreement and
Plan of Merger (the "ORIGINAL AGREEMENT"). Subsequently, Old Kent and
Pinnacle determined that it was in their respective best interests and in
the interests of their respective shareholders to amend the Original
Agreement and restate in one document the text of the Original Agreement as
so amended. Therefore, as of April 20, 1999, the parties have executed
this amended and restated Agreement and Plan of Merger (as so amended, the
"PLAN OF MERGER") to replace and supercede the Original Agreement. The
date of the Plan of Merger shall be as of March 18, 1999 (the "DATE OF THE
PLAN OF MERGER").
<PAGE>
As a condition to, and concurrently with the execution of, the
Original Agreement, Pinnacle and Old Kent entered into a Stock Option
Agreement attached as EXHIBIT A (the "OPTION AGREEMENT").
In consideration of the representations, warranties, and covenants
contained in this Plan of Merger, the parties agree:
ARTICLE I - THE TRANSACTION
Subject to the terms and conditions of this Plan of Merger, the Merger
shall be carried out in the following manner:
1.1 MERGER OF MERGERSUB WITH AND INTO PINNACLE. At the Effective
Time, MergerSub shall be merged with and into Pinnacle. Pinnacle and
MergerSub are each sometimes referred to as a "CONSTITUENT CORPORATION"
prior to the Merger. At the Effective Time, the Constituent Corporations
shall become a single corporation, which shall be Pinnacle (the "SURVIVING
CORPORATION"). The effect of the Merger upon each of the Constituent
Corporations and the Surviving Corporation shall be as provided in Chapter
Seven of the Michigan Act and Chapter 805, Act 5, Article 11 of the
Illinois Act with respect to the merger of domestic and foreign
corporations, where the surviving corporation will be subject to the laws
of the State of Illinois.
1.2 THE CLOSING. The "CLOSING" for the Merger shall be held at such
time, date, and location as may be mutually agreed by the parties. In the
absence of such agreement, the Closing shall be held at the offices of
Warner Norcross & Judd llp, 111 Lyon Street, N.W., Grand Rapids, Michigan,
commencing at 11 a.m. on the earliest date specified by either Old Kent or
Pinnacle upon ten business days' written notice (or at the election of Old
Kent, on the last business day of the month) after the last to occur of the
following events: (a) receipt of all consents and approvals of government
regulatory authorities, and the expiration of all related statutory waiting
periods, legally required to consummate the Merger; and (b) approval of
this Plan of Merger by Pinnacle's shareholders. Scheduling or commencing
the Closing shall not, however, constitute a waiver of the conditions
precedent of either Old Kent and MergerSub or Pinnacle as set forth in
Articles VI and VII, respectively. Upon completion of the Closing,
Pinnacle and MergerSub shall each execute and file the certificate of
merger as required by the Michigan Act and the articles of merger as
required by the Illinois Act to effect the Merger (together, the
"CERTIFICATES OF MERGER").
1.3 EFFECTIVE TIME OF THE MERGER. The Merger shall be consummated
following the Closing by filing the Certificates of Merger in the manner
required by law. The "EFFECTIVE TIME" of the Merger shall be as of the
time and date to be elected by Old Kent and specified in the Certificates
A-2
<PAGE>
of Merger, but not later than the first business day of the month next
following the month in which the Closing occurs.
1.4 ADDITIONAL ACTIONS. At any time after the Effective Time, the
Surviving Corporation may determine that further assignments or assurances
or any other acts are necessary or desirable to vest, perfect, or confirm,
of record or otherwise, in the Surviving Corporation its rights, title, or
interest in, to, or under any of the rights, properties, or assets of
MergerSub acquired or to be acquired by the Surviving Corporation as a
result of, or in connection with, the Merger, or to otherwise carry out the
purposes of this Plan of Merger. MergerSub hereby grants to the Surviving
Corporation an irrevocable power of attorney to execute and deliver all
such deeds, assignments, and assurances and to do all acts necessary,
proper, or convenient to accomplish this purpose. This irrevocable power
of attorney shall only be operative following the Effective Time. The
proper officers and directors of the Surviving Corporation shall be fully
authorized in the name of MergerSub to take any and all such action
contemplated by this Plan of Merger.
1.5 SURVIVING CORPORATION. Immediately after the Effective Time, the
Surviving Corporation shall have the following attributes until they are
subsequently changed in the manner provided by law:
1.5.1 NAME. The name of the Surviving Corporation shall be
"Pinnacle Banc Group, Inc."
1.5.2 ARTICLES OF INCORPORATION. The articles of incorporation
of the Surviving Corporation shall be the articles of incorporation of
Pinnacle as in effect immediately prior to the Effective Time, without
change.
1.5.3 BYLAWS. The bylaws of the Surviving Corporation shall be
the bylaws of Pinnacle as in effect immediately prior to the Effective
Time, without change.
1.5.4 DIRECTORS. The directors of the Surviving Corporation
shall be the same as the directors of MergerSub immediately prior to
the Effective Time.
1.5.5 OFFICERS. The officers of the Surviving Corporation shall
be the same as the officers of MergerSub immediately prior to the
Effective Time.
1.6 BANK CONSOLIDATION. After the Effective Time, Old Kent intends
to consolidate the Pinnacle Banks with and into Old Kent Bank resulting in
a single Michigan banking corporation, which shall be Old Kent Bank (the
"BANK CONSOLIDATION"). The Bank Consolidation will be effected pursuant to
a consolidation agreement (the "BANK CONSOLIDATION AGREEMENT"), in the form
A-3
<PAGE>
required by the Michigan Banking Code of 1969, as amended (the "MICHIGAN
BANKING CODE"), and by other applicable laws, containing terms and
conditions, not inconsistent with this Plan of Merger, as determined by Old
Kent Bank. The Bank Consolidation shall only occur if the Merger is
consummated, and it shall become effective immediately after the Effective
Time or such later time as may be determined by Old Kent. To obtain the
necessary regulatory approval for the Bank Consolidation to occur
immediately after the Effective Time, Pinnacle and each Pinnacle Bank shall
approve, adopt, execute, and deliver the Bank Consolidation Agreement and
take other reasonably required or convenient steps prior to the Effective
Time to effect the Bank Consolidation.
ARTICLE II - CONVERSION AND EXCHANGE OF SHARES
Subject to the terms and conditions of this Plan of Merger and as a
result of the Merger, all Common Stock, $3.12 par value per share, of
Pinnacle ("PINNACLE COMMON STOCK") shall be converted into Common Stock, $1
par value per share, of Old Kent ("OLD KENT COMMON STOCK") as follows:
2.1 CONVERSION OF SHARES. As of the Effective Time:
2.1.1 CONVERSION OF PINNACLE COMMON STOCK. Except as provided
below, each share of Pinnacle Common Stock outstanding immediately
prior to the Effective Time shall be converted into .717 (the
"EXCHANGE RATIO") shares of validly issued, fully paid, and
nonassessable Old Kent Common Stock.
2.1.2 OLD KENT RIGHTS. Each share of Old Kent Common Stock to
be issued in the Merger shall have attached to it the number of "Old
Kent Rights" issuable pursuant to the "Old Kent Rights Agreement" (as
those terms are defined in Section 3.4.1, 3.4.5) that are attached to
each issued and outstanding share of Old Kent Common Stock at the
Effective Time, provided that the Old Kent Rights are not then
separately transferable.
2.1.3 CONVERSION OF MERGERSUB COMMON STOCK. Each share of
Common Stock of MergerSub issued and outstanding immediately prior to
the Effective Time shall be converted automatically into and become
one fully paid and nonassessable share of common stock, $3.12 par
value per share, of the Surviving Corporation.
2.1.4 NO CONVERSION OF OLD KENT COMMON STOCK. Each share of Old
Kent Common Stock and each Old Kent Right outstanding immediately
prior to the Effective Time shall continue to be outstanding without
any change.
A-4
<PAGE>
2.1.5 STOCK HELD BY OLD KENT. Each share of Pinnacle Common
Stock, if any, held by Old Kent or any of its subsidiaries for its own
account, and not in a fiduciary or representative capacity for a
person other than Old Kent or any of its subsidiaries, shall be
canceled and no consideration shall be issuable or payable with
respect to any such share.
2.1.6 TREASURY SHARES. Each share of Pinnacle Common Stock held
by Pinnacle as a treasury share, if any, shall be canceled and no Old
Kent Common Stock or other consideration shall be issuable or payable
with respect to any such share.
2.1.7 DISSENTING SHARES. Each outstanding share of Pinnacle
Common Stock as to which a legally sufficient demand has been made in
accordance with Section 5/11.70 of the Illinois Act and which was not
voted in favor of approval of the Plan of Merger (each a "DISSENTING
SHARE") shall, after the Effective Time of the Merger, represent only
the rights of a dissenting shareholder under the Illinois Act,
including the right to obtain payment for the estimated fair value of
those shares, plus accrued interest, as provided under the Illinois
Act. A Dissenting Share shall not be converted into, or represent, a
right to receive Old Kent Common Stock as provided under this Plan of
Merger. Any Dissenting Shares shall not, after the Effective Time,
be entitled to vote for any purpose or receive any dividends or other
distributions. All payments in respect of Dissenting Shares shall be
from funds of Old Kent and not from the acquired assets of Pinnacle.
If, however, the holder of such a Dissenting Share fails to properly
perfect, effectively withdraws, waives or loses, or otherwise becomes
ineligible to exercise a dissenting shareholder's rights under the
Illinois Act, then at that time the Dissenting Shares held by that
shareholder shall be converted into Old Kent Common Stock as provided
in this Section 2.1 (CONVERSION OF SHARES).
2.1.8 PINNACLE COMMON STOCK NO LONGER OUTSTANDING. Each share
of Pinnacle Common Stock outstanding immediately prior to the
Effective Time shall, as of the Effective Time, no longer be
outstanding and shall represent only the right to receive shares of
Old Kent Common Stock as provided in this Plan of Merger, together
with any dividends and other distributions payable as provided in
Section 2.6.4 (DIVIDENDS PENDING SURRENDER), but subject to the
payment of cash in lieu of fractional shares as provided in
Section 2.7 (NO FRACTIONAL SHARES).
2.2 UPSET PROVISION. After a Closing is properly called pursuant to
Section 1.2 (THE CLOSING), Pinnacle shall have the right to terminate this
Plan of Merger if the "Upset Condition" then exists.
A-5
<PAGE>
2.2.1 UPSET CONDITION. The "UPSET CONDITION" shall exist if
both of the following conditions then exist:
(a) The Final Old Kent Price (defined below) is less than
$38.25 (the "FLOOR OLD KENT PRICE"); and
(b) The number determined by dividing the Final Old Kent
Price by $45.00 (the "INITIAL OLD KENT PRICE") is less than the
number obtained by subtracting (i) 0.15 from (ii) the quotient
obtained by dividing the Final Index Price (as defined below) by
the Initial Index Price (as defined below).
2.2.2 FINAL OLD KENT PRICE. The "FINAL OLD KENT PRICE" means
the average of the closing prices per share of Old Kent Common Stock
reported on the New York Stock Exchange ("NYSE") for the ten
consecutive full trading days ending on the eleventh business day
prior to the date of the Closing (the "PRICING PERIOD"), as reported
in the DOW JONES NEWS/RETRIEVAL system, or other equally reliable
means.
2.2.3 INITIAL INDEX PRICE. The "INITIAL INDEX PRICE" means the
average of the closing prices per share of each of the common stocks
of the Index Companies as reported on NYSE, The Nasdaq Stock Market
("NASDAQ"), or the American Stock Exchange ("AMEX") on March 18, 1999
("INITIAL INDEX DATE"). The Initial Index Price computed as of a
recent date is presented in Exhibit B as an illustration of the method
of computation, but is subject to adjustment as provided in Sections
2.2.6 (INDEX ADJUSTMENTS).
2.2.4 FINAL INDEX PRICE. The "FINAL INDEX PRICE" means the
average of the average closing prices per share of each of the common
stocks of the Index Companies as reported on NYSE, NASDAQ, or AMEX for
each trading day during the Pricing Period.
2.2.5 INDEX COMPANIES. The term "INDEX COMPANIES" refers to the
companies listed on EXHIBIT B, as the list may be modified under
Section 2.2.7 (INDEX EXCLUSIONS).
2.2.6 INDEX ADJUSTMENTS. If any Index Company declares a stock
dividend, stock split, or stock split-up (any such event being a
"STOCK DISTRIBUTION") of its common stock for which the ex-dividend
date, ex-split date, ex-distribution date or other comparable date
(the "EX-DATE") occurs between the Initial Index Date and the end of
the Pricing Period, then for purposes of the definitions in Section
2.2 (UPSET PROVISION) the closing prices for such common stock as of
the Initial Index Date and each date during the Pricing Period prior
to the Ex-Date shall be adjusted so as to be comparable as of the
Initial Index Date and throughout the Pricing Period in the same
A-6
<PAGE>
manner as is described in Section 2.3.1(a) (STOCK DIVIDENDS AND
DISTRIBUTIONS) for any Stock Distribution.
2.2.7 INDEX EXCLUSIONS. There shall be excluded from the list
of Index Companies any company as to which, between the Date of this
Plan of Merger and the end the Pricing Period, there occurs or there
is publicly announced (a) a proposed merger, acquisition, or business
combination in which that company is not or will not be the survivor,
(b) a tender offer, exchange offer, or other transaction or involving
the acquisition of a majority of that company's common stock or
assets, or (c) a reclassification, recapitalization, subdivision,
spin-off, split-up, or combination of its common stock. If a company
is excluded from the list of Index Companies, then the Initial Index
Price and the Final Index Price shall be calculated as if the excluded
company had not originally been included in the list of companies.
2.3 ADJUSTMENTS. The Exchange Ratio, Floor Old Kent Price, Initial
Old Kent Price, and Final Old Kent Price, and the related computations
described in Sections 2.1 (CONVERSION OF SHARES) and 2.2 (UPSET PROVISION)
shall be adjusted in the manner provided in this Section upon the
occurrence of any of the following events:
2.3.1 STOCK DIVIDENDS AND DISTRIBUTIONS. If Old Kent declares a
Stock Distribution of Old Kent Common Stock to its holders prior to
the date of the Effective Time, then:
(a) If the Ex-Date for the Stock Distribution occurs before
the end of the Pricing Period, then the Floor Old Kent Price and
the Initial Old Kent Price (and if the Ex-Date occurs during the
Pricing Period, then the closing price per share of Old Kent
Common Stock for each day during the Pricing Period prior to the
Ex-Date) shall each be adjusted by multiplying them by that ratio
(i) the numerator of which shall be the total number of shares of
Old Kent Common Stock outstanding immediately prior to the record
date for the Stock Distribution; and (ii) the denominator of
which shall be the total number of shares of Old Kent Common
Stock that are outstanding immediately prior to that record date
plus the additional number of shares to be issued in the Stock
Distribution; and
(b) If the record date for the Stock Distribution occurs
prior to the Effective Time, then the Exchange Ratio shall be
adjusted by multiplying it by that ratio (i) the numerator of
which shall be the total number of shares of Old Kent Common
Stock that are outstanding as of the record date for such Stock
Distribution plus the additional number of shares to be issued in
the Stock Distribution computed as of that record date; and (ii)
the denominator of which shall be the total number of shares of
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<PAGE>
Old Kent Common Stock outstanding as of the Stock Distribution's
record date.
2.3.2 OTHER ACTION AFFECTING OLD KENT COMMON STOCK. If there
occurs, other than as described in the preceding subsection, any
merger, business combination, recapitalization, reclassification,
subdivision, or combination that would substantially change the number
and value of outstanding shares of Old Kent Common Stock; a
distribution of warrants or rights with respect to Old Kent Common
Stock; or any other transaction that would have a substantially
similar effect; then the nature or amount of the consideration to be
received by the shareholders of Pinnacle in exchange for their shares
of Pinnacle Common Stock and the Exchange Ratio shall be adjusted in
such manner and at such time as shall be equitable under the
circumstances. It is intended that in the event of a reclassification
of outstanding shares of Old Kent Common Stock or a consolidation or
merger of Old Kent with or into another corporation, other than a
merger in which Old Kent is the surviving corporation and which merger
does not result in any reclassification of Old Kent Common Stock,
holders of Pinnacle Common Stock would receive, in lieu of each share
of Old Kent Common Stock to be issued in exchange for Pinnacle Common
Stock based on the Exchange Ratio, the kind and amount of shares of
Old Kent stock, other securities, money, and/or property receivable
upon such reclassification, consolidation, or merger by holders of Old
Kent Common Stock with respect to each share of Old Kent Common Stock
outstanding immediately prior to such reclassification, consolidation,
or merger.
2.3.3 EMPLOYEE STOCK OPTIONS, ETC. Notwithstanding any other
provisions of this Section, no adjustment shall be made in the event
of the issuance of additional shares of Old Kent Common Stock pursuant
to Old Kent's dividend reinvestment plan, pursuant to the exercise of
stock options under stock option plans of Old Kent, or upon the grant
or sale of shares or rights to receive shares to, or for the account
of, Old Kent directors or employees pursuant to restricted stock,
deferred stock compensation, thrift, employee stock purchase, and
other compensation benefit plans of Old Kent.
2.3.4 AUTHORIZED BUT UNISSUED SHARES. Notwithstanding the other
provisions of this Section, no adjustment shall be made in the event
of the issuance of additional shares of Old Kent Common Stock or other
securities pursuant to a public offering, private placement, or an
acquisition of one or more banks, corporations, or business assets as
authorized by the board of directors of Old Kent or a duly authorized
committee of the board.
2.3.5 CHANGES IN CAPITAL. Subject only to making any adjustment
to the Exchange Ratio and related computations prescribed by this
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<PAGE>
Section, nothing contained in this Plan of Merger shall preclude Old
Kent from amending its restated articles of incorporation to change
its capital structure or from issuing additional shares of Old Kent
Common Stock, preferred stock, shares of other capital stock, or
securities that are convertible into shares of capital stock.
2.4 INCREASE IN OUTSTANDING SHARES OF PINNACLE COMMON STOCK. In the
event that the number of shares of Pinnacle Common Stock outstanding is
greater than 7,399,343 for any reason whatsoever (whether or not such
increase constitutes a breach of this Plan of Merger), other than the
issuance of not more than 118,000 shares upon the exercise of Pinnacle
stock options identified in Section 4.4 (CAPITAL STOCK), then the Exchange
Ratio shall be adjusted by multiplying it by a fraction (i) the numerator
of which shall be 7,399,343 (the total number of shares of Pinnacle Common
Stock outstanding as of the Date of the Plan of Merger); and (ii) the
denominator of which shall be the total number of shares of Pinnacle Common
Stock outstanding as of the Effective Time of the Merger, excluding not
more than 118,000 shares, if any, issued after the Date of the Plan of
Merger upon the exercise of Pinnacle stock options identified in
Section 4.4 (CAPITAL STOCK).
2.5 CESSATION OF SHAREHOLDER STATUS. As of the Effective Time, each
record holder of shares of Pinnacle Common Stock outstanding immediately
prior to the Effective Time shall cease to be a shareholder of Pinnacle and
shall have no rights as a Pinnacle shareholder, except to the extent
provided by the Illinois Act with respect to Dissenting Shares. Except
with respect to Dissenting Shares, each stock certificate representing
shares of Pinnacle Common Stock outstanding immediately prior to the
Effective Time ("OLD CERTIFICATES") shall then be considered to represent
shares of Old Kent Common Stock and the right to receive cash in lieu of
fractional shares, all as provided in this Plan of Merger.
2.6 SURRENDER OF OLD CERTIFICATES AND DISTRIBUTION OF OLD KENT COMMON
STOCK. After the Effective Time, Old Certificates shall be exchangeable by
the holders thereof for new stock certificates representing the number of
shares of Old Kent Common Stock to which such holders shall be entitled in
the following manner:
2.6.1 TRANSMITTAL MATERIALS. As soon as practicable after the
Effective Time, Old Kent shall send or cause to be sent to each record
holder of Pinnacle Common Stock as of the Effective Time transmittal
materials for use in exchanging that holder's Old Certificates for Old
Kent Common Stock certificates. The transmittal materials will
contain instructions with respect to the surrender of Old
Certificates.
2.6.2 EXCHANGE AGENT. On or prior to the Effective Time, Old
Kent will deliver to Old Kent Bank, a Michigan banking corporation, or
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such other bank or trust company as Old Kent may designate (the
"EXCHANGE AGENT"), certificates representing the number of shares of
Old Kent Common Stock issuable and the amount of cash payable for
fractional shares in the Merger. The Exchange Agent shall not be
entitled to vote or exercise any rights of ownership with respect to
such shares of Old Kent Common Stock, except that it shall receive and
hold all dividends or other distributions paid or distributed with
respect to such shares for the account of the record holders entitled
to such shares.
2.6.3 DELIVERY OF NEW CERTIFICATES. Old Kent shall cause the
Exchange Agent to promptly issue and deliver stock certificates in the
names and to the addresses that appear on Pinnacle's stock records as
of the Effective Time, or in such other name or to such other address
as may be specified by the holder of record in transmittal documents
received by the Exchange Agent; PROVIDED, that with respect to each
Pinnacle shareholder, the Exchange Agent shall have received all of
the Old Certificates held by that shareholder, or an affidavit of loss
and indemnity bond for such certificate or certificates, together with
properly executed transmittal materials; and such certificates,
transmittal materials, affidavits, and bonds are in a form and
condition reasonably acceptable to Old Kent and the Exchange Agent.
2.6.4 DIVIDENDS PENDING SURRENDER. Whenever a dividend is
declared by Old Kent on Old Kent Common Stock that is payable to
shareholders of record of Old Kent as of a record date on or after the
date of the Effective Time, the declaration shall include dividends on
all shares issuable under this Plan of Merger. No former shareholder
of Pinnacle shall be entitled to receive a distribution of any such
dividend until the physical exchange of that shareholder's Old
Certificates (or an affidavit of loss and indemnity bond for such
certificates) for new Old Kent Common Stock certificates shall have
been effected. Upon the physical exchange of that shareholder's Old
Certificates (or an affidavit of loss and indemnity bond for such
certificates), that shareholder shall be entitled to receive from Old
Kent an amount equal to all such dividends (without interest thereon
and less the amount of taxes, if any, that may have been imposed or
paid thereon) declared and paid with respect to the shares of Old Kent
Common Stock represented thereby.
2.6.5 STOCK TRANSFERS. After the Effective Time, there shall be
no transfers on Pinnacle's stock transfer books of the shares of
Pinnacle Common Stock that were issued and outstanding immediately
prior to the Effective Time. If, after the Effective Time, Old
Certificates are properly presented for transfer, then they shall be
canceled and exchanged for stock certificates representing shares of
Old Kent Common Stock as provided in this Plan of Merger. After the
Effective Time, ownership of such shares as are represented by any Old
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Certificates may be transferred only on the stock transfer records of
Old Kent.
2.6.6 EXCHANGE AGENT'S DISCRETION. The Exchange Agent shall
have discretion to determine reasonable rules and procedures relating
to the exchange (or lack thereof) of Old Certificates and the issuance
and delivery of new certificates of Old Kent Common Stock into which
shares of Pinnacle Common Stock are converted in the Merger and
governing the payment for fractional shares of Pinnacle Common Stock.
2.7 NO FRACTIONAL SHARES. Notwithstanding any other provision of
this Article II, no certificates or scrip representing fractional shares of
Old Kent Common Stock shall be issued in the Merger upon the surrender of
Old Certificates. No fractional interest in any share of Old Kent Common
Stock resulting from the Merger shall be entitled to any part of a
dividend, distribution, or stock split with respect to shares of Old Kent
Common Stock nor entitle the record holder to vote or exercise any rights
of a shareholder with respect to that fractional interest. In lieu of
issuing any fractional share, each holder of an Old Certificate who would
otherwise have been entitled to a fractional share of Old Kent Common Stock
upon surrender of all Old Certificates for exchange shall be paid an amount
in cash (without interest) equal to such fraction of a share multiplied by
the Final Old Kent Price.
2.8 STOCK OPTIONS.
2.8.1 PLAN AMENDMENT. The Pinnacle Banc Group, Inc. 1990
Incentive Stock Option Plan (the "OPTION PLAN") is hereby interpreted
and amended, subject to approval of this Plan of Merger by Pinnacle's
shareholders and effective immediately prior to the Effective Time of
the Merger, as follows:
(a) For all purposes of the Option Plan, the Merger (and
the contemplated subsequent liquidation of Pinnacle) shall be
considered to be a merger of Pinnacle in which Pinnacle is not
the surviving corporation.
(b) The provision of the Option Plan that provides for the
termination of outstanding stock options that remain unexercised
immediately prior to the Merger ("UNEXERCISED OPTIONS") upon
consummation of the Merger and the subsequent liquidation of
Pinnacle shall be deleted. To that end, the third paragraph of
Section V ("Changes in Stock") of the Option Plan shall be
amended to provide:
"Anything contained herein to the contrary
notwithstanding, upon the dissolution or
liquidation of the Company or upon any merger
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or consolidation in which the Company is not
the surviving corporation, the holder shall
have the right, immediately prior to such
dissolution, liquidation, merger or
consolidation, to exercise his option in
whole or in part to the extent it had not
been exercised, without regard to any
installment limitations placed on the
exercise of the option, but in no event shall
an option be exercised after the expiration
of its terms."
(c) Each Unexercised Option shall become, at the Effective
Time, an option to purchase that number of shares of Old Kent
Common Stock equal to the number of shares of Pinnacle Common
Stock subject to such Unexercised Option multiplied by the
Exchange Ratio, rounded to the nearest whole share.
2.8.2 OPTION EXERCISES. The exercise price per share of Old
Kent Common Stock under the option shall be equal to the exercise
price per share of the Pinnacle Common Stock that was purchasable
under each Unexercised Option divided by the Exchange Ratio (rounded
to the nearest whole cent). In addition, each option that is an
"incentive stock option" as defined in Section 422 of the Internal
Revenue Code shall be adjusted as required by Section 424 of the
Internal Revenue Code and the regulations issued thereunder so as not
to constitute a modification, extension or renewal of the option
within the meaning of section 424 of the Internal Revenue Code. The
duration and other terms and conditions of the assumed options shall
be the same as the original Pinnacle options, except that any
reference to Pinnacle shall be considered to be references to Old
Kent.
2.8.3 REGISTRATION. Old Kent shall use its best efforts to file
as soon as possible after the Effective Time, and in no event later
than 30 days after the Effective Time, and use its best efforts to
maintain the effectiveness of, a registration statement with the SEC
covering such options and the sale of the Old Kent Common Stock
issuable upon exercise of such options so long as unexercised options
remain outstanding.
2.8.4 NO NEW OPTIONS. At the Effective Time, the Option Plan
shall be terminated with respect to the granting of any additional
options or option rights.
2.8.5 NO CASH SURRENDER. In no event and at no time shall
Pinnacle (including its board of directors or any committee thereof)
permit or allow the holder of any outstanding Unexercised Options
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pursuant to the Pinnacle Banc Group, Inc., 1990 Incentive Stock Option
Plan (the "OPTION PLAN") to receive cash in exchange for the
cancellation of any Unexercised Option.
ARTICLE III - OLD KENT'S REPRESENTATIONS AND WARRANTIES
Old Kent and MergerSub represent and warrant to Pinnacle that, except
as otherwise set forth in the disclosure statement furnished to Pinnacle by
Old Kent on March 26, 1999 (the "OLD KENT DISCLOSURE STATEMENT"):
3.1 AUTHORIZATION, NO CONFLICTS, ETC.
3.1.1 AUTHORIZATION OF AGREEMENT. Each of Old Kent and
MergerSub has the requisite corporate power and authority to execute
and deliver this Plan of Merger and to consummate the Merger. This
Plan of Merger has been duly approved and adopted and the consummation
of the Merger has been duly authorized by the boards of directors of
Old Kent and MergerSub and the sole shareholder of MergerSub and no
other corporate proceedings on the part of Old Kent or MergerSub are
necessary to authorize this Plan of Merger or to consummate the
Merger. This Plan of Merger has been duly executed and delivered by,
and constitutes valid and binding obligations of, Old Kent and
MergerSub and is enforceable against Old Kent and MergerSub in
accordance with its terms.
3.1.2 NO CONFLICT, BREACH, VIOLATION, ETC. The execution,
delivery, and performance of this Plan of Merger by Old Kent and
MergerSub, and the consummation of the Merger by Old Kent and
MergerSub, do not and will not violate, conflict with, or result in a
breach of: (a) any provision of Old Kent's restated articles of
incorporation or bylaws or MergerSub's articles of incorporation or
bylaws; or (b) any statute, code, ordinance, rule, regulation,
judgment, order, writ, memorandum of understanding, arbitral award,
decree, or injunction applicable to Old Kent or its subsidiaries,
assuming the timely receipt of each of the approvals referred to in
Section 3.1.4 (REQUIRED APPROVALS).
3.1.3 NO CONTRACTUAL BREACH, DEFAULT, LIABILITY, ETC. The
execution, delivery, and performance of this Plan of Merger by Old
Kent and MergerSub, and the consummation of the Merger by Old Kent and
MergerSub, do not and will not:
(a) AGREEMENTS, ETC. Violate, conflict with, result in a
breach of, constitute a default under, require any consent,
approval, waiver, extension, amendment, authorization, notice or
filing under, or extinguish any material contract right of Old
Kent or any of its subsidiaries under any agreement, mortgage,
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lease, commitment, indenture, other instrument, or obligation to
which Old Kent or any of its subsidiaries is a party or by which
they are bound or affected, the result of which would have a
"Material Adverse Effect" (as defined in Section 9.1 ("MATERIAL
ADVERSE EFFECT" DEFINED)) on Old Kent;
(b) REGULATORY RESTRICTIONS. Violate, conflict with,
result in a breach of, constitute a default under, or require any
consent, approval, waiver, extension, amendment, authorization,
notice, or filing under, any memorandum of understanding or
similar regulatory consent agreement to which Old Kent is a party
or subject, or by which it is bound or affected; or
(c) TORTIOUS INTERFERENCE. Subject Pinnacle to material
liability for tortious interference with contractual rights.
3.1.4 REQUIRED APPROVALS. No notice to, filing with,
authorization of, exemption by, or consent or approval of, any public
body or authority is necessary for the consummation of the Merger by
Old Kent and MergerSub other than in connection or compliance with the
provisions of the Michigan Act and the Illinois Act, compliance with
federal and state securities laws, bylaws and rules of the New York
Stock Exchange, and the approvals required under the Bank Holding
Company Act of 1956, as amended (the "FEDERAL BANK HOLDING COMPANY
ACT"), the Federal Deposit Insurance Act, as amended the ("FDIA"), the
Michigan Banking Code, the Illinois Bank Holding Company Act, as
amended (the "ILLINOIS BANK HOLDING COMPANY ACT"), and the Illinois
Bank Act, as amended (the "ILLINOIS BANK ACT").
3.2 ORGANIZATION AND GOOD STANDING. Each of Old Kent and MergerSub
is a corporation duly organized, validly existing, and in good standing
under the laws of the State of Michigan. Old Kent possesses all requisite
corporate power and authority to own, operate, and lease its properties and
to carry on its business as it is now being conducted in all material
respects. Old Kent is a bank holding company duly registered as such with
the Board of Governors of the Federal Reserve System (the "FEDERAL RESERVE
BOARD") under the Federal Bank Holding Company Act. Old Kent is qualified
or admitted to conduct business as a foreign corporation in each state in
which the failure to be so qualified or admitted would have a Material
Adverse Effect on Old Kent.
3.3 SUBSIDIARIES. Old Kent owns all of the issued and outstanding
shares of capital stock of Old Kent Bank and MergerSub free and clear of
all claims, security interests, pledges, or liens of any kind. Old Kent
Bank is duly organized, validly existing, and in good standing as a banking
corporation under the laws of the state of Michigan.
