-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LgZiygnA1gF/G1KN7UIaESRSaTcL9+wxy++L8bGQzoeBLWWJZ2iw0IzBqtLofVsX 5IxLCrWusLt/iqZqYozJZA== 0000950152-01-002113.txt : 20010410 0000950152-01-002113.hdr.sgml : 20010410 ACCESSION NUMBER: 0000950152-01-002113 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010402 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20010404 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIFTH THIRD BANCORP CENTRAL INDEX KEY: 0000035527 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 310854434 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-08076 FILM NUMBER: 1595449 BUSINESS ADDRESS: STREET 1: 38 FOUNTAIN SQ PLZ STREET 2: FIFTH THIRD CENTER CITY: CINCINNATI STATE: OH ZIP: 45263 BUSINESS PHONE: 5135795300 8-K 1 l87403ae8-k.txt FIFTH THIRD BANCORP FORM 8-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): April 2, 2001 ------------- Fifth Third Bancorp -------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 000-08076 31-0854434 -------------------------------------------------------------------------- (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) Fifth Third Center 38 Fountain Square Plaza, Cincinnati, Ohio 45263 -------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (513) 579-5300 -------------- N/A -------------------------------------------------------------------------- (Former name or former address, if changed since last report) ================================================================================ 2 Item 2. Acquisition or Disposition of Assets. As previously reported in Item 5 of Fifth Third Bancorp's Current Reports on Form 8-K filed on November 20, 2000, as amended on January 30, 2001, and March 6, March 9, and March 14, 2001, Fifth Third and Old Kent Financial Corporation entered into an Agreement and Plan of Merger on November 20, 2000, and an Amended and Restated Agreement and Plan of Merger on January 16, 2001, pursuant to which Old Kent would be merged with and into Fifth Third Financial Corporation, a wholly-owned subsidiary of Fifth Third. These reports contained copies of the Agreement and Plan of Merger, Stock Option Agreement, Amended and Restated Agreement and Plan of Merger, Press Release dated November 20, 2000, Press Release dated March 8, 2001, Press Release dated March 13, 2001, Unaudited Pro Forma Condensed Combined Financial Information and Unaudited Condensed Pro Forma Financial Statement Information and Supplemental Financial Data. This transaction closed on April 2, 2001. A copy of the Press Release issued by Fifth Third on April 2, 2001 is attached hereto as Exhibit 99.1. This report is being filed to report the consummation of this transaction in this Item 2 and to include Old Kent's year end audited financial information for the years ended December 31, 2000. Unaudited pro forma financial information for this transaction was filed previously in Fifth Third's Current Reports filed on January 30, and March 6, 2001. Item 7. Financial Statements and Exhibits (a) Financial statements of business acquired The Old Kent Financial Corporation Consolidated Financial Statements for the Three Years in the Period Ended December 31, 2000 are included in Exhibit 99.2 attached hereto and incorporated herein, as follows: - Report of Independent Public Accountants - Consolidated Balance Sheets as of December 31, 2000 and 1999 - Consolidated Statements of Income for the Years Ended December 31, 2000, 1999 and 1998 - Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 - Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2000, 1999 and 1998 - Notes to Consolidated Financial Statements 3 (b) Pro forma financial information Previously filed in Fifth Third's Current Reports on Form 8-K/A and 8-K filed with the SEC on January 30, and March 6, 2001, respectively. (c) Exhibits Exhibit No. ----------- 2.1 Agreement and Plan of Merger dated as of November 20, 2000 by and between Fifth Third Bancorp and Old Kent Financial Corporation (omitting schedules and exhibits). Incorporated by reference to Fifth Third's Current Report on Form 8-K filed with the SEC on November 20, 2000.* 2.2 Amended and Restated Agreement and Plan of Merger dated as of January 16, 2001 by and among Old Kent Financial Corporation, Fifth Third Bancorp and Fifth Third Financial Corporation (omitting schedules and exhibits). Incorporated by reference to the Amendment filed with the SEC on January 30, 2001 to Fifth Third's Current Report on Form 8-K originally filed with the SEC on November 20, 2000.* 4.1 Stock Option Agreement dated as of November 20, 2000 by and between Old Kent Financial Corporation, as Issuer, and Fifth Third Bancorp, as Grantee. Incorporated by reference to Fifth Third's Current Report on Form 8-K filed with the SEC on November 20, 2000.* 23.1 Consent of Arthur Andersen LLP. 99.1 Press Release dated April 2, 2001. 99.2 Old Kent Financial Corporation Consolidated Financial Statements for the Three Years in the Period Ended December 31, 2000. -------------- * Incorporated by Reference. 4 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. FIFTH THIRD BANCORP (Registrant) April 4, 2001 /s/ Neal E. Arnold ----------------------------------- Neal E. Arnold Executive Vice President and Chief Financial Officer EX-23.1 2 l87403aex23-1.txt EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inclusion in this Form 8-K of our report dated January 17, 2001 on the audited financial statements of Old Kent Financial Corporation and subsidiaries for the year ended December 31, 2000. It should be noted that we have not audited any financial statements of the company subsequent to December 31, 2000, or performed any audit procedures subsequent to the date of our report. /s/ Arthur Andersen LLP Chicago, Illinois, April 2, 2001 EX-99.1 3 l87403aex99-1.txt EXHIBIT 99.1 1 EXHIBIT 99.1 [FIFTH THIRD BANK LOGO] - -------------------------------------------------------------------------------- News Release CONTACT: FIFTH THIRD BANCORP FOR IMMEDIATE RELEASE Neal E. Arnold (Analysts) 513/579-4356 APRIL 2, 2001 Roberta R. Jennings (Media) 513/579-4153 Peggy Janei (Media) 616/771-5257 FIFTH THIRD, OLD KENT COMPLETE MERGER MOVE INTRODUCES DOMINANT MIDWESTERN FIFTH THIRD BANKING FRANCHISE TO NEW MICHIGAN & ILLINOIS MARKETS FIFTH THIRD BANCORP (NASDAQ: FITB) and OLD KENT FINANCIAL CORPORATION (NYSE: OK) announced today that they have completed their