<PAGE>
EXHIBIT 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of Old Kent Financial
Corporation:
We have audited the accompanying consolidated balance sheets of Old Kent
Financial Corporation (a Michigan corporation) and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
income, cash flows and shareholders' equity for each of the three years
in the period ended December 31, 1999. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Old Kent Financial
Corporation and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Chicago, Illinois
January 12, 2001
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1999 1998
-----------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $679,155 $759,083
Federal funds sold and resale agreements 30,261 72,925
----------- -----------
Total cash and cash equivalents 709,416 832,008
Interest-earning deposits 2,167 10,012
Trading account securities -- 349,090
Mortgages held-for-sale 901,130 2,272,373
Securities available-for-sale:
Collateralized mortgage obligations and other
mortgage-backed securities 2,039,160 2,049,335
Other securities 1,198,669 2,001,869
----------- -----------
Total securities available-for-sale (amortized
cost of $3,335,192 and $3,986,921 respectively) 3,237,829 4,051,204
Securities held-to-maturity:
Collateralized mortgage obligations and other
mortgage-backed securities 92,335 180,371
Other securities 516,929 623,395
----------- -----------
Total securities held-to-maturity (market values
of $590,369 and $823,631 respectively) 609,264 803,766
Loans 13,901,663 11,787,940
Allowance for credit losses (206,279) (200,555)
----------- -----------
Net loans 13,695,384 11,587,385
----------- -----------
Premises and equipment 288,565 297,661
Other assets 1,156,532 945,187
----------- -----------
Total Assets $20,600,287 $21,148,686
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Non-interest-bearing $2,329,884 $2,554,510
Interest-bearing 13,332,300 13,823,656
Foreign deposits--interest-bearing 110,061 140,077
----------- -----------
Total deposits 15,772,245 16,518,243
Other borrowed funds 2,824,034 2,548,454
Other liabilities 318,244 305,664
Long-term debt 200,000 200,000
----------- -----------
Total Liabilities 19,114,523 19,572,361
----------- -----------
Shareholders' Equity:
Preferred stock: 25,000,000 shares authorized
Series D convertible, $1,000 stated value, 8.00%
7,250 shares authorized, issued and outstanding 7,250 7,250
Series E perpetual, $1,000 stated value, 8.00%
2,000 shares authorized, issued and outstanding 2,000 2,000
Common stock, $1 par value: 300,000,000 shares
authorized; 131,367,000 and 128,537,000 shares
issued and outstanding 131,367 128,537
Capital surplus 418,367 340,327
Retained earnings 1,004,125 1,057,116
Accumulated other comprehensive (loss)/income (77,345) 41,095
----------- -----------
Total Shareholders' Equity 1,485,764 1,576,325
----------- -----------
Total Liabilities and Shareholders' Equity $20,600,287 $21,148,686
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
2
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year ended December 31 (DOLLARS IN
THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997
-----------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $1,068,564 $1,027,521 $1,050,345
Interest on mortgages held-for-sale 115,135 121,023 66,815
Interest on securities (taxable) 232,339 278,372 298,119
Interest on securities (non-taxable) 38,493 32,684 30,432
Interest on investments 6,832 6,630 10,118
----------- ----------- -----------
Total interest income 1,461,363 1,466,230 1,455,829
----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits 546,522 576,743 596,097
Interest on other borrowed funds 128,571 135,803 112,932
Interest on long-term obligations 13,152 13,481 13,026
----------- ----------- -----------
Total interest expense 688,245 726,027 722,055
----------- ----------- -----------
NET INTEREST INCOME 773,118 740,203 733,774
PROVISION FOR CREDIT LOSSES 35,388 52,930 59,673
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 737,730 687,273 674,101
----------- ----------- -----------
OTHER INCOME:
Mortgage banking revenue (net) 192,296 152,378 98,144
Investment management & trust revenues 80,642 72,366 62,323
Deposit account revenue 78,153 74,401 66,544
Transaction processing revenue 22,891 20,832 16,082
Insurance sales commissions 24,139 21,216 15,066
Other 58,609 72,427 56,183
----------- ----------- -----------
Total other income 456,730 413,620 314,342
----------- ----------- -----------
OTHER EXPENSES:
Salaries and employee benefits 381,224 361,551 333,765
Occupancy 58,064 53,505 50,229
Equipment 49,281 45,948 41,173
Professional services 48,941 32,560 29,369
Telephone and telecommunication 25,426 20,863 16,362
Postage and courier charges 19,063 18,559 16,357
Merger charges 26,000 24,993 --
Other 157,880 145,624 126,477
----------- ----------- -----------
Total other expenses 765,879 703,603 613,732
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 428,581 397,290 374,711
Income taxes 149,463 136,152 126,880
----------- ----------- -----------
NET INCOME $279,118 $261,138 $247,831
Dividend on preferred stock (740) (740) (740)
----------- ----------- -----------
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $278,378 $260,398 $247,091
=========== =========== ===========
Average number of common shares
used to compute:
Basic earnings per share 139,003,000 143,962,000 150,116,000
Diluted earnings per share 140,594,000 145,888,000 151,803,000
Basic earnings per common share $2.00 $1.81 $1.65
Diluted earnings per common share $1.98 $1.79 $1.63
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
3
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Twelve months ended December 31,
(dollars in thousands) 1999 1998 1997
-------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $279,118 $261,138 $247,831
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities:
Provision for credit losses 35,388 52,930 59,673
Depreciation, amortization and
accretion 67,773 68,615 71,029
Net gains on sales of assets (182,236) (209,457) (109,429)
Net change in trading account
securities 349,411 (347,910) 61,523
Originations and acquisitions of
mortgages held-for-sale (12,228,588) (13,693,103) (6,926,939)
Proceeds from sales and prepayments
of mortgages held-for-sale 13,540,066 12,673,555 6,313,959
Net change in other assets (13,029) 120,262 (79,473)
Net change in other liabilities 64,067 (8,985) (12,699)
------------ ------------ -----------
Net cash provided by (used for)
operating activities 1,911,970 (1,082,955) (374,525)
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and
prepayments of securities available-
for-sale 1,010,726 586,182 321,719
Proceeds from sales of securities
available-for-sale 1,063,992 1,406,923 4,917,209
Purchases of securities available-for-
sale (1,413,839) (2,661,512) (5,191,126)
Proceeds from maturities and
prepayments of securities held-to-
maturity 294,042 1,105,076 802,948
Purchases of securities held-to-
maturity (97,698) (307,954) (663,796)
Net change in interest-earning
deposits 7,845 16,335 2,597
Proceeds from sale of loans 9,482 207,849 379,552
Net change in loans (1,330,339) 5,420 (819,488)
Acquisition of loans through flow
arrangements (822,329) (39,269) --
Purchases of leasehold improvements,
premises and equipment, net (24,854) (39,158) (47,672)
Acquisition of business units (net of
cash acquired) -- -- 17,204
Sale of business units (net of cash
sold) -- -- 1,234
------------ ------------ -----------
Net cash provided by (used for)
investing activities (1,302,972) 279,892 (279,619)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in time deposits (685,944) (64,524) (269,675)
Change in demand and savings deposits (60,054) 1,263,327 61,425
Change in other borrowed funds 275,579 (49,061) 968,439
Proceeds from issuance of capital
securities -- -- 100,000
Repurchases of common stock (178,692) (257,519) (196,180)
Proceeds from common stock issuances 26,290 20,218 11,683
Dividends paid to shareholders (108,769) (106,328) (89,892)
------------ ------------ -----------
Net cash provided by (used for)
financing activities (731,590) 806,113 585,800
------------ ------------ -----------
Net change in cash and cash
equivalents (122,592) 3,050 (68,344)
Cash and cash equivalents at beginning
of year 832,008 828,958 897,302
------------ ------------ -----------
Cash and cash equivalents at December
31 $709,416 $832,008 $828,958
============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid on deposits, other
borrowed funds and subordinated debt $685,620 $742,726 $727,082
Federal income taxes paid 99,904 112,093 107,173
Significant non-cash transactions:
Stock dividend issued 222,020 184,748 135,388
Stock issued to acquire businesses -- -- 76,938
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
4
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other Total
(dollars in thousands, Comprehensive Preferred Common Capital Retained Comprehensive Shareholders'
except per share data) Income Stock Stock Surplus Earnings Income Equity
-------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997 as previously
reported $57,809 $170,455 $963,110 $(11,177) $1,180,197
Adjustment to record
merger of CFSB Bancorp,
Inc. and Pinnacle Banc
Group, Inc., Merchants
Bancorp, Inc. and Grand
Premier Financial, Inc.
on a pooling-of-
interests basis 9,250 23,441 176,574 152,881 17,105 379,251
------ -------- -------- --------- -------- ----------
Restated balance at
January 1, 1997 9,250 81,250 347,029 1,115,991 5,928 1,559,448
------ -------- -------- --------- -------- ----------
Net income for the year $247,831 247,831 247,831
Unrealized gains on
securities, net of
$15,700 taxes 28,136 28,136 28,136
--------
Total comprehensive
income $275,967
========
Cash dividends:
$.581 per common share (89,152) (89,152)
$80.00 per preferred share (740) (740)
Common stock issued in
payment of stock
dividend -
4,686,000 shares (cash
in lieu of
fractionals--$326,000) 4,686 130,376 (135,388) (326)
Common stock issued for
Seaway Financial
Corporation
acquisition--1,924,000
shares 1,924 69,843 71,767
Common stock issued for
Grand Rapids Holland
Insurance Agency, Inc.