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3.4 CAPITAL STOCK.
3.4.1 CLASSES AND SHARES--OLD KENT. The authorized capital
stock of Old Kent consists of 325,000,000 shares divided into two
classes as follows: (a) 300,000,000 shares of Old Kent Common Stock,
of which, as of March 11, 1999, a total of 103,760,063 shares were
validly issued and outstanding; and (b) 25,000,000 shares of preferred
stock, without par value, of which 3,000,000 shares are designated
Series A Preferred Stock, 500,000 shares are designated Series B
Preferred Stock, and 1,000,000 shares are designated Series C
Preferred Stock, none of which preferred stock was issued and
outstanding as of the Date of the Plan of Merger. The 1,000,000
shares of Series C Preferred Stock are reserved for issuance pursuant
to Series C Preferred Stock Purchase Rights (the "OLD KENT RIGHTS")
governed by a Rights Agreement, dated as of January 20, 1997, as
amended, between Old Kent and Old Kent Bank (the "OLD KENT RIGHTS
AGREEMENT").
3.4.2 NO OTHER CAPITAL STOCK. As of the Date of the Plan of
Merger: (a) other than Old Kent Common Stock, there is no security or
class of securities issued and outstanding that represents or is
convertible into capital stock of Old Kent; and (b) there is no
outstanding subscription, option, warrant, or right to acquire any
capital stock of Old Kent, or agreement to which Old Kent is a party
or by which it is bound to issue capital stock, except as set forth
in, or as contemplated by, this Plan of Merger, and except (i) the Old
Kent Rights (which as of the Date of the Plan of Merger were
represented by and transferable only with certificates representing
shares of Old Kent Common Stock); (ii) stock options awarded pursuant
to stock option plans; (iii) provisions for the grant or sale of
shares or the right to receive shares to, or for the account of,
employees and directors pursuant to restricted stock, deferred stock
compensation, stock purchase and other benefit plans; (iv) shares of
Old Kent Common Stock issuable under agreements entered into in
connection with mergers or acquisitions of direct or indirect
subsidiaries or assets in transactions approved by the Old Kent board
of directors or a committee of such board; and (v) shares of Old Kent
Common Stock issuable under Old Kent's dividend reinvestment plan and
employee stock purchase plans.
. 3.4.3 ISSUANCE OF SHARES. Between March 11, 1999, and the Date
of the Plan of Merger, no additional shares of capital stock have been
issued by Old Kent, except as described in this Plan of Merger, and
except for shares issued or issuable pursuant to (a) the exercise of
employee stock options under employee stock option plans; (b) the
grant or sale of shares to, or for the account of, employees and
directors pursuant to restricted stock, deferred stock compensation,
stock purchase or other benefit plans; (c) the grant or sale of shares
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of Old Kent Common Stock issuable under agreements entered into in
connection with acquisitions of direct or indirect subsidiaries or
assets of such subsidiaries in transactions approved by the Old Kent
board of directors or committee thereof; and (d) Old Kent's dividend
reinvestment plan and employee stock purchase plans.
3.4.4 VOTING RIGHTS. Neither Old Kent nor any of its
subsidiaries (other than MergerSub) has outstanding any security or
issue of securities the holder or holders of which have the right to
vote on the approval of the Merger or this Plan of Merger, or that
entitle the holder or holders to consent to, or withhold consent on,
the Merger or this Plan of Merger.
3.4.5 CLASSES AND SHARES -- MERGERSUB. The authorized capital
stock of MergerSub consists of 60,000 shares of common stock, of
which, as of the execution of this Plan of Merger, a total of 1,000
shares were validly issued and outstanding.
3.5 OLD KENT COMMON STOCK. The shares of Old Kent Common Stock to be
issued in the Merger in accordance with this Plan of Merger have been duly
authorized and reserved and, when issued as contemplated by this Plan of
Merger, will be validly issued, fully paid, and nonassessable shares.
3.6 FINANCIAL STATEMENTS.
3.6.1 FINANCIAL STATEMENTS. The consolidated financial
statements of Old Kent and its subsidiaries as of and for the each of
three years ended December 31, 1996, 1997, and 1998, as reported on by
Old Kent's independent accountants, including all schedules and notes
relating to such statements (collectively, "OLD KENT'S FINANCIAL
STATEMENTS"), fairly present the financial condition and the results
of operations, changes in shareholders' equity, and cash flows of Old
Kent as of the respective dates of and for the periods referred to in
such financial statements, all in accordance with generally accepted
United States accounting principles ("GAAP") consistently applied.
The unaudited consolidated financial statements of Old Kent and its
subsidiaries as of and for each quarter ending after the Date of the
Plan of Merger, until the Effective Time, including all schedules and
notes relating to such statements, will be correct and complete, in
all material respects.
3.6.2 CALL REPORTS. The following reports (including all
related schedules, notes, and exhibits) were prepared and filed in
conformity with applicable regulatory requirements and were correct
and complete in all material respects when filed:
(a) The consolidated reports of condition and income of Old
Kent Bank as of and for each of the years ended December 31,
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1996, 1997, and 1998, as filed with the Federal Deposit Insurance
Corporation ("FDIC"); and
(b) The FR Y-9 and FR Y-6 for Old Kent and Old Kent Bank as
of and for each of the years ended December 31, 1996, 1997, and
1998, as filed with the Federal Reserve Board.
All of such reports required to be filed prior to the Closing by Old
Kent and/or Old Kent Bank will be prepared and filed in conformity
with applicable regulatory requirements applied consistently
throughout their respective periods (except as otherwise noted in such
reports) and will be correct and complete in all material respects
when filed.
3.7 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the extent
reflected or reserved against in Old Kent's Financial Statements as of
December 31, 1998, as of such date, neither Old Kent nor any of its
subsidiaries had liabilities or obligations, secured or unsecured (whether
accrued, absolute, or contingent) as to which there is a reasonable
probability that they could have a Material Adverse Effect on Old Kent.
3.8 ABSENCE OF MATERIAL ADVERSE CHANGE. Since December 31, 1998,
there has been no change in the financial condition, income, expenses, or
business of Old Kent and its subsidiaries (and not the banking industry as
a whole) that had or in the future will have a Material Adverse Effect on
Old Kent. No facts or circumstances have been discovered from which it
reasonably appears that there is a significant risk and reasonable
probability that there will occur a Material Adverse Effect on Old Kent
that is not applicable to the banking industry as a whole.
3.9 ABSENCE OF LITIGATION. There is no action, suit, proceeding,
claim, arbitration, or investigation pending or, to Old Kent's knowledge,
threatened by any person, including without limitation any governmental or
regulatory agency, against Old Kent or any of its subsidiaries, or the
assets or business of Old Kent or any of its subsidiaries, any of which has
had or in the future would have a Material Adverse Effect on Old Kent.
There is no factual basis known to Old Kent that presents a reasonable
potential for any such action, suit, proceeding, claim, arbitration, or
investigation.
3.10 REGULATORY FILINGS. In the last two years:
3.10.1 SEC FILINGS. Old Kent has filed, and will in the future
continue to file, in a timely manner all required filings with the
Securities and Exchange Commission (the "SEC"), including without
limitation all reports on Form 10-K and Form 10-Q;
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3.10.2 REGULATORY FILINGS. Old Kent has filed in a timely
manner all other material filings with other regulatory bodies for
which filings are required; and
3.10.3 COMPLETE AND ACCURATE. All such filings, as of their
respective filing dates, did not contain any untrue statement of
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
3.11 REGISTRATION STATEMENT, ETC.
3.11.1 "TRANSACTION DOCUMENTS." The term "TRANSACTION
DOCUMENTS" shall collectively mean: (i) the registration statement to
be filed by Old Kent with the SEC (the "REGISTRATION STATEMENT") in
connection with the Old Kent Common Stock to be issued in the Merger;
(ii) the prospectus and proxy statement (the "PROSPECTUS AND PROXY
STATEMENT") to be mailed to Pinnacle shareholders in connection with
the Shareholders' Meeting (as defined below); and (iii) any other
documents to be filed with the SEC, the Federal Reserve Board, the
Michigan Financial Institutions Bureau ("FIB"), the Illinois
Commissioner of Banks and Real Estate ("ILLINOIS COMMISSIONER"), the
states of Michigan or Illinois, or any other regulatory agency in
connection with the Merger.
3.11.2 ACCURATE INFORMATION. The information to be supplied by
Old Kent for inclusion or incorporation by reference in any
Transaction Document will not contain any untrue statement of material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (a) at the
respective times such Transaction Documents are filed; (b) with
respect to the Registration Statement, when it becomes effective; and
(c) with respect to the Prospectus and Proxy Statement, when it is
mailed and at the time of the Shareholders' Meeting.
3.11.3 COMPLIANCE OF FILINGS. All documents that Old Kent is
responsible for filing with the SEC or any regulatory agency in
connection with the Merger will comply as to form in all material
respects with the provisions of applicable law and regulation.
3.12 INVESTMENT BANKERS AND BROKERS. Old Kent has not employed any
broker, finder, or investment banker in connection with the Merger. Old
Kent has no express or implied agreement with any other person or company
relative to any commission or finder's fee payable with respect to this
Plan of Merger or the transactions contemplated by it.
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3.13 ACCOUNTING AND TAX TREATMENT. Neither Old Kent nor, to its
knowledge, any of its affiliates, has taken or agreed to take any action or
knows of any reason that, with respect to Old Kent and its affiliates,
would prevent Old Kent from accounting for the business combination to be
effected by the Merger as a pooling-of-interests. Old Kent is aware of no
reason why the Merger will fail to qualify as a reorganization under
Section 368(a) of the Internal Revenue Code.
3.14 AGREEMENTS WITH BANK REGULATORS. Neither Old Kent nor any of
Old Kent's subsidiaries is a party to any agreement or memorandum of
understanding with, or a party to any commitment letter, board resolution
or similar undertaking to, or is subject to any order or directive by, or
is a recipient of any extraordinary supervisory letter from, any
governmental authority that restricts materially the conduct of its
business, or in any manner relates to its capital adequacy, its credit or
reserve policies or its management, nor has Old Kent been advised by any
governmental authority that it is contemplating issuing or requesting (or
is considering the appropriateness of issuing or requesting) any such
order, decree, agreement, memorandum of understanding, extraordinary
supervisory letter, commitment letter or similar submission. Neither Old
Kent nor any of Old Kent's subsidiaries is required by applicable law to
give prior notice to a federal banking agency of the proposed addition of
an individual to its board of directors or the employment of an individual
as a senior or executive officer. As of the Date of the Plan of Merger,
Old Kent knows of no reason why the regulatory approvals referred to in
Sections 3.1.4 and 4.1.4 (REQUIRED APPROVALS) should not be obtained.
3.15 EVENTS SINCE DECEMBER 31, 1998. Neither Old Kent nor any of Old
Kent's subsidiaries has, since December 31, 1998, conducted its business
other than in the ordinary course or as contemplated by this Plan of
Merger.
3.16 RESERVE FOR LOAN LOSSES. The reserve for credit losses as
reflected in Old Kent's Financial Statements was (a) adequate to meet all
reasonably anticipated credit losses, net of recoveries related to assets
previously charged off as of those dates, and (b) consistent with GAAP and
safe and sound banking practices.
3.17 PUBLIC COMMUNICATIONS; SECURITIES OFFERING. Each annual report,
quarterly report, proxy material, press release, or other communication
previously sent or released by Old Kent to Old Kent's shareholders or the
public did not contain any untrue statement of material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under that they were
made, not misleading.
3.18 YEAR 2000 COMPLIANCE. Old Kent has: (i) initiated a review and
assessment of all areas within the business and operations (including those
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affected by material suppliers and vendors) of Old Kent and each of its
subsidiaries that could be adversely affected by the "YEAR 2000 PROBLEM,"
meaning the risk that computer applications used by Old Kent or any of its
subsidiaries (or material suppliers and vendors) may be unable to recognize
and perform properly date-sensitive functions involving certain dates prior
to and any date after December 31, 1999; (ii) developed a plan and time
line for addressing the Year 2000 Problem on a timely basis; and (iii) to
date, implemented that plan in accordance with that timetable. Old Kent
believes that all computer applications (including those of its material
suppliers and vendors) that are material to the business and operations of
Old Kent or any of its subsidiaries will on a timely basis be able to
perform properly date-sensitive functions for all dates before and after
January 1, 2000, except to the extent that a failure to do so would not
have a Material Adverse Effect on Old Kent.
3.19 TRUE AND COMPLETE INFORMATION. No schedule, statement, list,
certificate, or other information furnished or to be furnished by Old Kent
in connection with this Plan of Merger, including the Old Kent Disclosure
Statement, contains or will contain any untrue statement of a material
fact, or omits or will omit to state a material fact necessary to make the
statements contained therein, in light of the circumstances in which they
are made, not misleading.
ARTICLE IV - PINNACLE'S REPRESENTATIONS AND WARRANTIES
Pinnacle represents and warrants to Old Kent and MergerSub that,
except as otherwise set forth in the disclosure statement furnished to Old
Kent by Pinnacle on March 26, 1999, as amended April 1, 1999 (the "PINNACLE
DISCLOSURE STATEMENT"):
4.1 AUTHORIZATION, NO CONFLICTS, ETC.
4.1.1 AUTHORIZATION OF AGREEMENT. Pinnacle has the requisite
corporate power and authority to execute and deliver this Plan of
Merger and, subject to approval and adoption by Pinnacle's
shareholders, to consummate the Merger. This Plan of Merger has been
duly approved and adopted and the consummation of the Merger have been
duly authorized by the board of directors of Pinnacle and no other
corporate proceedings on the part of Pinnacle are necessary to
authorize this Plan of Merger or to consummate the Merger, subject
only to approval and adoption by the shareholders of Pinnacle. This
Plan of Merger has been duly executed and delivered by, and
constitutes valid and binding obligations of, Pinnacle and is
enforceable against Pinnacle in accordance with its terms.
4.1.2 NO CONFLICT, BREACH, VIOLATION, ETC. The execution,
delivery, and performance of this Plan of Merger by Pinnacle, and the
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consummation of the Merger, do not and will not violate, conflict
with, or result in a breach of any provision of: (a) Pinnacle's or
any of Pinnacle's subsidiaries' articles of incorporation, by-laws, or
similar organization documents; or (b) any statute, code, ordinance,
rule, regulation, judgment, order, writ, memorandum of understanding,
arbitral award, decree, or injunction applicable to Pinnacle or any of
Pinnacle's subsidiaries, assuming the timely receipt of each of the
approvals referred to in Section 4.1.4 (REQUIRED APPROVALS).
4.1.3 NO CONTRACTUAL BREACH, DEFAULT, LIABILITY, ETC. The
execution, delivery, and performance of this Plan of Merger by
Pinnacle, and the consummation of the Merger, do not and will not:
(a) AGREEMENTS, ETC. Violate, conflict with, result in a
breach of, constitute a default under, require any consent,
approval, waiver, extension, amendment, authorization, notice or
filing under, or extinguish any material contract right of
Pinnacle or any of Pinnacle's subsidiaries under any agreement,
mortgage, lease, commitment, indenture, other instrument, or
obligation to which Pinnacle or any of Pinnacle's subsidiaries is
a party or by which they are bound or affected, the result of
which would have a Material Adverse Effect on Pinnacle or
Pinnacle's subsidiaries;
(b) REGULATORY RESTRICTIONS. Violate, conflict with,
result in a breach of, constitute a default under, or require any
consent, approval, waiver, extension, amendment, authorization,
notice, or filing under, any memorandum of understanding or
similar regulatory consent agreement to which Pinnacle or any of
its subsidiaries is a party or subject, or by which it is bound
or affected; or
(c) TORTIOUS INTERFERENCE. Subject Old Kent or its
subsidiaries to liability for tortious interference with
contractual rights.
4.1.4 REQUIRED APPROVALS. No notice to, filing with,
authorization of, exemption by, or consent or approval of, any public
body or authority is necessary for the consummation of the Merger by
Pinnacle other than in connection or compliance with the provisions of
the Michigan Act and Illinois Act, compliance with federal and state
securities laws, and the consents, authorizations, approvals, or
exemptions required under the Federal Bank Holding Company Act, the
FDIA, the Michigan Banking Code, the Illinois Bank Holding Company
Act, and the Illinois Bank Act.
4.2 ORGANIZATION AND GOOD STANDING. Pinnacle is a corporation duly
organized, validly existing, and in good standing under the laws of the
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State of Illinois. Pinnacle possesses all requisite corporate power and
authority to own, operate, and lease its properties and to carry on its
business as it is now being conducted in all material respects. Pinnacle
is bank holding company duly registered as such with the Federal Reserve
Board under the Federal Bank Holding Company Act. Pinnacle is not, and is
not required to be, qualified or admitted to conduct business as a foreign
corporation in any other state, except where such failure would not have a
Material Adverse Effect on Pinnacle.
4.3 SUBSIDIARIES.
4.3.1 OWNERSHIP. Pinnacle owns all of the issued and
outstanding shares of capital stock of each of its subsidiaries, free
and clear of any claim, security interest, pledge, or lien of any
kind. Each Pinnacle Bank is duly organized, validly existing, and in
good standing as a bank under the laws of the state of Illinois. Each
of Pinnacle's other subsidiaries (as listed in the Pinnacle Disclosure
Statement) is duly incorporated, validly existing, and in good
standing in its state of incorporation. Pinnacle does not have
"CONTROL" (as defined in Section 2(a)(2) of the Federal Bank Holding
Company Act, using 5 percent rather than 25 percent), either directly
or indirectly, of any corporation engaged in an active trade or
business or that holds any significant assets other than as stated in
or disclosed under this Section.
4.3.2 RIGHTS TO CAPITAL STOCK. There is no legally binding and
enforceable subscription, option, warrant, right to acquire, or any
other similar agreement pertaining to the capital stock of any of
Pinnacle's subsidiaries.
4.3.3 QUALIFICATION AND POWER. Each of Pinnacle's subsidiaries
is qualified or admitted to conduct business in each state where such
qualification or admission is required except that state or those
states where the failure to be so qualified or admitted would not have
a Material Adverse Effect on Pinnacle or Pinnacle's subsidiaries.
Each of Pinnacle's subsidiaries has full corporate power and authority
to carry on its business as and where now being conducted.
4.3.4 DEPOSIT INSURANCE; OTHER ASSESSMENTS. Each Pinnacle Bank
maintains in full force and effect deposit insurance through the Bank
Insurance Fund of the FDIC. Each Pinnacle Bank has fully paid to the
FDIC as and when due all assessments with respect to its deposits as
are required to maintain such deposit insurance in full force and
effect. Each Pinnacle Bank has paid as and when due all material
fees, charges, assessments, and the like to each and every
governmental or regulatory agency having jurisdiction as required by
law, regulation, or rule.
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4.3.5 NO ACQUISITION OR MERGER RESTRICTIONS. Each of the
Pinnacle Banks has existed and operated under the Illinois Bank Act
for more than five years and qualifies under the Illinois Bank Holding
Company Act to be acquired by an out of state bank holding company,
and, immediately thereafter, to be merged or consolidated with and
into an out of state bank.
4.4 CAPITAL STOCK.
4.4.1 CLASSES AND SHARES. The authorized capital stock of
Pinnacle consists of 20,000,000 shares of common stock, $3.12 par
value per share, of which 7,399,343 shares are issued and outstanding
as of March 18, 1999, and 369,999 shares were reserved for issuance
under the Option Plan, of which options on 118,000 shares were
outstanding as of the Date of the Plan of Merger.
4.4.2 NO OTHER CAPITAL STOCK. Except for the Option
Agreement, there is no security or class of securities authorized or
issued that represents or is convertible into capital stock of
Pinnacle and, except for Unexercised Options to acquire up to 118,000
shares of Pinnacle Common Stock under the Option Plan, there is no
outstanding subscription, option, warrant, or right to acquire any
capital stock of Pinnacle, or agreements to which Pinnacle is a party
or by which it is bound to issue capital stock. No stock option
agreement issued under the Option Plan requires the payout of cash in
exchange for the cancellation of such Unexercised Option.
4.4.3 ISSUANCE OF SHARES. After the Date of the Plan of Merger,
the number of issued and outstanding shares of Pinnacle Common Stock
is not subject to change before the Effective Time except for issuance
of up to 118,000 additional shares of Pinnacle Common Stock pursuant
to the exercise of Unexercised Options issued under the Option Plan.
4.4.4 VOTING RIGHTS. Other than the shares of Pinnacle Common
Stock described in this Section, neither Pinnacle nor any of
Pinnacle's subsidiaries has outstanding any security or issue of
securities the holder or holders of which have the right to vote on
the approval of the Merger or this Plan of Merger or that entitle the
holder or holders to consent to, or withhold consent on, the Merger or
this Plan of Merger.
4.5 FINANCIAL STATEMENTS.
4.5.1 FINANCIAL STATEMENTS. The consolidated financial
statements of Pinnacle as of and for the each of three years ended
December 31, 1996, 1997, and 1998, as reported on by Pinnacle's
independent accountants, including all schedules and notes relating to
such statements, as previously delivered to Old Kent (collectively,
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"PINNACLE'S FINANCIAL STATEMENTS"), fairly present the financial
condition and the results of operations, changes in shareholders'
equity, and cash flows of Pinnacle as of the respective dates of and
for the periods referred to in such financial statements, all in
accordance with GAAP, consistently applied. The unaudited
consolidated financial statements of Pinnacle and its subsidiaries as
of and for each quarter ending after the Date of the Plan Merger until
the Effective Time, including all schedules and notes relating to such
statements, will be correct and complete, in all material respects.
No financial statements of any entity other than the Pinnacle Banks is
required by GAAP to be included in the consolidated financial
statements of Pinnacle.
4.5.2 CALL REPORTS. The following reports (including all
related schedules, notes, and exhibits) were prepared and filed in
conformity with applicable regulatory requirements and were correct
and complete in all material respects when filed:
(a) The consolidated reports of condition and income of
each Pinnacle Bank as of and for each of the years ended
December 31, 1996, 1997, and 1998, as filed with the FDIC; and
(b) The FR Y-9 and FR Y-6 for Pinnacle as of and for each
of the years ended December 31, 1996, 1997, and 1998, as filed
with the Federal Reserve Board.
All of such reports required to be filed prior to the Closing by
Pinnacle and/or each Pinnacle Bank will be prepared and filed in
conformity with applicable regulatory requirements applied
consistently throughout their respective periods (except as otherwise
noted in such reports) and will be correct and complete in all
material respects when filed. All of the reports identified in this
Section are collectively referred to as the "CALL REPORTS."
4.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the extent
reflected or reserved against in Pinnacle's Financial Statements as of
December 31, 1998, neither Pinnacle nor any of Pinnacle's subsidiaries had,
as of such date, liabilities or obligations, secured or unsecured (whether
accrued, absolute, or contingent) as to which there is a reasonable
probability that they could have a Material Adverse Effect on Pinnacle.
4.7 ABSENCE OF MATERIAL ADVERSE CHANGE. Since December 31, 1998,
there has been no change in the financial condition, income, expenses,
assets, liabilities, business, or prospects of Pinnacle (and not the
banking industry as a whole) that had or in the future will have a Material
Adverse Effect. No facts or circumstances have been discovered from which
it reasonably appears that there is a significant risk and reasonable
probability that there will occur a change that would have a Material
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Adverse Effect on Pinnacle that is not applicable to the banking industry
as a whole.
4.8 ABSENCE OF LITIGATION. There is no action, suit, proceeding,
claim, arbitration, or investigation pending or, to the knowledge of
Pinnacle, threatened by any person, including without limitation any
governmental or regulatory agency, against Pinnacle or any of Pinnacle's
subsidiaries, or the assets or business of Pinnacle or any of Pinnacle's
subsidiaries, any of which has had or may have a Material Adverse Effect on
Pinnacle or Pinnacle's subsidiaries. There is no factual basis that
presents a reasonable potential for any such action, suit, proceeding,
claim, arbitration, or investigation.
4.9 NO INDEMNIFICATION CLAIMS. To the knowledge of Pinnacle, there
has been no event, action, or omission by or with respect to any director,
officer, employee, trustee, agent, or other person who may be entitled to
receive indemnification or reimbursement of any claim, loss, or expense
under any agreement, contract, or arrangement providing for corporate
indemnification or reimbursement of any such person, which is reasonably
likely, either individually or in the aggregate, to have a Material Adverse
Effect on Pinnacle or Pinnacle's subsidiaries.
4.10 CONDUCT OF BUSINESS. Pinnacle and each of Pinnacle's
subsidiaries have conducted their respective businesses and used their
respective properties in substantial compliance with all federal, state,
and local laws, civil or common, ordinances and regulations, including
without limitation applicable federal and state laws and regulations
concerning banking, securities, truth-in-lending, truth-in-savings,
mortgage origination and servicing, usury, fair credit reporting, consumer
protection, occupational safety, civil rights, employee protection, fair
employment practices, fair labor standards, and insurance; and
Environmental Laws (as defined in Section 4.24.2 (ENVIRONMENTAL LAWS));
except for violations (individually or in the aggregate) that would not
have a Material Adverse Effect on Pinnacle.
4.11 CONTRACTS. There is no existing default by Pinnacle or any of
Pinnacle's subsidiaries, or any other party, under any contract or
agreement to which Pinnacle or any of Pinnacle's subsidiaries is a party,
or by which they are bound, the result of which would have a Material
Adverse Effect on Pinnacle or Pinnacle's subsidiaries. Excepting any
ordinary and customary banking relationships, there is no material
agreement, contract, mortgage, deed of trust, lease, commitment, indenture,
note, or other instrument under which another party is in material default
under its obligations to Pinnacle or its subsidiaries. Pinnacle is not
party to any contract, agreement, arrangement, or understanding (other than
ordinary and customary banking relationships) that would require Pinnacle
or any of its subsidiaries to make payments or make expenditures in excess
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of $200,000 per year or that would require any payment to another party
upon termination in excess of $50,000.
4.12 REGULATORY FILINGS. In the last five years:
4.12.1 SEC FILINGS. Pinnacle has filed, and in the future will
continue to file, in a timely manner all required filings with the
SEC, including without limitation all reports on Form 10-K and Form
10-Q;
4.12.2 REGULATORY FILINGS. Pinnacle has filed in a timely
manner all other filings with other regulatory bodies for which
filings are required; and
4.12.3 COMPLETE AND ACCURATE. All such filings, as of their
respective filing dates, did not contain any untrue statement of
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. All such
filings complied in all material respects with all laws, regulations,
forms, and guidelines applicable to such filings.
4.13 REGISTRATION STATEMENT, ETC.
4.13.1 ACCURATE INFORMATION. The information to be supplied by
Pinnacle for inclusion or incorporation by reference in any
Transaction Document will not contain any untrue statement of material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (a) at the
respective times such Transaction Documents are filed; (b) with
respect to the Registration Statement, when it becomes effective; and
(c) with respect to the Prospectus and Proxy Statement, when it is
mailed and at the time of the Shareholders' Meeting.
4.13.2 COMPLIANCE OF FILINGS. All documents that Pinnacle is
responsible for filing with the SEC or any regulatory agency in
connection with the Merger will comply as to form in all material
respects with the provisions of applicable law and regulation.
4.14 AGREEMENTS WITH BANK REGULATORS. Neither Pinnacle nor any of
Pinnacle's subsidiaries is a party to any agreement or memorandum of
understanding with, or a party to any commitment letter, board resolution
or similar undertaking to, or is subject to any order or directive by, or
is a recipient of any extraordinary supervisory letter from, any
governmental authority that restricts materially the conduct of its
business, or in any manner relates to its capital adequacy, its credit or
reserve policies or its management, nor has Pinnacle been advised by any
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governmental authority that it is contemplating issuing or requesting (or
is considering the appropriateness of issuing or requesting) any such
order, decree, agreement, memorandum of understanding, extraordinary
supervisory letter, commitment letter or similar submission. Neither
Pinnacle nor any of Pinnacle's subsidiaries is required by applicable law
to give prior notice to a Federal banking agency of the proposed addition
of an individual to its board of directors or the employment of an
individual as a senior or executive officer. As of the Date of the Plan of
Merger, Pinnacle knows of no reason why the regulatory approvals referred
to in Sections 3.1.4 and 4.1.4 (REQUIRED APPROVALS) cannot be obtained or
why the process would be materially impeded.
4.15 TAX MATTERS.
4.15.1 TAXES DEFINED. "TAXES" means any federal, state, county,
local, or foreign taxes, charges, assessments, levies, deficiencies,
or other governmental fees, charges, or amounts required to be
collected, withheld, or paid to any government, agency, or political
subdivision of any government in respect to any tax or governmental
fee or charge, together with any penalties, additions to tax or
interest, due under any applicable law, regulation, rule, or ordinance
to any governmental unit or agency, including, without limitation,
taxes with respect to income, profits, gross receipts, value added, AD
VALOREM, employment, unemployment, withholding, backup withholding,
nonresident alien withholding, social security, real property,
personal property, sales, use, excise, intangibles, license,
franchise, capital stock, and disability, and payments based on
occupation, services rendered, real property, personal property or
transfer.
4.15.2 TAX RETURNS. Pinnacle and its subsidiaries have each
duly and timely filed or delivered, and if necessary amended, all tax
returns, information returns, estimates, declarations, reports,
statements and other filings that are required by law, regulation,
rule, or ordinance (collectively, "TAX RETURNS"). Each such Tax
Return, as amended, is correct, complete and complies in all material
respects with all applicable laws, regulations, rules, and ordinances.
Pinnacle and its subsidiaries have each maintained all necessary and
appropriate accounting records to support the positions taken on all
filed Tax Returns and all exemptions from filing Tax Returns.
4.15.3 TAX ASSESSMENTS AND PAYMENTS. All Taxes due and payable
by Pinnacle and Pinnacle's subsidiaries have been paid or deposited in
full as and when due, including applicable extension periods. Each of
Pinnacle and Pinnacle's subsidiaries have withheld and paid over all
Taxes required to have been withheld and paid over, and complied with
all information reporting and backup withholding requirements,
including maintenance of required records with respect thereto, in
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connection with amounts paid or owing to any employee, creditor,
independent contractor or other third parties. The provisions made
for Taxes on Pinnacle's Financial Statements as of December 31, 1998,
are sufficient for the payment of all accrued but unpaid Taxes as of
the date indicated, whether or not disputed, with respect to all
periods through December 31, 1998. There is no lien on any of
Pinnacle's or its subsidiaries' assets or properties with respect to
Taxes, except for liens for Taxes not yet due and payable.
4.15.4 TAX AUDITS. None of the Tax Returns of Pinnacle and its
subsidiaries filed for any tax year after 1989 have been audited by
the Internal Revenue Service (the "IRS") or any state or local taxing
authority. There is no tax audit or legal or administrative
proceeding concerning the accuracy of tax or information returns or
the assessment or collection of Taxes pending or, to Pinnacle's
knowledge, threatened with respect to Pinnacle or its subsidiaries.
No claim concerning the calculation, assessment or collection of taxes
has been asserted with respect to Pinnacle or its subsidiaries. No
waiver or extension of any statute of limitations is in effect with
respect to Taxes or Tax Returns of Pinnacle or its subsidiaries.
4.15.5 TAX ACCOUNTING. Neither Pinnacle nor its subsidiaries
have been required to include in income any adjustment pursuant to
Section 481 of the Internal Revenue Code by reason of a voluntary
change in accounting method initiated by Pinnacle or its subsidiaries
and the IRS has not initiated or proposed any such adjustment or
change in accounting method. Neither Pinnacle nor its subsidiaries
has entered into a transaction which is being accounted for as an
installment obligation under Section 453 of the Internal Revenue Code.