merger. The combined company, which will operate as Fifth Third Bancorp, will have approximately $70 billion in assets, $48 billion in deposits, $195 billion in custody assets and a market capitalization of $30 billion. For the year ended December 31, 2000, on a pro forma basis, the combined company generated $3.7 billion in operating revenue, $1.1 billion in net income and $2.10 in operating earnings per share. As a result of this merger, Fifth Third will be ranked fourth in the state of Michigan with a nine percent market share, and sixth in Chicago with approximately $5.5 billion in deposits. Fifth Third will have 974 full-service Banking Centers, including 148 Bank Mart(R) locations open seven days a week and 1,930 Jeanie(R) Automated Teller Machines throughout Ohio, Michigan, Illinois, Kentucky, Indiana, Florida and Arizona. Fifth Third will exchange, on a tax-free basis, 0.74 shares of its common stock for each share of Old Kent common stock. Based upon Fifth Third's March 30, 2001 closing price of $53.44, the transaction, which is accounted for as a pooling of interests, is valued at approximately $5.5 billion. George A. Schaefer, Jr., President & CEO, Fifth Third Bancorp, reports, "With the addition of Old Kent, we have achieved our goal of entering the attractive deposit markets of Michigan and Illinois. We welcome one million new customers from Old Kent, and are now poised to deliver banking and investment products and services to 16 million people in this region." He continues, "Fifth Third has proven its ability to assimilate acquisitions successfully - without sacrificing quality earnings growth. Our management teams are in place and are working very hard to ensure a seamless conversion. David Wagner will join Fifth Third Bancorp's Board of Directors in June and will serve as Chairman of our Michigan bank. Two Fifth Third leaders, Brad Stamper and Pat Fehring, will serve as President & CEO of our banks in Chicago and Detroit, respectively. Two Old Kent leaders, Kevin Kabat and John Pelizzari, have been appointed President & CEO of our banks in Western Michigan and Northern Michigan, respectively." Old Kent Financial Corporation Chairman, President & CEO David J. Wagner remarks, "We are combining two superior performing banks with contiguous and similar Midwest markets, and will realize immediate earnings per share accretion. Additionally, Fifth Third has already introduced several new initiatives to our marketplace, and our consumer and business customers are enjoying a wider range of deposit, lending, corporate treasury management and merchant processing services. In fact, we have opened two and a half times as many checking accounts over the same period last year." He adds, "Fifth Third's decentralized decision making empowers local Fifth Third bankers to find the best way to produce double-digit earnings growth and invest capital in the communities where we operate. It's a winning strategy." - MORE - 2 EXHIBIT 99.1 Old Kent locations, accounts and ATMs will convert to Fifth Third over a six-month period, beginning in late April. A Welcome To Fifth Third video with a message from each affiliate President as well as an informational booklet about Fifth Third's products and services will be sent to each Old Kent customer prior to the conversion. Fifth Third will report first quarter 2001 earnings, excluding the effect of Old Kent, on April 16, 2001 prior to the market opening. Pooled results including Old Kent will be reported beginning in the second quarter. Fifth Third recently issued pro forma condensed income statements for the combined activities of Fifth Third and Old Kent for the year ended December 31, 2000 as well as the quarterly results of 2000. Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. The Company has $70 billion in assets, operates 17 affiliates with 974 full-service Banking Centers, including 148 Bank Mart(R) locations open seven days a week inside select grocery stores and 1,930 Jeanie(R) ATMs in Ohio, Kentucky, Indiana, Florida, Arizona, Michigan and Illinois. A leader in e-commerce, Fifth Third was named #1 e-business innovator by PC Week. The financial strength of Fifth Third's affiliate banks continues to be recognized by rating agencies with deposit ratings of AA- and Aa2 from Standard & Poor's and Moody's, respectively. Additionally, Fifth Third Bancorp continues to maintain the highest short-term ratings available at A-1+ and Prime-1, and was recently recognized by Moody's with one of the highest senior debt ratings for any U.S. bank holding company of Aa3. Fifth Third operates four main businesses: Retail, Commercial, Investment Advisors and Midwest Payment Systems, the Bank's data processing subsidiary. Investor information and press releases can be viewed at www.53.com; press releases are also available by fax at no charge by calling 800-758-5804, identification number 281775. The Company's common stock is traded in the over-the-counter market through The Nasdaq National Market under the symbol "FITB." * * * * This document contains or may contain forward-looking statements about Fifth Third Bancorp which we believe are within the meaning of the Private Securities Litigation Reform Act of 1995. This document contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Fifth Third including statements preceded by, followed by or that include the words "believes," "expects," "anticipates," or similar expressions. These forward-looking statements involve certain risks and uncertainties. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause a difference include, but are not limited to: (1) competitive pressure among depository institutions increase significantly; (2) changes in the interest rate environment reduce interest margins; (3) prepayment speeds, loan sales volumes, charge-offs and loan loss provisions; (4) general economic conditions, either natural or in the states in which Fifth Third does business, are less favorable than expected; (5) legislative or regulatory changes adversely affect the businesses in which Fifth Third is engaged; and (6) changes in the securities markets. Further information on other factors which could affect the financial results of Fifth Third after the merger are included in Fifth Third's filings with the Securities and Exchange Commission. These documents are available free of charge at the Commission's website at http://www.sec.gov from Fifth Third Bancorp. # # # EX-99.2 4 l87403aex99-2.txt EXHIBIT 99.2 1 EXHIBIT 99.2 OLD KENT FINANCIAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2000 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 2 Report of Independent Public Accountants To 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, 2000 and 1999, and the related consolidated statements of income, cash flows and shareholders' equity for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Chicago, Illinois, January 17, 2001 3 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ (DOLLARS IN THOUSANDS) ASSETS: Cash and due from banks $ 721,809 $ 679,155 Federal funds sold and resale agreements 10,633 30,261 ------------ ------------ Total cash and cash equivalents 732,442 709,416 Interest-earning deposits 23,878 2,167 Mortgages held-for-sale 1,101,732 901,130 Securities available-for-sale: Collateralized mortgage obligations and other mortgage-backed securities 2,465,363 2,039,160 Other securities 961,850 1,198,669 ------------ ------------ Total securities available-for-sale (amortized cost of $3,424,082 and $3,335,192, respectively) 3,427,213 3,237,829 Securities held-to-maturity: Collateralized mortgage obligations and other mortgage-backed securities 61,408 92,335 Other securities 464,165 516,929 ------------ ------------ Total securities held-to-maturity (market values of $530,285 and $590,369, respectively) 525,573 609,264 Loans 16,605,692 13,901,663 Allowance for credit losses (225,845) (206,279) ------------ ------------ Net loans 16,379,847 13,695,384 ------------ ------------ Premises and equipment, net 282,397 288,565 Other assets 1,369,207 1,156,532 ------------ ------------ Total Assets $ 23,842,289 $ 20,600,287 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Deposits: Non-interest-bearing $ 2,447,319 $ 2,329,884 Interest-bearing 14,837,045 13,332,300 Foreign deposits--interest-bearing 126,297 110,061 ------------ ------------ Total deposits 17,410,661 15,772,245 Other borrowed funds 3,840,006 2,824,034 Other liabilities 370,689 318,244 Long-term debt 449,790 200,000 ------------ ------------ Total Liabilities 22,071,146 19,114,523 ------------ ------------ 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; 139,736,000 and 131,367,000 shares issued and outstanding, respectively 139,736 131,367 Capital surplus 636,050 418,367 Retained earnings 984,072 1,004,125 Accumulated other comprehensive income/(loss) 2,035 (77,345) ------------ ------------ Total Shareholders' Equity 1,771,143 1,485,764 ------------ ------------ Total Liabilities and Shareholders' Equity $ 23,842,289 $ 20,600,287 ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements. 2 4 CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 ------------------------------------------------------------- 2000 1999 1998 ------------- ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INTEREST INCOME: Interest and fees on loans $ 1,362,443 $ 1,068,564 $ 1,027,521 Interest on mortgages held-for-sale 84,221 115,135 121,023 Interest on securities (taxable) 198,783 232,339 278,372 Interest on securities (non-taxable) 36,076 38,493 32,684 Interest on investments 2,478 6,832 6,630 ------------- ------------- ------------- Total interest income 1,684,001 1,461,363 1,466,230 ------------- ------------- ------------- INTEREST EXPENSE: Interest on deposits 676,231 546,522 576,743 Interest on other borrowed funds 199,593 128,571 135,803 Interest on long-term obligations 23,971 13,152 13,481 ------------- ------------- ------------- Total interest expense 899,795 688,245 726,027 ------------- ------------- ------------- NET INTEREST INCOME 784,206 773,118 740,203 PROVISION FOR CREDIT LOSSES 48,624 35,388 52,930 ------------- ------------- ------------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 735,582 737,730 687,273 ------------- ------------- ------------- OTHER INCOME: Mortgage banking revenue (net) 176,399 192,296 152,378 Investment management & trust revenues 86,846 80,642 72,366 Deposit account revenue 81,449 78,153 74,401 Transaction processing revenue 24,010 22,891 20,832 Insurance sales commissions 23,813 24,139 21,216 Securities (losses)/gains (8,524) 7,863 37,192 Other 61,375 50,746 35,235 ------------- ------------- ------------- Total other income 445,368 456,730 413,620 ------------- ------------- ------------- OTHER EXPENSES: Salaries and employee benefits 377,917 381,224 361,551 Occupancy 60,274 58,064 53,505 Equipment 50,110 49,281 45,948 Professional services 48,170 48,941 32,560 Telephone and telecommunication 26,823 25,426 20,863 Postage and courier charges 18,195 19,063 18,559 Merger charges 42,000 26,000 24,993 Other 152,326 157,880 145,624 ------------- ------------- ------------- Total other expenses 775,815 765,879 703,603 ------------- ------------- ------------- INCOME BEFORE INCOME TAXES 405,135 428,581 397,290 Income taxes 126,787 149,463 136,152 ------------- ------------- ------------- NET INCOME 278,348 279,118 261,138 Dividends on preferred stock (740) (740) (740) ------------- ------------- ------------- NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 277,608 $ 278,378 $ 260,398 ============= ============= ============= Average number of common shares used to compute: Basic earnings per share 137,621,000 139,003,000 143,962,000 Diluted earnings per share 139,182,000 140,594,000 145,888,000 Basic earnings per common share $2.02 $2.00 $1.81 Diluted earnings per common share $2.00 $1.98 $1.79