acquisition--86,000
shares 86 5,085 5,171
Common stock repurchased
for dividend
reinvestment plan,
employee stock plans,
acquisitions, stock
dividends and other
purposes--5,800,000
shares (5,800) (187,479) (2,901) (196,180)
Common stock issued
under dividend
reinvestment plan,
employee stock plans,
and other--1,715,000
shares 1,715 13,650 (214) 15,151
Common stock issued in
payment of 2-for-1
stock split -
48,611,000 shares 48,611 (2,164) (46,447) --
Tax benefit relating to
employee stock plans 4,977 4,977
------ -------- -------- --------- -------- ----------
Balance at December 31,
1997 9,250 132,472 381,317 1,088,980 34,064 1,646,083
------ -------- -------- --------- -------- ----------
Net income for the year $261,138 261,138 261,138
Unrealized gains on
securities, net of
$3,000 in taxes 7,031 7,031 7,031
--------
Total comprehensive
income $268,169
========
Cash dividends:
$.655 per common share (105,588) (105,588)
$80.00 per preferred share (740) (740)
Common stock issued in
payment of stock
dividend -
8,181,000 shares (cash
in lieu of
fractionals--$221,000) 8,181 176,346 (184,748) (221)
Common stock repurchased
for dividend
reinvestment plan,
employee stock plans,
acquisitions, stock
dividends and other
purposes-- 13,499,000
shares (13,499) (242,797) (1,223) (257,519)
Common stock issued
under dividend
reinvestment plan,
employee stock plans,
and other--1,383,000
shares 1,383 21,849 (703) 22,529
Tax benefit relating to
employee stock plans 3,612 3,612
------ -------- -------- --------- -------- ----------
Balance at December 31,
1998 9,250 128,537 340,327 1,057,116 41,095 1,576,325
------ -------- -------- --------- -------- ----------
Net income for the year $279,118 279,118 279,118
Unrealized losses on
securities, net of
$43,400 tax benefit (118,440) (118,440) (118,440)
--------
Total comprehensive
income $160,678
========
Cash dividends:
$.762 per common share (108,029) (108,029)
$80.00 per preferred share (740) (740)
Common stock issued in
payment of stock
dividend -
5,626,000 shares (cash
in lieu of
fractionals--$155,000 ) 5,626 216,240 (222,020) (154)
Common stock repurchased
for dividend
reinvestment plan,
employee stock plans,
acquisitions, stock
dividends and other
purposes--4,203,000
shares (4,203) (173,055) (1,434) (178,692)
Common stock issued
under dividend
reinvestment plan,
employee stock plans,
and other--1,407,000
shares 1,407 31,953 114 33,474
Tax benefit relating to
employee stock plans 2,902 2,902
------ -------- -------- --------- -------- ----------
Balance at December 31,
1999 $9,250 $131,367 $418,367 $1,004,125 $(77,345) $1,485,764
====== ======== ======== ========= ======== ==========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
5
<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 203 full service offices
throughout Michigan, 85 such offices in the metropolitan markets in and around
Chicago, Illinois, and two such offices in Indiana. It also operates a mortgage
banking company with 147 offices located in thirty-two states. Other business
activities include investment management and trust services, as well as
brokerage and insurance services. Old Kent's revenue is mainly derived by
providing financial services to commercial and retail customers located within
those markets. The financial services provided primarily consist of the
extension of credit and acceptance of deposits.
USE OF ESTIMATES
Conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, and the disclosure of contingent assets and liabilities at the
date of the financial statements, as well as the amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates.
TRADING ACCOUNT SECURITIES
Trading account securities are carried at market value. Gains and losses on
trading activities are included in other income in the Consolidated Statement
of Income.
SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale include those securities which might be sold as
part of Old Kent's management of interest rate risk, in response to changes in
interest rates, prepayment or credit risk or due to a desire to increase
capital or liquidity. While Old Kent has no current intention to sell these
securities, they may not be held for long-term investment. These assets are
carried on the balance sheet at their estimated fair values, with corresponding
(after-tax) valuation adjustments included as a component of shareholders'
equity. Gains and losses realized on sales of such securities are determined
using the specific identification method and are included in other income in
the Consolidated Statement of Income.
Premiums and discounts on securities available-for-sale, as well as securities
held-to-maturity, are amortized over the estimated lives of the related
securities. These amortization and adjustments stemming from changes in
estimated lives, are included in interest income in the accompanying
Consolidated Statement of Income.
SECURITIES HELD-TO-MATURITY
Securities held-to-maturity are stated at amortized cost. Designation as such a
security is made at the time of acquisition and is based on intent and ability
to hold the security to maturity.
6
<PAGE>
MORTGAGE BANKING ACTIVITIES
The Corporation sells residential mortgage loans to investors on both a
servicing released and servicing retained basis. Gains on sales of mortgages
are recorded to the extent proceeds exceed the carrying value of the loans.
Mortgage loans held-for-sale are carried at the lower of cost or market, which
is determined under the aggregate method. In determining the lower of cost or
market, the gains and losses associated with the corresponding financial
instruments used to hedge against increases in interest rates, are considered.
The fair value of the Corporation's mortgage servicing rights is determined
based on quoted market prices for comparable transactions, if available, or a
valuation model that calculates the present value of expected future cash
flows. Mortgage servicing rights are amortized ratably in relation to the
associated servicing revenue over the estimated lives of the serviced loans.
The Corporation evaluates and measures impairment of its capitalized servicing
rights using stratifications based on the risk characteristics of the
underlying loans. Management has determined those risk characteristics to
include loan type and interest rate. Impairment, when present, is recognized
through a valuation allowance.
LOANS
Loans are generally stated at their principal amount outstanding, net of
unearned income. Loan performance is reviewed regularly by loan review
personnel, loan officers and senior management. A loan is placed on nonaccrual
status and evaluated for impairment when principal or interest is past due 90
days or more and the loan is not well secured and in the process of collection,
or when, in the opinion of management, there is sufficient reason to doubt
collectibility of principal or interest. Interest previously accrued, but not
collected, is reversed and charged against interest income at the time the loan
is placed on nonaccrual status. Generally, the terms of loans that resulted
from troubled debt restructurings are at interest rates considered below
current market rates for comparable loans and are evaluated for impairment. The
Corporation considers loans which are on nonaccrual or restructured status as
impaired.
Old Kent's policy is to review impaired loans to determine the need for a
valuation allowance. The Corporation determines this need using the most
appropriate of the following methods: (1) the present value of the expected
future cash flows discounted at the loan's effective rate of interest, (2) the
loan's observable market price, or (3) the fair value of the collateral, if the
loan is collateral dependent. Large groups of smaller balance homogenous loans
with common risk characteristics are aggregated and collectively evaluated for
impairment. These large groups of smaller balance homogenous loans include
residential mortgages, consumer loans, and certain commercial loans, such as
those to small businesses.
Interest payments received on nonaccrual loans are recorded as principal
reductions if principal repayment is doubtful. Loans are no longer classified
as impaired when principal and interest payments are current and collectibility
is no longer in doubt. Interest income on restructured loans is recognized
according to the terms of the restructure, subject to the nonaccrual policy
described above.
Certain commitment and loan origination fees are deferred and amortized as an
adjustment of the related loan's yield over its contractual life using the
interest method, or other sufficiently similar methods. All remaining
commitment and loan origination fees and all direct costs associated with
originating or acquiring loans are recognized currently, which is not
materially different than the prescribed method.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at a level that, in management's
judgment, is adequate to absorb losses inherent in the loan portfolio. The
amount is based on management's specific review and analysis of the loan
portfolio, and evaluation of the effects of current economic conditions on the
loan portfolio. This process 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.
7
<PAGE>
PREMISES AND EQUIPMENT
Premises and equipment are stated at original costs, less accumulated
depreciation and amortization computed on the straight-line method over the
estimated useful lives of the assets or terms of the leases, whichever period
is shorter. For income tax purposes, minimum lives and accelerated methods are
used.
OTHER REAL ESTATE OWNED
Other real estate owned consists of properties acquired in partial or total
satisfaction of debt. Other real estate owned is stated at fair value. Losses
arising at acquisition are charged against the allowance for credit losses.
Reductions in fair value subsequent to acquisition are recorded in other
expense in the Consolidated Statement of Income.
INTANGIBLE AND OTHER LONG-LIVED ASSETS
Goodwill, representing the cost of investments in subsidiaries in excess of the
fair value of the net assets at acquisition, is amortized over periods ranging
from ten to twenty years. Other acquired intangible assets, such as those
associated with acquired core deposits, are amortized over periods not
exceeding fifteen years. When factors indicate that a long-lived asset or
identifiable intangible asset should be evaluated for impairment, the
Corporation estimates the undiscounted future cash flows over the remaining
life of the asset in assessing whether impairment should be recognized.
TRUST ASSETS
Property, other than cash deposits, held in a fiduciary or agency capacity is
not included in the Consolidated Balance Sheet, since such assets are not owned
by the Corporation.
RETIREMENT PLANS
The defined benefit pension plan covers substantially all employees. The plan
provides for normal and early retirement, deferred benefits for vested
employees and, under certain circumstances, survivor benefits in the event of
death. Benefits are based on the employees' years of service and their five
highest consecutive years of compensation over the last ten years of service,
subject to certain limits. The proportion of average compensation paid as a
pension is determined by age and length of service as defined in the plan.
Contributions to the plan satisfy or exceed the minimum funding requirement of
the Employee Retirement Income Security Act (ERISA). Assets held by the plan
consist primarily of investments in several of Old Kent's proprietary mutual
funds.
Old Kent also maintains noncontributory, nonqualified pension plan for certain
participants whose retirement benefit payments under qualified plans are
expected to exceed the limits imposed by the Internal Revenue Code. Old Kent
maintains nonqualified trusts, referred to as "rabbi" trusts, primarily to
fund and secure the benefits in excess of those permitted in certain of the
Old Kent qualified pension plans. These arrangements offer certain officers of
the Corporation a degree of assurance for ultimate payment of benefits. The
assets remain subject to the claims of creditors of Old Kent and are not the
property of the employees. Therefore, they are accounted for as assets of the
Corporation with a corresponding liability in the Consolidated Balance Sheet.
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 plan. The
estimated contribution by Old Kent is charged to expense during the year in
which the employee contribution is received and is included in employee
benefits in the Consolidated Statement of Income.
8
<PAGE>
INCOME TAXES
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using the enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be reversed. Old Kent and its subsidiaries file a consolidated
federal income tax return.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the average
number of common shares outstanding. Diluted earnings per share is computed by
dividing net income by the average number of common shares outstanding plus all
potential common shares. Dilutive potential common shares include all shares
which may become contractually issuable. For Old Kent, dilutive potential
common shares are primarily comprised of shares issuable under employee stock
plans.
COMPREHENSIVE INCOME
Comprehensive Income consists of net income and adjustments to available-for-
sale securities. Old Kent presents comprehensive income in the Consolidated
Statement of Shareholders' Equity.
FINANCIAL INSTRUMENT ACCOUNTING POLICY
Old Kent uses certain off-balance sheet derivative financial instruments,
including interest rate swaps, Treasury futures and options, and interest rate
caps and floors in connection with risk management activities. Provided these
instruments meet specific criteria, they are considered hedges and accounted
for under the accrual or deferral methods, as more fully discussed below.
Old Kent uses interest rate swaps to hedge interest rate risk on interest-
earning assets and interest-bearing liabilities. Amounts receivable or payable
under these agreements are included in net interest income. There is no
recognition on the balance sheet for changes in the fair value of the hedging
instrument. Gains or losses on terminated interest rate swaps are deferred and
amortized to interest income or expense over the remaining life of the contract
term.
Old Kent uses forward sale agreements and options on forward sale agreements to
protect the value of residential loan commitments, loans held-for-sale and
related mortgage-backed securities held in the trading account. The market
value of the financial hedges associated with loan origination commitments and
loans held-for-sale are included in the aggregate valuation of mortgages held-
for-sale. Premiums paid for options are deferred as a component of other assets
and amortized against gains on sale of loans over the contract term. Forward
sale agreements associated with mortgage-backed securities held in the trading
account are considered when marking those securities to market, with the
corresponding adjustment recorded to gains on sales of loans. 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.