4.15.6 EXCESS PARACHUTE PAYMENTS. No compensation that could be
payable (whether in cash, stock, options, or other property or the
vesting of property or other rights) by Pinnacle, its subsidiaries,
its affiliates, or any of their respective successors under any
employment, option, benefit plan, severance, termination or other
compensation arrangement currently in effect is, or will be, an
"excess parachute payment" (as defined in Section 280G of the Internal
Revenue Code).
4.16 TITLE TO PROPERTIES. Pinnacle and each of its subsidiaries have
good, sufficient, and marketable title to all of their properties and
assets, whether real, personal, or a combination thereof, reflected in
their books and records as being owned (including those reflected in
Pinnacle's Financial Statements as of December 31, 1998, except as since
disposed of in the ordinary course of business), free and clear of all
liens and encumbrances, except:
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4.16.1 REFLECTED ON BALANCE SHEET. As reflected on Pinnacle's
Financial Statements as of December 31, 1998;
4.16.2 NORMAL TO BUSINESS. Liens for current Taxes not yet
delinquent, and liens or encumbrances that are normal to the business
of Pinnacle and that would not have a Material Adverse Effect on
Pinnacle; and
4.16.3 IMMATERIAL IMPERFECTIONS. Such imperfections of title,
easements, restrictions, and encumbrances, if any, as are not material
in character, amount, or extent, and do not materially detract from
the value, or materially interfere with the present use, of the
properties subject thereto or affected thereby.
4.17 CONDITION OF REAL PROPERTY. With respect to each parcel of real
property owned, legally and beneficially, by Pinnacle or Pinnacle's
subsidiaries, including other real estate owned ("PINNACLE'S REAL
PROPERTY"), to its knowledge:
4.17.1 NO ENCROACHMENTS. Except for those encroachments that
have been insured over by a policy of title insurance, no building or
improvement to Pinnacle's Real Property encroaches on any easement or
property owned by another person. No building or property owned by
another person encroaches on Pinnacle's Real Property or on any
easement benefitting Pinnacle's Real Property. None of the boundaries
of Pinnacle's Real Property deviates substantially from those shown on
the survey of such property, if any, included with the Pinnacle
Disclosure Statement or from what the boundaries appear to be through
visual inspection. No claim of encroachment has been asserted by any
person with respect to Pinnacle's Real Property.
4.17.2 ZONING. Neither Pinnacle, any of Pinnacle's
subsidiaries, nor Pinnacle's Real Property is in material violation of
any zoning regulation, building restriction, restrictive covenant,
ordinance, or other law, order, regulation, or requirement relating to
Pinnacle's Real Property.
4.17.3 BUILDINGS. All buildings and improvements to Pinnacle's
Real Property are in good condition (normal wear and tear excepted),
are structurally sound and are not in need of material repairs, are
fit for their intended purposes, and are adequately serviced by all
utilities necessary for the effective operation of business as
presently conducted at that location.
4.17.4 NO CONDEMNATION. None of Pinnacle's Real Property is the
subject of any condemnation action. There is no proposal under active
consideration by any public or governmental authority or entity to
acquire Pinnacle's Real Property for any governmental purpose.
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4.18 REAL AND PERSONAL PROPERTY LEASES. With respect to each lease
and license pursuant to which Pinnacle or any of Pinnacle's subsidiaries,
as lessee or licensee, has possession of real or personal property,
excluding any personal property lease with payments of less than $25,000
per year ("PINNACLE'S LEASES"):
4.18.1 VALID. Each of Pinnacle's Leases is valid, effective,
and enforceable against the lessor or licensor in accordance with its
terms.
4.18.2 NO DEFAULT. There is no existing default under any of
Pinnacle's Leases or any event that with notice or passage of time, or
both, would constitute a default with respect to Pinnacle, any of
Pinnacle's subsidiaries, or any other party to the contract, which
default would have a Material Adverse Effect on Pinnacle.
4.19 ASSIGNMENT. None of Pinnacle's Leases contain a prohibition
against assignment by Pinnacle or any of Pinnacle's subsidiaries, by
operation of law or otherwise, or any provision that would materially
interfere with the possession or use of the property by Old Kent or its
subsidiaries for the same purposes and upon the same rental and other terms
following consummation of the Merger as are applicable to Pinnacle or
Pinnacle's subsidiaries prior to the Effective Time.
4.20 REQUIRED LICENSES, PERMITS, ETC.
4.20.1 LICENSES, PERMITS, ETC. Pinnacle and each of Pinnacle's
subsidiaries hold all licenses, certificates, permits, franchises, and
rights from all appropriate federal, state, and other public
authorities necessary for the conduct of its business as presently
conducted, the lack of which would not have a Material Adverse Effect
on Pinnacle or Pinnacle's subsidiaries.
4.20.2 REGULATORY ACTION. Neither Pinnacle nor any of its
subsidiaries nor any of their directors has within the last five years
been charged by a regulatory authority with, or to Pinnacle's
knowledge is under governmental investigation with respect to, any
actual or alleged violation of any statute, ordinance, rule,
regulation, guideline, or standard applicable to Pinnacle or its
subsidiaries' businesses. Neither Pinnacle nor any of its
subsidiaries nor any of their directors is the subject of any pending
or, to Pinnacle's knowledge, threatened proceeding by any regulatory
authority having jurisdiction over the business, properties, or
operations of Pinnacle or its subsidiaries.
4.21 DATA PROCESSING AND OTHER MATERIAL CONTRACTS. Except as
described in the Pinnacle Disclosure Statement:
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4.21.1 DATA PROCESSING. All material data processing contracts
of Pinnacle or Pinnacle's subsidiaries are cancelable on or before
December 31, 1999, without cost or penalty.
4.21.2 CHANGE OF CONTROL. There is no agreement, contract,
loan, mortgage, deed of trust, lease, commitment, indenture, note, or
other instrument under which (a) a consent or approval is required,
(b) an assignment by operation of law is prohibited, (c) a waiver or
loss of any right, or (d) acceleration of any obligation would occur,
as a result of the change of control of Pinnacle or its subsidiaries
upon consummation of the Merger where (w) the failure to obtain such
consent or approval, (x) the violation of prohibition against
assignment, (y) the waiver or loss of any right, or (z) the
acceleration of any obligation could materially interfere with the
ordinary course of business by Pinnacle or its subsidiaries (or Old
Kent or its subsidiaries as their successors) or have a Material
Adverse Effect on Pinnacle or its subsidiaries.
4.22 CERTAIN EMPLOYMENT MATTERS.
4.22.1 EMPLOYMENT POLICIES, PROGRAMS, AND PROCEDURES. The
policies, programs, and practices of Pinnacle relating to equal
opportunity and affirmative action, wages, hours of work, employee
disabilities, and other terms and conditions of employment are in
compliance in all material respects with applicable federal, state,
and local laws, orders, regulations, and ordinances governing or
relating to employment and employer practices and facilities.
4.22.2 RECORD OF PAYMENTS. There is no existing or outstanding
obligation of Pinnacle or any of Pinnacle's subsidiaries, whether
arising by operation of law, civil or common, by contract, or by past
custom, for any Employment-Related Payment (as defined in
Section 4.22.3 (EMPLOYMENT-RELATED PAYMENTS)) to any trust, fund,
company, governmental agency, or any person that has not been duly
recorded on the books and records of Pinnacle and paid when due or
duly accrued in the ordinary course of business in accordance with
GAAP.
4.22.3 EMPLOYMENT-RELATED PAYMENTS. For purposes of this Plan
of Merger, "EMPLOYMENT-RELATED PAYMENTS" include any payment to be
made with respect to any contract for employment; unemployment
compensation benefits; profit sharing, pension, or retirement
benefits; social security benefits; fringe benefits, including
vacation, or holiday pay, bonuses, and other forms of compensation; or
for medical insurance or medical expenses; any of which are payable
with respect to any present or former director, officer, employee, or
agent, or his or her survivors, heirs, legatees, or legal
representatives.
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4.22.4 EMPLOYMENT CLAIMS. There is no dispute, claim, or
charge, pending or, to Pinnacle's knowledge, threatened, alleging
breach of any express or implied employment contract or commitment, or
breach of any applicable law, order, regulation, public policy, or
ordinance relating to employment or terms and conditions of
employment. There is no factual basis for any valid claim or charge
with regard to such employment-related matters.
4.22.5 EMPLOYMENT RELATED AGREEMENTS. There is no written or
oral, express or implied:
(a) Employment contract or agreement, or guarantee of job
security, made with or to any past or present employee of
Pinnacle or any of Pinnacle's subsidiaries that is not terminable
by Pinnacle or Pinnacle's subsidiaries upon 60 days' or less
notice without penalty or obligation;
(b) Plan, contract, arrangement, understanding, or practice
providing for bonuses, pensions, options, stock purchases,
deferred compensation, retirement payments, retirement benefits
of the type described in Statement of Financial Accounting
Standard No. 106, or profit sharing; or
(c) Plan, agreement, arrangement, or understanding with
respect to payment of medical expenses, insurance (except
insurance continuation limited to that required under provisions
of the Consolidated Omnibus Budget Reconciliation Act), or other
benefits for any former employee or any spouse, child, member of
the same household, estate, or survivor of any employee.
4.23 EMPLOYEE BENEFIT PLANS. With respect to any "employee welfare
benefit plan," any "employee pension benefit plan," or any "employee
benefit plan" within the respective meanings of Sections 3(1), 3(2), and
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") (each referred to as an "EMPLOYEE BENEFIT PLAN"), maintained by
or for the benefit of Pinnacle or Pinnacle's subsidiaries or to which
Pinnacle or any of Pinnacle's subsidiaries has made payments or
contributions on behalf of its employees:
4.23.1 ERISA COMPLIANCE. Pinnacle, each of Pinnacle's
subsidiaries, each Employee Benefit Plan, and all trusts created
thereunder are in substantial compliance with ERISA, and all other
applicable laws and regulations insofar as such laws and regulations
apply to such plans and trusts.
4.23.2 INTERNAL REVENUE CODE COMPLIANCE. Pinnacle, each of
Pinnacle's subsidiaries, each Employee Benefit Plan that is intended
to be a qualified plan under Section 401(a) of the Internal Revenue
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Code, and all trusts created thereunder are in substantial compliance
with the applicable provisions of the Internal Revenue Code.
4.23.3 PROHIBITED TRANSACTIONS. No Employee Benefit Plan and no
trust created thereunder has been involved, subsequent to June 30,
1974, in any nonexempt "prohibited transaction" as defined in Section
4975 of the Internal Revenue Code and in Sections 406, 407, and 408 of
ERISA.
4.23.4 PLAN TERMINATION. No Employee Benefit Plan that is a
qualified plan under Section 401(a) of the Internal Revenue Code and
no trust created thereunder has been terminated, partially terminated,
curtailed, discontinued, or merged into another plan or trust after
January 1, 1985, except in compliance with notice and disclosure to
the Internal Revenue Service and the Pension Benefit Guaranty
Corporation (the "PBGC"), where applicable, as required by the
Internal Revenue Code and ERISA. With respect to each plan
termination, all termination procedures have been completed and there
is no pending or potential liability to the PBGC, to any plan, or to
any participant under the terminated plan. Each plan termination,
partial termination, curtailment, discontinuance, or consolidation has
been accompanied by the issuance of a current favorable determination
letter by the IRS and, where applicable, has been accompanied by plan
termination proceedings with and through the PBGC.
4.23.5 MULTIEMPLOYER PLAN. No Employee Benefit Plan is a
"multiemployer plan" within the meaning of Section 3(37)(A) of ERISA.
4.23.6 DEFINED BENEFIT PLAN. No Employee Benefit Plan in effect
as of the Date of the Plan of Merger is a "defined benefit plan"
within the meaning of Section 3(35) of ERISA.
4.23.7 PAYMENT OF CONTRIBUTIONS. Pinnacle has made when due all
contributions required under each Employee Benefit Plan and under
applicable laws and regulations.
4.23.8 PAYMENT OF BENEFITS. There is no payment that has become
due from any Employee Benefit Plan, any trust created thereunder, or
from Pinnacle or any of Pinnacle's subsidiaries that has not been paid
through normal administrative procedures to the plan participants or
beneficiaries entitled thereto, except for claims for benefits for
which administrative claims procedures under such plan have not been
exhausted.
4.23.9 ACCUMULATED FUNDING DEFICIENCY. No Employee Benefit Plan
that is intended to be a qualified plan under Section 401(a) of the
Internal Revenue Code and no trust created thereunder has incurred,
subsequent to June 30, 1974, an "accumulated funding deficiency" as
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defined in Section 412(a) of the Internal Revenue Code and Section 302
of ERISA (whether or not waived).
4.23.10 FILING OF REPORTS. Pinnacle and each of Pinnacle's
subsidiaries has filed or caused to be filed, and will continue to
file or cause to be filed, in a timely manner all filings pertaining
to each Employee Benefit Plan with the IRS, the United States
Department of Labor, and the PBGC as prescribed by the Internal
Revenue Code, ERISA, and the regulations issued thereunder. All such
filings, as amended, were complete and accurate in all material
respects as of the dates of such filings, and there were no material
misstatements or omissions in any such filing.
4.24 ENVIRONMENTAL MATTERS.
4.24.1 HAZARDOUS SUBSTANCES. For purposes of this Plan of
Merger, "HAZARDOUS SUBSTANCE" has the meaning set forth in Section
9601 of the Comprehensive Environmental Response Compensation and
Liability Act of 1980, as amended, 42 U.S.C. <Section> 9601, ET SEQ.
("CERCLA"), and also includes any substance now or in the future
regulated by or subject to any Environmental Law (as defined below)
and any other pollutant, contaminant, or waste, including, without
limitation, petroleum, asbestos, radon, and polychlorinated biphenyls.
4.24.2 ENVIRONMENTAL LAWS. For purposes of this Plan of Merger,
"ENVIRONMENTAL LAWS" means all laws (civil or common), ordinances,
rules, regulations, guidelines, and orders that: (a) regulate the
generation, manufacture, release, treatment, containment, storage,
handling, transportation, disposal, or management of Hazardous
Substances; (b) regulate or prescribe standards or requirements for
the protection of air, water, or soil quality; (c) are intended to
protect public health or the environment; or (d) establish liability
for the investigation, removal, or cleanup of, or damage caused by,
any Hazardous Substance.
4.24.3 OWNED OR OPERATED PROPERTY. With respect to: (i) the
real estate owned or leased by Pinnacle or any of Pinnacle's
subsidiaries or used in the conduct of their businesses; (ii) other
real estate owned by each Pinnacle Bank; (iii) real estate held and
administered in trust by each Pinnacle Bank; and (iv) to Pinnacle's
knowledge, any real estate formerly owned or leased by Pinnacle or
each Pinnacle Bank (for purposes of this Section, properties described
in any of (i) through (iv) are collectively referred to as
"PREMISES"):
(a) CONSTRUCTION AND CONTENT. To its knowledge after
reasonable inquiry, none of the Premises is constructed of, or
contains as a component part, any material that (either in its
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present form or as it may reasonably be expected to change
through aging or normal use) releases or may release any
Hazardous Substance in violation of applicable law. Without
limiting the generality of this Section, the Premises are free of
asbestos except to the extent properly sealed or encapsulated in
compliance with all applicable Environmental Laws and all
workplace safety and health laws and regulations.
(b) USES OF PREMISES. To its knowledge after reasonable
inquiry, no part of the Premises has been used for the
generation, manufacture, handling, containment, treatment,
transportation, storage, disposal, or management of Hazardous
Substances.
(c) UNDERGROUND STORAGE TANKS. To its knowledge after
reasonable inquiry, the Premises do not contain, and have never
contained, any underground storage tanks. With respect to any
underground storage tank that is listed in the Pinnacle
Disclosure Statement as an exception to the foregoing, each such
underground storage tank presently or previously located on
Premises is or has been maintained or removed, as applicable, in
compliance with all applicable Environmental Laws, and has not
been the source of any release of a Hazardous Substance to the
environment that has not been remediated.
(d) ABSENCE OF CONTAMINATION. To its knowledge, the
Premises do not contain and are not contaminated by any
reportable quantity, or any quantity or concentration in excess
of applicable cleanup standards, of a Hazardous Substance from
any source.
(e) ENVIRONMENTAL SUITS AND PROCEEDINGS. To its knowledge
after reasonable inquiry, there is no action, suit,
investigation, liability, inquiry, or other proceeding, ruling,
order, notice of potential liability, or citation involving
Pinnacle or any of Pinnacle's subsidiaries that is pending,
threatened, or previously asserted under, or as a result of any
actual or alleged failure to comply with any requirement of, any
Environmental Law. To its knowledge, there is no basis for any
of the foregoing.
(f) NO IRPTA REAL PROPERTY. None of the Premises
constitutes "real property" within the meaning of the Illinois
Responsible Property Transfer Act, as amended.
4.24.4 LOAN PORTFOLIO. With respect to any real estate securing
any outstanding loan or related security interest and any owned real
estate acquired in full or partial satisfaction of a debt previously
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contracted, Pinnacle and each of Pinnacle's subsidiaries has complied
in all material respects with their policies (as such policies may
have been in effect from time to time and as disclosed in the Pinnacle
Disclosure Statement), and all applicable laws and regulations,
concerning the investigation of each such property to determine
whether or not there exists or is reasonably likely to exist any
Hazardous Substance on, in, or under such property and whether or not
a release of a Hazardous Substance has occurred at or from such
property.
4.25 DUTIES AS FIDUCIARY. Each Pinnacle Bank has performed all of
its duties in any capacity as trustee, executor, administrator, registrar,
guardian, custodian, escrow agent, receiver, or other fiduciary in a
fashion that complies in all material respects with all applicable laws,
regulations, orders, agreements, wills, instruments, and common law
standards. No Pinnacle Bank has received notice of any claim, allegation,
or complaint from any person that either Pinnacle Bank failed to perform
these fiduciary duties in the required manner.
4.26 INVESTMENT BANKERS AND BROKERS. Pinnacle has employed Donaldson
Lufkin & Jenrette ("DLJ") in connection with the Merger. Pinnacle,
Pinnacle's subsidiaries, and their respective affiliates, directors,
officers, and agents (collectively, "PINNACLE'S REPRESENTATIVES") have not
employed, engaged, or consulted with any broker, finder, or investment
banker other than DLJ in connection with this Plan of Merger or the Merger.
Other than the fees and expenses payable by Pinnacle to DLJ in connection
with the Merger, as described in the Pinnacle Disclosure Statement, there
is no investment banking fee, financial advisory fee, brokerage fee,
finder's fee, commission, or compensation payable by Pinnacle or any of
Pinnacle's subsidiaries to any person with respect to the Plan of Merger or
the consummation of the Merger. True and complete copies of each
agreement, arrangement, and understanding between Pinnacle and DLJ are
included in the Pinnacle Disclosure Statement. Pinnacle has no express or
implied agreement, arrangement, or understanding with any person other than
DLJ relative to the payment of any investment banking fee, financial
advisory fee, brokerage fee, finder's fee, commission, or compensation with
respect to this Plan of Merger or the consummation of the Merger.
4.27 FAIRNESS OPINION. Pinnacle's board of directors has received
the opinion of DLJ, in its capacity as Pinnacle's financial advisor,
substantially to the effect that the consideration to be received by the
holders of the Pinnacle Common Stock in the Merger is fair to the holders
from a financial point of view, a copy of which has been, or promptly will
be, provided to Old Kent.
4.28 PINNACLE-RELATED PERSONS. For purposes of this Plan of Merger,
the term "PINNACLE-RELATED PERSON" shall mean any director or executive
officer of Pinnacle or any of Pinnacle's subsidiaries, their spouses and
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children, any person who is a member of the same household as such persons,
and any corporation, partnership, proprietorship, trust, or other entity of
which any such persons, alone or together, have Control.
4.28.1 CONTROL OF MATERIAL ASSETS. Other than in a capacity as
a shareholder, director, or executive officer of Pinnacle or
Pinnacle's subsidiaries, no Pinnacle-Related Person owns or controls
any material assets or properties that are used in the business of
Pinnacle or any of Pinnacle's subsidiaries.
4.28.2 CONTRACTUAL RELATIONSHIPS. Other than ordinary and
customary banking relationships, no Pinnacle-Related Person has any
contractual relationship with Pinnacle or any of Pinnacle's
subsidiaries.
4.28.3 LOAN RELATIONSHIPS. No Pinnacle-Related Person has any
outstanding loan or loan commitment from, or on whose behalf an
irrevocable letter of credit has been issued by, Pinnacle or any of
Pinnacle's subsidiaries in a principal amount of $60,000 or more.
4.29 CHANGE IN BUSINESS RELATIONSHIPS. Neither Pinnacle nor any of
Pinnacle's subsidiaries has notice, whether on account of the Merger or
otherwise, that: (a) any customer, agent, representative, or supplier of
Pinnacle or any of Pinnacle's subsidiaries intends to discontinue,
diminish, or change its relationship with Pinnacle or any of Pinnacle's
subsidiaries, the effect of which would have a Material Adverse Effect on
Pinnacle; or (b) any executive officer of Pinnacle or any of Pinnacle's
subsidiaries intends to terminate his or her employment.
4.30 INSURANCE. Pinnacle and each of Pinnacle's subsidiaries
maintain in full force and effect insurance on their respective assets,
properties, premises, operations, and personnel in such amounts and against
such risks and losses as are customary and adequate for comparable entities
engaged in the same business and industry. There is no unsatisfied claim
of $100,000 or more under such insurance as to which the insurance carrier
has denied liability. During the last five years, no insurance company has
canceled or refused to renew a policy of insurance covering Pinnacle's or
any of Pinnacle's subsidiaries' assets, properties, premises, operations,
or personnel. Pinnacle and each of Pinnacle's subsidiaries have given
adequate and timely notice to each insurance carrier, and have complied
with all policy provisions, with respect to any known claim for which a
defense and/or indemnification may be available to Pinnacle or any of
Pinnacle's subsidiaries.
4.31 BOOKS AND RECORDS. The books of account, minute books, stock
record books, and other records of Pinnacle are complete and correct in all
material respects and have been maintained in accordance with sound
business practices, including the maintenance of an adequate internal
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control system. The corporate minute books of Pinnacle and each of
Pinnacle's subsidiaries contain accurate and complete records of all
meetings of, and corporate action taken by, their shareholders, boards, and
committees thereof. Since January 1, 1990, the minutes of each meeting (or
corporate action without a meeting) of any such shareholders, boards, or
committees have been duly prepared and are contained in such minute books.
Upon Old Kent's request, all such minute books and related exhibits or
attachments have been or will be made available for Old Kent's review.
4.32 LOAN GUARANTEES. All guarantees of indebtedness owed to
Pinnacle or any of Pinnacle's subsidiaries, including without limitation
those of the Federal Housing Administration, the Small Business
Administration, and other state and federal agencies, are valid and
enforceable.
4.33 EVENTS SINCE DECEMBER 31, 1998. Neither Pinnacle nor any of
Pinnacle's subsidiaries has, since December 31, 1998:
4.33.1 BUSINESS IN ORDINARY COURSE. Other than as contemplated
by this Plan of Merger, conducted its business other than in the
ordinary course, or incurred or become subject to any liability or
obligation, except liabilities incurred in the ordinary course of
business, and except for any single liability or for the aggregate of
any group of related liabilities that do not exceed $100,000.
4.33.2 STRIKES OR LABOR TROUBLE. Experienced or, to its
knowledge, been threatened by any strike, work stoppage,
organizational effort, or other labor trouble, or any other event or
condition of any similar character that has had or could reasonably be
expected to have a Material Adverse Effect on Pinnacle.
4.33.3 DISCHARGE OF OBLIGATIONS. Discharged or satisfied any
lien or encumbrance, or paid any obligation or liability other than
those shown on Pinnacle's Financial Statements as of December 31,
1998, or incurred after that date, other than in the ordinary course
of business, except for such liens, encumbrances, liabilities, and
obligations that do not in the aggregate exceed $100,000.
4.33.4 MORTGAGE OF ASSETS. Mortgaged, pledged, or subjected to
lien, charge, or other encumbrance any of its assets, or sold or
transferred any such assets, except in the ordinary course of
business, except for such mortgages, pledges, liens, charges, and
encumbrances for indebtedness that do not in the aggregate exceed
$100,000.
4.33.5 CONTRACT AMENDMENT OR TERMINATION. Made or permitted any
amendment or early termination of any contract to which it is a party
and that is material to the financial condition, income, expenses,
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business, properties, operations, or prospects of Pinnacle, except as
may be expressly provided in this Plan of Merger.
4.34 RESERVE FOR LOAN LOSSES. The allowance for loan losses as
reflected in Pinnacle's Financial Statements and Call Reports for the
periods ended December 31, 1998, was and will be, as of their respective
dates, (a) adequate to meet all reasonably anticipated loan and lease
losses, net of recoveries related to loans previously charged off as of
those dates, and (b) consistent with GAAP and safe and sound banking
practices.
4.35 LOAN ORIGINATION AND SERVICING. In originating, underwriting,
servicing, purchasing, selling, transferring, and discharging loans,
mortgages, land contracts, and other contractual obligations, either for
its own account or for the account of others, each of Pinnacle's
subsidiaries has complied with all applicable terms and conditions of such
obligations and with all applicable laws, regulations, rules, contractual
requirements, and procedures, except for incidents of noncompliance that
would not, individually or in the aggregate, have a Material Adverse Effect
on Pinnacle or Pinnacle's subsidiaries.
4.36 PUBLIC COMMUNICATIONS; SECURITIES OFFERING. Each annual report,
quarterly report, proxy material, press release, or other communication
previously sent or released by Pinnacle to Pinnacle's shareholders or the
public did not contain any untrue statement of material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
4.37 NO INSIDER TRADING. Pinnacle has reviewed its stock transfer
records since December 31, 1995, and has questioned its directors and
executive officers concerning known stock transfers since that date. Based
upon that investigation, Pinnacle has not, and to Pinnacle's knowledge (a)
no director or officer of Pinnacle; (b) no person related to any such
director or officer by blood or marriage and residing in the same
household, and (c) no person knowingly provided material nonpublic
information by any one or more of these persons; has purchased or sold, or
caused to be purchased or sold, any shares of Pinnacle Common Stock during
any period when Pinnacle was in possession of material nonpublic
information or in violation of any applicable provision of the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT").
4.38 YEAR 2000 COMPLIANCE. Pinnacle and Pinnacle Bank have adopted
plans and procedures consistent with good business practices and the
requirements of their primary bank regulator for their Year 2000 Assets (as
defined below) to be timely modified, upgraded or replaced to become Year
2000 Ready (as defined below). Set forth in the Pinnacle Disclosure
Statement are copies of all letters and responses between Pinnacle or
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Pinnacle's subsidiaries and their vendors relating to such compliance
matters. The cost of achieving Year 2000 Readiness for any Year 2000
Assets that are not Year 2000 Ready would not have a Material Adverse
Effect on Pinnacle or Pinnacle's subsidiaries. No representation is made
relating to the compatibility of the technology used by Pinnacle or
Pinnacle's subsidiaries with that used by Old Kent or with respect to the
cost of integrating the technology of Pinnacle or Pinnacle's subsidiaries
with that used by Old Kent. "YEAR 2000 ASSETS" means all buildings,
plants, structures, machinery, equipment, software, hardware, computer
systems and other property owned, leased, licensed or used by Pinnacle or
Pinnacle's subsidiaries in their business. "YEAR 2000 READY" means that
the Year 2000 Asset accurately processes and handles date and time data,
including but not limited to performing all leap year calculations and
calculating, comparing and sequencing during and between the years 1999 and
2000 and all other years, and will not malfunction, cease to function or
provide invalid or incorrect results or data as a result of date or time
data, including when a Year 2000 Asset is used in combination with or is
interfacing with any other Year 2000 Asset or with any other asset or
information technology.
4.39 SUBSIDIARIES AND JOINT VENTURES. Neither Pinnacle nor any of
its subsidiaries is, directly or indirectly, a party to or bound by any
joint venture or strategic alliance agreement or arrangement with any
unaffiliated person providing for their cooperative development, marketing,
referrals, or sales of banking, securities, insurance, or other financial
products or services.
4.40 ACCOUNTING AND TAX TREATMENT. Neither Pinnacle nor, to its
knowledge, any of its affiliates, has taken or agreed to take any action or
knows of any reason that, with respect to Pinnacle and its affiliates,
would prevent Old Kent from accounting for the business combination to be
effected by the Merger as a pooling-of-interests. Pinnacle is aware of no
reason why the Merger will fail to qualify as a reorganization under
Section 368(a) of the Internal Revenue Code.
4.41 TRUE AND COMPLETE INFORMATION. No schedule, statement, list,
certificate, or other information furnished or to be furnished by Pinnacle
in connection with this Plan of Merger, including the Pinnacle Disclosure
Statement, contains or will contain any untrue statement of a material
fact, or omits or will omit to state a material fact necessary to make the
statements contained therein, in light of the circumstances in which they
are made, not misleading.
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ARTICLE V - COVENANTS PENDING CLOSING
Subject to the terms and conditions of this Plan of Merger, Pinnacle,
Old Kent and MergerSub further agree that:
5.1 DISCLOSURE STATEMENTS; ADDITIONAL INFORMATION.
5.1.1 FORM AND CONTENT. Each of the Old Kent Disclosure
Statement and the Pinnacle Disclosure Statement shall be substantially
in the form contained in EXHIBIT C. It shall contain appropriate
references and cross-references with respect to disclosures, and
appropriate identifying markings with respect to documents, that
pertain to one or more sections or articles of this Plan of Merger.
Each of Old Kent and Pinnacle shall deliver two complete copies of its
Disclosure Statement.
5.1.2 UPDATE. Not less than six business days prior to the
Closing, each of Old Kent and Pinnacle shall deliver to the other an
update to its Disclosure Statement describing any material changes and
containing any new or amended documents, as specified below, that are
not contained in its Disclosure Statement as initially delivered.
This update shall not cure any breach of a representation or warranty
occurring on the Date of the Plan of Merger.
5.1.3 CERTIFICATION. Each of Old Kent's and Pinnacle's
Disclosure Statement and its update shall be certified on its behalf
by its chief executive officer and its chief financial officer (or, in
the case of Old Kent, such other executive officer(s) as may be
appropriate) that such Disclosure Statement contains no untrue
statement of a material fact, or fails to omit to state a material
fact necessary to make the statements contained therein, in light of
the circumstances in which they are made, not misleading.
5.1.4 PINNACLE'S SCHEDULE OF ADDITIONAL INFORMATION. Pinnacle
shall prepare and, within 45 days after the Date of the Plan of
Merger, deliver to Old Kent two copies of the Schedule of Additional
Information attached as EXHIBIT D. The Schedule of Additional
Information shall contain the information described in EXHIBIT D with
appropriate references and cross-references with respect to
disclosures and appropriate identifying marking with respect to
documents. In addition, the Schedule of Additional Information shall
contain true and correct copies of each and every document specified
in EXHIBIT D.
5.2 CHANGES AFFECTING REPRESENTATIONS. While this Plan of Merger is
in effect, if either Old Kent or Pinnacle becomes aware of any facts or of
the occurrence or impending occurrence of any event that (a) would cause
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one or more of the representations and warranties it has given in Article
III or IV, respectively, subject to the exceptions contained in the
Pinnacle Disclosure Statement or the Old Kent Disclosure Statement,
respectively, to become untrue or incomplete; or (b) would have caused one
or more of such representations and warranties to be untrue or incomplete
had such facts been known or had such event occurred prior to the Date of
the Plan of Merger, then such party (the "NOTIFYING PARTY") shall
immediately give detailed written notice of such discovery or change,
including a detailed description of the underlying facts or events, to the
other party; and unless waived by the other party in writing, the Notifying
Party shall use all reasonable efforts to take remedial or preventative
action, if possible, in order that such representations and warranties will
be true and complete at the Closing. No remedial action taken by a
Notifying Party shall be deemed to cure a breach of any representation or
warranty given by the Notifying Party in this Plan of Merger, unless such
cure is to the reasonable satisfaction of the other party.