The accompanying notes to consolidated financial statements are an integral part of these statements. 3 5 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------------------- 2000 1999 1998 ----------- ------------ ------------ (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 278,348 $ 279,118 $ 261,138 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Provision for credit losses 48,624 35,388 52,930 Depreciation, amortization and accretion 68,025 67,773 68,615 Net gains on sales of assets (123,641) (182,236) (209,457) Net change in trading account securities -- 349,411 (347,910) Originations and acquisitions of mortgages held-for-sale (9,269,992) (12,228,588) (13,693,103) Proceeds from sales and prepayments of mortgages held-for-sale 9,048,301 13,540,066 12,673,555 Net change in other assets (85,403) (13,029) 120,262 Net change in other liabilities 33,002 64,067 (8,985) ----------- ------------ ------------ Net cash provided by (used for) operating activities (2,736) 1,911,970 (1,082,955) ----------- ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities and prepayments of securities 610,708 1,010,726 586,182 available-for-sale Proceeds from sales of securities available-for-sale 641,163 1,063,992 1,406,923 Purchases of securities available-for-sale (1,312,012) (1,413,839) (2,661,512) Proceeds from maturities and prepayments of securities held-to-maturity 86,786 294,042 1,105,076 Purchases of securities held-to-maturity (2,342) (97,698) (307,954) Net change in interest-earning deposits (17,228) 7,845 16,335 Proceeds from sale of loans 183,173 9,482 207,849 Net change in loans (912,462) (1,330,339) 5,420 Acquisition of loans through flow arrangements (1,658,560) (822,329) (39,269) Purchases of leasehold improvements, premises and equipment, net (31,112) (24,854) (39,158) Acquisition of business units (net of cash acquired) 1,863 -- -- ----------- ------------ ------------ Net cash provided by (used for) investing activities (2,410,023) (1,302,972) 279,892 ----------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Change in time deposits 1,176,977 (685,944) (64,524) Change in demand and savings deposits 135,015 (60,054) 1,263,327 Change in other borrowed funds 994,987 275,579 (49,061) Proceeds from issuance of subordinated bank notes 249,774 -- -- Repurchases of common stock (60,517) (178,692) (257,519) Proceeds from common stock issuances 58,340 26,290 20,218 Dividends paid to shareholders (118,791) (108,769) (106,328) ----------- ------------ ------------ Net cash provided by (used for) financing activities 2,435,785 (731,590) 806,113 ----------- ------------ ------------ Net change in cash and cash equivalents 23,026 (122,592) 3,050 Cash and cash equivalents at beginning of year 709,416 832,008 828,958 ----------- ------------ ------------ Cash and cash equivalents at December 31 $ 732,442 $ 709,416 $ 832,008 =========== ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid on deposits, other borrowed funds and subordinated debt $ 871,522 $ 685,620 $ 742,726 Federal income taxes paid 144,704 99,904 112,093 Significant non-cash transactions: Stock dividend issued 178,580 222,020 184,748 Stock issued to acquire businesses 39,054 -- --
The accompanying notes to consolidated financial statements are an integral part of these statements. 4 6 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED OTHER TOTAL COMPREHENSIVE PREFERRED COMMON CAPITAL RETAINED COMPREHENSIVE SHAREHOLDERS' INCOME STOCK STOCK SURPLUS EARNINGS INCOME/(LOSS) EQUITY ------ ------ ------- ------- -------- ------------- ------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE AT JANUARY 1, 1998 AS PREVIOUSLY REPORTED $ -- $118,880 $ 294,896 $ 976,661 $ 18,151 $1,408,588 Adjustment to record merger of Merchants Bancorp, Inc. and Grand Premier Financial, Inc. on a pooling-of-interest basis 9,250 13,592 86,421 112,319 15,913 237,495 ------ -------- --------- ---------- --------- ---------- Restated balance at January 1, 1998 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: $0.655 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: $0.762 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--$154,000) 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 ------ -------- --------- ---------- --------- ---------- Net income for the year $ 278,348 278,348 278,348 Unrealized gains on securities, net of $21,400 in taxes 79,380 79,380 79,380 --------- Total comprehensive income $ 357,728 ========= Cash dividends: (118,051) (118,051) $0.880 per common share (740) (740) $80.00 per preferred share Common stock issued in payment of stock dividend - 6,526,000 shares (cash in lieu of fractionals--$121,000) 6,526 171,933 (178,580) (121) Common stock issued for Home Bancorp acquisition - 1,377,000 shares 1,377 38,707 (1,030) 39,054 Common stock repurchased for dividend reinvestment plan, employee stock plans, acquisitions, stock dividends and other purposes--1,926,000 shares (1,926) (58,591) (60,517) Common stock issued under dividend reinvestment plan, employee stock plans, and other--2,392,000 shares 2,392 57,743 60,135 Tax benefit relating to employee stock plans 7,891 7,891 ------ -------- --------- ---------- --------- ---------- BALANCE AT DECEMBER 31, 2000 $9,250 $139,736 $ 636,050 $ 984,072 $ 2,035 $1,771,143 ====== ======== ========= ========== ========= ==========
The accompanying notes to consolidated financial statements are an integral part of these statements. 5 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Consolidated Financial Statements have been prepared in conformity with U.S. generally accepted accounting principles and reporting practices prescribed for the banking industry. A description of significant accounting policies follows: Basis of Presentation The Consolidated Financial Statements for the Corporation include the accounts of Old Kent Financial Corporation ("Parent Company") and its wholly owned subsidiaries (collectively, "Old Kent" or the "Corporation"). Significant intercompany balances and transactions have been eliminated in consolidation. Nature of Operations The Corporation operates two commercial banks with 202 full service offices throughout Michigan, 81 such offices in the metropolitan markets in and around Chicago, Illinois, and 12 such offices in Indiana. It also operates a mortgage banking company with 126 offices located in 30 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 8 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Mortgage Banking Activities The Corporation sells residential mortgage loans to investors on both a servicing released and servicing retained basis. Gains on sales of mortgages are recorded to the extent proceeds exceed the carrying value of the loans. Mortgage loans held-for-sale are carried at the lower of cost or market, which is determined under the aggregate method. In determining the lower of cost or market, the gains and losses associated with the corresponding financial instruments used to hedge against increases in interest rates are considered. The fair value of the Corporation's mortgage servicing rights is determined based on quoted market prices for comparable transactions, if available, or a valuation model that calculates the present value of expected future cash flows. Mortgage servicing rights are amortized ratably in relation