9
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137,
"Deferral of the Effective Date of FASB Statement No. 133, and as amended
by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities- an Amendment of FASB Statement No. 133." These
Statements establish accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
the other contracts) be recorded on the balance sheet as either an asset or
a liability measured at its fair value. These Statements require 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 the changes in fair value of the derivative
instrument to be offset against the change in fair value of the related
hedge item. SFAS No. 133 requires a company to formally document, designate
and assess the effectiveness of hedging relationships that receive hedge
accounting.
Old Kent has adopted the provision of SFAS 133 as of January 1, 2001. With
respect to certain derivative instruments embedded in other contracts, Old
Kent has elected to apply SFAS 133, as amended, only to those instruments
that were issued, acquired or substantially modified after December 31, 1998.
The Corporation has examined and updated its current derivative use policy,
and identified the following hedge arrangements, along with their anticipated
treatment on an ongoing operating basis under the provisions of FASB
Statement No. 133. As discussed in the following paragraphs, the Statement
could increase volatility in earnings and other comprehensive income.
The Corporation enters into interest rate swap agreements to manage interest
rate risk. Under the provisions of SFAS 133, these swap agreements will be
classified as a cash flow hedge and qualify for special hedge accounting.
It is expected that these hedges will be highly effective, therefore
minimizing any future impact on earnings or accumulated other comprehensive
income as a result of changes in the future cash flows of the derivative
instrument or hedged item.
Old Kent Mortgage Company enters into hedging agreements to hedge the
interest rate inherent in loan commitments. Because mortgage loan
commitments are expected to be deemed derivatives under SFAS No. 133, the
loan commitments and the corresponding hedges do not qualify for hedge
accounting. As a result, both instruments will be marked-to-market on the
balance sheet and will also have a direct impact to the income statement.
Based on current market conditions, management believes these impacts to
be not material. Old Kent Mortgage Company utilizes instruments to hedge
the mortgages held-for-sale portfolio and to help protect against market
value changes in the MSR portfolio. These hedges are classified as fair value
hedges under SFAS No. 133 and may have an impact on the earnings of the
Corporation, which is deemed not material based on current estimates.
Reclassification
Certain reclassifications have been made to prior periods' financial
statements to place them on a basis comparable with the current period's
financial statements.
NOTE 2. BUSINESS ACQUISITIONS
On October 13, 2000, Old Kent completed the acquisition of Home Bancorp.
The merger was accounted for as a purchase transaction. Old Kent
exchanged approximately 5.6 million shares of Old Kent Common Stock for
all the outstanding shares of Home Bancorp Common Stock. The approximate
purchase price for this transaction is $39.1 million. Home Bancorp was a
bank holding company headquartered in Fort Wayne, Indiana, with consolidated
assets of approximately $390 million and consolidated deposits of
approximately $327 million at September 30, 2000. Home Bancorp operated 10
banking locations; seven in Fort Wayne, two in Decatur and one branch in
New Haven.
On April 1, 2000, Old Kent completed the acquisition of Grand Premier
Financial, Inc. ("Grand Premier"). The merger was accounted for
as a pooling-of-interests and all financial statements have been
adjusted to reflect this business combination. Old Kent exchanged
approximately 9.4 million shares of Old Kent Common Stock for all
10
<PAGE>
the outstanding shares of Grand Premier Common Stock. Grand Premier was a bank
holding company headquartered in Wauconda, Illinois, with consolidated assets of
approximately $1.7 billion and consolidated deposits of approximately 1.3
billion at March 31, 2000. Grand Premier operated 23 banking offices in the
Chicago area and Northern Illinois.
On February 11, 2000, Old Kent completed the acquisition of Merchants
Bancorp, Inc. ("Merchants"). The merger was accounted for as a pooling-of-
interests and all financial statements in this report have been adjusted
to reflect this business combination. Old Kent exchanged approximately
4.4 million shares of Old Kent Common Stock for all of the outstanding
shares of Merchants Common Stock. Merchants was a bank holding company
headquartered in Aurora, Illinois. When acquired, Merchants had
consolidated assets of approximately $1 billion and consolidated deposits of
approximately $0.7 billion. Merchants operated 12 suburban Chicago area
banking sites as well as two banking sites in DeKalb and Kendall Counties.
During the first six months of 2000, Old Kent recognized $43.6 million of
after-tax merger related charges associated with Grand Premier Financial, Inc.
and Merchants Bancorp, Inc. which had the effect of reducing earnings per
share by $.31. On a pre-tax basis, the charges consisted of transaction
costs of $5.9 million; employment charges of $19.8 million primarily related
to redundant staffing; $16.3 million mainly associated with contract
cancellation costs and asset obsolescence for duplicate operations; $12.0
million special loan loss provision to conform Grand Premier and Merchants
asset quality measurements with Old Kent's practices; and $6.1 million of
securities losses resulting from the sale of $266 million of securities and
$5.3 million resulting from the securitization and sale of $270 million of
residential mortgages to realign the balance sheet composition of the newly
combined companies to Old Kent's profile.
On September 3, 1999, Old Kent completed the acquisition of Pinnacle Banc
Group, Inc. ("Pinnacle"). The merger was accounted for as a pooling-of-
interests and all financial statements in this report have been adjusted to
reflect this business combination. Old Kent exchanged approximately 5.6 million
shares of Old Kent Common Stock for all of the outstanding shares of Pinnacle
Common Stock. Pinnacle was a bank holding company headquartered in the Chicago
suburb of Oak Brook, Illinois. When acquired, Pinnacle had assets of
approximately $1.0 billion and consolidated deposits of approximately $861
million. Pinnacle was the parent of Pinnacle Bank, which operated thirteen
branches in the Chicago metropolitan area and Pinnacle Bank of the Quad-Cities,
which operated three branches in western Illinois.
On July 9, 1999, Old Kent completed the acquisition of CFSB Bancorp, Inc.
("CFSB"). The merger was accounted for as a pooling-of-interests and all
financial statements in this report have been adjusted to reflect this
business combination. Old Kent exchanged approximately 5.5 million shares
of Old Kent Common Stock for all of the outstanding shares of CFSB Common
Stock. CFSB was a holding company headquartered in Lansing, Michigan. When
acquired, CFSB had consolidated assets of approximately $878 million and
consolidated deposits of approximately $567 million. CFSB was the parent of
Community First Bank. CFSB provided banking services through sixteen offices in
Ingham, Clinton, Eaton and Ionia Counties in Michigan.
During the third quarter of 1999, Old Kent recognized $17.6 million of after-
tax, merger-related charges associated with CFSB and Pinnacle, which had the
effect of reducing earnings per share by $.13. On a pre-tax basis, the charges
consisted of transaction costs of $2.0 million; employment charges of $11.8
million primarily related to redundant staffing; and $12.2 million mainly
associated with contract cancellation costs and asset obsolescence for
duplicate operations. Old Kent's unexpended reserves for these charges were
$7.7 million at December 31, 1999. These reserves were substantially utilized
during 2000.
On October 1, 1998, Old Kent completed the acquisition of First Evergreen
Corporation ("First Evergreen"). When acquired, First Evergreen had assets of
approximately $1.9 billion and deposits of approximately $1.7 billion. The
merger was accounted for as a pooling-of-interests and all financial statements
in this report have been adjusted to reflect this business combination. Old
Kent exchanged approximately 12.8 million shares of Old Kent Common Stock for
all the outstanding shares of First Evergreen Common Stock. During the fourth
quarter of 1998, Old Kent recognized $19.7 million of after-tax, merger-related
charges, which had the effect of reducing earnings per share by $.13. First
Evergreen was a bank holding company headquartered in Evergreen Park, Illinois.
First Evergreen provided banking services through eight offices in Cook County,
Illinois.
11
<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 $21.0 million during 1999 and
$61.4 million during 1998.
At December 31, 1999, securities having an aggregate amortized cost of
approximately $2.6 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 $710 million in
1999, and $694 million in 1998. The maximum amount of outstanding agreements at
any month-end during 1999 was $811 million. The average Securities Purchased
Under Agreements to Resell was $12 million in 1999, and $12 million in 1998.
It is Old Kent's policy to take possession of securities purchased under
agreements to resell.
NOTE 4. SECURITIES AVAILABLE-FOR-SALE
The following summarizes amortized cost and market values of securities
available-for-sale at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1999 (IN THOUSANDS) GROSS GAINS LOSSES VALUE
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and federal agency
securities $771,887 $141 $24,154 $747,874
Collateralized mortgage
obligations:
U.S. Government issued 1,056,360 54 32,586 1,023,828
Privately issued 424,985 40 8,898 416,127
Mortgage-backed pass-through
securities 626,783 484 28,062 599,205
State and political subdivisions 236,117 3,730 5,222 234,625
Other securities 219,060 301 3,191 216,170
---------- ------- -------- ----------
Total $3,335,192 $4,750 $102,113 $3,237,829
========== ======= ======== ==========
<CAPTION>
DECEMBER 31, 1998 (IN THOUSANDS)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and federal agency
securities $1,393,338 $30,711 $400 $1,423,649
Collateralized mortgage
obligations:
U.S. Government issued 1,473,575 10,713 2,133 1,482,155
Privately issued 366,307 2,057 902 367,462
Mortgage-backed pass-through
securities 198,890 1,499 671 199,718
State and political subdivisions 249,818 13,974 366 263,426
Other securities 304,993 11,518 1,717 314,794
---------- ------- ------- ----------
Total $3,986,921 $70,472 $6,189 $4,051,204
========== ======= ======= ==========
</TABLE>
12
<PAGE>
The amortized cost and market values of securities available-for-sale at
December 31, 1999, are shown below by their contractual maturity. Expected
maturities may differ from contractual maturities because issuers may have the
right to call or prepay the obligation with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
DECEMBER 31, 1999 (IN THOUSANDS) COST VALUE
------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury and federal agency securities:
Due in one year or less $87,668 $87,531
Due after one year through five years 457,844 444,236
Due after five years through ten years 171,785 163,868
Due after ten years 54,590 52,239
---------- ----------
Total U.S. Treasury and federal agency securities 771,887 747,874
---------- ----------
State and political subdivision securities:
Due in one year or less 26,585 26,606
Due after one year through five years 73,313 73,586
Due after five years through ten years 57,176 57,429
Due after ten years 79,043 77,004
---------- ----------
Total state and political subdivision securities 236,117 234,625
Collateralized mortgage obligations and other mortgage-
backed securities 2,108,128 2,039,160
Other securities 219,060 216,170
---------- ----------
Total $3,335,192 $3,237,829
========== ==========
</TABLE>
NOTE 5. SECURITIES HELD-TO-MATURITY
The following summarizes amortized cost and market values of securities held-
to-maturity at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
December 31, 1999 (in thousands) COST GAINS LOSSES VALUE
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and federal agency
securities $30,507 $9 $534 $29,982
Collateralized mortgage
obligations:
U.S. Government issued 25,973 -- 503 25,470
Privately issued 5,266 -- 55 5,211
Mortgage-backed pass-through
securities 61,096 947 791 61,252
State and political subdivision
securities 482,253 5,660 23,630 464,283
Other securities 4,169 2 -- 4,171
-------- ------- ------- --------
Total $609,264 $6,618 $25,513 $590,369
======== ======= ======= ========
<CAPTION>
December 31, 1998 (in thousands)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and federal agency
securities $182,362 $2,406 $33 $184,735
Collateralized mortgage
obligations:
U.S. Government issued 65,649 77 240 65,486
Privately issued 26,210 -- 106 26,104
Mortgage-backed pass-through
securities 88,512 1,974 93 90,393
State and political subdivision
securities 440,077 16,347 467 455,957
Other securities 956 -- -- 956
-------- ------- ------- --------
Total $803,766 $20,804 $939 $823,631
======== ======= ======= ========
</TABLE>
13
<PAGE>
The amortized cost and market values of securities held-to-maturity at December
31, 1999, are shown below by their contractual maturity. Expected maturities
may differ from contractual maturities because issuers may have the right to
call or prepay the obligation with or without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
December 31, 1999 (In Thousands) COST VALUE
----------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury and federal agency securities:
Due in one year or less $3,011 $3,020
Due after one year through five years 5,000 4,886
Due after five years through ten years 22,496 22,076
-------- --------
Total U.S. Treasury and federal agency securities 30,507 29,982
-------- --------
State and political subdivision securities:
Due in one year or less 36,467 36,735
Due after one year through five years 117,548 119,495
Due after five years through ten years 129,860 128,457
Due after ten years 198,378 179,596
-------- --------
Total state and political subdivision securities 482,253 464,283
Collateralized mortgage obligations and other mortgage-
backed securities 92,335 91,933
Other 4,169 4,171
-------- --------
Total $609,264 $590,369
======== ========
</TABLE>
NOTE 6. LOANS AND NONPERFORMING ASSETS
The following summarizes loans:
<TABLE>
<CAPTION>
December 31 (in thousands) 1999 1998
-----------------------------------------------------------
<S> <C> <C>
Commercial $3,742,234 $3,353,056
Real estate--Commercial 2,988,586 2,536,561
Real estate--Construction 1,204,291 835,731
Real estate--Residential mortgages 1,881,498 2,095,838
Real estate--Consumer home equity 2,240,708 1,251,689
Consumer 1,582,012 1,548,691
Lease financing 262,334 166,374
----------- -----------
Total Loans $13,901,663 $11,787,940
=========== ===========
</TABLE>
Loans made by Old Kent to its directors and executive officers, including their
family members and associated entities, aggregated $78 million and $54 million
at December 31, 1999 and 1998, respectively. During 1999, new loans and other
additions amounted to $53 million and repayments and other reductions were $29
million. These loans were made in the ordinary course of business under normal
credit terms, including interest rate and collateralization and do not
represent more than a normal risk of collection.