5.3 PINNACLE'S CONDUCT OF BUSINESS PENDING THE EFFECTIVE
TIME. Pinnacle agrees that, until the Effective Time, except as consented
to in writing by Old Kent or as otherwise provided in this Plan of Merger,
Pinnacle shall, and it shall cause each of its subsidiaries to:
5.3.1 ORDINARY COURSE. Conduct its business and manage its
property only in the usual, regular, and ordinary course and not
otherwise, in substantially the same manner as prior to the Date of
the Plan of Merger, and not make any substantial change to its
expenditures or methods of management or operation in respect of such
business or property.
5.3.2 NO INCONSISTENT ACTIONS. Take no action that would be
inconsistent with or contrary to the representations, warranties, and
covenants made by Pinnacle in this Plan of Merger, and take no action
that would cause Pinnacle's representations and warranties to become
untrue except as and to the extent required by applicable laws and
regulations or regulatory agencies having jurisdiction or this Plan of
Merger.
5.3.3 COMPLIANCE. Comply in all material respects with all
laws, regulations, agreements, court orders, and administrative orders
applicable to the conduct of its business unless the application of
such laws, regulations, or orders is being contested in good faith and
Old Kent has been notified of such contest.
5.3.4 NO AMENDMENTS. Make no change in its articles of
incorporation or its by-laws.
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5.3.5 BOOKS AND RECORDS. Maintain its books, accounts, and
records in the usual and regular manner, and in material compliance
with all applicable laws and accounting standards.
5.3.6 NO CHANGE IN STOCK. Except as contemplated by this Plan
of Merger or the Option Agreement: (a) make no change in the number
of shares of its capital stock issued and outstanding other than
pursuant to the exercise of outstanding options awarded prior to the
Date of the Plan of Merger under the Option Plan; (b) grant no
warrant, option, or commitment relating to its capital stock; (c)
enter into no agreement relating to its capital stock; and (d) issue
no securities convertible into its capital stock.
5.3.7 MAINTENANCE. Use all reasonable efforts to maintain its
property and assets in their present state of repair, order, and
condition, reasonable wear and tear and damage by fire or other
casualty excepted.
5.3.8 PRESERVATION OF GOODWILL. Use all reasonable efforts to
preserve its business organization intact, to keep available the
services of its present officers and employees, and to preserve the
goodwill of its customers and others having business relations with
it.
5.3.9 INSURANCE POLICIES. Use all reasonable efforts to
maintain and keep in full force and effect insurance coverage, so long
as such insurance is reasonably available, on its assets, properties,
premises, operations, and personnel in such amounts, against such
risks and losses, and with such self-insurance requirements as are
presently in force.
5.3.10 CHARGE-OFFS. Charge off loans and maintain its allowance
for loan losses, in each case in a manner in conformity with the prior
practices of Pinnacle and the Pinnacle Banks and applicable industry,
regulatory, and accounting standards.
5.3.11 POLICIES AND PROCEDURES. Make no material change in any
policies and procedures applicable to the conduct of its business,
including without limitation any loan and underwriting policies, loan
loss and charge-off policies, investment policies, and employment
policies, except as and to the extent required by law or regulatory
agencies having jurisdiction.
5.3.12 NEW DIRECTORS OR EXECUTIVE OFFICERS. Except to reelect
persons who are then incumbent officers and directors at annual
meetings, not (a) increase the number of directors or fill any vacancy
on the board of directors, or (b) elect or appoint any person to an
executive office.
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5.3.13 COMPENSATION AND FRINGE BENEFITS. Take no action to
increase, or agree to increase, the salary, severance, or other
compensation payable to, or fringe benefits of, or pay or agree to pay
any bonus to, any officer or director, or any other class or group of
employees as a class or group, except for: (a) increases, agreements,
or payments that are reasonable in amount, consistent with the prior
year, announced or made only after first advising Old Kent, and which
shall not exceed eight percent (8%) in any individual instance or an
average of four percent (4%) for all employees collectively; (b)
previously planned salary increases that have been disclosed in
writing to Old Kent prior to the Date of the Plan of Merger; and (c)
incentive compensation plan awards, as generally described in the
Pinnacle Disclosure Statement and mutually agreed by Pinnacle and Old
Kent; each of which shall be paid or become effective, as the case may
be, not later than the Effective Time; PROVIDED, that the payment of
all such compensation shall be subject to the limitations prescribed
for pooling-of-interests accounting treatment of the Merger.
5.3.14 BENEFIT PLANS. Take no action to introduce, change, or
agree to introduce or change, any pension, profit-sharing, or employee
benefit plan, fringe benefit program, or other plan or program of any
kind for the benefit of its employees unless required by law or this
Plan of Merger; make no contribution to any employee pension plan
other than profit sharing contributions to the Pinnacle Banc Group,
Inc. Profit Sharing Plan and Trust (the "PINNACLE RETIREMENT PLAN")
and matching employer contributions to the Pinnacle Retirement Plan as
mutually agreed by Pinnacle and Old Kent.
5.3.15 NEW EMPLOYMENT AGREEMENTS. Take no action to enter into
any employment agreement that is not terminable by Pinnacle or any of
Pinnacle's subsidiaries, as the case may be, without cost or penalty
upon 60 days' or less notice, except as contemplated by this Plan of
Merger.
5.3.16 BORROWING. Take no action to borrow money except in the
ordinary course of business.
5.3.17 MORTGAGING ASSETS. Take no action to sell, mortgage,
pledge, encumber, or otherwise dispose of, or agree to sell, mortgage,
pledge, encumber, or otherwise dispose of, any of its property or
assets, except in the ordinary course of business, except for property
or assets, or any group of related properties or assets, that have a
fair market value of less than $100,000.
5.3.18 NOTICE OF ACTIONS. Notify Old Kent of the threat or
commencement of any action, suit, proceeding, claim, arbitration, or
investigation against or relating to: (a) Pinnacle or any of
Pinnacle's subsidiaries; (b) their respective directors, officers, or
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employees in their capacities as such; (c) Pinnacle's or Pinnacle's
subsidiaries' assets, liabilities, businesses, or operations; or
(d) the Merger or this Plan of Merger.
5.3.19 COOPERATION. Take such reasonable actions as may be
necessary to cooperate in effecting the Merger.
5.3.20 CHARITABLE CONTRIBUTIONS. Neither make nor renew any
charitable contributions, gifts, commitments, or pledges of cash or
other assets except for contributions that, in the aggregate, will
have a fair market value not greater than $100,000 prorated for the
year 1999 through the Effective Time.
5.3.21 LARGE EXPENDITURES. Take no action to pay, agree to pay,
or incur any liability, excepting such liabilities that have been
accrued on its books as of the Date of the Plan of Merger, for the
purchase or lease of any item of real property, fixtures, equipment,
or other capital asset in excess of $50,000 individually or in excess
of $100,000 in the aggregate with respect to Pinnacle, except pursuant
to prior commitments or plans made by Pinnacle that are disclosed in
the Pinnacle Disclosure Statement.
5.3.22 NEW SERVICE ARRANGEMENTS. Take no action to enter into,
or commit to enter into, any agreement for trust, consulting,
professional, or other services to Pinnacle or any of Pinnacle's
subsidiaries that is not terminable by Pinnacle without penalty upon
60 days' or less notice, except for contracts for services under which
the aggregate required payments do not exceed $50,000, except for
legal, accounting, and other ordinary expenses related to this Plan of
Merger.
5.3.23 CAPITAL IMPROVEMENTS. Take no action to open, enlarge,
or materially remodel any bank or other facility, and not lease,
purchase, or otherwise acquire any real property for use as a branch
bank, or apply for regulatory approval of any new branch bank,
excepting pursuant to prior commitments or plans made by Pinnacle or
the Pinnacle Banks that are disclosed in the Pinnacle Disclosure
Statement.
5.4 APPROVAL OF PLAN OF MERGER BY PINNACLE SHAREHOLDERS. Pinnacle,
acting through its board of directors, shall, in accordance with the
Illinois Act and its articles of incorporation and by-laws, promptly and
duly call, give notice of, convene, and hold as soon as practicable
following the date upon which the Registration Statement becomes effective,
a shareholders meeting for the purpose of approving this Plan of Merger
(the "SHAREHOLDERS' MEETING").
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5.4.1 BOARD RECOMMENDATION. Except while a "Fiduciary Event"
(as defined below) has occurred and continues, at the Shareholders'
Meeting and in any proxy materials used in connection with the
meeting, the board of directors of Pinnacle shall recommend that its
shareholders vote for approval of this Plan of Merger.
5.4.2 SOLICITATION OF PROXIES. Except while a Fiduciary Event
has occurred and continues:
(a) Pinnacle shall use its best efforts to solicit from its
shareholders proxies to vote on the proposal to approve this Plan
of Merger and to secure a quorum at the Shareholders' Meeting.
(b) Pinnacle shall use its best efforts to secure the vote
of shareholders required by the Illinois Act and Pinnacle's
articles of incorporation and by-laws to approve this Plan of
Merger.
5.4.3 FIDUCIARY EVENT. A "FIDUCIARY EVENT" shall have occurred
when the board of directors of Pinnacle has (a) received in writing a
"Superior Proposal" (as defined below), which is then pending, (b)
determined in good faith (based on the advice of legal counsel) that
the failure to so withdraw, modify, or change its recommendation would
cause the board of directors of Pinnacle to breach its fiduciary
duties to Pinnacle's shareholders under applicable law, and (c)
determined to accept and recommend the Superior Proposal to the
shareholders of Pinnacle.
5.4.4 SUPERIOR PROPOSAL. A "SUPERIOR PROPOSAL" means any bona
fide unsolicited Proposal (as defined in Section 5.9.2 (COMMUNICATION
OF OTHER PROPOSALS)) made by a third party on terms that the board of
directors of Pinnacle determines in its good faith judgment, based
upon the written advice of DLJ or such other financial advisor of
nationally recognized reputation, to be more financially favorable to
Pinnacle's shareholders than this Plan of Merger.
5.4.5 NOTICE. Pinnacle agrees that it shall notify Old Kent at
least two business days prior to taking any action with respect to
such Superior Proposal or taking any action with respect to the
withdrawal, modification, or change of its recommendation to
shareholders for adoption of this Plan of Merger. Notwithstanding
anything to the contrary contained in this Plan of Merger, any
withdrawal, modification, or change of recommendation upon a Fiduciary
Event in accordance with the provisions of this Section shall not
constitute a breach of this Plan of Merger by Pinnacle.
5.5 REGULAR DIVIDENDS. Pinnacle shall not declare, set aside, pay,
or make any dividend or other distribution or payment (whether in cash,
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stock, or property) with respect to, or purchase or redeem, any shares of
the capital stock other than regular quarterly cash dividends in an amount
not to exceed $0.25 per share per quarter of Pinnacle Common Stock payable
on the regular historical payment dates, all in a manner consistent with
Pinnacle's past dividend practice. Old Kent and Pinnacle agree that they
will cooperate to assure that, during any calendar quarter, there shall not
be a duplication of payment of dividends to shareholders of Pinnacle.
Notwithstanding the preceding sentences, if and to the extent that the
payment of a dividend in the manner provided in this Section would, in Old
Kent's reasonable judgment, present a significant risk that under GAAP or
the rules, regulations, or interpretations of the SEC or its staff, the
Merger would not qualify for pooling-of-interests accounting treatment,
that dividend shall not be paid, but an equitable adjustment shall be made
to the Exchange Ratio for the amount of the dividend not paid.
5.6 DATA PROCESSING AND RELATED CONTRACTS. Neither Pinnacle nor
Pinnacle's subsidiaries shall enter into any new data processing agreement
without the consent of Old Kent (which consent shall not be unreasonably
withheld or delayed if such agreement is necessary for Pinnacle or
Pinnacle's subsidiaries to conduct business in the ordinary course) and
shall advise Old Kent of all anticipated renewals or extensions of existing
data processing service agreements, data processing software license
agreements, and data processing hardware lease agreements with independent
vendors. Pinnacle agrees to cooperate with Old Kent in negotiating with
those vendors the length of any extension or renewal term of those
agreements, which, unless otherwise agreed by Old Kent, shall not exceed
one year from the date of renewal. Pinnacle agrees to send to each vendor,
as and when due, such notices of nonrenewal as may be necessary or
appropriate under the terms of the applicable agreements to prevent those
agreements from automatically renewing for a term of more than one year
from the date of renewal, except as otherwise agreed between Pinnacle and
Old Kent.
5.7 AFFILIATES -- COMPLIANCE WITH ACCOUNTING AND SECURITIES RULES.
5.7.1 PINNACLE'S AFFILIATES. Pinnacle shall use its best
efforts to cause each director, executive officer, and other person
who is an "affiliate" (for purposes of (a) Rule 145 under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), and (b)
qualifying the Merger for pooling-of-interests accounting treatment)
of Pinnacle to deliver to Old Kent, as soon as practicable after the
Date of the Plan of Merger, and prior to the date of the Shareholders'
Meetings, a written agreement, in the form of EXHIBIT E (the "PINNACLE
AFFILIATE AGREEMENTS"). Pinnacle shall provide a list of such
affiliates within seven days of the Date of the Plan of Merger and
shall update such list as necessary upon the reasonable request of Old
Kent.
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5.7.2 OLD KENT'S AFFILIATES. Old Kent use all reasonable
efforts to cause each director, executive officer, and other person
who is an "affiliate" (for the purpose of qualifying the Merger for
pooling-of-interests accounting treatment) of Old Kent, as soon as
practicable after the Date of the Plan of Merger, and prior to the
date of the Shareholders' Meetings, to execute and deliver a written
agreement under which such affiliate agrees not to sell, pledge,
transfer, or otherwise dispose of his or her Old Kent Common Stock
during any period that any such disposition would, under GAAP or the
rules, regulations, or interpretations of the SEC or its staff,
disqualify the Merger for pooling-of-interests accounting treatment.
5.7.3 PUBLISHING OPERATING RESULTS. Old Kent shall use all
reasonable efforts to publish as promptly as reasonably practical but
in no event later than 30 days after the end of the first full month
after the Effective Time in which there are at least 30 days of
post-Merger combined operations (which month may be the month in which
the Effective Time occurs), combined sales and net income figures as
contemplated by and in accordance with the terms of SEC Accounting
Series Release No. 135.
5.8 INDEMNIFICATION AND INSURANCE.
5.8.1 INDEMNIFICATION. Old Kent shall honor any and all rights
to indemnification and advancement of expenses now existing in favor
of the directors and officers of Pinnacle and Pinnacle's subsidiaries
under their articles of incorporation or bylaws which, as enforceable
contractual rights, shall survive the Merger and shall, as contractual
rights, continue with respect to acts or omissions occurring before
the Effective Time with the same force and effect as prior to the
Effective Time.
5.8.2 INSURANCE. Old Kent shall use all reasonable efforts to
cause the persons serving as officers and directors of Pinnacle
immediately prior to the Effective Time to be covered for a period of
at least two years from the Effective Time by the directors' and
officers' liability insurance policy maintained by Pinnacle with
respect to acts or omissions occurring prior to the Effective Time
that were committed by such officers and directors in their capacity
as such. Old Kent may substitute for Pinnacle's current coverage new
coverage under policies offering at least comparable coverage and
amounts containing terms and conditions that are not materially less
advantageous than Pinnacle's current policy. In no event shall Old
Kent be required to spend, directly or indirectly through Pinnacle or
its subsidiaries, more than $70,000 per annum (the "INSURANCE AMOUNT")
to either maintain or procure insurance coverage pursuant to this Plan
of Merger. If Old Kent does not advise Pinnacle in writing prior to
the commencement of the Pricing Period that it has procured such
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coverage for at least two years or agrees to do so without regard to
the Insurance Amount, Pinnacle shall be permitted (after giving Old
Kent three business days prior written notice and an additional two
business day period to purchase such coverage), in lieu of receiving
the foregoing insurance coverage, to procure tail coverage for past
acts and omissions for a single premium amount not in excess of the
Insurance Amount.
5.9 EXCLUSIVE COMMITMENT. Except as provided below, neither Pinnacle
nor any of Pinnacle's Representatives, investment bankers, or agents, shall
take any action inconsistent with the intent to consummate the Merger upon
the terms and conditions of this Plan of Merger. Without limiting the
foregoing:
5.9.1 NO SOLICITATION. Neither Pinnacle nor any of Pinnacle's
Representatives, investment bankers, or agents shall, directly or
indirectly, invite, initiate, solicit, encourage, or unless a
Fiduciary Event has occurred and continues (or a Superior Proposal
has been presented and such Superior Proposal would otherwise give
rise to a Fiduciary Event except that the board of directors of
Pinnacle, at that time, has yet to determine to accept and recommend
the Superior Proposal to the shareholders of Pinnacle), negotiate with
any other party, any proposals, offers, or expressions of interest
concerning any tender offer, exchange offer, merger, consolidation,
sale of shares, sale of assets, or assumption of liabilities not in
the ordinary course, or other business combination involving Pinnacle
or any of Pinnacle's subsidiaries other than the Merger (a "BUSINESS
COMBINATION").
5.9.2 COMMUNICATION OF OTHER PROPOSALS. Pinnacle shall cause
written notice to be delivered to Old Kent promptly upon receipt of
any solicitation, offer, proposal, or expression of interest (a
"PROPOSAL") concerning a Business Combination. Such notice shall
contain the material terms and conditions of the Proposal to which
such notice relates and shall, unless a Fiduciary Event has occurred
and continues, contain a copy of Pinnacle's unequivocal rejection of
the Proposal in the form actually delivered to the person from whom
the Proposal was received. Thereafter, Pinnacle shall promptly notify
Old Kent of any material changes in the terms, conditions, and status
of any Proposal.
5.9.3 FURNISHING INFORMATION. Unless a Fiduciary Event has
occurred and continues (or a Superior Proposal has been presented and
such Superior Proposal would otherwise give rise to a Fiduciary Event
except that the board of directors of Pinnacle, at that time, has yet
to determine to accept and recommend the Superior Proposal to the
shareholders of Pinnacle), neither Pinnacle nor any of Pinnacle's
Representatives, investment bankers, or agents shall furnish any
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nonpublic information concerning Pinnacle to any person who is not
affiliated or under contract with Pinnacle or Old Kent, except as
required by applicable law or regulations and prior to furnishing such
information to such person, Pinnacle shall receive from such person an
executed confidentiality agreement with terms no less favorable to
Pinnacle than those contained in its confidentiality agreement with
Old Kent and Pinnacle shall then provide only such information as has
been furnished previously to Old Kent.
5.9.4 CORPORATE LIABILITY FOR INDIVIDUAL'S BREACH. For the
purposes of this Section, any breach of this Section by an executive
officer or director of Pinnacle in his or her individual capacity
shall be deemed to be a breach by Pinnacle.
5.10 REGISTRATION STATEMENT. Old Kent agrees to prepare and file
with the SEC under the Securities Act, the Registration Statement and the
related Prospectus and Proxy Statement included as a part thereof covering
the issuance by Old Kent of the shares of Old Kent Common Stock as
contemplated by this Plan of Merger, together with such amendments as may
reasonably be required for the Registration Statement to become effective.
Old Kent agrees to provide Pinnacle with reasonable opportunities to review
and comment upon the Registration Statement, each amendment to the
Registration Statement, and each form of the Prospectus and Proxy Statement
before filing. Old Kent agrees to provide Pinnacle, upon request, with
copies of all correspondence received from the SEC with respect to the
Registration Statement and its amendments and with all responsive
correspondence to the SEC. Old Kent agrees to notify Pinnacle of any stop
orders or threatened stop orders with respect to the Registration
Statement. Pinnacle agrees to provide all necessary information pertaining
to Pinnacle promptly upon request, and to use all reasonable efforts to
obtain the cooperation of Pinnacle's independent accountants and attorneys
in connection with the preparation of the Registration Statement.
5.11 OTHER FILINGS. Old Kent agrees to prepare and file with the
Federal Reserve Board, the Illinois Commissioner, and each other regulatory
agency having jurisdiction all documents reasonably required to obtain each
necessary approval of or consent to consummate the Merger. Old Kent agrees
to provide Pinnacle with reasonable opportunities to review and comment
upon such documents before filing and to make such amendments and file such
supplements thereto as Pinnacle may reasonably request. Old Kent shall
provide Pinnacle with copies of all correspondence received from these
agencies and all responsive correspondence sent to these agencies.
5.12 MISCELLANEOUS AGREEMENTS AND CONSENTS. Subject to the terms and
conditions of this Plan of Merger, each of the parties agrees to use all
reasonable efforts to take, or cause to be taken, all actions, and to do,
or cause to be done, all things necessary, proper, or advisable under
applicable laws and regulations to consummate and make effective the
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Merger. Old Kent and Pinnacle will use all reasonable efforts to obtain
consents of all third parties and governmental bodies necessary or
desirable for the consummation of the Merger.
5.13 ACCESS AND INVESTIGATION. For the purpose of permitting an
examination of one party by the other's officers, attorneys, accountants,
and representatives, each party shall:
5.13.1 ACCESS. Permit, and shall cause each of their respective
subsidiaries to permit, full access to their respective properties,
books, and records at reasonable times;
5.13.2 COOPERATION. Use reasonable efforts to cause its and each
of their respective subsidiaries' officers, directors, employees,
accountants, and attorneys to cooperate fully, for the purpose of
permitting a complete and detailed examination of such matters by the
other party's officers, attorneys, accountants, and representatives;
5.13.3 INFORMATION. Furnish to the other, upon reasonable
request, any information reasonably requested respecting its and each
of its subsidiaries' properties, assets, business, and affairs;
5.13.4 CONSENTS. Each of Old Kent and Pinnacle acknowledges
that certain information may not be disclosed by the other without the
prior written consent of persons not affiliated with that party. If
such information is requested, then the other party shall use
reasonable efforts to obtain such prior consent and shall not be
required to disclose such information unless and until such prior
consent has been obtained.
5.13.5 RETURN AND RETENTION. In the event of termination of
this Plan of Merger, Old Kent and Pinnacle each agree to promptly
return to the other party or to destroy all written materials
furnished to it by the other party and the other party's subsidiaries,
and all copies, notes, and summaries of such written materials. Old
Kent and Pinnacle each agree to preserve intact all such materials
that are returned to them and to make such materials reasonably
available upon reasonable request or subpoena for a period of not less
than six years from the termination of this Plan of Merger.
5.14 CONFIDENTIALITY. Except as provided below, Old Kent, MergerSub
and Pinnacle each agree:
5.14.1 TREATMENT; RESTRICTED ACCESS. All information furnished
to the other party pursuant to this Plan of Merger shall be treated as
strictly confidential and shall not be disclosed to any other person,
natural or corporate, except for its employees, attorneys,
accountants, regulators, and financial advisers who are reasonably
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believed to have a need for such information in connection with the
Merger.
5.14.2 NO OTHER USE. No party shall make any use, other than
related to the Merger, of any information it may come to know as a
direct result of a disclosure by the other party, its subsidiaries,
directors, officers, employees, attorneys, accountants, or advisers or
that may come into its possession from any other confidential source
during the course of its investigation.
5.14.3 EXCEPTED INFORMATION. The provisions of this
Section shall not preclude Old Kent or Pinnacle, or their respective
subsidiaries, from using or disclosing information that is readily
ascertainable from public information or trade sources, known by it
before the commencement of discussions between the parties or
subsequently developed by it or its subsidiaries independent of any
investigation under this Plan of Merger, received from any other
person who is not affiliated with a party and who is not under any
obligation to keep such information confidential, or reasonably
required to be included in any filing or application required by any
governmental or regulatory agency.
5.14.4 PROHIBIT INSIDER TRADING. Old Kent and Pinnacle shall
each take responsible steps to assure that any person who receives
nonpublic information concerning the Merger or the other party will
treat the information confidentially as provided in this Section and
not directly or indirectly buy or sell, or advise or encourage other
persons to buy or sell, the other party's stock until such information
is properly disclosed to the public.
5.15 ENVIRONMENTAL INVESTIGATION. Old Kent shall be permitted to
conduct an environmental assessment of each parcel of Pinnacle's Real
Property and, at Old Kent's option, (a) any other real estate formerly
owned by Pinnacle or any of Pinnacle's subsidiaries, and (b) any other real
estate acquired by any of Pinnacle's subsidiaries in satisfaction of a debt
previously contracted. As to each such property:
5.15.1 PRELIMINARY ENVIRONMENTAL ASSESSMENTS. Old Kent may, at
its expense, engage an environmental consultant to conduct a
preliminary ("PHASE I") assessment of the property. Pinnacle and
Pinnacle's subsidiaries shall provide reasonable assistance, including
site access and a knowledgeable contact person, to the consultant for
purposes of conducting the Phase I assessments.
5.15.2 ENVIRONMENTAL RISKS. If there are any facts or
conditions identified in a Phase I assessment that Old Kent believes
could pose a current or future risk of a material liability,
interference with use, or diminution of value of the property, then
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Old Kent shall identify that risk to Pinnacle, identify the facts or
conditions underlying that risk, and provide Pinnacle with a copy of
the Phase I assessment for that property (an "ENVIRONMENTAL RISK").
5.15.3 PHASE II AND III WORK. Old Kent may obtain one or more
estimates of the proposed scope of work and cost of any further
environmental investigation, remediation, or other follow-up work it
reasonably considers necessary or appropriate to assess and, if
necessary or appropriate, remediate an Environmental Risk ("PHASE II
AND III WORK"). Old Kent shall provide copies of those estimates to
Pinnacle. The fees and expenses of any Phase II and III Work shall be
paid by Pinnacle. Old Kent and Pinnacle shall cooperate in the
review, approval, and implementation of all work plans for Phase II
and III Work. All work plans for any Phase II and III Work shall be
mutually satisfactory to Old Kent and Pinnacle. Mutually agreed upon
Phase II and III Work shall be undertaken and completed as quickly as
possible and shall be completed prior to the Closing.
5.15.4 OLD KENT'S TERMINATION RIGHTS. If (a) Old Kent and
Pinnacle are unable to agree upon a course of action to complete any
Phase II and III Work and/or a mutually acceptable modification to
this Plan of Merger, and (b) Old Kent cannot be reasonably assured
that the after-tax cost of the sum of (i) the actual cost of all
investigative and remedial or other corrective actions or measures
taken pursuant to Section 5.15.3 (PHASE II AND III WORK); (ii) the
estimated cost of all investigative actions and remedial or other
corrective actions or measures not undertaken but required by
Environmental Laws, or necessary to avoid future exposure to material
liability under Environmental Laws; and (iii) all diminutions of the
value of such properties; in the aggregate will not exceed $1,000,000
on an after federal income tax basis, then Old Kent may terminate this
Plan of Merger as provided in Section 8.3.3 (ENVIRONMENTAL RISKS).
5.16 EMPLOYMENT AMENDMENTS. Pinnacle shall cause the Pinnacle Banks,
prior to execution of the Original Agreement, to obtain executed amendments
(in the form previously agreed to by Old Kent and Pinnacle) to the three
existing employment agreements with Pinnacle's senior officers providing
for, among other things, mutually agreeable no-compete and non-solicitation
covenants from those employees, which shall only become effective upon
consummation of the Merger at the Effective Time (the "EMPLOYMENT
AMENDMENTS").
5.17 TERMINATION OF PROFIT SHARING AND 401(K) PLAN. Upon request by
Old Kent, Pinnacle shall, and shall cause Pinnacle Bank to, take all action
that is necessary and appropriate in the judgment of Old Kent to terminate
the Pinnacle Retirement Plan on a mutually agreed date that is as close as
practicable to, but not more than 30 days before, the Effective Time.
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5.18 ACCOUNTING AND TAX TREATMENT. During the term of this Plan of
Merger, Old Kent, MergerSub, and Pinnacle each agree not to take any action
that would prevent Old Kent from qualifying, or materially increase the
risk of disqualifying, the Merger as a pooling-of-interests for accounting
purposes or as a "reorganization" within the meaning of Section 368(a) of
the Internal Revenue Code; PROVIDED, that nothing in this Plan of Merger
shall limit Old Kent's ability to exercise its rights under the Option
Agreement. Old Kent and Pinnacle each agree to take such action as may be
reasonably required to negate the impact of any past actions that might
adversely impact the ability of Old Kent to treat the Merger as a pooling-
of-interests.
5.19 PUBLIC ANNOUNCEMENTS. Old Kent, MergerSub, and Pinnacle shall
cooperate with each other in the development and distribution of all news
releases and other public information disclosures with respect to this Plan
of Merger, except as may be otherwise required by law, and neither Old
Kent, MergerSub, nor Pinnacle shall issue any news releases with respect to
this Plan of Merger or the Merger unless such news releases have been
mutually agreed upon by the parties, except as required by law.
ARTICLE VI - CONDITIONS PRECEDENT TO OLD KENT'S OBLIGATIONS
All obligations of Old Kent and MergerSub under this Plan of Merger
are subject to the fulfillment (or waiver in writing by a duly authorized
officer of Old Kent), prior to or at the Closing, of each of the following
conditions:
6.1 RENEWAL OF REPRESENTATIONS AND WARRANTIES, ETC.
6.1.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Pinnacle contained in this Plan of Merger shall be true
and correct when made and as of the Closing as if made at and as of
such time, except (a) as expressly contemplated or permitted by this
Plan of Merger; (b) for representations and warranties relating to a
time or times other than the Closing that were or will be true and
correct at such time or times; and (c) where the failure or failures
of such representations and warranties to be so true and correct,
individually or in the aggregate, does not result or would not result
in a Material Adverse Effect.
6.1.2 COMPLIANCE WITH AGREEMENTS. Pinnacle shall have performed
and complied with all agreements, conditions, and covenants required
by this Plan of Merger to be performed or complied with by Pinnacle
prior to or at the Closing in all material respects.
6.1.3 CERTIFICATES. Compliance with Sections 6.1.1
(REPRESENTATIONS AND WARRANTIES) and 6.1.2 (COMPLIANCE WITH
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AGREEMENTS) shall be evidenced by one or more certificates signed by
appropriate officers of Pinnacle, dated as of the date of the Closing,
certifying the foregoing in such detail as Old Kent may reasonably
request, describing any exceptions to such compliance in such
certificates.
6.2 OPINION OF LEGAL COUNSEL. Pinnacle shall have delivered to Old
Kent an opinion of Burke, Warren, MacKay & Serritella, P.C., counsel for
Pinnacle, dated as of the date of the Closing and substantially in the form
contained in EXHIBIT F, with only such changes as may be reasonably
satisfactory to counsel for Old Kent.
6.3 REQUIRED REGULATORY APPROVALS. Old Kent shall have received all
such approvals, consents, authorizations, and licenses of all regulatory
and other governmental and self-regulatory authorities having jurisdiction
as may be required to permit the performance by Pinnacle, Old Kent, and
MergerSub of their respective obligations under this Plan of Merger and the
consummation of the Merger, without the regulating authority's imposition
of non-standard conditions on approval that are not reasonably acceptable
to Old Kent.
6.4 SHAREHOLDER APPROVAL. The shareholders of Pinnacle shall have
approved this Plan of Merger.
6.5 ORDER, DECREE, ETC. Neither Old Kent, MergerSub, nor Pinnacle
shall be subject to any order, decree, or injunction of a court or agency
of competent jurisdiction that enjoins or prohibits the consummation of the
Merger.