to the associated servicing revenue over the estimated lives of the serviced loans. The Corporation evaluates and measures impairment of its capitalized servicing rights using stratifications based on the risk characteristics of the underlying loans. Management has determined those risk characteristics to include loan type and interest rate. Impairment, when present, is recognized through a valuation allowance. Loans Loans are generally stated at their principal amount outstanding, net of unearned income. Loan performance is reviewed regularly by loan review personnel, loan officers and senior management. A loan is placed on nonaccrual status and evaluated for impairment when principal or interest is past due 90 days or more and the loan is not well secured and in the process of collection, or when, in the opinion of management, there is sufficient reason to doubt collectibility of principal or interest. Interest previously accrued, but not collected, is reversed and charged against interest income at the time the loan is placed on nonaccrual status. Generally, the terms of loans that resulted from troubled debt restructurings are at interest rates considered below current market rates for comparable loans and are evaluated for impairment. The Corporation considers loans which are on nonaccrual or restructured status as impaired. Old Kent's policy is to review impaired loans to determine the need for a valuation allowance. The Corporation determines this need using the most appropriate of the following methods: (1) the present value of the expected future cash flows discounted at the loan's effective rate of interest, (2) the loan's observable market price, or (3) the fair value of the collateral, if the loan is collateral dependent. Large groups of smaller balance homogenous loans with common risk characteristics are aggregated and collectively evaluated for impairment. These large groups of smaller balance homogenous loans include residential mortgages, consumer loans, and certain commercial loans, such as those to small businesses. Interest payments received on nonaccrual loans are recorded as principal reductions if principal repayment is doubtful. Loans are no longer classified as impaired when principal and interest payments are current and collectibility is no longer in doubt. Interest income on restructured loans is recognized according to the terms of the restructure, subject to the nonaccrual policy described above. Certain commitment and loan origination fees are deferred and amortized as an adjustment of the related loan's yield over its contractual life using the interest method, or other sufficiently similar methods. All remaining commitment and loan origination fees and all direct costs associated with originating or acquiring loans are recognized currently, which is not materially different than the prescribed method. Allowance for Credit Losses The allowance for credit losses is maintained at a level that, in management's judgment, is adequate to absorb losses inherent in the loan portfolio. The amount is based on management's specific review and analysis of the loan portfolio, and evaluation of the effects of current economic conditions on the loan portfolio. This process 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 9 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 a 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 10 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 11 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" Old Kent adopted 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, on January 1, 2001. These Statements establish accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded other contracts) be recorded on the balance sheet as an asset or a liability measured at its current fair value and that changes in a 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 hedged item. SFAS No. 133 requires a company to formally document, designate and assess the effectiveness of hedging relationships that receive hedge accounting. The impact of adopting this standard was not material to the Corporation. 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 1.4 million shares of Old Kent Common Stock for all the outstanding shares of Home Bancorp Common Stock. The approximate purchase price for this transaction was $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 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. 10 12 NOTE 2. BUSINESS ACQUISITIONS (CONTINUED) During 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. Reserves for these charges were substantially utilized during 2000. 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 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 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. Pending Merger as of December 31, 2000 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. 11 13 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 $27.7 million during 2000 and $21.0 million during 1999. At December 31, 2000, securities having an aggregate amortized cost of approximately $2.2 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 $854 million in 2000, and $710 million in 1999. The maximum amount of outstanding agreements at any month-end during 2000 was $1 billion. The average Securities Purchased Under Agreements to Resell was $2 million in 2000 and $12 million in 1999. 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, 2000 and 1999:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---------- ------- -------- ---------- (DOLLARS IN THOUSANDS) DECEMBER 31, 2000 U.S. Treasury and federal agency securities $ 506,320 $ 7,467 $ 1,164 $ 512,623 Collateralized mortgage obligations: U.S. Government issued 989,450 2,159 6,766 984,843 Privately issued 536,112 2,043 3,185 534,970 Mortgage-backed pass-through securities 946,151 6,047 6,648 945,550 State and political subdivisions 196,649 6,195 987 201,857 Other securities 249,400 694 2,724 247,370 ---------- ------- -------- ---------- Total $3,424,082 $24,605 $ 21,474 $3,427,213 ========== ======= ======== ========== DECEMBER 31, 1999 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 ========== ======= ======== ==========
12 14 NOTE 4. SECURITIES AVAILABLE-FOR-SALE (CONTINUED) The amortized cost and market values of securities available-for-sale at December 31, 2000, 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.