During 1998, Old Kent sold $90.1 million of student loans and $47.4 million of
auto loans. A $1.7 million gain was recognized on these sales. During 1997, Old
Kent sold its credit card loan portfolio of $266.3 million and $59.3 million of
other consumer loans. A $17.0 million gain was recognized on these sales.
14
<PAGE>
NOTE 6. LOANS AND NONPERFORMING ASSETS.
The table below summarizes impaired loans and other nonperforming assets:
<TABLE>
<CAPTION>
December 31 (in thousands) 1999 1998
---------------------------------------------------
<S> <C> <C>
Impaired loans:
Nonaccrual loans $ 66,395 $ 73,295
Restructured loans 2,210 3,964
----------- -----------
Total impaired loans 68,605 77,259
Other real estate owned 8,538 8,795
----------- -----------
Total nonperforming assets $ 77,143 $ 86,054
=========== ===========
</TABLE>
Loans past due 90 days or more for which interest income continues to be
recognized totaled $14.9 million and $17.0 million at December 31, 1999, and
1998, respectively. Gross interest income that would have been recorded in 1999
for nonaccrual and restructured loans as of December 31, 1999, assuming
interest had been accrued throughout the year in accordance with original
terms, was $6.7 million. The comparable total for 1998 was $7.5 million. The
amount of interest included in income on these loans was $2.6 million and $3.0
million in 1999 and 1998, respectively. During the years 1999 and 1998,
impaired loans averaged $67.8 million and $81.6 million, respectively. At
December 31, 1999, there was no specific valuation allowance associated with
impaired loans.
At December 31, 1999, the Corporation's management has also identified loans
totaling approximately $14.3 million as potential problem loans. These loans
are not included as nonperforming assets in the table above. While these loans
were in compliance with repayment terms at December 31, 1999, other
circumstances caused management to seriously doubt the ability of the borrowers
to continue to remain in compliance with existing loan repayment terms.
Although Old Kent has a diversified loan portfolio, a substantial natural
geographic concentration of credit risk exists within the Corporation's defined
customer market areas. These geographic market areas are the State of Michigan,
the greater Grand Rapids, Michigan area, and the Chicago, Illinois metropolitan
and suburban markets. There are no significant concentrations of credit where
customers' ability to honor loan terms is dependent upon a single economic
sector.
15
<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) 1999 1998 1997
----------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $200,555 $196,968 $199,288
Additions:
Provision charged to operations 35,388 52,930 59,673
Business acquisitions and loan purchases 120 -- 3,204
-------- -------- --------
Total additions 35,508 52,930 62,877
-------- -------- --------
Deductions:
Credit losses (55,006) (70,810) (74,837)
Less recoveries 25,222 21,942 18,235
-------- -------- --------
Net credit losses (29,784) (48,868) (56,602)
Loan sales and other dispositions -- (475) (8,595)
-------- -------- --------
Total deductions (29,784) (49,343) (65,197)
-------- -------- --------
Balance at end of year $206,279 $200,555 $196,968
======== ======== ========
</TABLE>
NOTE 8. PREMISES AND EQUIPMENT
The following summarizes leasehold improvements, premises and equipment:
<TABLE>
<CAPTION>
December 31 (in thousands) 1999 1998
-----------------------------------------------------------------------
<S> <C> <C>
Land $47,552 $48,299
Land improvements 13,372 11,196
Buildings and improvements 274,940 280,791
Leasehold improvements 31,168 27,733
Furniture and equipment 253,340 240,850
----------- -----------
620,372 608,869
Less accumulated depreciation and amortization 331,807 311,208
----------- -----------
Net premises and equipment $ 288,565 $ 297,661
=========== ===========
</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) 1999 1998
------------------------------------- -----------
<S> <C> <C>
Goodwill $ 132,988 $ 143,768
Core deposit intangibles 18,340 22,897
----------- -----------
Total $ 151,328 $ 166,665
=========== ===========
</TABLE>
16
<PAGE>
Other assets shown on the consolidated balance sheet include mortgage servicing
rights ("MSRs") as follows:
<TABLE>
<CAPTION>
DECEMBER 31, (IN THOUSANDS) 1999 1998
---------------------------------------------------------------------------
<S> <C> <C>
MSRs, net of amortization $ 277,544 $ 231,112
Less servicing valuation reserve -- (9,129)
----------- -----------
Carrying value of MSRs $ 277,544 $ 221,983
=========== ===========
Estimated aggregate fair value of capitalized MSRs $ 323,000 $ 255,000
</TABLE>
The estimated fair values shown above for these MSRs, were determined based
upon quoted market prices for comparable transactions, where available, or the
present value of expected future cash flows.
The following reflects capitalized mortgage servicing rights and the related
servicing valuation reserve for the years indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, (IN THOUSANDS) 1999 1998
--------------------------------------------------------------
<S> <C> <C>
MSRs:
Balance at beginning of period $231,112 $153,064
Additions 257,925 204,224
Sales (155,839) (73,740)
Amortization (55,654) (52,436)
----------- -----------
Balance at end of period $277,544 $231,112
=========== ===========
Related servicing valuation reserve:
Balance at beginning of period $(9,129) $(4,629)
Servicing valuation provision 9,129 (4,500)
----------- -----------
Balance at end of period $-- $(9,129)
=========== ===========
</TABLE>
NOTE 10. OTHER BORROWED FUNDS
The following summarizes other borrowed funds:
<TABLE>
<CAPTION>
DECEMBER 31 (IN THOUSANDS) 1999 1998
-----------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Bank notes $500,000 $250,000
Securities sold under agreements to repurchase 732,274 782,075
Treasury tax and loan demand notes 161,084 110,940
Federal funds purchased 271,486 502,000
Federal Home Loan Bank advances 1,102,420 849,085
Other borrowed funds 56,770 54,354
----------- -----------
Total other borrowed funds $ 2,824,034 $ 2,548,454
=========== ===========
</TABLE>
The $500.0 million of bank notes bear interest at variable rates indexed to
three-month LIBOR and prime and mature at various dates through 2000.
The Federal Home Loan Bank (FHLB) advances are at fixed and variable interest
rates and mature at various dates through 2011. The fixed interest rate
advances have a weighted average interest rate of 6.06%. The variable
interest rate advances are indexed to one-month LIBOR and Fed effective
rates. Advances from the FHLB are collateralized by 1-4 family mortgages.
17
<PAGE>
NOTE 11. LONG-TERM DEBT
Long-term debt, as shown in the accompanying consolidated balance sheets,
consists of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(dollars in thousands)
<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 Debenture ranks subordinate and junior in
right of payment to all Indebtedness (as defined) of Old Kent. The Debenture
matures on February 1, 2027, but may be redeemed in whole or in part beginning
on February 1, 2007, or earlier upon the occurrence of certain special events
defined in the Indenture governing the Debenture.
On January 31, 1997, the Trust sold Floating Rate Subordinated Capital Income
Securities ("Preferred Securities") having an aggregate liquidation amount of
$100 million to investors and issued Common Capital Securities ("Common
Securities") having an aggregate liquidation amount of $3,092,784 to Old Kent.
All of the proceeds from the sale of Preferred Securities and Common Securities
were invested in the Debenture. Preferred Securities and Common Securities
represent undivided beneficial interests in the Debenture, which is the sole
asset of the Trust. Holders of Preferred Securities and Common Securities are
entitled to receive distributions from the Trust on terms which correspond to
the interest and principal payments due on the Debenture. Payment of
distributions by the Trust and payments on liquidation of the Trust or
redemption of Preferred Securities are guaranteed by Old Kent to the extent the
Trust has funds available (the "Guarantee"). Old Kent's obligations under the
Guarantee, taken together with its obligations under the Debenture and the
Indenture, constitute a full and unconditional guarantee of all of the Trust's
obligations under the Preferred Securities issued by the Trust. Because the
Common Securities held by Old Kent represent all of the outstanding voting
securities of the Trust (in the absence of a default or other specified event),
the Trust is considered to be a wholly owned subsidiary of Old Kent for
reporting purposes and its accounts are reflected in the Consolidated Financial
Statements of Old Kent.
The Preferred Securities qualify as Tier I capital for regulatory capital
purposes. Issuance of the Preferred Securities by the Trust had the effect of
increasing Old Kent's regulatory capital.