6.6 PROCEEDINGS. There shall not be any action, suit, proceeding,
claim, arbitration, or investigation pending or threatened against or
relating to Pinnacle, any of Pinnacle's subsidiaries, or its or their
respective directors (in the capacity as such), officers (in the capacity
as such), properties, or businesses that may result in any liability that
could have a Material Adverse Effect on Pinnacle.
6.7 TAX MATTERS. Old Kent shall have received a tax opinion from its
counsel, reasonably satisfactory in form and substance to Old Kent,
substantially to the effect that:
6.7.1 REORGANIZATION. The acquisition of substantially all of
the assets of Pinnacle by Old Kent solely in exchange for Old Kent
Common Stock and the assumption by Old Kent of liabilities of Pinnacle
will constitute a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code, and Old Kent and Pinnacle will each be a
"party to a reorganization" within the meaning of Section 368(b) of
the Internal Revenue Code.
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6.7.2 ASSETS' TAX BASIS. The basis of the Pinnacle assets in
the hands of Old Kent will be the same as the basis of those assets in
the hands of Pinnacle immediately prior to the Merger.
6.7.3 NO GAIN OR LOSS. No gain or loss will be recognized by
Old Kent on the constructive acquisition by Old Kent of substantially
all of the assets of Pinnacle in exchange for Old Kent Common Stock
and the assumption by Old Kent of the liabilities of Pinnacle.
6.7.4 HOLDING PERIOD. The holding period of the assets of
Pinnacle in the hands of Old Kent will include the holding period
during which such assets were held by Pinnacle.
The tax opinion shall be supported by one or more fact certificates or
affidavits in such form and content as may be reasonably requested by Old
Kent's counsel from Pinnacle and its subsidiaries.
6.8 REGISTRATION STATEMENT. The Registration Statement shall have
been declared effective by the SEC and shall not be subject to a stop order
or any threatened stop order.
6.9 CERTIFICATE AS TO OUTSTANDING SHARES. Old Kent shall have
received one or more certificates dated as of the Closing date and signed
by the secretary of Pinnacle on behalf of Pinnacle, and by the transfer
agent for Pinnacle Common Stock, certifying (a) the total number of shares
of capital stock of Pinnacle issued and outstanding as of the close of
business on the day immediately preceding the Closing; and (b) with respect
to the secretary's certification, the number of shares of Pinnacle Common
Stock, if any, that are issuable on or after that date, all in such form as
Old Kent may reasonably request.
6.10 CHANGE OF CONTROL WAIVERS. Old Kent shall have received
evidence of the consents or other waivers of any material rights and the
waiver of the loss of any material rights that may be triggered by the
change of control of Pinnacle upon consummation of the Merger under (a) any
agreement, contract, mortgage, deed of trust, lease, commitment, indenture,
note, or other instrument, under which the failure to obtain such consent
or waiver could result in a Material Adverse Effect on Pinnacle; and (b)
each contract identified in EXHIBIT H (collectively, the "DESIGNATED
CONTRACTS"); all in form and substance reasonably satisfactory to Old Kent.
6.11 POOLING ASSURANCES. Old Kent shall have received a letter
addressed to Old Kent and Pinnacle, from Pinnacle's independent
accountants, as of a date reasonably approximate to the date of the
Closing, to the effect that, as of such date, Pinnacle is eligible to
participate in a pooling-of-interests combination and a letter from Old
Kent's independent accountants, satisfactory in form and substance, to the
effect that (based in part on the letter from Pinnacle's independent
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accountants) the Merger should be treated as a pooling-of-interests for
accounting and financial reporting purposes, subject to satisfaction of
post-Merger conditions.
ARTICLE VII - CONDITIONS PRECEDENT TO PINNACLE'S OBLIGATIONS
All obligations of Pinnacle under this Plan of Merger are subject to
the fulfillment (or waiver in writing by a duly authorized officer of
Pinnacle), prior to or at the Closing, of each of the following conditions:
7.1 RENEWAL OF REPRESENTATIONS AND WARRANTIES, ETC.
7.1.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Old Kent and MergerSub contained in this Plan of Merger
shall be true and correct when made and as of the Closing as if made
at and as of such time, except (a) as expressly contemplated or
permitted by this Plan of Merger; (b) for representations and
warranties relating to a time or times other than the Effective Time
that were or will be true and correct at such time or times; and (c)
where the failure or failures of such representations and warranties
to be so true and correct, individually or in the aggregate, does not
result or would not result in a Material Adverse Effect.
7.1.2 COMPLIANCE WITH AGREEMENTS. Old Kent and MergerSub shall
have performed and complied with all agreements, conditions, and
covenants required by this Plan of Merger to be performed or complied
with by Old Kent and MergerSub prior to or at the Closing in all
material respects.
7.1.3 CERTIFICATES. Compliance with Sections 7.1.1
(REPRESENTATIONS AND WARRANTIES) and 7.1.2 (COMPLIANCE WITH
AGREEMENTS) shall be evidenced by one or more certificates signed by
appropriate officers of Old Kent and MergerSub, dated as of the date
of the Closing, certifying the foregoing in such detail as Pinnacle
may reasonably request, describing any exceptions to such compliance
in such certificates.
7.2 OPINION OF LEGAL COUNSEL. Old Kent shall have delivered to
Pinnacle an opinion of Warner Norcross & Judd llp, counsel for Old Kent,
dated as of the date of the Closing and substantially in the form contained
in EXHIBIT G, with only such changes as may be reasonably satisfactory to
counsel for Pinnacle.
7.3 REQUIRED REGULATORY APPROVALS. Pinnacle, Old Kent, and MergerSub
shall have received all such approvals, consents, authorizations, and
licenses of all regulatory and other governmental authorities having
jurisdiction as may be required to permit the performance by Pinnacle, Old
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Kent and MergerSub of their respective obligations under this Plan of
Merger and the consummation of the Merger.
7.4 SHAREHOLDER APPROVAL. Pinnacle shall have received the requisite
approval of the shareholders of Pinnacle of this Plan of Merger.
7.5 ORDER, DECREE, ETC. Neither Old Kent, MergerSub, nor Pinnacle
shall be subject to any applicable order, decree, or injunction of a court
or agency of competent jurisdiction that enjoins or prohibits the
consummation of the Merger.
7.6 TAX MATTERS. Pinnacle shall have received a tax opinion from Old
Kent's counsel, reasonably satisfactory in form and substance to Pinnacle,
substantially to the effect that:
7.6.1 REORGANIZATION. The acquisition of substantially all of
the assets of Pinnacle by Old Kent solely in exchange for Old Kent
Common Stock and the assumption by Old Kent of liabilities of Pinnacle
will constitute a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code, and Old Kent and Pinnacle will each be a
"party to a reorganization" within the meaning of Section 368(b) of
the Internal Revenue Code.
7.6.2 NO GAIN OR LOSS. No gain or loss will be recognized by
the shareholders of Pinnacle upon the receipt of Old Kent Common Stock
in exchange for all of their shares of Pinnacle Common Stock, except
to the extent of any cash received in lieu of a fractional share of
Old Kent Common Stock.
7.6.3 STOCK TAX BASIS. The basis of the Old Kent Common Stock
to be received by shareholders of Pinnacle will, in each instance, be
the same as the basis of the respective shares of Pinnacle Common
Stock surrendered in exchange therefor.
7.6.4 HOLDING PERIOD. The holding period of the Old Kent Common
Stock received by shareholders of Pinnacle will, in each instance,
include the period during which the Pinnacle Common Stock surrendered
in exchange therefor was held, PROVIDED, that the Pinnacle Common
Stock was, in each instance, held as a capital asset in the hands of
the shareholder of Pinnacle at the Effective Time.
The tax opinion shall be supported by one or more fact certificates or
affidavits in such form and content as may be reasonably requested by Old
Kent's counsel from Old Kent and its subsidiaries.
7.7 REGISTRATION STATEMENT. The Registration Statement shall have
been declared effective by the SEC and shall not be subject to a stop order
or any threatened stop order.
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7.8 FAIRNESS OPINION. Pinnacle shall have received an opinion from a
nationally recognized financial advisor reasonably acceptable to Old Kent,
dated as of the Date of the Plan of Merger and renewed as of a date
approximately the date of the Prospectus and Proxy Statement, to the effect
that the terms of the Merger are fair to Pinnacle's shareholders from a
financial point of view as of that date and such opinion shall not have
been subsequently withdrawn; PROVIDED, that Pinnacle shall have used all
reasonable efforts to obtain such a fairness opinion.
7.9 LISTING OF SHARES. The shares of Old Kent Common Stock that
shall be issued to the shareholders of Pinnacle upon consummation of the
Merger shall have been authorized for listing on the New York Stock
Exchange upon official notice of issuance.
7.10 EXCHANGE AGENT CERTIFICATE. Pinnacle shall have received a
certificate from the Exchange Agent certifying to receipt of certificates
for shares of Old Kent Common Stock to be issued and sufficient cash to
make payments in lieu of fractional shares as contemplated by this Plan of
Merger.
ARTICLE VIII - ABANDONMENT OF MERGER
This Plan of Merger may be terminated and the Merger abandoned at any
time prior to the Effective Time (notwithstanding that approval of this
Plan of Merger by the shareholders of Pinnacle may have previously been
obtained) as follows:
8.1 MUTUAL ABANDONMENT. By mutual consent of the boards of
directors, or duly authorized committees thereof, of Old Kent and Pinnacle.
8.2 UPSET DATE. By either Old Kent or Pinnacle if the Merger shall
not have been consummated on or before January 31, 2000.
8.3 OLD KENT'S RIGHTS TO TERMINATE. By Old Kent under any of the
following circumstances:
8.3.1 PINNACLE DISCLOSURE STATEMENT. Old Kent shall have
reasonably determined that: (a) any exception to Pinnacle's
representations and warranties or any other information set forth in
the Pinnacle Disclosure Statement fairly indicate that the financial
value of Pinnacle is materially less than indicated by information
provided by or on behalf of Pinnacle to Old Kent in writing prior to
5:00 p.m. on March 18, 1999; (b) based upon Old Kent's preclosing
investigation of Pinnacle, there exists any set of facts or
circumstances that would have a Material Adverse Effect on Pinnacle;
or (c) Pinnacle or Pinnacle Bank is exposed to risks, or the Merger
would be likely to expose Old Kent to risks, that in the reasonable
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judgment of Old Kent could result in a Material Adverse Effect with
respect to Pinnacle and Pinnacle's subsidiaries; PROVIDED, that with
respect to taking action under clauses (a), (b), or (c) of this
Subsection, Old Kent notifies Pinnacle of such abandonment and
termination not later than 6 p.m. on April 2, 1999, assuming Old
Kent's timely receipt of the Pinnacle Disclosure Statement as provided
under this Plan of Merger.
8.3.2 FAILURE TO SATISFY CLOSING CONDITIONS. If any of the
conditions specified in Article VI have not been met or waived by Old
Kent, at such time as such condition can no longer be satisfied
notwithstanding Old Kent's best efforts to comply with those covenants
given by Old Kent in this Plan of Merger.
8.3.3 ENVIRONMENTAL RISKS. If Old Kent has given Pinnacle
notice of an unacceptable Environmental Risk as provided in
Section 5.15.4 (OLD KENT'S TERMINATION RIGHTS).
8.3.4 POOLING QUALIFICATION. At any time after Old Kent's
independent accountants have advised Old Kent that they are not of the
opinion that the Merger is likely to qualify for treatment as a
pooling-of-interests for accounting and financial reporting purposes;
PROVIDED, that Old Kent shall not have wilfully taken any action to
disqualify the Merger as a pooling-of-interests for accounting and
financial reporting purposes.
8.3.5 APPROVAL OF PINNACLE'S SHAREHOLDERS. This Plan of Merger
is not approved by the requisite vote of Pinnacle's shareholders at
the Shareholders' Meeting.
8.3.6 OCCURRENCE OF A FIDUCIARY EVENT. At any time after there
has occurred a Fiduciary Event.
8.3.7 MATERIAL ADVERSE EVENT. If there shall have occurred one
or more events that shall have caused or are reasonably likely to
cause a Material Adverse Effect on Pinnacle.
8.4 PINNACLE'S RIGHTS TO TERMINATE. By the board of directors, or a
duly authorized committee thereof, of Pinnacle under any of the following
circumstances:
8.4.1 UPSET CONDITION. If the Upset Condition exists in
accordance with Section 2.2 (UPSET PROVISION) during the time period
provided for in such Section.
8.4.2 OLD KENT DISCLOSURE STATEMENT. The cumulative effect of
any exceptions to Old Kent's representations and warranties or any
other information set forth in the Old Kent Disclosure Statement would
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have a Material Adverse Effect on Old Kent; PROVIDED, that Pinnacle
notifies Old Kent of such abandonment and termination not later than 6
p.m. on April 2, 1999, assuming Pinnacle's timely receipt of the Old
Kent Disclosure Statement as provided under this Plan of Merger.
8.4.3 FAILURE TO SATISFY CLOSING CONDITIONS. If any of the
conditions specified in Article VII have not been met or waived by
Pinnacle at such time as such condition can no longer be satisfied
notwithstanding Pinnacle's best efforts to comply with those covenants
given by Pinnacle in this Plan of Merger.
8.4.4 APPROVAL OF PINNACLE'S SHAREHOLDERS. This Plan of Merger
is not approved by the requisite vote of Pinnacle's shareholders at
the Shareholders' Meeting and Pinnacle's board of directors has
advised Old Kent that it does not believe that such vote can be
obtained through reasonable further efforts.
8.4.5 MATERIAL ADVERSE EVENT. If there shall have occurred one
or more events that shall have caused or are reasonably likely to
cause a Material Adverse Effect on Old Kent.
8.5 EFFECT OF TERMINATION. In the event of termination of this Plan
of Merger by either Pinnacle or Old Kent as provided in this Article, this
Plan of Merger shall forthwith become void and have no effect, and none of
Pinnacle's, Old Kent's, any of their respective subsidiaries, or any of the
officers or directors of any of them shall have any liability of any nature
whatsoever hereunder, or in connection with the transactions contemplated
hereby (other than the Option Agreement), except that (a) the Option
Agreement and Sections 5.14 (CONFIDENTIALITY), 8.5 (EFFECT OF TERMINATION),
9.2 (NONSURVIVAL OF REPRESENTATIONS, WARRANTIES, AND AGREEMENTS), and 9.4
(EXPENSES), shall survive any termination of this Plan of Merger, and
(b) notwithstanding anything to the contrary contained in this Plan of
Merger, neither Pinnacle, Old Kent, nor MergerSub shall be relieved or
released from any liabilities or damages arising out of its breach of any
provision of this Plan of Merger.
ARTICLE IX - MISCELLANEOUS
Subject to the terms and conditions of this Plan of Merger, Old Kent,
MergerSub, and Pinnacle further agree as follows:
9.1 "MATERIAL ADVERSE EFFECT" DEFINED. As used in this Plan of
Merger, the term "MATERIAL ADVERSE EFFECT" means any change or effect that,
individually or when taken together with all other such changes or effects
that have occurred prior to the date of determination of the occurrence of
the Material Adverse Effect, has or is reasonably likely to have a material
negative impact on (a) the business, assets, financial condition, results
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of operations, or value of Old Kent and its subsidiaries, taken as a whole,
or, as the case may be, Pinnacle and the Pinnacle Banks, taken as a whole;
or (b) the ability of Old Kent or Pinnacle, as the case may be, to satisfy
the applicable closing conditions or consummate the Merger or perform its
obligations under the Option Agreement. Notwithstanding the above, the
impact of the following shall not be included in any determination of a
Material Adverse Effect: (a) changes in GAAP, generally applicable to
financial institutions and their holding companies, however, excluding from
this exception any material change to pooling-of-interests accounting
rules; (b) actions and omissions of a party (or any of its subsidiaries)
taken with the prior written consent of the other party; (c) changes in
economic conditions (including changes in the level of interest rates)
generally affecting financial institutions; and (d) fees and expenses
reasonably related to this transaction (such as any additional insurance
coverages, employment and consulting services, legal, accounting, and
investment banking fees and expenses, and severance and retention
provisions).
9.2 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES, AND AGREEMENTS. None
of the representations, warranties, covenants, and agreements in this Plan
of Merger or in any other agreement or instrument delivered pursuant to
this Plan of Merger, including any rights arising out of any breach of such
representations, warranties, covenants, and agreements, shall survive the
Effective Time, except for the Option Agreement, Pinnacle Affiliate
Agreements, Employment Amendments, and those covenants and agreements
contained herein and therein that, by their terms, apply or are to be
performed in whole or in part after the Effective Time.
9.3 AMENDMENT. Subject to applicable law, this Plan of Merger may be
amended, modified, or supplemented by, and only by, written agreement of
Old Kent, MergerSub, and Pinnacle, or by the respective officers thereunto
duly authorized, at any time prior to the Effective Time.
9.4 EXPENSES. Except as otherwise provided in this Plan of Merger,
Pinnacle and Old Kent shall each pay its own expenses incident to preparing
for, entering into, and carrying out this Plan of Merger, and incident to
the consummation of the Merger. Each party shall pay the fees and expenses
of any investment banker engaged by that party. The costs of all filing
fees pertaining to the Registration Statement shall be paid by Old Kent.
The costs of printing and mailing the Prospectus and Proxy Statement shall
be paid by Pinnacle.
9.5 SPECIFIC ENFORCEMENT. The parties each agree that, consistent
with the terms and conditions of this Plan of Merger, in the event of a
breach by a party to this Plan of Merger, money damages will be inadequate
and not susceptible of computation because of the unique nature of
Pinnacle, the Pinnacle Banks, and the Merger. Therefore, the parties each
agree that a federal or state court of competent jurisdiction shall have
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authority, subject to the rules of law and equity, to specifically enforce
the provisions of this Plan of Merger by injunctive order or such other
equitable means as may be determined in the court's discretion.
9.6 JURISDICTION; VENUE; JURY. Old Kent, MergerSub, and Pinnacle
each agree to the jurisdiction and venue of any state or federal court
located in Kent County, Michigan. Old Kent, MergerSub, and Pinnacle each
hereby waive their right to a trial by jury.
9.7 WAIVER. Any of the terms or conditions of this Plan of Merger
may be waived in writing at any time by action taken by the board of
directors of a party, a duly authorized committee thereof, or a duly
authorized officer of such party. The failure of any party at any time or
times to require performance of any provision of this Plan of Merger shall
in no manner affect such party's right at a later time to enforce the same
provision. No waiver by any party of any condition, or of the breach of
any term, covenant, representation, or warranty contained in this Plan of
Merger, whether by conduct or otherwise, in any one or more instances shall
be deemed to be or construed as a further or continuing waiver of any such
condition or breach, or as a waiver of any other condition or of the breach
of any other term, covenant, representation, or warranty.
9.8 NOTICES. All notices, requests, demands, and other
communications under this Plan of Merger shall be in writing and shall be
deemed to have been duly given if delivered or sent and received by a fax
transmission (if receipt by the intended recipient is confirmed by
telephone and if hard copy is delivered by overnight delivery service the
next day), a hand delivery, or a nationwide overnight delivery service (all
fees prepaid) to the following addresses:
IF TO OLD KENT OR MERGERSUB: WITH A COPY TO:
Old Kent Financial Corporation Warner Norcross & Judd LLP
Attention: Mary E. Tuuk, Attention: Gordon R. Lewis
Senior Vice President and Legal 900 Old Kent Building
Coordinator 111 Lyon Street, N.W.
111 Lyon Street, N.W., Suite 100 Grand Rapids, Michigan 49503-2489
Grand Rapids, Michigan 49503
Facsimile: (616) 771-4698 Facsimile: (616) 752-2500
Telephone: (616) 771-5272 Telephone: (616) 752-2000
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IF TO PINNACLE: WITH A COPY TO:
Pinnacle Banc Group, Inc. Burke, Warren, MacKay & Serritella,
Attention: John J. Gleason, Jr. P.C.
Vice Chairman and Chief Executive Attention: Richard W. Burke
Officer IBM Plaza, 22nd Floor
2215 York Road, Suite 306 330 North Wabash Avenue
Oak Brook, Illinois 60523 Chicago, Illinois 60611-3607
Facsimile: (630) 571-3012 Facsimile: (312) 840-7900
Telephone: (630) 574-3550 Telephone: (312) 840-7000
9.9 GOVERNING LAW. This Plan of Merger shall be governed, construed,
and enforced in accordance with the laws of the State of Michigan, without
regard to principles of conflicts of laws.
9.10 ENTIRE AGREEMENT. This Plan of Merger supersedes all prior
agreements between the parties with respect to its subject matter and
constitutes (along with the agreements and documents referred to in this
Plan of Merger) a complete and exclusive statement of the terms of the
agreement between the parties with respect to its subject matter; except
for matters set forth in any written instrument concurrently or
contemporaneously executed by the parties. No party may assign any of its
rights or obligations under this Plan of Merger to any other person.
9.11 THIRD PARTY BENEFICIARIES. The terms and conditions of this
Plan of Merger shall inure to the benefit of and be binding upon Old Kent,
MergerSub, and Pinnacle and their respective successors. Nothing in this
Plan of Merger, express or implied, is intended to confer upon any person
other than Old Kent, MergerSub, and Pinnacle any rights, remedies,
obligations, or liabilities under or by reason of this Plan of Merger.
9.12 COUNTERPARTS. This Plan of Merger may be executed in one or
more counterparts, which taken together shall constitute one and the same
instrument. Executed counterparts of this Plan of Merger shall be deemed
to have been fully delivered and shall become legally binding if and when
executed signature pages are received by fax from a party. If so delivered
by fax, the parties agree to promptly send original, manually executed
copies by nationwide overnight delivery service.
9.13 FURTHER ASSURANCES; PRIVILEGES. Each of Old Kent and Pinnacle
shall, at the request of the other, execute and deliver such additional
documents and instruments and take such other actions as may be reasonably
requested to carry out the terms and provisions of this Plan of Merger.
9.14 HEADINGS, ETC. The article headings and section headings
contained in this Plan of Merger are inserted for convenience only and
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shall not affect in any way the meaning or interpretation of this Plan of
Merger.
9.15 CALCULATION OF DATES AND DEADLINES. Unless otherwise
specified, any period of time to be determined under this Plan of Merger
shall be deemed to commence at 12:01 a.m. on the first full day after the
specified starting date, event, or occurrence. Any deadline, due date,
expiration date, or period-end to be calculated under this Plan of Merger
shall be deemed to end at 5 p.m. on the last day of the specified period.
The time of day shall be determined with reference to the then current
local time in Grand Rapids, Michigan.
9.16 SEVERABILITY. If any term, provision, covenant, or restriction
contained in this Plan of Merger is held by a final and unappealable order
of a court of competent jurisdiction to be invalid, void, or unenforceable,
then the remainder of the terms, provisions, covenants, and restrictions
contained in this Plan of Merger shall remain in full force and effect, and
shall in no way be affected, impaired, or invalidated unless the effect
would be to cause this Plan of Merger to not achieve its essential
purposes.
9.17 EFFECT OF AMENDMENT; TRANSACTIONS UNDER ORIGINAL AGREEMENT. By
executing and delivering this amended and restated Agreement and Plan of
Merger, the parties reaffirm and ratify all of the ancillary agreements to
the Original Agreement, including without limitation the Option Agreement
and the Employment Amendments, and agree that such ancillary agreements
remain in full force and effect. Notwithstanding their execution and
delivery of this amended and restated Agreement and Plan of Merger, the
parties agree that if any of the conditions to their obligations under this
Plan of Merger (as set forth in Articles VI and VII, respectively) are
incapable of fulfillment (and are not waived in writing by a duly
authorized officer of Old Kent or Pinnacle, as the case may be) prior to or
at the Closing but would be capable of fulfillment under the terms of the
Original Agreement prior to or at the closing contemplated therein, then
this Plan of Merger, as of April 20, 1999, shall be null and void and the
Original Agreement, as executed as of March 18, 1999, shall be reinstated
according to its original terms and shall govern the transactions
contemplated by this Plan of Merger.
9.18 OLD KENT'S ASSURANCES REGARDING MERGERSUB. In consideration of
Pinnacle's execution and delivery of this Plan of Merger, Old Kent
absolutely, unconditionally and irrevocably guarantees prompt payment when
due of any and all amounts due from MergerSub to Pinnacle hereunder and
prompt performance of all of MergerSub's other obligations hereunder;
subject, however, to all of MergerSub's rights and defenses under this Plan
of Merger. Old Kent, as sole shareholder of MergerSub, agrees that it
shall vote all of the outstanding capital stock of MergerSub in favor of
approval of this Plan of Merger and the Merger.
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In Witness Whereof, the undersigned parties have duly executed
and acknowledged this Plan of Merger as of the date first written above.
Old Kent Financial Corporation
By /s/Mark F. Furlong
Mark F. Furlong,
Executive Vice President
OKFC Merger Corporation
By /s/Mark F. Furlong
Mark F. Furlong, President
Pinnacle Banc Group, Inc.
By /s/John J. Gleason, Jr.
John J. Gleason, Jr., Vice Chairman
and Chief Executive Officer
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EXHIBIT B
To the Agreement and Plan of Merger between
Pinnacle Banc Group, Inc. and Old Kent Financial Corporation
Index Companies
AmSouth Bancorporation $ 49.0625
Associated Banc-Corp 32.8750
BB&T (formerly Southern Nat'l Corp) 40.1250
Pacific Century Financial 21.9375
Colonial BancGroup, Inc. 12.1250
Comerica Incorporated 67.9375
Commerce Bancshares, Inc. 40.6250
Compass Bancshares, Inc. 38.2500
First American Corporation 44.3750
First Citizens BancShares Inc. 76.9375
First Security Corporation 18.3750
First Tennessee National Corp. 40.7500
First Virginia Banks, Inc. 49.9375
Hibernia Corporation 14.9375
Huntington Bancshares Inc. 32.9375
Marshall & Ilsley Corporation 58.5000
Mercantile Bankshares Corporation 38.8750
North Fork Bancorporation, Inc. 23.2500
Northern Trust Corporation 93.0000
Synovus Financial Corp. 22.9375
SouthTrust Corporation 40.0625
Summit Bancorp 39.8125
TCF Financial Corporation 26.8125
Unionbankcal Corp 33.9375
Union Planters Corporation 45.9375
Zions Bancorporation 68.1250
AVERAGE 41.2476
Old Kent Financial Corporation 45.0000
<PAGE>
A P P E N D I X B
STOCK OPTION AGREEMENT
This Stock Option Agreement (the "AGREEMENT") is made as of March
18, 1999, by and between Old Kent Financial Corporation, a Michigan
corporation ("GRANTEE"), and Pinnacle Banc Group, Inc., an Illinois
corporation ("ISSUER").
As a condition to, and contemporaneous with, the execution of
this Agreement, the parties are entering into an Agreement and Plan of
Merger dated March 18, 1999 (the "PLAN OF MERGER"). In consideration
therefor, and as an inducement to Grantee to pursue the transactions
contemplated by the Plan of Merger, Issuer has agreed to grant Grantee the
Option (as defined below). The board of directors of Issuer has approved
the grant of the Option and the Plan of Merger. Capitalized terms used but
not defined in this Agreement shall have the meanings given to those terms
in the Plan of Merger.
In consideration of the foregoing, and the mutual covenants and
agreements set forth in this Agreement and in the Plan of Merger, the
parties agree:
1. GRANT OF OPTION.
(a) Issuer hereby grants to Grantee an unconditional,
irrevocable option (the "OPTION") to purchase, subject to the terms of this
Agreement, up to 1,479,128 fully paid and nonassessable shares of Issuer
Common Stock, par value $3.12 ("COMMON STOCK"), at a price per share equal
to $27.1875; PROVIDED that in the event Issuer issues or agrees to issue
any shares of Common Stock at a price per share less than $27.1875 (as
adjusted pursuant to Section 5(b)) (other than as permitted under the Plan
of Merger), such price shall be equal to such lesser price (as adjusted, if
applicable, the "OPTION PRICE"); FURTHER PROVIDED, that in no event shall
the number of shares for which this Option is exercisable, together with
the number of shares owned by Grantee other than shares held by Grantee in
a fiduciary capacity for a customer as to which it has no beneficial
interest ("FIDUCIARY SHARES"), exceed 19.99% of the Issuer's issued and
outstanding shares of Common Stock.
(b) The number of shares of Common Stock subject to the Option
shall be increased or decreased, as appropriate, in the event that any
additional shares of Common Stock are issued or otherwise become
outstanding (other than pursuant to this Agreement or pursuant to an event
described in Section 5(a) of this Agreement) or existing shares are
redeemed, retired or otherwise become no longer outstanding after the date
of this Agreement so that, after any such issuance, redemption or
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retirement, together with the number of shares previously issued pursuant
to this Agreement or otherwise owned by Grantee other than Fiduciary
Shares, the number of shares of Common Stock subject to the Option equals
19.99% of the number of shares of Common Stock then issued and outstanding
without giving effect to any shares subject or issued pursuant to the
Option. Nothing contained in this Section 1(b) or elsewhere in this
Agreement shall be considered to authorize Issuer to issue shares in breach
of any provision of the Plan of Merger.
2. EXERCISE OF OPTION.
(a) The holder or holders of the Option (the "HOLDER") may
exercise the Option, in whole or part, if and when at any time both an
Initial Triggering Event (as defined below) and a Subsequent Triggering
Event (as defined below) shall have occurred prior to the occurrence of an
Exercise Termination Event (as defined below), PROVIDED that the Holder
shall have sent notice of such exercise (as required by Section 2(f))
within six months following such Subsequent Triggering Event (or such later
date as provided in Section 10).
(b) Each of the following shall be an "EXERCISE TERMINATION
EVENT": (i) consummation of the Merger at the Effective Time of the Merger;
(ii) termination of the Plan of Merger in accordance with the provisions
thereof if such termination occurs before the occurrence of an Initial
Triggering Event; and (iii) the passage of 18 months (or such longer period
as provided in Section 10) after termination of the Plan of Merger if such
termination follows the occurrence of an Initial Triggering Event.
Notwithstanding anything to the contrary in this Agreement: (i) the Option
may not be exercised at any time when Grantee shall be in material breach
of any of its covenants or agreements contained in the Plan of Merger such
that Issuer shall be entitled to terminate the Plan of Merger as a result
of such material breach; and (ii) this Agreement shall automatically
terminate upon the proper termination of the Plan of Merger (x) by Issuer
as a result of the material breach by Grantee of its covenants or
agreements contained in the Plan of Merger, or (y) by Issuer or Grantee if
the approval by any federal or state governmental authority or regulatory
or administrative agency or commission (each a "GOVERNMENTAL ENTITY")
necessary to consummate the Merger and the other transactions contemplated
by the Plan of Merger shall have been denied by final nonappealable action
of such agency or authority.