ESTIMATE AMORTIZED MARKET COST VALUE ---------- ---------- (DOLLARS IN THOUSANDS) DECEMBER 31, 2000 U.S. Treasury and federal agency securities: Due in one year or less $ 43,108 $ 43,642 Due after one year through five years 336,823 340,994 Due after five years through ten years 113,557 114,997 Due after ten years 12,832 12,990 ---------- ---------- Total U.S. Treasury and federal agency securities 506,320 512,623 ---------- ---------- State and political subdivision securities: Due in one year or less 8,871 9,106 Due after one year through five years 35,720 36,666 Due after five years through ten years 58,339 59,884 Due after ten years 93,719 96,201 ---------- ---------- Total state and political subdivision securities 196,649 201,857 Collateralized mortgage obligations and other mortgage-backed securities 2,471,713 2,465,363 Other securities 249,400 247,370 ---------- ---------- Total $3,424,082 $3,427,213 ========== ==========
NOTE 5. SECURITIES HELD-TO-MATURITY The following summarizes amortized cost and market values of securities held-to-maturity at December 31, 2000 and 1999:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE -------- ------ ------- -------- (DOLLARS IN THOUSANDS) DECEMBER 31, 2000 U.S. Treasury and federal agency securities $ 14,969 $1,185 $ -- $ 16,154 Collateralized mortgage obligations: U.S. Government issued 16,703 -- 127 16,576 Privately issued -- -- -- -- Mortgage-backed pass-through securities 44,705 783 216 45,272 State and political subdivision securities 443,682 7,771 4,684 446,769 Other securities 5,514 -- -- 5,514 -------- ------ ------- -------- Total $525,573 $9,739 $ 5,027 $530,285 ======== ====== ======= ======== DECEMBER 31, 1999 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 ======== ====== ======= ========
13 15 NOTE 5. SECURITIES HELD-TO-MATURITY (CONTINUED) The amortized cost and market values of securities held-to-maturity at December 31, 2000, are shown below by their contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay the obligation with or without call or prepayment penalties.
ESTIMATED AMORTIZED MARKET COST VALUE -------- -------- (DOLLARS IN THOUSANDS) DECEMBER 31, 2000 U.S. Treasury and federal agency securities: Due after one year through five years $ 5,000 $ 5,396 Due after five years through ten years 9,969 10,758 -------- -------- Total U.S. Treasury and federal agency securities 14,969 16,154 -------- -------- State and political subdivision securities: Due in one year or less 32,552 32,779 Due after one year through five years 111,500 112,276 Due after five years through ten years 131,644 132,560 Due after ten years 167,986 169,154 -------- -------- Total state and political subdivision securities 443,682 446,769 Collateralized mortgage obligations and other mortgage-backed securities 61,408 61,848 Other 5,514 5,514 -------- -------- Total $525,573 $530,285 ======== ========
NOTE 6. LOANS AND NONPERFORMING ASSETS The following summarizes loans: DECEMBER 31 -------------------------------- 2000 1999 ----------- ----------- (DOLLARS IN THOUSANDS) Commercial $ 4,046,746 $ 3,742,234 Real estate-- Commercial 3,240,404 2,988,586 Real estate-- Construction 1,738,785 1,204,291 Real estate-- Residential mortgages 1,601,136 1,881,498 Real estate-- Consumer home equity 2,424,279 2,240,708 Consumer 3,147,893 1,582,012 Lease financing 406,449 262,334 ----------- ----------- Total Loans $16,605,692 $13,901,663 =========== =========== Loans made by Old Kent to its directors and executive officers, including their family members and associated entities, aggregated $60 million and $78 million at December 31, 2000 and 1999, respectively. During 2000, new loans and other additions amounted to $27 million and repayments and other reductions were $45 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. 14 16 NOTE 6. LOANS AND NONPERFORMING ASSETS (CONTINUED) The table below summarizes impaired loans and other nonperforming assets: DECEMBER 31 ------------------------- 2000 1999 -------- ------- (DOLLARS IN THOUSANDS) Impaired loans: Nonaccrual loans $ 84,005 $66,395 Restructured loans 1,603 2,210 -------- ------- Total impaired loans 85,608 68,605 Other real estate owned 14,943 8,538 -------- ------- Total nonperforming assets $100,551 $77,143 ======== ======= Loans past due 90 days or more for which interest income continues to be recognized totaled $41.4 million and $14.9 million at December 31, 2000 and 1999, respectively. Gross interest income that would have been recorded in 2000 for nonaccrual and restructured loans as of December 31, 2000, assuming interest had been accrued throughout the year in accordance with original terms, was $5.6 million. The comparable total for 1999 was $6.7 million. The amount of interest included in income on these loans was $1.8 million and $2.6 million in 2000 and 1999, respectively. During the years 2000 and 1999, impaired loans averaged $78.0 million and $67.8 million, respectively. At December 31, 2000 and 1999, there were no specific valuation allowances associated with impaired loans. At December 31, 2000, the Corporation's management has also identified loans totaling approximately $18.7 million as potential problem loans. These loans are not included as nonperforming assets in the table above. While these loans were in compliance with repayment terms at December 31, 2000, other circumstances caused management to seriously doubt the ability of the borrowers to continue to remain in compliance with existing loan repayment terms. Although Old Kent has a diversified loan portfolio, a substantial natural geographic concentration of credit risk exists within the Corporation's defined customer market areas. These geographic market areas are the State of Michigan, the greater Grand Rapids, Michigan area, and the Chicago, Illinois metropolitan and suburban markets. There are no significant concentrations of credit where customers' ability to honor loan terms is dependent upon a single economic sector. NOTE 7. ALLOWANCE FOR CREDIT LOSSES The following summarizes the changes in the allowance for credit losses:
YEAR ENDED DECEMBER 31 ---------------------------------------------- 2000 1999 1998 --------- --------- --------- (DOLLARS IN THOUSANDS) Balance at beginning of year $ 206,279 $ 200,555 $ 196,968 Additions: Provision charged to operations 48,624 35,388 52,930 Business acquisitions and loan purchases 2,318 120 -- --------- --------- --------- Total additions 50,942 35,508 52,930 --------- --------- --------- Deductions: Credit losses (60,443) (55,006) (70,810) Less recoveries 29,067 25,222 21,942 --------- --------- --------- Net credit losses (31,376) (29,784) (48,868) Loan sales and other dispositions -- -- (475) --------- --------- --------- Total deductions (31,376) (29,784) (49,343) --------- --------- --------- Balance at end of year $ 225,845 $ 206,279 $ 200,555 ========= ========= =========
15 17 NOTE 8. PREMISES AND EQUIPMENT The following summarizes leasehold improvements, premises and equipment: DECEMBER 31 ------------------------ 2000 1999 -------- -------- (DOLLARS IN THOUSANDS) Land $ 47,671 $ 47,552 Land improvements 14,719 13,372 Buildings and improvements 267,704 274,940 Leasehold improvements 32,327 31,168 Furniture and equipment 270,813 253,340 -------- -------- 633,234 620,372 Less accumulated depreciation and amortization 350,837 331,807 -------- -------- Net premises and equipment $282,397 $288,565 ======== ======== NOTE 9. OTHER ASSETS Other assets shown on the consolidated balance sheet include the following intangible assets (net of accumulated amortization): DECEMBER 31 ------------------------ 2000 1999 -------- -------- (DOLLARS IN THOUSANDS) Goodwill $113,816 $132,988 Core deposit intangibles 14,744 18,340 -------- -------- Total $128,560 $151,328 ======== ======== Other assets shown on the consolidated balance sheet include mortgage servicing rights ("MSRs") as follows: DECEMBER 31 ------------------------ 2000 1999 -------- -------- (DOLLARS IN THOUSANDS) Carrying value of MSRs $291,999 $277,544 Estimated aggregate fair value of capitalized MSRs $299,000 $323,000 The estimated fair values shown above for these MSRs were determined based upon quoted market prices for comparable transactions, where available, or the present value of expected future cash flows. The following reflects capitalized mortgage servicing rights and the related servicing valuation reserve for the years indicated: YEAR ENDED DECEMBER 31 --------------------------- 2000 1999 ----------- --------- (DOLLARS IN THOUSANDS) MSRs: Balance at beginning of period $ 277,544 $ 231,112 Additions 185,929 257,925 Sales (141,218) (155,839) Amortization (30,256) (55,654) --------- --------- Balance at end of period $ 291,999 $ 277,544 ========= ========= Related servicing valuation reserve: Balance at beginning of period $ -- $ (9,129) Servicing valuation provision -- 9,129 --------- --------- Balance at end of period $ -- $ -- ========= ========= 16 18 NOTE 10. OTHER BORROWED FUNDS The following summarizes other borrowed funds: DECEMBER 31 ---------------------------- 2000 1999 ---------- ---------- (DOLLARS IN THOUSANDS) Bank notes $ -- $ 500,000 Securities sold under agreements to repurchase 880,938 732,274 Treasury tax and loan demand notes 160,006 161,084 Federal funds purchased 1,014,150 271,486 Federal Home Loan Bank advances 1,754,333 1,102,420 Other borrowed funds 30,579 56,770 ---------- ---------- Total other borrowed funds $3,840,006 $2,824,034 ========== ========== 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 6.71%. The variable interest rate advances are indexed to three-month LIBOR. Advances from the FHLB are collateralized by 1-4 family mortgages. NOTE 11. LONG-TERM DEBT Long-term debt, as shown in the accompanying consolidated balance sheets, consists of the following:
DECEMBER 31 ------------------------ 2000 1999 -------- -------- (DOLLARS IN THOUSANDS) Subordinated notes, 6 5/8% due November 15, 2005 $100,000 $100,000 Subordinated notes, 3 month LIBOR plus .75% due November 1, 2005 100,000 -- Subordinated notes, Years 1-5; 7.75%; Years 6-10; 1 month LIBOR plus 1.16%, due August 15, 2010 149,790 -- Capital securities, as described below 100,000 100,000 -------- -------- Total long-term debt $449,790 $200,000 ======== ========
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. 17 19 NOTE 11. LONG-TERM DEBT (CONTINUED) 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 1 capital for regulatory capital purposes. On April 28, 2000, Old Kent Bank (the "Bank") issued subordinated bank notes (the "Notes") having a principal amount of $100 million. Cumulative interest on the principal sum of the Notes accrues from April 28, 2000, and it is payable quarterly in areas on the first day of February, May, August and November, commencing August 1, 2000 of each year at a variable rate per annum equal to three-month LIBOR (London Interbank Offered Rate) plus .75% until paid. The Notes are unsecured and subordinate and junior in right of payment to Old Kent Bank's obligations to its depositors, its obligations under bankers' acceptances, letters of credit and senior notes, collateralized borrowings, and its obligations to all of its other general creditors. The Notes mature on November 1, 2005, but the Bank at its option may redeem some or all of the Notes on any interest payment date beginning on November 1, 2000. The Notes qualify as Tier II capital for regulatory capital purposes. On August 15, 2000, Old Kent Bank ("the Bank") issued subordinated bank notes (the "Notes") having a principal amount of $150 million. Cumulative interest on the principal sum of the Notes accrues from August 15, 2000, and it is payable semi-annual in arrears on August 15, and February 15, commencing February 15, 