NOTE 12. PREFERRED STOCK AND PREFERRED STOCK PURCHASE RIGHTS
At December 31, 1999, 1998 and 1997, there were 25,000,000 shares of preferred
stock authorized but not issued. At December 31, 1999, 1998 and 1997, 3,000,000
of these shares were designated Series A Preferred Stock and 500,000 shares
were designated Series B Preferred Stock. At December 31, 1999 and 1998,
1,000,000 shares of authorized but unissued preferred stock were designated
Series C Preferred Stock.
On December 31, 1999, approximately 50.8 million Series C Preferred Stock
Purchase Rights ("Series C Rights") were outstanding. Series C Rights were
issued under the Preferred Stock Purchase Rights Plan of 1997 and are governed
by a rights agreement (the "Rights Agreement"), which was adopted by the Board
on January 20, 1997. Series C Rights were issued on February 14, 1997 as a
dividend to holders of the Corporation's common stock at the rate of one right
for each share of common stock outstanding. As a result of a two-for-one stock
split paid in 1997 and a 5% stock dividend paid in 1997, 1998 and 1999, each
share of the Corporation's common stock carried .4113 of a Series C Right at
December 31, 1999. Each full Series C Right entitled the holder to buy 1/100 of
a share of Series C Preferred Stock at a price of $160.00. The exercise price
and the number of shares of Series C Preferred Stock issuable upon the exercise
of the Series C Rights are subject to adjustment in certain cases to prevent
dilution. Series C Rights are attached to and evidenced by common stock
certificates and are not transferable apart from the common stock until the
occurrence of certain events set forth in the Rights Agreement. Series C Rights
do not have any voting rights. Series C Rights are redeemable at the option of
the Corporation, at a price of $.01 per Series C
18
<PAGE>
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 .4113 of a Right (subject to
possible future adjustment) with each newly issued share of common stock.
On December 31, 1999, 7,250 shares of preferred stock were designated Series D
Perpetual Preferred Stock ("Series D Shares") and 2,000 shares of preferred
stock were designated Series E Preferred Stock ("Series E Shares"). Series D
Shares and Series E Shares were, at December 31, 1999, authorized, unissued,
and reserved for issuance in the then pending acquisition of Grand Premier.
Each Series D Share and Series E Share would have a stated value of $1,000 per
share and would provide for cumulative dividends, payable quarterly, at an
annual rate of 8% based on the $1,000 stated value. Series D Shares are senior
as to dividends to Series E Shares and both Series D and Series E Shares are
senior as to dividends to Old Kent Series C Preferred Stock and Old Kent Common
Stock. In the event of liquidation, Series D Shares and Series E Shares would
rank on parity and would be senior to Old Kent Series C Preferred Stock and Old
Kent Common Stock. Neither Series D Shares nor Series E Shares are redeemable
at the option of either Old Kent or the holder. Series D Shares are
convertible, at the option of the holder, into shares of Old Kent Common Stock,
at a price of $18.2905 of stated value per share of Old Kent Common Stock,
subject to antidilution provisions. Series E Shares would not be convertible,
but would, in the event of certain business combinations, be entitled to
receive a cash payment equivalent to the conversion value of Series D Shares.
Series D Shares and Series E Shares were issued to holders of equivalent
classes of preferred stock of Grand Premier in Old Kent's acquisition
of Grand Premier, completed April 1, 2000.
NOTE 13. COMMON STOCK
During the three years ended December 31, 1999, the Corporation has issued
shares for stock dividends as follows:
<TABLE>
<CAPTION>
Amount of Number of
Stock Shares Payment Record Declaration
Dividend Issued Date Date Date
Year --------- --------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
1999 5 percent 5,125,000 July 19 June 29 June 21
1998 5 percent 4,489,000 July 17 June 26 June 15
1997 5 percent 2,269,000 July 28 June 27 June 16
</TABLE>
On July 14, 2000, the Corporation issued 6.5 million shares of its common stock
in a 5 percent stock dividend, to shareholders of record June 30, 2000. On
December 15, 1997, the Corporation issued 46.4 million shares of its common
stock in a two-for-one stock split, effected as a 100 percent stock dividend,
to shareholders of record on November 14, 1997. All per share amounts included
in this report have been retroactively adjusted to reflect the effect of the
stock dividends and the stock split. On June 16, 1997, the Board of Directors
of the Corporation authorized repurchase of up to 3.0 million shares of Old
Kent Common Stock, which would be reserved for later reissue in connection with
future stock dividends, employee stock plans and other corporate purposes. This
authorization was amended by the Board of Directors on October 20, 1997, to
give effect to the two-for-one stock split paid December 15, 1997. The amended
authorization doubled the number of shares authorized for repurchase but not
yet repurchased on the payment date of the stock split. On June 15, 1998, the
Board of Directors of the Corporation authorized repurchase of up to 6.0
million shares of Old Kent Common Stock, which are reserved for later reissue
in connection with future stock dividends, employee stock plans, and other
corporate purposes. On June 21, 1999, Old Kent's Board of Directors authorized
repurchase of up to 3.0 million shares of Old Kent Common Stock, which are
reserved for later reissue in connection with future stock dividends, employee
stock plans and other corporate purposes.
19
<PAGE>
The table below summarizes shares repurchased and reserved with the intent of
future reissuance at December 31, 1999:
<TABLE>
<CAPTION>
Dividend
Reinvestment
Stock and Employee
Total Dividends Stock Plans
---------- ---------- ------------
<S> <C> <C> <C>
Shares reserved at December 31, 1998 3,801,670 2,600,000 1,201,670
Shares repurchased under authorizations 4,128,908 3,168,209 960,699
Shares issued for related stated purposes (5,939,532) (5,018,209) (921,323)
---------- ---------- ---------
Shares reserved at December 31, 1999 1,991,046 750,000 1,241,046
========== ========== =========
</TABLE>
Of the 4.1 million shares repurchased during 1999, 1.5 million shares were
repurchased under the June 15, 1999, authorization. At December 31, 1999, Old
Kent had remaining authorization to repurchase approximately 1.5 million shares
of its common stock over the ensuing seven month period. Shares intended for
anticipated future stock dividends are reacquired ratably on a quarterly basis;
shares intended for reissue in connection with dividend reinvestment and
employee stock plans are reacquired quarterly as needed to maintain shares
reserved for those purposes at a level consistent with anticipated permissible
needs; shares for use in connection with general corporate purposes and
business acquisitions are reacquired based upon need.
NOTE 14. STOCK BASED COMPENSATION
Old Kent has stock option plans under which options may be granted to certain
key employees at not less than the market price of Old Kent's common stock on
the date of grant. The options granted are exercisable immediately, or are
subject to a vesting schedule where one third of the shares vests immediately,
one third vests at the first anniversary date of the grant, and the final third
vests at the second anniversary date. Options granted expire within ten years
of the date of grant, subject to certain cancellation provisions relating to
employment. In addition, under the Stock Incentive Plan of 1999, Old Kent may
also award restricted stock to certain key employees. At December 31, 1999, a
total of 7.9 million shares were reserved for option or restricted stock
grants, including 3.6 million shares available for future option or restricted
stock grants under stock incentive plans. Restricted shares issued pursuant to
the plans are restricted as to sale or transfer for a specified period,
typically five years and are forfeitable (subject to certain exceptions) upon
termination of employment, but provide the recipients with all other rights and
benefits of ownership. During 1999, 1998, and 1997, Old Kent issued 52,667
shares, 112,671 shares and 211,003 shares of its common stock with total market
values of $1,892,100, $3,835,000 and $5,071,000, respectively, which are being
amortized ratably to expense over the period of restriction. The following
table summarizes stock option transactions and the related average exercise
prices for the last three years:
<TABLE>
<CAPTION>
(adjusted for stock splits and dividends)
-----------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
No. of Exer. No. of Exer. No. of Exer.
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 3,434,773 $20.26 2,757,404 $13.28 3,207,087 $10.28
Options granted 1,982,966 38.98 1,178,352 32.83 590,838 23.40
Options exercised (759,164) (14.77) (437,680) (9.97) (1,015,630) (10.59)
Options forfeited or
canceled (74,251) (34.54) (63,303) (23.18) (24,891) (11.75)
--------- --------- ---------
Options outstanding at
end of year 4,584,324 $30.05 3,434,773 $20.26 2,757,404 $13.28
========= ========= =========
Weighted average
estimated fair value of
options granted in year $10.86 $8.80 $5.33
Exercisable at end of
year 2,858,759 $25.37 2,777,443 $18.07 2,388,872 $12.11
========= ========= =========
</TABLE>
20
<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>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Dividend yield 2.0% 2.0% 2.5%
Expected average life (in years) 6 6 5
Expected volatility 22% 23% 20%
Risk free interest rate 5.8-6.3% 4.5-5.5% 5.7-6.2%
</TABLE>
Options were outstanding at December 31, 1999 as follows:
<TABLE>
<CAPTION>
Outstanding Stock Exercisable
Options Options
-------------------- ------------------
Weighted
Average
Number of Weighted Remaining Weighted
Exercise Options Average Contractual Average
price per Lowest Highest at year Exercise Life Number of Exercise
share Price Price end Price (years) Options Price
--------- ------ ------- --------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Under $11 $4.43 $10.04 203,546 $8.03 1.7 203,546 $8.03
$11 -$18 11.80 17.79 812,692 13.53 5.3 807,084 13.54
$19 -$28 20.05 27.30 478,496 23.50 7.6 432,150 21.03
$29 -$39 29.42 38.80 1,178,206 32.97 8.6 766,415 33.11
Over $39 39.20 39.85 1,911,384 39.26 9.5 649,564 39.27
--------- ---------
All options $4.43 $39.85 4,584,324 $30.05 8.0 2,858,759 $25.37
========= =========
</TABLE>
The Corporation accounts for its option plans and employee stock purchase plan
under the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25), under which no compensation cost has
been recognized in the accompanying Consolidated Statement of Income. The table
below displays pro forma amounts for net income and net income per common share
which reflects the effects of additional compensation cost for 1999, 1998, and
1997 option grants as if they had been recognized under SFAS No. 123,
"Accounting for Stock Based Compensation." The 1999 proforma figures also
include the impact of additional compensation cost associated with the 15%
discount provided to eligible employees who participate in the Old Kent
Financial Corporation Employee Stock Purchase Plan of 1999, which is further
described below.
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- ---------------------------
Basic Diluted Basic Diluted Basic Diluted
Net Income EPS EPS Net Income EPS EPS Net Income EPS EPS
------------------------------------------------------------------------------------------------
(in millions) (in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As reported $279.1 $2.00 $1.98 $261.1 $1.81 $1.79 $247.8 $1.65 $1.63
Pro forma $269.7 $1.94 $1.92 $256.3 $1.78 $1.76 $246.0 $1.63 $1.62
</TABLE>
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 804,665 authorized
but previously unissued shares of Old Kent's common stock. Shares awarded under
the plan would not be issued until the end of the deferral period, unless there
is a change in control of the Corporation, in which case the shares would be
issued to a trust where they are to be held and distributed at the end of the
deferral period. Employees who receive awards under this plan will receive
additional shares as if the dividends which would have been paid on the shares
awarded if they were outstanding during the deferral period were reinvested
under Old Kent's dividend reinvestment plan. There were no awards of deferred
stock during 1999 or 1998. During 1997, Old Kent awarded 32,382 shares of its
common stock valued at $755,000 at their award date. At December 31, 1999,
there were 523,301 shares reserved for future deferred stock compensation plan
awards.