(c) The term "INITIAL TRIGGERING EVENT" shall mean any of the
following events or transactions occurring on or after the date of this
Agreement:
(i) Issuer or any of its subsidiaries (an "ISSUER
SUBSIDIARY"), without having received Grantee's prior written consent,
shall have entered into an agreement to engage in an Acquisition
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Transaction (as defined below) with any person (for purposes of this
Agreement, the term "person" has the meaning given that term in
Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934,
as amended (the "EXCHANGE ACT"), and the rules and regulations
thereunder) other than Grantee or any of its subsidiaries (a "GRANTEE
SUBSIDIARY");
(ii) the board of directors of Issuer shall have recommended
that the shareholders of Issuer approve or accept any Acquisition
Transaction other than the Merger;
(iii) any person other than Grantee or any Grantee
Subsidiary shall have acquired beneficial ownership or the right to
acquire beneficial ownership of 10% or more of the outstanding shares
of Common Stock (for purposes of this Agreement, the term "beneficial
ownership" has the meaning given that term in Section 13(d) of the
Exchange Act and the rules and regulations thereunder);
(iv) the shareholders of Issuer shall have voted and failed
to approve the Plan of Merger and the Merger at a meeting that was
held for that purpose or any adjournment or postponement thereof, or
such meeting shall not have been held in violation of the Plan of
Merger or shall have been canceled prior to termination of the Plan of
Merger if, prior to such meeting (or if such meeting shall not have
been held or shall have been canceled, prior to such termination), it
shall have been publicly announced or the shareholders of Issuer shall
have been advised that any person (other than Grantee or any Grantee
Subsidiary) shall have made, or shall have an intention to make, a
proposal to engage in an Acquisition Transaction;
(v) the board of directors of Issuer shall not have
recommended, or shall have withdrawn or modified (or publicly
announced its intention to withdraw or modify) in any manner adverse
in any respect to Grantee, its recommendation that the shareholders of
Issuer approve the transactions contemplated by the Plan of Merger at
any meeting that was held for that purpose, in anticipation of
engaging in an Acquisition Transaction (other than with Grantee or any
Grantee Subsidiary) or following a proposal to Issuer to engage in an
Acquisition Transaction, or Issuer or any Issuer Subsidiary shall have
authorized, recommended or proposed (or publicly announced or advised
its shareholders of its intention to authorize, recommend or propose)
an agreement to engage in an Acquisition Transaction with any person
other than Grantee or any Grantee Subsidiary;
(vi) any person other than Grantee or any Grantee Subsidiary
shall have filed with the Securities and Exchange Commission ("SEC") a
registration statement or tender offer materials with respect to a
potential exchange or tender offer that would constitute an
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Acquisition Transaction (or filed a preliminary proxy statement with
the SEC with respect to a potential vote by its shareholders to
approve the issuance of shares to be offered in such an exchange or
tender offer);
(vii) Issuer shall have willfully breached any covenant
or obligation contained in the Plan of Merger in anticipation of
engaging in an Acquisition Transaction (other than with Grantee or any
Grantee Subsidiary), and following such breach Grantee would be
entitled to terminate the Plan of Merger (whether immediately or after
the giving of notice or passage of time, or both);
(xiii) any person other than Grantee or any Grantee
Subsidiary shall have filed an application or notice with the
applicable Governmental Entity under the Bank Holding Company Act of
1956, the Federal Deposit Insurance Act, the Illinois Bank Holding
Company Act of 1957 or the Illinois Banking Act, which application or
notice has been accepted for processing, for approval to engage in an
Acquisition Transaction; or
(xiv) a Fiduciary Event shall have occurred under the
Plan of Merger.
For purposes of this Agreement, "ACQUISITION TRANSACTION" means: (a) a
merger or consolidation, or any similar transaction, involving Issuer or
any Issuer Subsidiary (other than mergers, consolidations or similar
transactions (i) involving solely Issuer and/or one or more wholly-owned
(except for directors' qualifying shares) Issuer Subsidiary, PROVIDED, any
such transaction is not entered into in violation of the terms of the Plan
of Merger or (ii) in which the shareholders of Issuer immediately prior to
the completion of such transaction own at least 50% of the Common Stock of
Issuer (or the resulting or surviving entity in such transaction)
immediately after completion of such transaction, PROVIDED, any such
transaction is not entered into in violation of the terms of the Plan of
Merger); (b) a purchase, lease or other acquisition of all or a substantial
part of the assets or deposits of Issuer or Issuer Subsidiary; (c) a
purchase or other acquisition (including by way of merger, consolidation,
share exchange or otherwise) of securities representing 10% or more of the
voting power of Issuer or any Issuer Subsidiary; or (d) any substantially
similar transaction. For purposes of this Agreement, "subsidiary" has the
meaning given that term in Rule 12b-2 under the Exchange Act. In this
Agreement, the phrase "in anticipation of engaging in an Acquisition
Transaction" shall include, without limitation, any action taken by
Issuer's officers or board of directors after any written or oral,
authorized or unauthorized, proposal or expression of interest has been
communicated to any member of Issuer's management or board of directors
concerning an Acquisition Transaction that in any way would involve Issuer
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and such proposal or expression of interest has not been withdrawn at the
time of the action.
(d) The term "SUBSEQUENT TRIGGERING EVENT" shall mean either of
the following events or transactions occurring after the date of this
Agreement:
(i) the acquisition by any person (other than Grantee or
any Grantee Subsidiary) of beneficial ownership of 25% or more of the
then outstanding Common Stock; or
(ii) occurrence of the Initial Triggering Event described in
clause (i) of Section 2(c), except that the percentage referred to for
purposes of defining "Acquisition Transaction" in clause (c) of that
definition shall be 25%.
(e) Issuer shall notify Grantee promptly in writing of the
occurrence of any Initial Triggering Event or Subsequent Triggering Event
(collectively, "TRIGGERING EVENTS"), it being understood that the giving of
such notice by Issuer shall not be a condition to the right of Holder to
exercise the Option.
(f) If Holder is entitled and wishes to exercise the Option (or
any portion thereof), it shall send to Issuer a written notice (the date of
such notice is referred to as the "NOTICE DATE") specifying: (i) the total
number of shares it will purchase pursuant to such exercise; and (ii) a
place and date not earlier than three business days nor later than 60
business days from the Notice Date for the closing of such purchase (the
"CLOSING DATE"); PROVIDED, that if prior notification to or approval of any
Governmental Entity is required in connection with such purchase, Holder
shall promptly file the required notice or application for approval, shall
notify Issuer of such filing, and shall expeditiously process the same and
the period of time that otherwise would run pursuant to this sentence shall
run instead from the date on which any required notification periods have
expired or been terminated or such approvals have been obtained and any
requisite waiting period or periods shall have passed. Any exercise of the
Option shall be considered to occur on the Notice Date relating thereto.
(g) At the closing referred to in Section 2(f), Holder shall (i)
pay to Issuer the aggregate purchase price for the shares of Common Stock
purchased pursuant to the exercise of the Option in immediately available
funds by wire transfer to a bank account designated by Issuer and (ii)
present and surrender this Agreement to Issuer at its principal executive
offices; PROVIDED, that failure or refusal of Issuer to designate such a
bank account or accept surrender of this Agreement shall not preclude
Holder from exercising the Option.
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(h) At the closing, simultaneously with the delivery of
immediately available funds as provided in Section 2(g), Issuer shall
deliver to Holder a certificate or certificates representing the number of
shares of Common Stock purchased by Holder and, if the Option should be
exercised in part only, a new Option evidencing the rights of Holder to
purchase the balance of the shares subject to this Option.
(i) Certificates for Common Stock delivered at a closing under
this Agreement may be endorsed with a restrictive legend that shall read
substantially as follows:
"The transfer of the shares represented by this certificate is
subject to certain provisions of an agreement, dated as of March
18, 1999, between the registered holder hereof and Issuer and to
resale restrictions arising under the Securities Act of 1933, as
amended. A copy of such agreement is on file at the principal
office of Issuer and will be provided to the holder hereof
without charge upon receipt by Issuer of a written request
therefor."
It is understood and agreed that: (i) the reference to the resale
restrictions of the Securities Act of 1933, as amended (the "SECURITIES
ACT"), in the above legend shall be removed by delivery of substitute
certificate(s) without such reference if Holder shall have delivered to
Issuer a copy of a letter from the staff of the SEC, or an opinion of
counsel, in form and substance reasonably satisfactory to Issuer, to the
effect that such legend is not required for purposes of the Securities Act;
(ii) the reference to the provisions of this Agreement in the above legend
shall be removed by delivery of substitute certificate(s) without such
reference if the shares have been sold or transferred in compliance with
the provisions of this Agreement and under circumstances that do not
require the retention of such reference in the opinion of counsel to
Holder; and (iii) the legend shall be removed in its entirety if the
conditions in the preceding clauses (i) and (ii) are both satisfied. In
addition, such certificates shall bear any other legend as may be required
by law.
(j) Upon the giving by Holder to Issuer of the written notice of
exercise of the Option provided for under Section 2(f) and the tender of
the applicable purchase price in immediately available funds, Holder shall
be considered, subject to the receipt of any necessary regulatory
approvals, to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that the stock transfer books
of Issuer shall then be closed or that certificates representing such
shares of Common Stock shall not then be actually delivered to Holder.
Issuer shall pay all expenses, and any and all federal, state and local
taxes and other charges that may be payable in connection with the
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preparation, issuance and delivery of stock certificates under this Section
2 in the name of Holder or its assignee, transferee or designee.
3. COVENANTS OF ISSUER. Issuer agrees: (i) that it shall at all
times maintain, free from preemptive rights, sufficient authorized but
unissued or treasury shares of Common Stock so that the Option may be
exercised without additional authorization of Common Stock after giving
effect to all other options, warrants, convertible securities and other
rights to purchase Common Stock; (ii) that it will not, by charter
amendment or through reorganization, consolidation, merger, dissolution or
sale of assets, or by any other voluntary act, avoid or seek to avoid the
observance or performance of any of the covenants, stipulations or
conditions to be observed or performed under this Agreement by Issuer;
(iii) promptly to take all action as may from time to time be required
(including (x) complying with all applicable premerger notification,
reporting and waiting period requirements and (y) if, under the applicable
federal or state regulatory requirements or any state or federal banking
law, prior approval of or notice to any Governmental Entity is necessary
before the Option may be exercised, cooperating fully with Holder in
preparing such applications or notices and providing such information to
each such Governmental Entity as they may require to permit Holder to
exercise the Option and Issuer duly and effectively to issue shares of
Common Stock pursuant to this Agreement; and (iv) promptly to take all
action provided in this Agreement to protect the rights of Holder against
dilution.
4. EXCHANGE OF OPTION. This Agreement (and the Option granted by
this Agreement) are exchangeable, without expense, at the option of Holder,
upon presentation and surrender of this Agreement at the principal office
of Issuer, for other Agreements providing for Options of different
denominations entitling Holder to purchase, on the same terms and subject
to the same conditions as are set forth in this Agreement, in the aggregate
the same number of shares of Common Stock subject to this Option. The terms
"Agreement" and "Option" as used in this Agreement include any stock option
agreements and related options for which this Agreement (and the Option
granted by this Agreement) may be exchanged. Upon receipt by Issuer of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Agreement, and (in the case of loss, theft or
destruction) of reasonably satisfactory indemnification, and upon surrender
and cancellation of this Agreement, if mutilated, Issuer will execute and
deliver a new Agreement of like tenor and date. Any such new Agreement
executed and delivered shall constitute an additional contractual
obligation on the part of Issuer, whether or not the Agreement so lost,
stolen, destroyed or mutilated shall at any time be enforceable by anyone.
5. ADJUSTMENTS. In addition to the adjustment in the number of
shares of Common Stock that are subject to the Option pursuant to Section 1
of this Agreement, the number of shares of Common Stock subject to the
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Option and the Option Price shall be subject to adjustment from time to
time as provided in this Section 5.
(a) In the event of any change in, or distributions in respect
of, Common Stock by reason of stock dividends, stock splits, mergers,
recapitalizations, combinations, subdivisions, conversions, exchanges of
shares or the like, the type and number of shares of Common Stock subject
to the Option shall be appropriately adjusted and proper provision shall be
made so that, if any additional shares of Common Stock are to be issued or
otherwise become outstanding as a result of any such change (other than
pursuant to an exercise of the Option), the number of shares of Common
Stock that remain subject to the Option shall be increased so that, after
such issuance and together with shares of Common Stock previously issued
pursuant to the exercise of the Option (as adjusted on account of any of
the foregoing changes in the Common Stock), such number equals 19.99% of
the number of shares of Common Stock then issued and outstanding.
(b) Whenever the number of shares of Common Stock subject to the
Option is adjusted as provided in this Section 5, the Option Price shall be
adjusted by multiplying the Option Price by a fraction, the numerator of
which shall be equal to the number of shares of Common Stock subject to the
Option prior to the adjustment and the denominator of which shall be equal
to the number of shares of Common Stock subject to the Option after the
adjustment.
6. REGISTRATION RIGHTS. Upon the occurrence of a Subsequent
Triggering Event that occurs prior to an Exercise Termination Event, Issuer
shall, at the request of Grantee delivered within 12 months (or such later
period as provided in Section 10) of such Subsequent Triggering Event
(whether on its own behalf or on behalf of any subsequent holder of this
Option (or part thereof) or owner of any of the shares of Common Stock
issued pursuant hereto), promptly prepare, file and keep current a shelf
registration statement under the Securities Act covering any shares issued
and/or issuable pursuant to this Option and shall use its best efforts to
cause such registration statement to become effective and remain current to
permit the sale or other disposition of any shares of Common Stock issued
upon total or partial exercise of this Option ("OPTION SHARES") in
accordance with any plan of disposition requested by Grantee. Issuer will
use its best efforts to cause such registration statement promptly to
become effective and then to remain effective for such period not in excess
of 180 days from the day such registration statement first becomes
effective or such shorter time as may be reasonably necessary to effect
such sales or other dispositions. Grantee shall have the right to demand
two such registrations. Issuer shall bear the costs of both of such
registrations (including, without limitation, Issuer's attorneys' fees,
printing costs and filing fees, except for underwriting discounts or
commissions, brokers' fees and the fees and disbursements of Grantee's
counsel related thereto). Notwithstanding the above, if, at the time of
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any request by Grantee for registration of Option Shares as provided above,
Issuer is in the process of registration with respect to an underwritten
public offering by Issuer of shares of Common Stock, and if in the good
faith judgment of the managing underwriter or managing underwriters (or, if
none, the sole underwriter or underwriters) of such offering the offer and
sale of the Option Shares would interfere with the successful marketing of
the shares of Common Stock offered by Issuer, the number of Option Shares
otherwise to be covered in the registration statement contemplated by this
Section 6 may be reduced; PROVIDED, that, after any such required
reduction, the number of Option Shares included in such offering for the
account of Holder shall constitute at least 25% of the total number of
shares to be sold by Holder and Issuer in the aggregate; PROVIDED FURTHER,
that if such reduction occurs, then Issuer shall file a registration
statement for the balance of the Option Shares subject to the registration
demand as promptly as practical as to which no reduction pursuant to this
Section 6 shall be permitted or occur and the Holder shall thereafter be
entitled to one additional registration and the 12 month period referred to
in the first sentence of this Section shall be increased to 24 months.
Each such Holder shall provide all information reasonably requested by
Issuer for inclusion in any registration statement to be filed to register
Option Shares. If requested by any such Holder in connection with such
registration, Issuer shall become a party to any underwriting agreement
relating to the sale of such shares, but only to the extent of obligating
itself in respect of representations, warranties, indemnities and other
agreements customarily included in such underwriting agreements for Issuer.
Upon receiving any request under this Section 6 from any Holder, Issuer
agrees to send a copy thereof to any other person known to Issuer to be
entitled to registration rights under this Section 6, in each case by
promptly mailing the same, postage prepaid, to the address of record of the
persons entitled to receive such copies. Notwithstanding anything to the
contrary in this Agreement, in no event shall the number of registrations
that Issuer is obligated to effect be increased by reason of the fact that
there shall be more than one Holder as a result of any assignment or
division of this Agreement.
7. REPURCHASE OF OPTION.
(a) At any time after the occurrence of a Repurchase Event
(defined below): (i) at the request of Holder, delivered prior to an
Exercise Termination Event (or such later period as provided in Section
10), Issuer (or any successor to Issuer) shall repurchase the Option from
Holder at a price (the "OPTION REPURCHASE PRICE") equal to the amount by
which (x) the market/offer price (as defined below) exceeds (y) the Option
Price, multiplied by the number of shares for which this Option may then be
exercised; and (ii) at the request of the owner of Option Shares from time
to time (the "OWNER"), delivered prior to an Exercise Termination Event (or
such later period as provided in Section 10), Issuer (or any successor to
Issuer) shall repurchase such number of the Option Shares from Owner as
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Owner shall designate at a price (the "OPTION SHARE REPURCHASE PRICE")
equal to the market/offer price multiplied by the number of Option Shares
so designated. The term "MARKET/OFFER PRICE" shall mean the highest of:
(i) the price per share of Common Stock at which a tender or exchange offer
therefor has been made; (ii) the price per share of Common Stock to be paid
by any third party pursuant to an agreement with Issuer; (iii) the highest
sale price for shares of Common Stock within the six-month period
immediately preceding the date Holder gives notice of the required
repurchase of this Option or Owner gives notice of the required repurchase
of Option Shares, as the case may be; or (iv) in the event of a sale of all
or any substantial part of Issuer's assets or deposits, the sum of the net
price paid in such sale for such assets or deposits and the current market
value of the remaining assets of Issuer as determined by a nationally
recognized investment banking firm selected by Holder or Owner, as the case
may be, and reasonably acceptable to Issuer, divided by the number of
shares of Common Stock of Issuer outstanding at the time of such sale. In
determining the market/offer price, the value of consideration other than
cash shall be determined by a nationally recognized investment banking firm
selected by Holder or Owner, as the case may be, and reasonably acceptable
to Issuer.
(b) Holder or Owner, as the case may be, may exercise its right
to require Issuer to repurchase the Option and any Option Shares pursuant
to this Section 7 by surrendering for such purpose to Issuer, at its
principal office, a copy of this Agreement or certificates for Option
Shares, as applicable, accompanied by a written notice or notices stating
that Holder or Owner, as the case may be, elects to require Issuer to
repurchase this Option and/or the Option Shares in accordance with the
provisions of this Section 7. As promptly as practicable, and in any event
within five business days after the surrender of the Option and/or
certificates representing Option Shares and the receipt of such notice or
notices relating thereto, Issuer shall deliver or cause to be delivered to
Holder the Option Repurchase Price and/or to Owner the Option Share
Repurchase Price therefor or the portion thereof that Issuer is not then
prohibited under applicable law and regulation from so delivering.
(c) To the extent that Issuer is prohibited under applicable law
or regulation, or as a consequence of administrative policy, from
repurchasing the Option and/or the Option Shares in full, Issuer shall
immediately so notify Holder and/or Owner and thereafter deliver or cause
to be delivered, from time to time, to Holder and/or Owner, as appropriate,
the portion of the Option Repurchase Price and the Option Share Repurchase
Price, respectively, that it is no longer prohibited from delivering,
within five business days after the date on which Issuer is no longer so
prohibited; PROVIDED, that if Issuer at any time after delivery of a notice
of repurchase pursuant to Section 7(b) is prohibited under applicable law
or regulation, or as a consequence of administrative policy, from
delivering to Holder and/or Owner, as appropriate, the Option Repurchase
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Price and the Option Share Repurchase Price, respectively, in full (and
Issuer hereby undertakes to use its best efforts to obtain all required
regulatory and legal approvals and to file any required notices as promptly
as practicable in order to accomplish such repurchase), Holder or Owner may
revoke its notice of repurchase of the Option or the Option Shares either
in whole or to the extent of the prohibition, whereupon, in the latter
case, Issuer shall promptly: (i) deliver to Holder and/or Owner, as
appropriate, that portion of the Option Repurchase Price or the Option
Share Repurchase Price that Issuer is not prohibited from delivering; and
(ii) deliver, as appropriate, either (A) to Holder, a new Agreement
evidencing the right of Holder to purchase that number of shares of Common
Stock obtained by multiplying the number of shares of Common Stock for
which the surrendered Agreement was exercisable at the time of delivery of
the notice of repurchase by a fraction, the numerator of which is the
Option Repurchase Price less the portion of the Option Repurchase Price
previously delivered to Holder and the denominator of which is the Option
Repurchase Price, and/or (B) to Owner, a certificate for the Option Shares
it is then so prohibited from repurchasing. If an Exercise Termination
Event shall have occurred prior to the date of the notice by Issuer
described in the first sentence of this Section 7(c), or shall be scheduled
to occur at any time before the expiration of a period ending on the
thirtieth day after such date, Holder shall nonetheless have the right to
exercise the Option until the expiration of such 30-day period.
(d) For purposes of this Section 7, a "REPURCHASE EVENT" shall
be considered to have occurred upon the occurrence of any of the following
events or transactions after the date of this Agreement:
(i) the acquisition by any person (other than Grantee or
any Grantee Subsidiary) of beneficial ownership of 50% or more of the
then outstanding Common Stock; or
(ii) the consummation of any Acquisition Transaction
described in Section 2(c)(i), except that the percentage referred to
for purposes of defining "Acquisition Transaction" in clause (c) shall
be 50%.
8. SUBSTITUTE OPTION.
(a) In the event that prior to an Exercise Termination Event,
Issuer shall enter into an agreement to (i) consolidate with or merge into
any person, other than Grantee or any Grantee Subsidiary, or engage in a
plan of exchange with any person, other than Grantee or any Grantee
Subsidiary and Issuer shall not be the continuing or surviving corporation
of such consolidation or merger or the acquiror in such plan of exchange,
(ii) permit any person, other than Grantee or any Grantee Subsidiary, to
merge into Issuer or be acquired by Issuer in a plan of exchange and Issuer
shall be the continuing or surviving corporation, but, in connection with
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such merger or plan of exchange, the then outstanding shares of Common
Stock shall be changed into or exchanged for stock or other securities of
any other person or cash or any other property or the then outstanding
shares of Common Stock shall after such merger or plan of exchange
represent less than 50% of the outstanding shares and share equivalents of
the merged or acquiring company, or (iii) sell or otherwise transfer all or
a substantial part of its or any Issuer Subsidiary's assets or deposits to
any person, other than Grantee or any Grantee Subsidiary, then, and in each
such case, the agreement governing such transaction shall make proper
provision so that the Option shall, upon the consummation of any such
transaction and upon the terms and conditions set forth in this Agreement,
be converted into, or exchanged for, an option (the "SUBSTITUTE OPTION"),
at the election of Holder, to acquire capital stock of either (x) the
Acquiring Corporation (as defined below) or (y) any person that controls
the Acquiring Corporation.
(b) The following terms have the following meanings:
(i) "ACQUIRING CORPORATION" means: (i) the continuing
or surviving person of a consolidation or merger with Issuer
(if other than Issuer); (ii) the acquiring person in a plan
of exchange in which Issuer is acquired; (iii) Issuer in a
merger or plan of exchange in which Issuer is the continuing
or surviving or acquiring person; and (iv) the transferee of
all or a substantial part of Issuer's assets or deposits (or
the assets or deposits of any Issuer Subsidiary).
(ii) "SUBSTITUTE COMMON STOCK" means the voting common
stock to be issued by the issuer of the Substitute Option
upon exercise of the Substitute Option.
(iii) "ASSIGNED VALUE" means the market/offer
price, as defined in Section 7.
(iv) "AVERAGE PRICE" means the average closing price of
a share of the Substitute Common Stock for the one year
immediately preceding the consolidation, merger or sale in
question, but in no event higher than the closing price of
the shares of Substitute Common Stock on the day preceding
such consolidation, merger or sale; PROVIDED, that if Issuer
is the issuer of the Substitute Option, the Average Price
shall be computed with respect to a share of common stock
issued by the person merging into Issuer or by any company
which controls or is controlled by such person, as Holder
may elect.
(c) The Substitute Option shall have the same terms as the
Option; PROVIDED, that if the terms of the Substitute Option cannot, for
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legal reasons, be the same as the Option, such terms shall be as similar as
possible and in no event less advantageous to Holder. The issuer of the
Substitute Option shall also enter into an agreement with the then Holder
or Holders of the Substitute Option in substantially the same form as this
Agreement (after giving effect for such purpose to the provisions of
Section 9), which agreement shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number
of shares of Substitute Common Stock as is equal to the Assigned Value
multiplied by the number of shares of Common Stock for which the Option was
exercisable immediately prior to the event described in the first sentence
of Section 8(a), divided by the Average Price. The exercise price of the
Substitute Option per share of Substitute Common Stock shall then be equal
to the Option Price multiplied by a fraction, the numerator of which shall
be the number of shares of Common Stock for which the Option was
exercisable immediately prior to the event described in the first sentence
of Section 8(a) and the denominator of which shall be the number of shares
of Substitute Common Stock for which the Substitute Option is exercisable.
(e) In no event, pursuant to any of the subsections above, shall
the Substitute Option be exercisable for a number of shares that, together
with the number of shares owned by Grantee other than Fiduciary Shares, is
more than 19.99% of the shares of Substitute Common Stock outstanding prior
to exercise of the Substitute Option. In the event that the Substitute
Option would be exercisable for more than 19.99% of the shares of
Substitute Common Stock outstanding prior to exercise but for this Section
8(e), the issuer of the Substitute Option (the "SUBSTITUTE OPTION ISSUER")
shall make a cash payment to Holder equal to the excess of (i) the value of
the Substitute Option without giving effect to the limitation in this
Section 8(e) over (ii) the value of the Substitute Option after giving
effect to the limitation in this Section 8(e). This difference in value
shall be determined by a nationally recognized investment banking firm
selected by Holder and reasonably acceptable to Substitute Option Issuer.
(f) Issuer shall not enter into any transaction described in
Section 8(a) unless the Acquiring Corporation and any person that controls
the Acquiring Corporation assume in writing all the obligations of Issuer
under this Agreement.
9. REPURCHASE OF SUBSTITUTE OPTION.
(a) At the request of a holder of the Substitute Option (a
"SUBSTITUTE OPTION HOLDER"), the Substitute Option Issuer shall repurchase
the Substitute Option from the Substitute Option Holder at a price (the
"SUBSTITUTE OPTION REPURCHASE PRICE") equal to the amount by which (i) the
Highest Closing Price (as defined below) exceeds (ii) the exercise price of
the Substitute Option, multiplied by the number of shares of Substitute
Common Stock for which the Substitute Option may then be exercised. In
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addition, at the request of the owner (the "SUBSTITUTE SHARE OWNER") of
shares of Substitute Common Stock, the Substitute Option Issuer shall
repurchase the Substitute Common Stock at a price (the "SUBSTITUTE SHARE
REPURCHASE PRICE") equal to the Highest Closing Price multiplied by the
number of Substitute Shares so designated. The term "HIGHEST CLOSING PRICE"
shall mean the highest closing price for shares of Substitute Common Stock
within the six-month period immediately preceding the date the Substitute
Option Holder gives notice of the required repurchase of the Substitute
Option or the Substitute Share Owner gives notice of the required
repurchase of the Substitute Common Stock, as applicable.
(b) The Substitute Option Holder and the Substitute Share Owner,
as the case may be, may exercise their respective rights to require the
Substitute Option Issuer to repurchase the Substitute Option and the
Substitute Common Stock pursuant to this Section 9 by surrendering for such
purpose to the Substitute Option Issuer, at its principal office, the
agreement for such Substitute Option (or, in the absence of such an
agreement, a copy of this Agreement) and certificates for Substitute Common
Stock accompanied by a written notice or notices stating that the
Substitute Option Holder or the Substitute Share Owner, as the case may be,
elects to require the Substitute Option Issuer to repurchase the Substitute
Option and/or the Substitute Common Stock in accordance with the provisions
of this Section 9. As promptly as practicable, and in any event within five
business days after the surrender of the Substitute Option and/or
certificates representing Substitute Common Stock and the receipt of such
notice or notices relating thereto, the Substitute Option Issuer shall
deliver or cause to be delivered to the Substitute Option Holder the
Substitute Option Repurchase Price and/or to the Substitute Share Owner the
Substitute Share Repurchase Price therefor or the portion thereof that the
Substitute Option Issuer is not then prohibited under applicable law and
regulation from so delivering.
(c) To the extent that the Substitute Option Issuer is
prohibited under applicable law or regulation, or as a consequence of
administrative policy, from repurchasing the Substitute Option and/or the
Substitute Common Stock in part or in full, the Substitute Option Issuer
shall immediately so notify the Substitute Option Holder and/or the
Substitute Share Owner and thereafter deliver or cause to be delivered,
from time to time, to the Substitute Option Holder and/or the Substitute
Share Owner, as appropriate, the portion of the Substitute Option
Repurchase Price and the Substitute Share Repurchase Price, respectively,
which it is no longer prohibited from delivering, within five business days
after the date on which the Substitute Option Issuer is no longer so
prohibited; PROVIDED, that if the Substitute Option Issuer is at any time
after delivery of a notice of repurchase pursuant to Section 9(b)
prohibited under applicable law or regulation, or as a consequence of
administrative policy, from delivering to the Substitute Option Holder
and/or the Substitute Share Owner, as appropriate, the Substitute Option
B-14
<PAGE>
Repurchase Price and the Substitute Share Repurchase Price, respectively,
in full (and the Substitute Option Issuer shall use its best efforts to
obtain all required regulatory and legal approvals as promptly as
practicable to accomplish such repurchase), the Substitute Option Holder or
Substitute Share Owner may revoke its notice of repurchase of the
Substitute Option or the Substitute Common Stock either in whole or to the
extent of the prohibition, whereupon, in the latter case, the Substitute
Option Issuer shall promptly: (i) deliver to the Substitute Option Holder
or Substitute Share Owner, as appropriate, that portion of the Substitute
Option Repurchase Price or the Substitute Share Repurchase Price that the
Substitute Option Issuer is not prohibited from delivering; and (ii)
deliver, as appropriate, either (x) to the Substitute Option Holder, a new
Substitute Option evidencing the right of the Substitute Option Holder to
purchase that number of shares of Substitute Common Stock obtained by
multiplying the number of shares of Substitute Common Stock for which the
surrendered Substitute Option was exercisable at the time of delivery of
the notice of repurchase by a fraction, the numerator of which is the
Substitute Option Repurchase Price less the portion of the Substitute
Option Repurchase Price previously delivered to the Substitute Option
Holder and the denominator of which is the Substitute Option Repurchase
Price, and/or (y) to the Substitute Share Owner, a certificate for the
Substitute Common Stock it is then so prohibited from repurchasing. If an
Exercise Termination Event shall have occurred prior to the date of the
notice by the Substitute Option Issuer described in the first sentence of
Section 9(c), or shall be scheduled to occur at any time before the
expiration of a period ending on the thirtieth day after such date, the
Substitute Option Holder shall nevertheless have the right to exercise the
Substitute Option until the expiration of such 30-day period
10. EXTENSION OF EXERCISE PROVISIONS. The 30-day, six-month, 12-
month, 18-month or 24-month time periods for the exercise of certain rights
under Sections 2, 6, 7, 9, 12 and 14 shall be extended: (i) to the extent
necessary to obtain all regulatory approvals for the exercise of such
rights (for so long as the Holder, Owner, Substitute Option Holder or
Substitute Common Stock Owner, as the case may be, is using commercially
reasonable efforts to obtain such regulatory approvals), and for the
expiration of all statutory waiting periods; and (ii) to the extent
necessary to avoid liability under Section 16(b) of the Exchange Act by
reason of such exercise.
11. REPRESENTATIONS AND WARRANTIES OF ISSUER. Issuer hereby
represents and warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated by
this Agreement. The execution and delivery of this Agreement and the
consummation of the transactions contemplated by this Agreement have been
duly and validly authorized by the board of directors of Issuer prior to
B-15
<PAGE>
the date of this Agreement and no other corporate proceedings on the part
of Issuer are necessary to authorize this Agreement or to consummate the
transactions so contemplated. This Agreement has been duly and validly
executed and delivered by Issuer. This Agreement is the valid and legally
binding obligation of Issuer.
(b) Issuer has taken all necessary corporate action to
authorize, reserve and permit it to issue, and at all times from the date
of this Agreement through the termination of this Agreement in accordance
with its terms will have reserved for issuance upon the exercise of the
Option, that number of shares of Common Stock equal to the maximum number
of shares of Common Stock at any time and from time to time issuable under
this Agreement, and all such shares, upon issuance pursuant to this
Agreement, will be duly authorized, validly issued, fully paid,
nonassessable and will be delivered free and clear of all claims, liens,
encumbrances and security interests and not subject to any preemptive
rights.
12. ASSIGNMENT. Neither party to this Agreement may assign any of
its rights or obligations under this Agreement or the Option created under
this Agreement to any other person without the express written consent of
the other party, except that if a Subsequent Triggering Event shall have
occurred prior to an Exercise Termination Event, Grantee, subject to the
express provisions of this Agreement, may assign in whole or in part its
rights and obligations under this Agreement; PROVIDED, that until the date
15 days following the date on which the last of all applicable Governmental
Entities has approved an application by Grantee to acquire the shares of
Common Stock subject to the Option, Grantee may not assign its rights under
the Option except in: (i) a widely dispersed public distribution; (ii) a
private placement in which no one party acquires the right to purchase in
excess of 2% of the voting shares of Issuer; (iii) an assignment to a
single party (such as a broker or investment banker) for the purpose of
conducting a widely dispersed public distribution on Grantee's behalf; or
(iv) any other manner approved by all applicable Governmental Entities.
13. COOPERATION. Grantee and Issuer each will use its best efforts
to make all filings with, and to obtain consents of, all third parties and
Governmental Entities necessary to the consummation of the transactions
contemplated by this Agreement, but Grantee shall not be obligated to apply
to state banking authorities for approval to acquire the shares of Common
Stock issuable under this Agreement until such time, if ever, as it
considers appropriate to do so.
14. MINIMUM REPURCHASE PROCEEDS.
(a) Grantee may, at any time following a Repurchase Event which
occurs prior to the occurrence of an Exercise Termination Event (or such
later period as provided in Section 10), relinquish the Option (together
B-16
<PAGE>
with any Option Shares issued to and then owned by Grantee) to Issuer in
exchange for a cash fee equal to the Surrender Price; PROVIDED, that
Grantee may not exercise its rights pursuant to this Section 14 if Issuer
has repurchased the Option (or any portion thereof) or any Option Shares
pursuant to Section 7. The "SURRENDER PRICE" shall be equal to $7,517,668
(i) plus, if applicable, Grantee's purchase price with respect to any
Option Shares and (ii) minus, if applicable, the excess of (A) the net cash
amounts, if any, received by Grantee pursuant to the arms' length sale of
Option Shares (or any other securities into which such Option Shares were
converted or exchanged) to any unaffiliated party, over (B) the Option
Price.
(b) Grantee may exercise its right to relinquish the Option and
any Option Shares pursuant to this Section 14 by surrendering to Issuer, at
its principal office, a copy of this Agreement together with certificates
for Option Shares, if any, accompanied by a written notice stating (i) that
Grantee elects to relinquish the Option and Option Shares, if any, in
accordance with the provisions of this Section 14 and (ii) the Surrender
Price. The Surrender Price shall be payable in immediately available
funds on or before the second business day following receipt of such notice
by Issuer.
(c) To the extent that Issuer is prohibited under applicable law
or regulation, or as a consequence of administrative policy, from paying
the Surrender Price to Grantee in full, Issuer shall immediately so notify
Grantee and thereafter deliver or cause to be delivered, from time to time,
to Grantee, the portion of the Surrender Price that it is no longer
prohibited from paying, within five business days after the date on which
Issuer is no longer so prohibited; PROVIDED, that if Issuer at any time
after delivery of a notice of surrender pursuant to Section 14(b) is
prohibited under applicable law or regulation, or as a consequence of
administrative policy, from paying to Grantee the Surrender Price in full:
(i) Issuer shall (A) use its best efforts to obtain all required regulatory
and legal approvals and to file any required notices as promptly as
practicable in order to make such payments, (B) within five days of the
submission or receipt of any documents relating to any such regulatory and
legal approvals, provide Grantee with copies of the same, and (c) keep
Grantee advised of both the status of any such request for regulatory and
legal approvals, as well as any discussions with any relevant regulatory or
other third party reasonably related to the same; and (ii) Grantee may
revoke such notice of surrender by delivery of a notice of revocation to
Issuer and, upon delivery of such notice of revocation, the date of the
Exercise Termination Event shall be extended to a date six months from the
date on which the Exercise Termination Event would have occurred if not for
the provisions of this Section 14(c) (during which period Grantee may
exercise any of its rights under this Agreement, including any and all
rights pursuant to this Section 14).
B-17
<PAGE>
15. REMEDIES. The parties acknowledge that damages would be an
inadequate remedy for a breach of this Agreement by either party and that
the obligations of the parties shall be enforceable by either party through
injunctive or other equitable relief. In connection therewith, the parties
waive the posting of any bond or similar requirement.
16. SEVERABILITY. If any term, provision, covenant or restriction
contained in this Agreement is held by a court or a federal or state
regulatory agency of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions contained in this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated. If for any
reason such court or regulatory agency determines that Holder is not
permitted to acquire, or Issuer is not permitted to repurchase pursuant to
Section 7, the full number of shares of Common Stock provided in Section
1(a) (as adjusted pursuant to Sections 1(b) or 5), it is the express
intention of Issuer to allow Holder to acquire or to require Issuer to
repurchase such lesser number of shares as may be permissible, without any
amendment or modification of this Agreement.
17. NOTICES. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be
considered to have been duly given if delivered or sent and received by a
fax transmission (if receipt by the intended recipient is confirmed by
telephone and if hard copy is delivered by overnight delivery service the
next day), by hand delivery, or by a nationwide overnight delivery service
(all fees prepaid) to the respective addresses of the parties set forth in
the Plan of Merger.
18. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Michigan, regardless of the
laws that might otherwise govern under applicable principles of conflicts
of laws.
19. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be considered to be an original, but all
of which shall constitute one and the same agreement.
20. FEES AND EXPENSES. Except as otherwise expressly provided in
this Agreement, each party shall bear and pay all costs and expenses
incurred by it or on its behalf in connection with the transactions
contemplated under this Agreement, including fees and expenses of its own
financial consultants, investment bankers, accountants and counsel.
21. ENTIRE AGREEMENT. Except as otherwise expressly provided in this
Agreement or in the Plan of Merger, this Agreement contains the entire
agreement between the parties with respect to the transactions contemplated
under this Agreement and supersedes all prior arrangements or
B-18
<PAGE>
understandings with respect thereof, written or oral. The terms and
conditions of this Agreement shall inure to the benefit of and be binding
upon the parties to this Agreement and their respective successors and
permitted assigns. Nothing in this Agreement, express or implied, is
intended to confer upon any party, other than the parties to this
Agreement, and their respective successors and permitted assignees, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.
In Witness Whereof, the parties have caused this Stock Option
Agreement to be executed by their officers, thereunto duly authorized, as
of the date first written above.
Old Kent Financial Corporation
By: /s/Mark F. Furlong
Mark F. Furlong
Executive Vice President
Pinnacle Banc Group, Inc.
By: /s/John J. Gleason, Jr.
John J. Gleason, Jr.
Vice Chairman and Chief
Executive Officer
B-19
<PAGE>
A P P E N D I X C
[DLJ Letterhead]
As of July 2, 1999
Board of Directors
Pinnacle Banc Group, Inc.
2215 York Road
Suite 306
Oak Brook, IL 60523
Members of the Board:
You have requested our opinion as to the fairness from a financial
point of view to the holders of the common stock, $3.12 par value per share
(the "Pinnacle Common Stock"), of Pinnacle Banc Group, Inc. ("Pinnacle" or
the "Company") of the consideration to be received by the holders of
Pinnacle Common Stock pursuant to the terms of the Amended and Restated
Agreement and Plan of Merger, dated as of March 18, 1999 (the "Agreement"),
by and between Old Kent Financial Corporation ("Old Kent"), OKFC Merger
Corporation ("MergerSub"), and the Company, pursuant to which MergerSub
will be merged with and into Pinnacle (the "Merger").
Pursuant to the Agreement, each outstanding share of Pinnacle Common
Stock will be converted into the right to receive 0.75285 shares of validly
issued, fully paid and nonassessable common stock, $1 par value per share
(the"Old Kent Common Stock"), of Old Kent. We understand that the Merger
is conditioned upon, among other things, receipt of opinions to the effect
that the Merger will qualify for treatment as a tax-free reorganization and
as a pooling of interests for accounting purposes. The terms of the Merger
are more fully set forth in the Agreement.
In arriving at our opinion, we have reviewed the financial terms and
provisions of the Agreement. We also have reviewed financial and other
information that was publicly available or furnished to us by Pinnacle and
Old Kent including information provided during discussions with their
respective managements. Included in the information provided during
discussions with the Company's management has been certain financial
projections of the Company for the period beginning January 1, 1999 and
ending December 31, 2003<F1>. During our discussion with Old Kent's
- ----------------------
<F1> Net income has been projected by the Company assuming a redeployment
of the Company's investment portfolio into a portfolio of mortgage
backed securities.
<PAGE>
Board of Directors
Pinnacle Banc Group, Inc.
Page 2 As of July 2, 1999
management, they directed us to use I/B/E/S estimates for financial
projections of Old Kent for the period beginning January 1, 1999 and ending
December 31, 2003. In addition, we have compared certain financial and
securities data of the Company and Old Kent with various other companies
whose securities are traded in public markets, reviewed the historical
stock prices and trading volumes of Pinnacle Common Stock and Old Kent
Common Stock, reviewed prices and premiums paid in certain other business
combinations and conducted such other financial studies, analyses and
investigations as we deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied upon and assumed without
independent verification the accuracy and completeness of all of the
financial and other information that was available to us from public
sources, that was provided to us by the Company and Old Kent or their
respective representatives, or that was otherwise reviewed by us. In
particular, we have relied upon the estimates of the management of Old Kent
of the operating synergies achievable as a result of the Merger and upon
our discussion of such synergies with the management of the Company. With
respect to the financial projections used in our analysis, we have assumed
that they have been reasonably prepared on the basis reflecting the best
currently available estimates and judgments of the management of the
Company and Old Kent as to the future operating and financial performance
of the Company and Old Kent, respectively. We have relied as to legal
matters involving the Merger on advice of counsel to the Company.
We are not experts in the evaluation of loan portfolios or allowances
for loan and real estate owned losses. We have relied upon the Company's
valuation of the loan portfolio and loan allowances. We have not
independently verified and have assumed that the aggregate allowances for
loan losses set forth in the balance sheets of each of Pinnacle and Old
Kent at December 31, 1998 are adequate to cover such losses and complied
fully with applicable law, regulatory policy and sound banking practice as
of the date of such financial statements. We were not retained to and we
did not conduct a physical inspection of any of the properties or
facilities of Pinnacle or Old Kent, and we did not make any independent
evaluation or appraisal of the assets, liabilities or prospects of Pinnacle
or Old Kent, were not furnished with any such evaluation or appraisal, and
did not review any individual credit files. In rendering our opinion, we
have been advised by Pinnacle and Old Kent and have assumed that there are
no other factors that would delay or subject to adverse conditions any
necessary regulatory or governmental approval for the Merger, and we have
assumed that all conditions to the Merger will be satisfied and not waived.
C-2
<PAGE>
Board of Directors
Pinnacle Banc Group, Inc.
Page 3 As of July 2, 1999
Our opinion is necessarily based on economic, market, financial and
other conditions as they exist on, and on the information made available to
us as of, the date of this letter. It should be understood that, although
subsequent developments may affect this opinion, we do not have any
obligation to update, revise or reaffirm this opinion. We are expressing
no opinion herein as to the prices at which Old Kent Common Stock will
actually trade at any time. Our opinion does not address the relative
merits of the Merger, as contrasted with other business strategies being
considered by the Company's Board of Directors, nor does it address the
Board's decision to proceed with the Merger. Our opinion does not
constitute a recommendation to any stockholder as to how such stockholder
should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part
of its investment banking services, is regularly engaged in the valuation
of businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. In the
ordinary course of our business we actively trade the debt and equity
securities of companies, including Pinnacle and Old Kent, for our own
account and for the accounts of customers and may hold a long or short
position in such securities at any time. DLJ has performed investment
banking and other services for the Company and Old Kent in the past and has
been compensated for such services.
Based upon the foregoing and such other factors as we deem relevant,
we are of the opinion that the consideration to be received by the holders
of Pinnacle Common Stock pursuant to the Agreement from a financial point
of view is fair to the Company's shareholders.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /S/ DAVID D. OLSON
David D. Olson
Managing Director
C-3
<PAGE>
A P P E N D I X D
OLD KENT FINANCIAL
CORPORATION
1998
ANNUAL REPORT
[OLD KENT LOGO]
IMPORTANT NOTE
This Annual Report is reproduced as printed and distributed in March, 1999.
Per share data has not been adjusted to reflect a subsequent 5% stock
dividend. Please refer to the attached prospectus and proxy statement
and the documents incorporated in it by reference for updated business
and financial information.
<PAGE>
OLD KENT FINANCIAL CORPORATION
1998 Annual Report
<TABLE>
<CAPTION>
Contents Page
- ------------------------------------------------------------------------
<S> <C>
Old Kent Financial Corporation D-2
A Message to our Shareholders D-2
Five-Year Summary of Selected Financial Data D-3
Financial Review D-4
Management's Responsibility for Financial Reporting D-36
Report of Independent Public Accountants D-37
Consolidated Financial Statements D-38
Notes to Consolidated Financial Statements D-43
Board of Directors and Senior Management Back Cover
</TABLE>
<PAGE>
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.
D-2
<PAGE>
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%
<PAGE>
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
D-3
<PAGE>
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 D-38 and the five year
summary of selected financial data on page D-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
<PAGE>
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
D-4
<PAGE>
$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>
<PAGE>
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
D-5
<PAGE>
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."
D-6
<PAGE>
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
<PAGE>
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
D-7
<PAGE>
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.
D-8
<PAGE>
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%.
D-9
<PAGE>
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.
<PAGE>
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
D-10
<PAGE>
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.
<PAGE>
<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>
D-11
<PAGE>
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>
D-12
<PAGE>
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:
<PAGE>
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
<PAGE>
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)
<PAGE>
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.
D-13
<PAGE>
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.
D-14
<PAGE>
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
<PAGE>
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>
D-15
<PAGE>
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%.
D-16
<PAGE>
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
<PAGE>
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>
D-17
<PAGE>
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
<PAGE>
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
<PAGE>
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,
D-18
<PAGE>
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
<PAGE>
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.
D-19
<PAGE>
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:
<PAGE>
<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>
D-20
<PAGE>
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.
<PAGE>
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>
D-21
<PAGE>
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,
<PAGE>
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.
D-22
<PAGE>
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:
<PAGE>
<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.
D-23
<PAGE>
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.
<PAGE>
<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
D-24
<PAGE>
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
<PAGE>
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
D-25
<PAGE>
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.
<PAGE>
<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.
D-26
<PAGE>
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
<PAGE>
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.
D-27
<PAGE>
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.
<PAGE>
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.
D-28
<PAGE>
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
<PAGE>
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
D-29
<PAGE>
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
<PAGE>
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
D-30
<PAGE>
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>
<PAGE>
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>
D-31
<PAGE>
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
<PAGE>
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.
D-32
<PAGE>
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
<PAGE>
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.
D-33
<PAGE>
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 D-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
<PAGE>
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
D-34
<PAGE>
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>
<PAGE>
<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.
D-35
<PAGE>
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 D-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
<PAGE>
Robert H. Warrington
Robert H. Warrington
Vice Chairman and
Chief Financial Officer
Janet S. Nisbett
Janet S. Nisbett
Senior Vice President and
Controller
D-36
<PAGE>
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
D-37
<PAGE>
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:
<PAGE>
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.
D-38
<PAGE>
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
<PAGE>
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.
D-39
<PAGE>
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)
<PAGE>
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>
D-40
<PAGE>
<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.
D-41
<PAGE>
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
========
<PAGE>
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.
D-42
<PAGE>
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,
<PAGE>
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.
D-43
<PAGE>
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
<PAGE>
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
D-44
<PAGE>
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.
<PAGE>
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
D-45
<PAGE>
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.
<PAGE>
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
D-46
<PAGE>
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
<PAGE>
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
D-47
<PAGE>
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
<PAGE>
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.
D-48
<PAGE>
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
<PAGE>
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>
D-49
<PAGE>
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
<PAGE>
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>
D-50
<PAGE>
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
<PAGE>
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.
D-51
<PAGE>
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.
<PAGE>
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>
D-52
<PAGE>
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:
<PAGE>
<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.
D-53
<PAGE>
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.
<PAGE>
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>
D-54
<PAGE>
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
<PAGE>
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
D-55
<PAGE>
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:
<PAGE>
<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
D-56
<PAGE>
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>
<PAGE>
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>
D-57
<PAGE>
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
<PAGE>
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
D-58
<PAGE>
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
<PAGE>
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.
D-59
<PAGE>
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,
<PAGE>
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.
D-60
<PAGE>
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:
<PAGE>
<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
D-61
<PAGE>
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
<PAGE>
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.
D-62
<PAGE>
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:
<PAGE>
<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.
D-63
<PAGE>
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.
<PAGE>
<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
D-64
<PAGE>
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>
<PAGE>
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
D-65
<PAGE>
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.
<PAGE>
<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
D-66
<PAGE>
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.
<PAGE>
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
D-67
<PAGE>
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>
D-68
<PAGE>
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
<PAGE>
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>
D-69
<PAGE>
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>
<PAGE>
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
D-70
<PAGE>
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
<PAGE>
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>
D-71
<PAGE>
A P P E N D I X E
Appendix E contains excerpts from Old Kent's Quarterly
Report on Form 10-Q, for the quarter ended March 31, 1999.
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ---------------------------------------------------------------------------------------
<CAPTION>
MARCH 31, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 526,476 $ 615,845
Federal funds sold and resale agreements 13,740 9,230
----------- -----------
Total cash and cash equivalents 540,216 625,075
Interest-earning deposits 14,155 5,044
Trading account securities 988 349,090
Mortgages held-for-sale 1,436,097 2,262,696
Securities available-for-sale:
Collateralized mortgage obligations and other
mortgage-backed securities 1,922,846 1,819,122
Other securities 976,154 947,574
----------- -----------
Total securities available-for-sale (amortized cost of
$2,887,142 and $2,735,301, respectively) 2,899,000 2,766,696
Securities held-to-maturity:
Collateralized mortgage obligations and other
mortgage-backed securities 144,845 180,369
Other securities 630,307 623,376
----------- -----------
Total securities held-to-maturity (market values of
$789,840 and $823,610, respectively) 775,152 803,745
Loans 9,306,484 8,883,716
Allowance for credit losses (168,621) (167,665)
----------- -----------
Net loans 9,137,863 8,716,051
----------- -----------
Premises and equipment 221,826 220,981
Other assets 886,519 839,480
----------- -----------
TOTAL ASSETS $15,911,816 $16,588,858
=========== ===========
E-1
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Non-interest-bearing $ 1,862,138 $ 2,098,446
Interest-bearing 10,580,804 10,700,895
Foreign deposits -- interest-bearing 47,702 140,077
----------- -----------
Total deposits 12,490,644 12,939,418
Other borrowed funds 1,786,655 2,061,142
Other liabilities 335,521 253,188
Long term debt 200,000 200,000
----------- -----------
Total Liabilities 14,812,820 15,453,748
Shareholders' Equity:
Preferred stock: 25,000,000 shares authorized and unissued -- --
Common stock, $1 par value: 300,000,000 shares authorized;
103,208,097 and 104,498,649 shares issued and outstanding 103,208 104,499
Capital surplus 80,194 139,736
Retained earnings 908,242 870,468
Accumulated other comprehensive income 7,352 20,407
----------- -----------
Total Shareholders' Equity 1,098,996 1,135,110
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $15,911,816 $16,588,858
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
E-2
<PAGE>
<TABLE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- ---------------------------------------------------------------------------------------
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Interest Income:
Interest and fees on loans $ 187,169 $ 201,768
Interest on mortgages held-for-sale 35,979 26,882
Interest on securities available-for-sale 43,953 36,589
Interest on securities held-to-maturity:
Taxable 7,660 23,362
Tax-exempt 5,852 4,588
Interest on deposits 180 175
Interest on federal funds sold and resale agreements 196 923
Interest on trading account securities 1,610 12
-------- ---------
Total interest income 282,599 294,299
-------- ---------
Interest Expense:
Interest on domestic deposits 107,975 110,963
Interest on foreign deposits 727 660
Interest on other borrowed funds 22,071 31,294
Interest on subordinated debt 3,208 3,366
-------- ---------
Total interest expense 133,981 146,283
-------- ---------
Net Interest Income 148,618 148,016
Provision for credit losses 6,866 15,381
-------- ---------
Net interest income after provision
for credit losses 141,752 132,635
-------- ---------
Other Income:
Mortgage banking revenues (net) 43,549 29,905
Investment management and trust revenues 17,520 14,217
Deposit account revenues 14,332 13,860
Insurance sales commissions 5,855 5,560
ATM revenues 1,802 1,602
Brokerage commissions 1,179 557
Securities gains 123 838
E-3
<PAGE>
Nonrecurring income/(expense) (30) 5,713
Other 11,552 10,376
-------- ---------
Total other income 95,882 82,628
-------- ---------
Other Expenses:
Salaries and employee benefits 79,059 74,457
Occupancy expense 11,413 10,209
Equipment expense 9,129 8,716
Amortization of goodwill and intangibles 3,548 3,578
Advertising and promotion 2,517 2,328
Other expenses 43,155 36,933
-------- ---------
Total other expenses 148,821 136,221
-------- ---------
Income Before Income Taxes 88,813 79,042
Income taxes 30,210 27,519
-------- ---------
Net Income $ 58,603 $ 51,523
======== =========
EARNINGS PER COMMON SHARE:
BASIC $ 0.56 $ 0.47
DILUTED $ 0.56 $ 0.47
DIVIDENDS PER COMMON SHARE $ 0.200 $ 0.171
Average number of shares used to compute: (in thousands)
Basic earnings per share 103,848 109,347
Diluted earnings per share 104,822 110,266
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
E-4
<PAGE>
<TABLE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ----------------------------------------------------------------------------------------------------
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
(DOLLARS IN THOUSANDS) 1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 58,603 $ 51,523
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for credit losses 6,866 15,381
Depreciation, amortization and accretion 11,521 12,725
Net gains on sales of assets (55,017) (36,537)
Net change in trading account securities 348,166 (1,062)
Originations and acquisitions of mortgages held-for-sale (3,632,802) (3,009,976)
Proceeds from sales and prepayments of mortgages held-for-sale 4,442,342 2,540,568
Net change in other assets 19,642 (12,794)
Net change in other liabilities 88,832 11,989
----------- -----------
Net cash provided by (used for) operating activities 1,288,153 (428,183)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and prepayments of securities
available-for-sale 167,320 71,257
Proceeds from sales of securities available-for-sale 131,153 297,156
Purchases of securities available-for-sale (450,026) (600,847)
Proceeds from maturities and prepayments of securities
held-to-maturity 75,363 146,055
Purchases of securities held-to-maturity (46,181) (100,754)
Net change in interest-earning deposits (9,111) (8,819)
Proceeds from sale of loans 6,691 106,848
Net change in loans (435,137) 128,703
Purchases of leasehold improvements, premises and equipment, net (8,688) (4,286)
----------- -----------
Net cash provided by (used for) investing activities (568,616) 35,313
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in time deposits (253,384) (84,700)
Change in demand and savings deposits (195,406) 156,876
Change in other borrowed funds (274,486) 376,971
Repurchases of common stock (66,989) (58,074)
E-5
<PAGE>
Proceeds from common stock issuances 6,697 5,733
Dividends paid to shareholders (20,828) (24,623)
----------- -----------
Net cash (used for) provided by financing activities (804,396) 372,183
----------- -----------
Net change in cash and cash equivalents (84,859) (20,687)
Cash and cash equivalents at beginning of year 625,075 674,649
----------- -----------
Cash and cash equivalents at March 31 $ 540,216 $ 653,962
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid on deposits, other borrowed funds and
subordinated debt $ 126,726 $ 149,270
Income taxes paid 192 3,431
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
E-6
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1999
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Corporation's annual
report on Form 10-K for the year ended December 31, 1998.
Certain reclassifications have been made to prior periods' financial
statements to place them on a basis comparable with the current periods'
financial statements.
NOTE B: FINANCIAL INSTRUMENT ACCOUNTING POLICIES
Old Kent uses certain off-balance sheet derivative financial instruments,
including interest rate swaps, Treasury futures and options, and interest
rate caps and floors in connection with risk management activities.
Provided these instruments meet specific criteria, they are considered
hedges and accounted for under the accrual or deferral methods, as more
fully discussed below.
Old Kent uses interest rate swaps to hedge interest rate risk on interest
earning assets and interest bearing liabilities. Amounts receivable or
payable under these agreements are included in net interest income. There
is no recognition on the balance sheet for changes in the fair value of the
hedging instrument. Gains or losses on terminated interest rate swaps are
deferred and amortized to interest income or expense over the remaining
life of the hedged item.
Old Kent uses forward sale agreements and options on forward sale
agreements to protect the value of residential loan commitments, loans held
for sale and related mortgage backed securities held in the trading
account. The market value of the financial hedges associated with loan
origination commitments and loans held for sale are included in the
aggregate valuation of mortgages held for sale. Premiums paid for options
are deferred as a component of other assets and amortized against gains on
sale of loans over the contract term. Forward sale agreements associated
E-7
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
with mortgage backed securities held in the trading account are considered
when marking those securities to market, with the corresponding adjustment
recorded to gains on sale of loans.
Old Kent uses Treasury futures and options on Treasury futures to help
protect against market value changes in the mortgage servicing right
("MSR") portfolio. The fair value of the hedges are recorded as an
adjustment to the carrying amount of the MSR with a corresponding
adjustment to cash or other receivables or payables. If terminated, the
realized gain or loss on the hedge is included in MSR amortization over the
estimated life of the loan servicing that had been hedged. Option premiums
paid or received are deferred as a component of other assets and amortized
as MSR amortization over the contract term.
Derivative financial instruments, such as caps and floors, that do not meet
the required criteria are carried on the balance sheet at fair value with
realized and unrealized changes in that value recognized in earnings. If
the hedged item is sold or its outstanding balance otherwise declines below
that of the related hedging instrument, the derivative product (or
applicable excess portion thereof) is marked-to-market and the resulting
gain or loss is included in earnings.
NOTE C: ADOPTION OF FASB 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Statement establishes accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or a liability measured at
its fair value. The Statement requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must
formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
Statement 133 is effective beginning January 1, 2000. A company may also
implement the Statement as of the beginning of any fiscal quarter after
issuance. Statement 133 cannot be applied retroactively. Statement 133
must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997 (and, at Old Kent's
election, those issued or acquired before January 1, 1998).
E-8
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
Old Kent has not yet quantified the impacts of adopting Statement 133 on
the consolidated financial statements and has not determined the timing of
or method of adoption of Statement 133. However, the Statement could
increase volatility in earnings and other comprehensive income.
NOTE D: LOANS AND NONPERFORMING ASSETS
The following summarizes loans and nonperforming assets at the dates
indicated (in thousands of dollars):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C> <C>
LOANS:
Commercial $ 2,736,781 $ 2,727,892
Real estate - Commercial 1,947,824 1,920,107
Real estate - Construction 766,561 693,958
Real estate - Residential mortgages 1,023,480 1,012,510
Real estate - Consumer home equity 1,352,674 1,031,312
Consumer 1,309,777 1,334,374
Lease financing 169,387 163,563
------------ -------------
Total Loans $ 9,306,484 $ 8,883,716
============ =============
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- -----------
<S> <C> <C> <C>
NONPERFORMING ASSETS:
Nonaccrual loans $ 58,050 $ 57,120
Restructured loans 2,467 2,664
--------- --------
Impaired loans 60,517 59,784
Other real estate owned 5,468 6,872
--------- --------
Total nonperforming assets $ 65,985 $ 66,656
========= ========
Loans past due 90 days or more $ 8,472 $ 15,083
========= ========
</TABLE>
E-9
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
At March 31, 1999, the Corporation's management has identified loans
totaling approximately $20.9 million as potential problem loans. These
loans are not included as nonperforming assets in the table above. While
these loans were in compliance with repayment terms at March 31, 1999,
other circumstances caused management to seriously doubt the ability of the
borrowers to continue to remain in compliance with existing loan repayment
terms.
NOTE E: ALLOWANCE FOR CREDIT LOSSES AND NET CHARGE-OFFS
The following summarizes the changes in the allowance for credit losses,
and net charge-offs (in thousands of dollars):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
1999 1998
---- ----
<S> <C> <C> <C>
ALLOWANCE FOR CREDIT LOSSES
Balance at January 1, $ 167,665 $ 160,952
Changes in allowance due to acquisitions / divestitures
/ sales 120 (475)
Provision for credit losses 6,866 15,381
Gross loans charged-off (10,185) (14,288)
Gross recoveries of loans previously charged-off 4,155 4,259
----------- ---------
Balance at end of period $ 168,621 $ 165,829
=========== =========
</TABLE>
E-10
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
1999 1998
---- ----
<S> <C> <C> <C>
NET LOAN CHARGE-OFFS
Commercial & Commercial Real Estate Loans $ 2,419 $ 3,947
Consumer 3,342 5,586
Residential Mortgages -- 41
Leases 269 455
----------- ---------
Total Net Charge-Offs $ 6,030 $ 10,029
=========== =========
</TABLE>
NOTE F: SECURITIES AVAILABLE-FOR-SALE
The following summarizes amortized costs and estimated market values of
securities available-for-sale at the dates indicated (in thousands of
dollars):
E-11
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
<TABLE>
<CAPTION>
CARRYING
GROSS GROSS VALUE
AMORTIZED UNREALIZED UNREALIZED AT MARKET
MARCH 31, 1999: COST GAINS LOSSES VALUE
-------------- ---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and federal agency securities $ 799,658 $ 9,331 $ 837 $ 808,152
Collateralized mortgage obligations:
U.S. Government issued 1,355,027 1,424 -- 1,356,451
Privately issued 250,554 8,473 4,432 254,595
Mortgage-backed pass-through securities 215,810 357 1,497 214,670
Other securities 266,093 1,013 1,974 265,132
----------- -------- -------- -----------
Total securities available-for-sale $ 2,887,142 $ 20,598 $ 8,740 $ 2,899,000
=========== ======== ======== ===========
DECEMBER 31, 1998:
-----------------
U.S. Treasury and federal agency securities $ 726,839 $ 21,576 $ 42 $ 748,373
Collateralized mortgage obligations:
U.S. Government issued 1,301,667 8,661 1,817 1,308,511
Privately issued 365,343 2,055 902 366,496
Mortgage-backed pass-through securities 143,449 1,230 564 144,115
Other securities 198,003 1,659 461 199,201
----------- -------- -------- -----------
Total securities available-for-sale $ 2,735,301 $ 35,181 $ 3,786 $ 2,766,696
=========== ======== ======== ===========
</TABLE>
NOTE G: SECURITIES HELD-TO-MATURITY
The following summarizes amortized costs and estimated market values of
securities held-to-maturity at the dates indicated (in thousands of
dollars):
E-12
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
MARCH 31, 1999: COST GAINS LOSSES VALUE
-------------- ---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and federal agency securities $ 145,555 $ 1,379 $ 35 $ 146,899
Collateralized mortgage obligations:
U.S. Government issued 65,413 1,013 174 66,252
Privately issued -- -- -- --
Mortgage-backed pass-through securities 79,432 1,855 144 81,143
State and political subdivisions 483,817 15,031 4,237 494,611
Other Securities 935 -- -- 935
----------- -------- ------ ---------
Total securities held-to-maturity $ 775,152 $ 19,278 $4,590 $ 789,840
=========== ======== ====== =========
DECEMBER 31, 1998:
U.S. Treasury and federal agency securities $ 182,364 $ 2,406 $ 33 $ 184,737
Collateralized mortgage obligations:
U.S. Government issued 65,647 77 240 65,484
Privately issued 26,210 -- 106 26,104
Mortgage-backed pass-through securities 88,512 1,974 93 90,393
State and political subdivisions 440,077 16,347 467 455,957
Other 935 -- -- 935
----------- -------- ------ ---------
Total securities held-to-maturity $ 803,745 $ 20,804 $ 939 $ 823,610
=========== ======== ====== =========
</TABLE>
NOTE H: SHAREHOLDERS' EQUITY
In June, 1998, the Board of Directors of Old Kent Financial Corporation
declared a 5% stock dividend payable July 17, 1998 to shareholders of
record on June 26, 1998. All per share amounts included in this report
have been adjusted to reflect this dividend.