The Old Kent Financial Corporation Employee Stock Purchase Plan of 1999 (the
"Purchase Plan") provides for eligible employees to authorize the Company
to withhold up to $1,000 of their compensation for the purchase of shares of
Old Kent Common Stock. Approximately 2,379 or 30% of the Company's eligible
employees participate in the Purchase Plan. The purchase price for each share
is equal to 85% of the market value on the day of the
21
<PAGE>
purchase. A total of 2.2 million shares were reserved for issuance under the
Purchase Plan. The market value of shares purchased by a participant cannot
exceed $25,000 in any one year. Since the inception of the Purchase Plan in
July of 1999, a total of 25,575 shares have been purchased by participants at
prices ranging from $29.22 to $32.26 per share. The weighted average price of
these shares was $30.90. As of December 31,1999, 2.18 million shares of the
Corporation's common stock are available for purchase under the Purchase Plan.
Old Kent also had restricted stock plans under which certain key employees were
awarded restricted stock. These plans were replaced in 1999 by the Employee
Stock Purchase Plan of 1999 and all future awards will be made under this plan.
Shares issued pursuant to the plans are restricted as to sale or transfer for a
period of up to five years and are forfeitable (subject to certain exceptions)
upon termination of employment, but provide the recipients with all other
rights and benefits of ownership. During 1998 and 1997, Old Kent issued 112,671
shares and 211,003 shares of its common stock with total market values of
$3,835,000 and $5,071,000, respectively, which are being amortized ratably to
expense over the period of restriction.
NOTE 15. EMPLOYEE BENEFITS
The Corporation provides pension benefits to substantially all of its employees
under the terms of the "Old Kent Retirement Income Plan." Old Kent also
provides its key executives with pension benefits under the provisions of the
"Old Kent Executive Retirement Income Plan." Old Kent uses a measurement date
of September 30 for its disclosures. The following table sets forth the changes
in the benefit obligation and plan assets as well as the funded status of both
pension plans for the years ended December 31, 1999 and 1998 in accordance
with the provisions of SFAS No. 132, "Employers' Disclosures about Pensions
and Other Post-Retirement Benefits."
<TABLE>
<CAPTION>
QUALIFIED NON-QUALIFIED
RETIREMENT INCOME RETIREMENT INCOME
PLAN PLAN
------------------- ------------------
(IN THOUSANDS) 1999 1998 1999 1998
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation at prior
measurement date $116,040 $107,314 $22,194 $20,030
Service cost 9,544 9,085 766 875
Interest cost 7,478 7,582 1,420 1,448
Amendments -- 2,594 -- 431
Actuarial (gain)/loss (21,071) 4,572 (3,803) 746
Benefits paid in current year (11,302) (15,107) (1,219) (1,336)
-------- -------- -------- --------
Benefit obligation at measurement
date $100,689 $116,040 $19,358 $22,194
======== ======== ======== ========
Change in Plan Assets
Market value of assets at prior
measurement date $114,661 $111,094 $ -- $ --
Actual return on assets 880 15,674 -- --
Contributions made in current year 2,009 3,000 1,219 1,336
Benefits paid in current year (11,302) (15,107) (1,219) (1,336)
-------- -------- -------- --------
Market value of assets at
measurement date $106,248 $114,661 $ -- $ --
======== ======== ======== ========
Reconciliation of Funded Status
Funded status $5,559 $(1,379) $(19,358) $(22,194)
Unrecognized transition
(asset)/obligation (8,965) (10,792) 157 245
Unrecognized prior service cost 4,225 4,785 2,062 2,332
Unrecognized net (gain)/loss (10,374) 2,426 910 4,997
-------- -------- -------- --------
Accrued pension cost, December 31,
1999 $(9,555) $(4,960) $(16,229) $(14,620)
======== ======== ======== ========
</TABLE>
At December 31, 1999, $16.4 million was held in "rabbi" trust accounts to fund
and secure the benefits of the Non-Qualified Retirement Income Plan as
described in Note 1.
22
<PAGE>
Net pension expense included the following components:
<TABLE>
<CAPTION>
NON-QUALIFIED
QUALIFIED RETIREMENT RETIREMENT INCOME
INCOME PLAN PLAN
YEAR ENDED DECEMBER 31 ---------------------- --------------------
(IN THOUSANDS) 1999 1998 1997 1999 1998 1997
----------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Service cost (benefits earned
during the year) $9,544 $9,085 $7,739 $766 $875 $946
Interest cost on projected
benefit obligation 7,478 7,582 7,955 1,420 1,448 1,639
Expected (return)/loss on plan
assets (9,633) (9,365) (8,348) -- -- --
Amortization of transition
obligation (1,827) (1,827) (1,827) 89 89 89
Amortization of prior service
cost 560 216 216 261 207 207
Recognized net actuarial
(gain)/loss 482 1,046 926 284 316 399
------ ------ ------ ------ ------ ------
Net periodic pension expense $6,604 $6,737 $6,661 $2,820 $2,935 $3,280
====== ====== ====== ====== ====== ======
</TABLE>
The following assumptions were used in determining the actuarial present value
of the projected benefit obligations as of the measurement date for each of the
following years:
<TABLE>
<CAPTION>
QUALIFIED NON-QUALIFIED
RETIREMENT INCOME RETIREMENT
PLAN INCOME PLAN
------------------- ----------------
1999 1998 1997 1999 1998 1997
-------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 7.75% 6.75% 7.00% 7.75% 6.75% 7.00%
Rate of increase in future compensation
levels 4.50 4.25 4.25 6.00 6.00 6.00
Expected long-term rate of return on
plan assets 10.00 10.00 10.00 -- -- --
</TABLE>
Old Kent has adopted amended assumptions, as shown above, for use in the
actuarial determination of its projected benefit obligations at December 31,
1999. Beginning with 1999, Old Kent changed its measurement date from December
31 to September 30. The effects of these changes are included in the actuarial
gain for 1999. The amended assumptions reflect a change in outlook based on
management's assessment of expected economic conditions for the foreseeable
future.
Eligible employees may elect to participate in Old Kent's retirement savings
plans whereby the Corporation contributes a 50% matching contribution for each
amount contributed by participating employees, within limits as defined in the
plans. The cost of these retirement savings plans was $8,881,000, $10,238,000,
and $8,433,000 for 1999, 1998 and 1997, respectively.
The Corporation provides post-retirement benefits other than pensions for a
small group of employees who were entitled to such benefits under plans of
predecessor banking organizations acquired by Old Kent. These benefits
primarily consist of health care and life insurance. The costs of these
benefits are not material and are recognized in the financial statements during
the employees' years of service.
NOTE 16. TAXES ON INCOME
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1999 1998 1997
----------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes:
Current $125,658 $106,801 $105,445
Deferred 14,382 23,017 14,415
State income taxes 9,423 6,334 7,020
-------- -------- --------
Total provision $149,463 $136,152 $126,880
======== ======== ========
</TABLE>
The preceding table excludes tax (benefit) expense of ($43.4 million) and
$3.0 million for 1999 and 1998 respectively, related to the market value
adjustments on investment securities available-for-sale, which is recorded
directly in shareholders' equity.
23
<PAGE>
Income tax expense differs from that computed at the federal statutory rate as
follows:
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1999 1998 1997
----------------------------------------------------------------------
<S> <C> <C> <C>
Tax at 35% statutory rate $149,904 $138,936 $131,066
Tax effect of:
Tax-exempt interest (14,969) (13,006) (11,246)
Other, net 14,528 10,222 7,060
-------- -------- --------
Income tax expense $149,463 $136,152 $126,880
======== ======== ========
Effective tax rate 34.9% 34.3% 33.9%
</TABLE>
Components of the deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1999 1998
------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses $76,007 $74,609
Deferred compensation 25,585 21,834
Accrued expenses 9,273 6,107
Unrealized loss on securities available-for-sale 20,307 --
Other 14,758 15,386
------- -------
Total deferred tax assets 145,930 117,936
Valuation allowance -- --
------- -------
Deferred tax assets 145,930 117,936
------- -------
Deferred tax liabilities:
Mortgage servicing rights 81,827 60,879
Unrealized gain on securities available-for-sale -- 23,049
Other 21,998 20,877
------- -------
Deferred tax liabilities 103,825 104,805
------- -------
Net deferred tax assets $42,105 $13,131
======= =======
</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 because each
business requires different technology and marketing strategies, and also
differs in product emphasis.
Corporate Banking provides a full array of credit, cash management and
international services to corporate customers. The majority of Old Kent's
corporate customers are owner-operated, middle-market companies with $5-150
million in annual sales. This customer base is spread across industries,
including manufacturing, wholesaling, distributing, real estate developing, and
retailing. Retail Banking distributes a broad array of consumer and small
business products including deposits, loans and other transaction oriented
services. These products and services are delivered through a comprehensive
distribution system which includes ATMs, telephone, on-line and supermarket
banking as well as conventional branch sales offices. Community Banking
provides locally-based delivery of a complete range of financial products and
services to smaller communities. Investment and Insurance Services delivers
investment and insurance products through a wide network which includes
traditional trust, private banking, brokerage, investment advisory, insurance
agency, mutual funds, employee benefit administration and other financial
services. Mortgage Banking provides a wide array of residential mortgage loan
products to borrowers through a branch network of 147 offices in 32 states. The
Treasury function primarily manages Old Kent's liquidity and interest rate
risk. With the exception of the Mortgage Banking segment which operates
nationwide, Old Kent's segments operate primarily within the lower peninsula of
Michigan and northern Illinois.
The Treasury function administers intersegment funding using transfer pricing
techniques, consistent with market rates. The elimination of intersegment
funding interest income and expense is included in the Treasury line of
business results.
24
<PAGE>
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
to 1998 and 1999. The following table summarizes information about reportable
operating segments' profit and loss and segments' assets as of December 31,
1999 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------------
INVESTMENT
CORPORATE RETAIL COMMUNITY & MORTGAGE RECONCILING CONSOLIDATED
BANKING BANKING BANKING INSURANCE BANKING TREASURY ITEMS* TOTAL
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest revenues $214,593 $277,576 $174,598 $23,323 $47,294 $35,734 $ -- $773,118
Provision for loan
losses 13,172 12,638 4,572 1,020 4,093 (107) -- 35,388
Non-interest revenues
and fees 23,928 84,630 38,616 114,426 189,776 5,354 -- 456,730
Depreciation and
amortization 9,857 26,118 11,311 4,729 11,590 5,645 -- 69,250
Segment income taxes 47,964 45,973 32,859 17,619 21,772 (8,324) (8,400) 149,463
Net segment profit
(after taxes) 84,936 82,927 61,337 32,077 23,156 12,285 (17,600) 279,118
Segment assets 4,394,143 4,756,319 2,844,415 422,114 2,031,647 6,151,649 -- 20,600,287
Segment loans 4,390,457 4,311,669 2,725,432 359,743 649,718 1,464,644 -- 13,901,663
Segment allowance for
loan losses 90,280 56,395 47,830 5,330 5,249 1,195 -- 206,279
Net segment loans 4,300,177 4,255,274 2,677,602 354,413 644,469 1,463,449 -- 13,695,384
Segment deposits 1,171,730 9,365,585 3,271,642 585,714 2,100 1,375,474 -- 15,772,245
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------------------
INVESTMENT
CORPORATE RETAIL COMMUNITY & MORTGAGE RECONCILING CONSOLIDATED
BANKING BANKING BANKING INSURANCE BANKING TREASURY ITEMS* TOTAL
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest revenues $202,999 $260,421 $171,566 $20,809 $27,299 $57,109 $ -- $740,203
Provision for loan
losses 16,328 13,557 16,459 1,118 1,252 716 3,500 52,930
Non-interest revenues
and fees 19,928 72,791 47,791 100,747 148,687 23,676 -- 413,620
Depreciation and
amortization 9,934 24,240 11,460 4,545 8,001 6,627 -- 64,807
Segment income taxes 38,767 42,699 32,216 12,663 15,193 3,429 (8,815) 136,152
Net segment profit
(after taxes) 72,435 78,952 61,275 22,878 16,701 28,575 (19,678) 261,138
Segment assets 3,791,541 3,291,629 2,565,990 357,842 3,404,540 7,737,144 -- 21,148,686
Segment loans 3,756,337 3,030,030 2,431,477 314,622 261,569 1,993,905 -- 11,787,940
Segment allowance for
loan losses 83,467 53,915 54,000 5,768 1,672 1,733 -- 200,555
Net segment loans 3,672,870 2,976,115 2,377,477 308,854 259,897 1,992,172 -- 11,587,385
Segment deposits 1,134,108 9,677,697 3,420,381 485,242 7,463 1,793,352 -- 16,518,243
</TABLE>
* THE RECONCILING ITEMS IN THE TABLE REFLECT ONE-TIME CHARGES RELATED TO OLD
KENT'S MERGERS DURING 1998 AND 1999. DURING 1999 OLD KENT MERGED WITH CFSB
AND PINNACLE. MERGER CHARGES RELATED TO THESE TRANSACTIONS TOTALED $17.6
MILLION AFTER-TAX. DURING 1998 OLD KENT MERGED WITH FIRST EVERGREEN
CORPORATION. MERGER CHARGES RELATED TO THIS TRANSACTION TOTALED $19.7 MILLION
AFTER-TAX. THESE MERGERS ARE DESCRIBED IN MORE DETAIL IN NOTE 2.
25
<PAGE>
NOTE 18. EARNINGS PER SHARE
The following table reconciles the numerators and denominators used in the
calculations of basic and diluted earnings per common share for each of the
last three years:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic:
Net Income $279,118,000 $261,138,000 $247,831,000
Less: Dividends on preferred stock (740,000) (740,000) (740,000)
------------ ------------ ------------
Income available to common shareholders $278,378,000 $260,398,000 $247,091,000
============ ============ ============
Average common shares outstanding 139,003,000 143,962,000 150,116,000
Basic earnings per common share $2.00 $1.81 $1.65
Diluted:
Net Income $279,118,000 $261,138,000 $247,831,000
Less: Dividends on preferred stock (740,000) (740,000) (740,000)
------------ ------------ ------------
Add: Dividends on convertible preferred
stock 580,000 580,000 580,000
------------ ------------ ------------
Income available to common shareholders $278,958,000 $260,978,000 $247,671,000
============ ============ ============
Average common shares outstanding 139,003,000 143,962,000 150,116,000
Dilutive effect of:
Employee stock plans 1,175,000 1,510,000 1,271,000
Convertible preferred stock 416,000 416,000 416,000
------------ ------------ ------------
Total average shares and assumed
conversions 140,594,000 145,888,000 151,803,000
============ ============ ============
Diluted earnings per common share $1.98 $1.79 $1.63
</TABLE>
26
<PAGE>
NOTE 19. COMMITMENTS AND CONTINGENCIES
Certain facilities and equipment are leased under noncancellable operating
lease agreements which expire at various dates through the year 2021. The
aggregate minimum rental commitments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 (IN THOUSANDS) PREMISES EQUIPMENT TOTAL
--------------------------------------------------------------------
<S> <C> <C> <C>
2000 $14,740 $3,763 $18,503
2001 12,176 1,898 14,074
2002 10,115 959 11,074
2003 6,648 163 6,811
2004 4,376 14 4,390
Thereafter 14,995 -- 14,995
------- ------ -------
Total minimum payments $63,050 $6,797 $69,847
======= ====== =======
</TABLE>
Rental expense charged to operations in 1999, 1998, and 1997, amounted to
approximately $20,465,000, $16,477,000 and $11,201,000, respectively, including
amounts paid under short-term cancellable leases. Certain leases contain
provisions for renewal and purchase options, and require payment of property
taxes, insurance and related expenses.
Included as a reduction of Old Kent's occupancy expense is building rental
income of approximately $4,733,000, $4,519,000 and $3,790,000, for 1999, 1998,
and 1997, respectively.
At December 31, 1999, Old Kent and its subsidiaries were parties, both as
plaintiff and as defendant, to a number of lawsuits which arose in the ordinary
course of business. In the opinion of management, after consultation with the
Corporation's counsel, the ultimate resolution of these matters will not have a
material effect on the Corporation's consolidated financial position or results
of operations.
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
re-pricing characteristics. The Corporation uses investment security and
wholesale funding instruments to manage its exposure to interest rate risk.
Interest rate swap and cap 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.
27
<PAGE>
Old Kent's credit risk in swap and cap contracts relates to the failure of a
counterparty to pay according to the contractual terms of the agreement.
The Corporation manages the credit risk of its interest rate swap and cap
agreements through credit approvals, risk control limits and ongoing monitoring
procedures. Credit exposure is represented by the fair value of interest rate
swaps and caps with a positive fair value, adjusted for accrued interest.
<TABLE>
<CAPTION>
1999 1998
------------------- -----------------
Notional Credit Notional Credit
December 31 (IN THOUSANDS) Amount Exposure Amount Exposure
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Receive fixed/pay floating swaps $1,029,917 $2,556 $819,917 $19,668
Receive floating/pay fixed swaps 410,000 4,258 60,000 --
Interest rate caps 20,000 24 20,000 6
---------- ------ -------- -------
$1,459,917 $6,838 $899,917 $19,674
========== ====== ======== =======
</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 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>
1999 1998
----------------- -----------------
Notional Credit Notional Credit
December 31 (IN THOUSANDS) Amount Exposure Amount Exposure
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate caps sold $26,000 $ -- $26,000 $ --
Interest rate caps purchased 26,000 227 26,000 105
Interest rate floors sold 26,000 -- 26,000 --
Interest rate floors purchased 26,000 57 26,000 366
Receive fixed/pay floating swap 6,500 -- 6,500 --
Receive floating/pay fixed swap 6,500 597 6,500 117
</TABLE>
MORTGAGE BANKING
The Corporation uses forward sales, futures, and option contracts to protect
the value of residential mortgage loans that are being underwritten or
warehoused for future sale to investors in the secondary market. Adverse market
interest rate changes, between the time that a customer receives a rate-lock
commitment and when the fully-funded mortgage loan is sold to an investor, can
erode the value of that mortgage. Therefore, Old Kent enters into forward sales
and futures contracts and purchases exchange-traded option contracts to
mitigate the interest rate risk associated with the origination and sale of
mortgage loans. Old Kent accepts credit risk in forward sales contracts to the
extent of nonperformance by a counterparty, in which case Old Kent would be
compelled to sell the mortgages to another party at the current market price.
The credit exposure of forward sales, futures, and option contracts represents
the aggregate value of contracts with a positive fair value.
<TABLE>
<CAPTION>
1999 1998
-------------------- -----------------------
December 31 Contractual Credit Contractual Credit
(IN THOUSANDS) Amount Exposure Amount Exposure
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage forward sales $618,000 $5,290 $2,257,013 $1,304
Futures and options 389,000 460 390,000 80
</TABLE>
28
<PAGE>
Old Kent began utilizing treasury futures and options in 1998 to hedge the
value of its mortgage servicing rights that could result from falling mortgage
rates and increased mortgage prepayments. The credit risk inherent in these
transactions relates to the possibility of a counterparty not paying according
to the terms of the contract, however this risk is minimal in these hedge
instruments since exchange traded futures and options contracts are used. The
credit exposure is represented by the aggregate value of futures, puts, and
calls with a positive fair value. There were no contracts of this type
outstanding as of December 31, 1999.
<TABLE>
<CAPTION>
1999
--------------------------------------
Expiration Number of Notional Credit
December 31 (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
denominated in foreign currencies. The Corporation manages its exposure to
foreign currency fluctuations by entering into offsetting contracts with
authorized counterparties, usually foreign banks. The credit risk inherent in
these transactions relates to the possibility of failure by a counterparty to
fulfill its purchase or delivery responsibility, whereby Old Kent would execute
the transaction with another counterparty at the prevailing currency exchange
rate. The credit exposure of Old Kent's foreign exchange contracts represents
the aggregate value of contracts with a positive fair value. The extension of
foreign exchange credit facilities to counterparties follows the same approval
process as other credit facilities. The majority of Old Kent's foreign exchange
contracts relate to major currencies such as Canadian Dollars, British Pounds
Sterling, German Deutschemarks, Japanese Yen, Italian Lira, and French Francs.
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
Contractual Credit Contractual Credit
December 31 (IN THOUSANDS) Amount Exposure Amount Exposure
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign exchange forward contracts $32,211 $798 $10,774 $134
</TABLE>
COMMITMENTS
Commitments to extend credit are agreements to lend cash to a customer as long
as there is no breach of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require the payment of a fee. The majority of Old Kent's loan commitments have
maturities that are less than one year and reflect the prevailing market rates
at the time of the commitment. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if deemed necessary by Old Kent, upon extension of credit is based
upon management's credit evaluation of the counterparty. Standby and commercial
letters of credit are Old Kent's conditional commitments to guarantee the
performance of a customer to another party. The Corporation's exposure to
credit loss in the event of nonperformance by the other party is represented by
the contractual amount of those instruments. Old Kent uses the same credit
underwriting policies in making commitments and issuing letters of credit as it
does for its other lending activities.
<TABLE>
<CAPTION>
CONTRACTUAL AMOUNT AT
DECEMBER 31 (IN MILLIONS) 1999 1998
---------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit $5,762 $5,856
Standby and commercial letters of credit 539 513
</TABLE>
29
<PAGE>
NOTE 21. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments" ("SFAS No. 107"), the
following methods and assumptions were used to estimate the fair value of each
significant class of financial instrument, as defined by SFAS No. 107, for
which it is practicable to estimate that value.