At that same meeting, Old Kent's Directors authorized management, at its
discretion, to purchase up to 6.0 million shares of the Corporation's
common stock. It is anticipated that these shares will be purchased by the
Corporation in a systematic program of open market or privately negotiated
purchases. They will be reserved for later reissue in connection with
potential future stock dividends, the dividend reinvestment plan, employee
E-13
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
benefit plans, and other general corporate purposes. As of March 31,
1999, repurchases of Old Kent Common Stock under this authorization totaled
4.9 million shares.
NOTE I: REPORTABLE OPERATING SEGMENTS
Under the provisions of "SFAS No. 131," Old Kent has six reportable
operating segments: Corporate Banking, Retail Banking, Community Banking,
Investment and Insurance Services, Mortgage Banking and Treasury. Old
Kent's reportable segments are strategic business units that are managed
separately because each business requires different technology and
marketing strategies, and also differs in product emphasis.
The following table summarizes information about reportable operating
segments' profit as of March 31, 1999 and 1998:
<TABLE>
<CAPTION>
NET INTEREST NON INTEREST NET
INCOME INCOME AND FEES INCOME
------ --------------- ------
<S> <C> <C> <C>
MARCH 31, 1999
- --------------
Corporate Banking $ 34,874 $ 3,773 $ 15,418
Retail Banking 60,360 13,792 13,484
Community Banking 37,560 8,002 13,061
Investment & Insurance Services 3,996 25,415 6,766
Mortgage Banking 12,379 44,218 6,535
Treasury (551) 682 3,339
--------- --------- ---------
Consolidated $ 148,618 $ 95,882 $ 58,603
========= ========= =========
MARCH 31, 1998
- --------------
Corporate Banking $ 35,430 $ 3,758 $ 14,530
Retail Banking 59,335 13,842 12,467
Community Banking 38,511 12,288 12,784
Investment & Insurance Services 3,380 21,295 3,944
Mortgage Banking 6,078 29,901 2,207
Treasury 5,282 1,544 5,591
--------- --------- ---------
Consolidated $ 148,016 $ 82,628 $ 51,523
========= ========= =========
</TABLE>
E-14
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
NOTE J: OTHER ASSETS
Other assets, as shown in the accompanying consolidated balance sheets,
include the following (net of amortization):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Goodwill $ 103,793 $ 102,538
Core Deposit Intangibles 18,398 19,452
--------- ----------
Total $ 122,191 $ 121,990
========= ==========
</TABLE>
Other assets, as shown in the accompanying consolidated balance sheets,
include mortgage servicing rights ("MSR's") as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
MSR's (net of amortization) $ 264,261 $227,625
Less servicing impairment reserve (9,129) (9,129)
--------- --------
Carrying value of MSR's $ 255,132 $218,496
========= ========
Estimated aggregate fair value of capitalized MSR's $ 296,000 $253,000
========= ========
</TABLE>
The following reflects changes in capitalized mortgage serving rights for
the time periods indicated:
E-15
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of period $ 218,496 $ 146,359
Additions 91,356 45,952
Sales (38,525) (9,867)
Amortization (16,195) (10,273)
Impairment provision -- (500)
--------- ---------
Balance at end of period $ 255,132 $ 171,671
========= =========
</TABLE>
Old Kent Mortgage Company actively manages prepayment risks associated with
mortgage servicing rights through its significant loan origination and
replenishment capacity, customer retention initiatives, recurring bulk
sales of mortgage servicing rights, and use of financial hedges. Old Kent
Mortgage Company has entered into an agreement to sell mortgage serving
rights associated with $4.5 to $9.0 billion of mortgage loans during 1999.
This forward bulk servicing sale agreement provides for quarterly sales of
newly originated conventional mortgage servicing rights.
NOTE K: EARNINGS PER SHARE
The following table reconciles the numerators and denominators used in the
calculations of basic and diluted earnings per share:
E-16
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------
1999 1998
---- ----
<S> <C> <C>
Numerators: Numerator for both basic and diluted $ 58,603,000 $51,523,000
earnings per share, net income ============ ===========
Denominators:
Denominator for basic earnings per share, average 103,848,000 109,347,000
outstanding common shares
Potential dilutive shares resulting from employee
stock plans 974,000 919,000
------------ -----------
Denominator for diluted earnings per share 104,822,000 110,266,000
============ ===========
Earnings per share:
Basic $0.56 $0.47
Diluted $0.56 $0.47
</TABLE>
NOTE L: COMPREHENSIVE INCOME
Comprehensive income reflects the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. For Old Kent, comprehensive income represents net
income adjusted for the change in unrealized gains and losses on
available-for-sale securities. Comprehensive income was approximately $46
million and $54 million for the quarters ended March 31, 1999 and 1998,
respectively.
NOTE M: BUSINESS COMBINATIONS
On October 1, 1998, Old Kent completed the merger of First Evergreen
Corporation ("First Evergreen") into Old Kent. When acquired, First
Evergreen had assets of approximately $1.9 billion, deposits of
approximately $1.7 billion and eight banking sites. The merger was
accounted for as a pooling-of-interests. Old Kent exchanged 32.0312 shares
of Old Kent common stock for each share of First Evergreen stock. The
issuance totaled approximately 12.8 million shares. First Evergreen was
the parent of First National Bank of Evergreen Park. Old Kent's unexpended
E-17
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
reserves for merger related charges were substantially utilized by March
31, 1999.
On February 24, 1999, Old Kent entered into a definitive agreement for the
merger of CFSB Bancorp, Inc.("CFSB") into Old Kent. The merger will be
accounted for as a pooling-of-interests. Old Kent will exchange .6222
shares of Old Kent Common Stock for each outstanding share of CFSB Common
Stock. Old Kent expects to issue approximately 5.4 million shares related
to this transaction. CFSB is a holding company headquartered in Lansing,
Michigan, with consolidated assets of approximately $889 million and
consolidated deposits of approximately $580 million at March 31, 1999.
CFSB is the parent of Community First Bank. CFSB provides banking services
through sixteen offices in Ingham, Clinton, Eaton and Ionia counties. The
merger is subject to shareholder and regulatory approval and is expected
to be completed in the third quarter of 1999.
On March 18, 1999, Old Kent entered into a definitive agreement for the
merger of Pinnacle Banc Group, Inc. ("Pinnacle") into Old Kent. The merger
will be accounted for as a pooling-of-interests. Old Kent will exchange
.717 shares of Old Kent Common Stock for each outstanding share of Pinnacle
Common Stock. Old Kent expects to issue approximately 5.4 million shares
related to this transaction. Pinnacle is a bank holding company
headquartered in the Chicago suburb of Oak Brook, Illinois, with
consolidated assets of approximately $1,045 million and consolidated
deposits of approximately $872 million at March 31, 1999. Pinnacle is the
parent of Pinnacle Bank which operates thirteen branches in the Chicago
metropolitan area and Pinnacle Bank of the Quad-Cities which operates three
branches in western Illinois. The merger is subject to shareholder and
regulatory approval and is expected to be completed in the third quarter
of 1999.
NOTE N: LONG TERM DEBT
Long term debt, as shown in the accompanying consolidated balance sheets,
consists of the following:
E-18
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Subordinated notes, 6 5/8% due November 15, 2005 $ 100,000 $ 100,000
Capital securities, as described below 100,000 100,000
--------- ---------
Total long term debt $ 200,000 $ 200,000
========= =========
</TABLE>
On January 31, 1997, Old Kent issued a floating rate junior subordinated
debenture (the "Debenture") having a principal amount of $103,092,784 to
Old Kent Capital Trust I (the "Trust"). Cumulative interest on the
principal sum of the Debenture accrues from January 31, 1997, and it is
payable quarterly in arrears on the first day of February, May, August and
November of each year at a variable rate per annum equal to LIBOR (London
Interbank Offering Rate) plus .80% until paid. Interest is computed on the
actual number of days elapsed in a year of twelve 30 day months. The
Debentures rank subordinate and junior in right of payment to all
indebtedness (as defined) of Old Kent. The Debenture matures on February
1, 2027, but may be redeemed in whole or in part beginning on February 1,
2007, or earlier upon the occurrence of certain special events defined in
the Indenture governing the Debenture.
On January 31, 1997, the Trust sold Floating Rate Subordinated Capital
Income Securities ("Preferred Securities") having an aggregate liquidation
amount of $100 million to investors and issued Common Capital Securities
("Common Securities") having an aggregate liquidation amount of $3,092,784
to Old Kent. All of the proceeds from sale of Preferred Securities and
Common Securities were invested in the Debenture. Preferred Securities and
Common Securities represent undivided beneficial interests in the
Debenture, which is the sole asset of the Trust. Holders of Preferred
Securities and Common Securities are entitled to receive distributions from
the Trust on terms which correspond to the interest and principal payments
due on the Debenture. Payment of distributions by the Trust and payments
on liquidation of the Trust or redemption of Preferred Securities are
guaranteed by Old Kent to the extent the Trust has funds available (the
"Guarantee"). Old Kent's obligations under the Guarantee, taken together
with its obligations under the Debenture, the Indenture, the applicable
Declaration of Trust and Old Kent's agreement to pay all fees and expenses
related to the trust and all ongoing costs, expenses and liabilities of the
E-19
<PAGE>
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED)
March 31, 1999
Trust for so long as the trust holds the Debenture, constitute a full and
unconditional guarantee of all of the Trust's obligations under the
Preferred Securities issued by the Trust. Because the Common Securities
held by Old Kent represent all of the outstanding voting securities of the
Trust (in the absence of a default or other specified event), the Trust is
considered to be a wholly owned subsidiary of Old Kent for reporting
purposes and its accounts are reflected in the consolidated financial
statements of Old Kent.
The Preferred Securities qualify as Tier I capital for regulatory capital
purposes. Issuance of the Preferred Securities by the Trust had the effect
of increasing Old Kent's regulatory capital. Proceeds from the sale of the
Debenture to the Trust were available for general corporate purposes,
including repurchase of shares.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected Old Kent's financial condition and
results of operations during the periods included in the consolidated
financial statements included in this filing.
RESULTS OF OPERATIONS
Old Kent's net income was $58.6 million for the first quarter of 1999
compared to $51.5 million for the same period in 1998. First quarter
diluted earnings per share was $.56, a 19.1% increase over $.47 for the
same period last year.
Total assets were $15.9 billion at quarter-end compared to $16.6 billion at
December 31, 1998. The decrease was primarily a result of a reduction in
mortgages-held-for-sale. Return on average equity for the first quarter of
1999 was 21.11% compared to 17.54% for the first quarter of 1998. Return
on average assets was 1.44% for the first quarter of 1999 compared to 1.30%
for the first quarter of 1998.
Old Kent's net interest income for the first quarter of 1999 was $148.6
million, a .4% increase from the $148.0 million recorded in the same period
of 1998. For the first quarter of 1999, the net interest margin was 4.12%
compared to 4.14% a year ago. The decrease in the net interest margin was
primarily due to reduced equity balances resulting from repurchases of
common stock.
The provision for credit losses was $6.9 million in the first quarter of
1999 and $15.4 million in the first quarter of 1998. Net credit losses
were $6.0 million or .27% of average loans for the first quarter of 1999
compared to $10.0 million or .45% of average loans for the same period a
year ago. The decrease was primarily due to lower net charge offs in the
consumer and commercial portfolios. This improvement was directly
attributable to strong credit quality policies as well as emphasis in
reducing loan balances with undesirable credit risk through sale
transactions or through thoughtful exits of the credit relationship. The
allowance for credit losses as a percent of loans and leases outstanding
was 1.81% at March 31, 1999 and 1.89% at December 31, 1998. Impaired loans
as a percent of total loans was .65% at March 31, 1999 and .67% at December
31, 1998.
Total other operating income, (other income, excluding securities
transactions and other nonrecurring income) increased 25.9% or $19.7
million during the first quarter of 1999 over the same period a year ago.
The mortgage banking business contributed $13.6 million of this increase,
primarily as a result of growth and expansion of Old Kent Mortgage Company,
along with a generally favorable economy and continued low interest rates.
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<PAGE>
Investment management and trust revenues increased 23.2% or $3.3 million as
a result of focused sales initiatives and business development efforts.
Service charges on deposits increased 3.4% or $.5 million. All other
service charges and fees increased $2.3 million over the same period a
year ago.
Old Kent sold approximately $4.3 billion of residential mortgage loans
during the quarter. Old Kent's residential third party mortgage servicing
portfolio was $14.7 billion at March 31, 1999, and $14.0 billion at
December 31, 1998.
Total net securities gains for the first quarter of 1999 were $123,000,
compared to gains of $838,000 for the same period of 1998.
Total operating expenses for the first quarter of 1999 increased $12.6
million, or 9.3%, over the same period in 1998. These increases are
primarily attributable to the growth in Mortgage Banking. Old Kent
Mortgage Company operated 160 branches in 32 states as of March 31, 1999
compared to 114 branches in 27 states as of March 31, 1998.
Salaries, wages and employee benefits increased $4.6 million or 6.2% for
the first quarter of 1999 over the first quarter of 1998 largely as a
result of increased staffing in the Mortgage Company. The number of full-
time equivalent employees for the Corporation increased by 566 over a year
ago, to 7,605 at March 31, 1999.
<TABLE>
<CAPTION>
MARCH 31,
------------
1999 1998 CHANGE
---- ---- ------
<S> <C> <C> <C>
FULL-TIME EQUIVALENT STAFF:
Banking units 4,540 4,881 (341)
Mortgage banking 2,760 1,840 920
Insurance, leasing & brokerage 305 318 (13)
----- ----- ----
Total 7,605 7,039 566
===== ===== ====
</TABLE>
During the first quarter of 1999 compared to the same period a year ago,
occupancy expenses increased 11.8%, and equipment expenses increased 4.7%.
Other operating expenses increased by 14.9% or $6.4 million over the prior
year.
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<PAGE>
YEAR 2000 READINESS DISCLOSURE
The Corporation is currently in the process of addressing a significant
issue facing all users of automated information systems. The problem is
that many computer systems that process transactions based on two digits
representing the year of transaction may recognize a date using "00" as the
year 1900 rather than the year 2000. The problem could affect a wide
variety of automated information systems such as mainframe applications,
personal computers and communication systems, in the form of software
failure, errors or miscalculations. By nature, the banking and financial
services industries are highly dependent upon computer systems to process
significant transaction volumes and because of a date dependency for
interest measurements on financial instruments such as loans and deposits.
The Corporation initiated its Year 2000 analysis in early 1995. The
assessment included an inventory of software applications, communications
with third party vendors and suppliers, and certification of compliance
from third party providers. The Corporation has a comprehensive written
plan which is regularly updated and monitored by technical and non-
technical management and personnel. Plan status is regularly reviewed by
management of the Corporation and reported upon to the Board of Directors.
The Corporation utilizes vendor supplied software packages for its "mission
critical" applications. All "mission critical" systems were Year 2000 ready
with the current releases installed and tested for all applications and
were in production on December 31, 1998. In addition, the Corporation has
acquired testing tools to be used during a second phase of testing. During
this phase, which will occur during the first half of 1999, system dates
will be reset and validation will take place in an integrated event level
testing environment.
In a worst case scenario, testing of the remediated systems could yield a
failure when processing data beyond December 31, 1999. However, management
believes this to be a remote possibility since initial testing has yielded
no issues of significant consequence. In addition, the second phase of
testing is expected to allow adequate time to address any issues which are
identified. The Corporation is also updating its business resumption plans
to include contingency actions for Year 2000 issues. With these measures in
place, the Corporation expects no materially adverse failures in its data
processing systems as a result of the century change.
Diagnosis, reprogramming and other remedies are expected to result in
expenditures of approximately $16 million, over the four years ended
December 31, 1999. As of March 31, 1999, approximately $13.2 million of
these expenditures have been recognized as incurred by Old Kent since 1995.
As of March 31, 1999, Old Kent was fully compliant on all "mission
critical" computer systems and 85% compliant on non-critical applications.
Management expects to be fully compliant on non-critical applications by
mid-1999 and expects to expend the remaining $2.8 million during 1999.
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<PAGE>
In addition to reviewing its own computer operating systems and
applications, the Corporation has initiated formal communications with its
significant suppliers (operating risk) and large customers (credit risk) to
determine the extent to which Old Kent is vulnerable to those third
parties' failure to resolve their own Year 2000 issues. There is no
assurance that the systems of other companies on which the Corporation's
systems rely will be timely converted. If such modifications and
conversions are not made, or are not completed in a timely manner, the Year
2000 issue could have an adverse impact on the operations of the
Corporation. The Corporation's Year 2000 contingency plans for each line of
business will address alternative processing methods for all critical
functions including lending, transaction processing, liquidity and service
delivery methods.
This Year 2000 Readiness Disclosure is based upon and partially repeats
information provided by Old Kent's outside consultants, vendors and others
regarding the Year 2000 readiness of Old Kent and its customers, vendors
and other parties. Although management believes this information to be
accurate, it has not in each case independently verified such information.
BALANCE SHEET CHANGES
Total interest-earning assets decreased 4.1% or $615 million from December
31, 1998. Loans increased $423 million or 4.8% since year end 1998. Total
securities increased $123 million since year-end 1998. Mortgages held-
for-sale decreased 36.5% or $827 million. Other interest-earning assets,
primarily representing securitized mortgages classified as trading account
securities, decreased $334 million since year end 1998.
Total deposits decreased $448 million or 3.5% from year-end 1998;
noninterest-bearing deposits decreased 11.3% or $236 million and interest-
bearing deposits decreased 2.0% or $212 million. Other borrowed funds
decreased $275 million or 13.3% from December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The maintenance of an adequate level of liquidity is necessary to ensure
that sufficient funds are available to meet customers' loan demand and
deposit withdrawals. Old Kent Bank's liquidity sources consist of
securities available-for-sale, maturing loans and securities held-to-
maturity, and other short-term investments. Liquidity has also been
obtained through liabilities such as customer-related core deposits, funds
borrowed, certificates of deposit and public funds deposits.
Old Kent has filed a shelf registration to issue $250 million of common
stock, preferred stock, depositary shares, debt securities and warrants and
a shelf registration to issue an additional $200 million of trust
preferred securities. Sales of securities under these registration
statements could also be used as a source of liquidity and capital if and
as needed.
E-24
<PAGE>
At March 31, 1999, shareholders' equity was $1,099 million compared to
$1,135 million at December 31, 1998. The changes in total shareholders'
equity and book value per common share are summarized in the tables below.
<TABLE>
<CAPTION>
TOTAL SHARE-
HOLDERS' EQUITY BOOK VALUE PER
(IN MILLIONS) COMMON SHARE
--------------- --------------
<S> <C> <C>
Balance, December 31, 1998 $ 1,135.1 $ 10.86
Net income for the three months ended 58.6 .56
March 31, 1999
Cash dividends paid (20.8) (.20)
Change in other comprehensive income (13.1) (.13)
Stock repurchases (net of stock issued) (60.8) (.44)
--------- ------
Balance, March 31, 1999 $ 1,099.0 10.65
========= ======
</TABLE>
As shown in the table below, the Corporation repurchased approximately 1.5
million shares of its common stock during the three months ended March 31,
1999. These shares were repurchased pursuant to previously announced
authorizations by Old Kent's board of directors. The repurchase of these
shares had a beneficial effect on earnings per common share and return on
average equity for the three month period ended March 31, 1999.
OLD KENT COMMON STOCK REPURCHASED AND RESERVED FOR FUTURE REISSUANCE IN
CONNECTION WITH:
<TABLE>
<CAPTION>
DIVIDEND
REINVESTMENT
STOCK AND EMPLOYEE
TOTAL DIVIDENDS STOCK PLANS
----- --------- ------------
<S> <C> <C> <C>
SHARES RESERVED AT 12/31/98 3,801,670 2,600,000 1,201,670
Shares repurchased 1,504,968 1,300,000 204,968
Shares reissued (214,416) 0 (214,416)
--------- --------- ---------
SHARES RESERVED AT 3/31/99 5,092,222 3,900,000 1,192,222
========= ========= =========
</TABLE>
For a number of years, Old Kent has been authorized by its board of
directors to repurchase shares in connection with the Corporation's
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<PAGE>
Dividend Reinvestment and Employee Stock Plans, and on a quarterly basis
has systematically maintained a level of shares equivalent to permissible
needs.
At March 31, 1999, Old Kent held 5,092,222 shares of its common stock
reserved for reissuance as detailed in the table above. These shares were
repurchased under June, 1998 and 1997 board of directors authorizations
allowing management to repurchase up to 6 million shares (under each
authorization) of Old Kent Common Stock intended for future reissuance in
connection with stock dividends, dividend reinvestment and employee stock
plans, and other corporate purposes. Under the most recent (June, 1998)
authorization, approximately 5.2 million of the total 6.0 million shares
authorized are intended for anticipated future stock dividends. Management
anticipates that this number of shares will have been repurchased prior to
July, 1999 in a systematic pattern (on a quarterly ratable basis) of open
market and privately negotiated transactions. The remaining .8 million
shares of the authorization are intended for reissue in connection with the
Corporation's dividend reinvestment and employee stock plans, as well as
other unspecified corporate purposes such as business acquisitions
accounted for as purchases.
Total equity at March 31, 1999, was increased by an after-tax unrealized
gain of $7.3 million on securities available-for-sale. Shareholders'
equity as a percentage of total assets as of March 31, 1999, was 6.91%.
The following table represents the Registrant's consolidated regulatory
capital position as of March 31, 1999:
<TABLE>
<CAPTION>
REGULATORY CAPITAL AT MARCH 31, 1999
(IN MILLIONS) TIER 1 TOTAL
LEVERAGE RISK-BASED RISK-BASED
RATIO CAPITAL CAPITAL
----- ------- -------
<S> <C> <C> <C>
Actual capital $ 1073.1 $1073.1 $ 1,318.8
Required minimum regulatory capital 484.3 464.9 929.8
-------- ------- ---------
Capital in excess of requirements $ 588.8 $ 608.2 $ 389.0
======== ======= =========
Actual ratio 6.65% 9.23% 11.35%
Regulatory Minimum Ratio 3.00% 4.00% 8.00%
Ratio considered "well capitalized"
by regulatory agencies 5.00% 6.00% 10.00%
</TABLE>
E-26
<PAGE>
A P P E N D I X F
ILLINOIS BUSINESS CORPORATION ACT OF 1983
ARTICLE 11. MERGER AND CONSOLIDATION -- DISSENTERS' RIGHTS
SEC. 11.65. RIGHT TO DISSENT.
(a) A shareholder of a corporation is entitled to dissent from, and obtain
payment for his or her shares in the event of any of the following
corporate actions:
(1) consummation of a plan of merger or consolidation or a plan of
share exchange to which the corporation is a party if (i) shareholder
authorization is required for the merger or consolidation or the share
exchange by Section 11.20 [805 ILCS 5/11.20] or the articles of
incorporation or (ii) the corporation is a subsidiary that is merged with
its parent or another subsidiary under Section 11.30 [805 ILCS 5/11.30];
(2) consummation of a sale, lease or exchange of all, or
substantially all, of the property and assets of the corporation other than
in the usual and regular course of business;
(3) an amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(i) alters or abolishes a preferential right of such shares;
(ii) alters or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of such shares;
(iii) in the case of a corporation incorporated prior to
January 1, 1982, limits or eliminates cumulative voting rights with respect
to such shares; or
(4) any other corporate action taken pursuant to a shareholder vote
if the articles of incorporation, by-laws, or a resolution of the board of
directors provide that shareholders are entitled to dissent and obtain
payment for their shares in accordance with the procedures set forth in
Section 11.70 [805 ILCS 5/11.70] or as may be otherwise provided in the
articles, by-laws or resolution.
(b) A shareholder entitled to dissent and obtain payment for his or her
shares under this Section may not challenge the corporate action creating
his or her entitlement unless the action is fraudulent with respect to the
<PAGE>
shareholder or the corporation or constitutes a breach of a fiduciary duty
owed to the shareholder.
(c) A record owner of shares may assert dissenters' rights as to fewer
than all the shares recorded in such person's name only if such person
dissents with respect to all shares beneficially owned by any one person
and notifies the corporation in writing of the name and address of each
person on whose behalf the record owner asserts dissenters' rights. The
rights of a partial dissenter are determined as if the shares as to which
dissent is made and the other shares were recorded in the names of
different shareholders. A beneficial owner of shares who is not the record
owner may assert dissenters' rights as to shares held on such person's
behalf only if the beneficial owner submits to the corporation the record
owner's written consent to the dissent before or at the same time the
beneficial owner asserts dissenters' rights.
SEC. 11.70. PROCEDURE TO DISSENT.
(a) If the corporate action giving rise to the right to dissent is to be
approved at a meeting of shareholders, the notice of meeting shall inform
the shareholders of their right to dissent and the procedure to dissent.
If, prior to the meeting, the corporation furnishes to the shareholders
material information with respect to the transaction that will objectively
enable a shareholder to vote on the transaction and to determine whether or
not to exercise dissenters' rights, a shareholder may assert dissenters'
rights only if the shareholder delivers to the corporation before the vote
is taken a written demand for payment for his or her shares if the proposed
action is consummated, and the shareholder does not vote in favor of the
proposed action.
(b) If the corporate action giving rise to the right to dissent is not to
be approved at a meeting of shareholders, the notice to shareholders
describing the action taken under Section 11.30 or Section 7.10 [805 ILCS
5/11.30 or 805 ILCS 5/7.10] shall inform the shareholders of their right to
dissent and the procedure to dissent. If, prior to or concurrently with the
notice, the corporation furnishes to the shareholders material information
with respect to the transaction that will objectively enable a shareholder
to determine whether or not to exercise dissenters' rights, a shareholder
may assert dissenter's rights only if he or she delivers to the corporation
within 30 days from the date of mailing the notice a written demand for
payment for his or her shares.
(c) Within 10 days after the date on which the corporate action giving
rise to the right to dissent is effective or 30 days after the shareholder
delivers to the corporation the written demand for payment, whichever is
later, the corporation shall send each shareholder who has delivered a
written demand for payment a statement setting forth the opinion of the
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<PAGE>
corporation as to the estimated fair value of the shares, the corporation's
latest balance sheet as of the end of a fiscal year ending not earlier than
16 months before the delivery of the statement, together with the statement
of income for that year and the latest available interim financial
statements, and either a commitment to pay for the shares of the dissenting
shareholder at the estimated fair value thereof upon transmittal to the
corporation of the certificate or certificates, or other evidence of
ownership, with respect to the shares, or instructions to the dissenting
shareholder to sell his or her shares within 10 days after delivery of the
corporation's statement to the shareholder. The corporation may instruct
the shareholder to sell only if there is a public market for the shares at
which the shares may be readily sold. If the shareholder does not sell
within that 10 day period after being so instructed by the corporation, for
purposes of this Section the shareholder shall be deemed to have sold his
or her shares at the average closing price of the shares, if listed on a
national exchange, or the average of the bid and asked price with respect
to the shares quoted by a principal market maker, if not listed on a
national exchange, during that 10 day period.
(d) A shareholder who makes written demand for payment under this Section
retains all other rights of a shareholder until those rights are cancelled
or modified by the consummation of the proposed corporate action. Upon
consummation of that action, the corporation shall pay to each dissenter
who transmits to the corporation the certificate or other evidence of
ownership of the shares the amount the corporation estimates to be the fair
value of the shares, plus accrued interest, accompanied by a written
explanation of how the interest was calculated.
(e) If the shareholder does not agree with the opinion of the corporation
as to the estimated fair value of the shares or the amount of interest due,
the shareholder, within 30 days from the delivery of the corporation's
statement of value, shall notify the corporation in writing of the
shareholder's estimated fair value and amount of interest due and demand
payment for the difference between the shareholder's estimate of fair value
and interest due and the amount of the payment by the corporation or the
proceeds of sale by the shareholder, whichever is applicable because of the
procedure for which the corporation opted pursuant to subsection (c).
(f) If, within 60 days from delivery to the corporation of the shareholder
notification of estimate of fair value of the shares and interest due, the
corporation and the dissenting shareholder have not agreed in writing upon
the fair value of the shares and interest due, the corporation shall either
pay the difference in value demanded by the shareholder, with interest, or
file a petition in the circuit court of the county in which either the
registered office or the principal office of the corporation is located,
requesting the court to determine the fair value of the shares and interest
due. The corporation shall make all dissenters, whether or not residents of
this State, whose demands remain unsettled parties to the proceeding as an
action against their shares and all parties shall be served with a copy of
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<PAGE>
the petition. Nonresidents may be served by registered or certified mail or
by publication as provided by law. Failure of the corporation to commence
an action pursuant to this Section shall not limit or affect the right of
the dissenting shareholders to otherwise commence an action as permitted by
law.
(g) The jurisdiction of the court in which the proceeding is commenced
under subsection (f) by a corporation is plenary and exclusive. The court
may appoint one or more persons as appraisers to receive evidence and
recommend decision on the question of fair value. The appraisers have the
power described in the order appointing them, or in any amendment to it.
(h) Each dissenter made a party to the proceeding is entitled to judgment
for the amount, if any, by which the court finds that the fair value of his
or her shares, plus interest, exceeds the amount paid by the corporation or
the proceeds of sale by the shareholder, whichever amount is applicable.
(i) The court, in a proceeding commenced under subsection (f), shall
determine all costs of the proceeding, including the reasonable
compensation and expenses of the appraisers, if any, appointed by the court
under subsection (g), but shall exclude the fees and expenses of counsel
and experts for the respective parties. If the fair value of the shares as
determined by the court materially exceeds the amount which the corporation
estimated to be the fair value of the shares or if no estimate was made in
accordance with subsection (c), then all or any part of the costs may be
assessed against the corporation. If the amount which any dissenter
estimated to be the fair value of the shares materially exceeds the fair
value of the shares as determined by the court, then all or any part of the
costs may be assessed against that dissenter. The court may also assess the
fees and expenses of counsel and experts for the respective parties, in
amounts the court finds equitable, as follows:
(1) Against the corporation and in favor of any or all dissenters if
the court finds that the corporation did not substantially comply with the
requirements of subsections (a), (b), (c), (d), or (f).
(2) Against either the corporation or a dissenter and in favor of any
other party if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by this Section.
If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated and that the
fees for those services should not be assessed against the corporation, the
court may award to that counsel reasonable fees to be paid out of the
amounts awarded to the dissenters who are benefited. Except as otherwise
provided in this Section, the practice, procedure, judgment and costs shall
be governed by the Code of Civil Procedure [735 ILCS 5/1-101 et seq.].
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<PAGE>
(j) As used in this Section:
(1) "Fair value", with respect to a dissenter's shares, means the
value of the shares immediately before the consummation of the corporate
action to which the dissenter objects excluding any appreciation or
depreciation in anticipation of the corporate action, unless exclusion
would be inequitable.
(2) "Interest" means interest from the effective date of the
corporate action until the date of payment, at the average rate currently
paid by the corporation on its principal bank loans or, if none, at a rate
that is fair and equitable under all the circumstances.
F-5
<PAGE>