The estimated fair values of financial instruments, as shown below, are not
intended to reflect the estimated liquidation or market value of the
Corporation taken as a whole. The disclosed fair value estimates are limited to
Old Kent's significant financial instruments. These include financial
instruments recognized as assets and liabilities on and off the consolidated
balance sheet. The estimated fair values shown below do not include any value
for assets and liabilities which are not financial instruments as defined by
SFAS No. 107, such as the value of real property, the value of "core deposit
intangibles," the value of mortgage servicing rights, nor the value of
anticipated future business.
The estimated fair value amounts were determined using available market
information, current pricing information applicable to Old Kent and various
valuation methodologies. Where market quotations were not available for
financial instruments, considerable management judgment was involved in the
determination of estimated fair values. Therefore, the estimated fair value of
financial instruments shown below may not be representative of the amounts at
which they could be exchanged in a current or future transaction. Due to the
inherent uncertainties of expected cash flows of financial instruments, the use
of alternate valuation assumptions and methods could have a significant effect
on the derived estimated fair value amounts.
CASH AND CASH EQUIVALENTS, INTEREST RECEIVABLE AND INTEREST PAYABLE
For these short-term instruments, the carrying amount was deemed to be a
reasonable estimate of fair value.
INTEREST-EARNING DEPOSITS
The estimated fair value of these holdings was calculated by discounting the
expected future cash flows using rates applicable to similar instruments with
the same remaining maturity.
TRADING ACCOUNT SECURITIES, SECURITIES AVAILABLE-FOR-SALE AND SECURITIES HELD-
TO-MATURITY
The estimated fair values were based upon quoted market or dealer prices.
NET LOANS AND MORTGAGES HELD-FOR-SALE
Generally, the fair value of loans was estimated by discounting the expected
future cash flows using current interest rates at which similar loans would be
made to borrowers with similar credit ratings and remaining maturities. For
certain variable rate loans that 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 for
all instruments that had either short-term maturities or variable re-pricing
structures. The fair value of medium-term fixed rate borrowed funds was
estimated by discounting the expected future cash flows using current interest
rates at which similar borrowings could be made at comparable maturities.
30
<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 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>
1999 1998
------------------------ -----------------------
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 $709,416 $709,416 $832,008 $832,008
Interest-earning deposits 2,167 2,167 10,012 10,012
Trading account securities -- -- 349,090 349,090
Securities available-for-
sale 3,237,829 3,237,829 4,051,204 4,051,204
Securities held-to-
maturity 609,264 590,369 803,766 823,631
Mortgages held-for-sale 901,130 924,980 2,272,373 2,322,429
Net loans 13,695,384 13,795,288 11,587,385 11,952,032
Interest receivable 140,547 140,547 136,202 136,202
FINANCIAL LIABILITIES:
Non-interest-bearing
deposits 2,329,884 2,329,884 2,554,510 2,554,510
Interest-bearing deposits
-- no maturities 6,272,243 6,272,243 6,107,671 6,107,671
Interest-bearing deposits
-- fixed maturities 7,170,118 7,158,373 7,856,062 7,899,532
Other borrowed funds 2,824,034 2,811,534 2,548,454 2,553,373
Interest payable 64,042 64,042 61,417 61,417
Subordinated debt 100,000 95,910 100,000 104,510
Capital securities 100,000 100,000 100,000 100,000
INTEREST RATE CONTRACTS
RELATING TO:
Assets: Commercial loans 3,803 (8,420) 3,925 15,744
Mortgages held-for-sale -- 5,007 -- (3,554)
Investments -- 24 -- 6
Liabilities (208) 4,516 -- (953)
</TABLE>
31
<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:
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31 (IN THOUSANDS) 1999 1998
----------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $8,887 $11,746
Interest-earning deposits and other securities 95,143 150,749
Premises and equipment 13,487 10,758
Investment in and advances to subsidiaries 1,614,817 1,674,308
Other assets 63,142 62,803
---------- ----------
Total Assets $1,795,476 $1,910,364
========== ==========
Liabilities and Shareholders' Equity:
Other borrowed funds $12,250 $26,875
Long-term debt 203,093 203,093
Accrued expenses and other liabilities 94,369 104,071
---------- ----------
Total Liabilities 309,712 334,039
Shareholders' Equity 1,485,764 1,576,325
---------- ----------
Total Liabilities and Shareholders' Equity $1,795,476 $1,910,364
========== ==========
</TABLE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 (IN THOUSANDS) 1999 1998 1997
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiaries $254,466 $356,445 $192,772
Service fees from subsidiaries 96,434 81,446 60,459
Interest and other 12,466 24,227 22,836
-------- -------- --------
Total income 363,366 462,118 276,067
-------- -------- --------
Expenses:
Interest 14,855 18,620 18,908
Salaries and benefits 51,391 60,672 57,821
Occupancy 4,815 5,794 4,795
Equipment 7,768 7,838 7,559
Other 50,434 44,541 34,277
-------- -------- --------
Total expenses 129,263 137,465 123,360
-------- -------- --------
Income before income taxes and equity in
undistributed net income of subsidiaries 234,103 324,653 152,707
Income tax benefit 4,993 10,105 12,965
-------- -------- --------
Income before equity in undistributed net income
of subsidiaries 239,096 334,758 165,672
Equity in undistributed net income of subsidiaries 40,022 (73,620) 82,159
-------- -------- --------
Net Income $279,118 $261,138 $247,831
======== ======== ========
</TABLE>
32
<PAGE>
NOTE 22. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 (IN THOUSANDS) 1999 1998 1997
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $279,118 $261,138 $247,831
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of
subsidiaries (40,022) 73,620 (82,159)
Depreciation, amortization and accretion 9,725 11,563 12,686
Net gains on sales of assets (6,855) (13,072) (2,843)
Net change in other assets (1,381) (3,485) (9,391)
Net change in other liabilities (6,013) (7,945) 29,089
-------- -------- --------
Net cash provided by operating activities 234,572 321,819 195,213
-------- -------- --------
Cash flows from investing activities:
Net change in interest-earning assets 54,093 30,534 (11,346)
Net change in investment in and advances to
subsidiaries (9,878) (5,818) (6,841)
Purchases of leasehold improvements, premises
& equipment, net (5,850) (4,468) (3,880)
-------- -------- --------
Net cash provided by (used for) investing
activities 38,365 20,248 (22,067)
-------- -------- --------
Cash flows from financing activities:
Payments on other borrowed funds (21,625) (30,950) (34,523)
Proceeds from other borrowings 7,000 23,825 21,600
Issuance of long-term debt, net -- -- 97,872
Proceeds from common stock issuances 26,290 20,218 27,485
Repurchases of common stock (178,692) (257,519) (196,180)
Dividends paid to shareholders (108,769) (106,328) (89,892)
-------- -------- --------
Net cash used for financing activities (275,796) (350,754) (173,638)
-------- -------- --------
Net decrease in cash and cash equivalents (2,859) (8,687) (492)
Cash and cash equivalents at beginning of year 11,746 20,433 20,925
-------- -------- --------
Cash and cash equivalents at end of year $8,887 $11,746 $20,433
======== ======== ========
</TABLE>
Federal and state banking laws and regulations place certain restrictions on
the amount of dividends and loans a bank may make to its parent company. As of
January 2000, the subsidiary banks may distribute to the parent company, in
addition to their 2000 net income, approximately $8.6 million in dividends
without written approval from bank regulatory agencies. The remaining net
assets of subsidiary banks, approximating $1.3 billion at December 31, 1999,
are unavailable for transfer to the parent company without prior regulatory
consent.
NOTE 23. RISK BASED CAPITAL
The Corporation and its subsidiary banks are subject to various regulatory
capital requirements administered by federal and other banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory,
and possibly additional discretionary, actions by regulators that, if
undertaken, could have a material effect on the Corporation's financial
statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation and its subsidiary banks must meet
specific capital guidelines that involve quantitative measures of the
Corporation's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Corporation and its
subsidiary banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
33
<PAGE>
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios of core (Tier 1)
capital, total capital and leverage ratios. Management believes, as of December
31, 1999, that the Corporation and its subsidiary banks meet all capital
adequacy requirements to which it is subject.
In the most recent examinations by Federal and State regulatory agencies, the
Corporation and its subsidiary banks were categorized as "well capitalized"
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized the Corporation and its subsidiary banks must maintain
minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the table below. There are no conditions or events since that
notification that management believes have changed the Corporation's or its
subsidiary banks' categories.
The following summarizes the Corporation's, and its subsidiary banks'
regulatory capital ratios at December 31, 1999 and 1998:
<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, 1999:
Total Capital (to Risk Weighted
Assets)
Consolidated $1,814 11.33% $1,281 8.00% $1,601 10.00%
Old Kent Bank 1,700 10.80 1,259 8.00 1,574 10.00
Old Kent Bank, N.A. 11 10.02 9 8.00 11 10.00
Tier 1 Capital (to Risk Weighted
Assets)
Consolidated 1,517 9.48 640 4.00 960 6.00
Old Kent Bank 1,507 9.57 630 4.00 945 6.00
Old Kent Bank, N.A. 10 8.95 4 4.00 7 6.00
Leverage Ratio (to Average Assets)
Consolidated 1,517 7.47 609 3.00 1,015 5.00
Old Kent Bank 1,507 7.51 602 3.00 1,003 5.00
Old Kent Bank, N.A. 10 7.69 4 3.00 7 5.00
As of December 31, 1998:
Total Capital (to Risk Weighted
Assets)
Consolidated $1,749 11.94% $1,172 8.00% $1,465 10.00%
Old Kent Bank 1,630 11.42 1,142 8.00 1,427 10.00
Old Kent Bank, N.A. 10 10.64 8 8.00 9 10.00
Tier 1 Capital (to Risk Weighted
Assets)
Consolidated 1,470 10.04 586 4.00 878 6.00
Old Kent Bank 1,456 10.19 572 4.00 857 6.00
Old Kent Bank, N.A. 9 9.39 4 4.00 6 6.00
Leverage Ratio (to Average Assets)
Consolidated 1,470 7.22 611 3.00 1,018 5.00
Old Kent Bank 1,456 7.24 603 3.00 1,006 5.00
Old Kent Bank, N.A. 9 7.71 4 3.00 6 5.00
</TABLE>
34
<PAGE>
NOTE 24. SUBSEQUENT EVENT
Old Kent signed a definitive agreement on November 20, 2000, providing for
the merger of the Corporation into a wholly-owned subsidiary of Fifth Third
Bancorp ("Fifth Third"). The merger is intended to be structured as a
pooling-of-interests for accounting purposes. Under the terms of the
agreement, each share of Old Kent common stock will be converted into .74
shares of Fifth Third common stock, and each share of Old Kent preferred
stock will be converted into one share of Fifth Third preferred stock with
substantially identical terms. Management anticipates that this merger will
be completed during the second quarter of 2001.
35