2001 to August 15, 2005, at a fixed rate per annum equal to 7.75% (such period being referred to as the "Fixed Rate Period"). During the period commencing on August 15, 2005 to the Maturity Date or earlier redemption date (such period being referred to as the "Floating Rate Period"), the cumulative interest on the principal sum of the Notes accrues from August 15, 2005, and it is payable monthly on the 15th day of each year at a variable rate per annum equal to one-month LIBOR (London Interbank Offered Rate) plus 1.16% until paid. The Notes are unsecured and subordinate and junior in right of payment to Old Kent's obligations to its depositors, its obligations under bankers, acceptances, letters of credit and senior notes, collateralized borrowings, and its obligations to all of its other creditors. The Notes mature on August 15, 2010, but the Bank at its option may redeem some or all of the Notes on any interest payment date beginning on August 15, 2005. The Notes quality as Tier II capital for regulatory purposes. 18 20 NOTE 12. PREFERRED STOCK AND PREFERRED STOCK PURCHASE RIGHTS At December 31, 2000, 1999 and 1998, there were 25,000,000 shares of preferred stock authorized. At December 31, 2000, 1999 and 1998, 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, 2000, 1999 and 1998, 1,000,000 shares of authorized but unissued preferred stock were designated Series C Preferred Stock. On December 31, 2000, approximately 57.5 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 and 2000, each share of the Corporation's common stock carried .4113 of a Series C Right at December 31, 2000. Each full Series C Right entitled the holder to buy 1/100 of a share of Series C Preferred Stock at a price of $160.00. The exercise price and the number of shares of Series C Preferred Stock issuable upon the exercise of the Series C Rights are subject to adjustment in certain cases to prevent dilution. Series C Rights are attached to and evidenced by common stock certificates and are not transferable apart from the common stock until the occurrence of certain events set forth in the Rights Agreement. Series C Rights do not have any voting rights. Series C Rights are redeemable at the option of the Corporation, at a price of $.01 per Series C Right, prior to the time any person or group acquires beneficial ownership of 15% or more of the then outstanding common stock, commences a 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, 2000, 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"). Each Series D Share and Series E Share has a stated value of $1000 per share and provides 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. 19 21 NOTE 13. COMMON STOCK During the three years ended December 31, 2000, the Corporation has issued shares for stock dividends as follows: AMOUNT NUMBER OF STOCK OF SHARES PAYMENT RECORD DECLARATION YEAR DIVIDEND ISSUED DATE DATE DATE - ---- --------- --------- ------- ------- ------- 2000 5 percent 6,525,000 July 14 June 30 June 19 1999 5 percent 5,125,000 July 19 June 29 June 21 1998 5 percent 4,489,000 July 17 June 26 June 15 On June 15, 1998, the Board of Directors of the Corporation authorized repurchases of up to 6.0 million shares of Old Kent Common Stock. During 1998 and 1999 these shares were acquired for and subsequently reissued in connection with 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. During 1999 and 2000 these shares were acquired and later reissued in connection with stock dividends, employee stock plans and other corporate purposes. On June 19, 2000, the Board of Directors authorized the repurchase of up to 1.2 million shares of Old Kent Common Stock for use in connection with employee stock plans and the Corporation's direct stock purchase plan. Under the terms of this authorization, the Corporation had acquired approximately 431,000 shares for these purposes as of December 31, 2000. The Corporation issued during 2000 a portion of these shares, the remaining approximately 112,000 shares remained as shares reserved for later use at December 31, 2000. In early 2001, Old Kent discontinued its repurchase activities. The table below summarizes shares repurchased and reserved at December 31, 2000:
DIVIDEND REINVESTMENT STOCK AND EMPLOYEE TOTAL DIVIDENDS STOCK PLANS ---------- ---------- ---------- Shares reserved at December 31, 1999 1,991,046 750,000 1,241,046 Shares repurchased under authorizations 1,926,205 750,000 1,176,205 Shares issued for related stated purposes (3,805,656) (1,500,000) (2,305,656) ---------- ---------- ---------- Shares reserved at December 31, 2000 111,595 -- 111,595 ========== ========== ==========
Of the 1.9 million shares repurchased during 2000, approximately 1.5 million shares were repurchased under the June 21, 1999, authorization. Shares for future stock dividends were reacquired ratably on a quarterly basis; shares intended for reissue in connection with dividend reinvestment and employee stock plans were reacquired quarterly as needed. 20 22 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, 2000, a total of 8.7 million shares were reserved for option or restricted stock grants, including 3.3 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 2000, 1999, and 1998, Old Kent issued 116,351 shares, 52,667 shares, and 112,671 shares of its common stock with total market values of $3,581,438, $1,892,100, and $3,835,000, 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:
2000 1999 1998 ------------------------- -------------------------- ------------------------- WEIGHTED WEIGHTED WEIGHTED NO. OF AVERAGE NO. OF AVERAGE NO. OF AVERAGE SHARES EXER. PRICE SHARES EXER. PRICE SHARES EXER. PRICE ------ ----------- ------ ----------- ------ ----------- (ADJUSTED FOR STOCK DIVIDENDS) Options outstanding at beginning of 4,584,324 $30.05 3,434,773 $20.26 2,757,404 $13.28 year Options granted 2,856,352 27.49 1,982,966 38.98 1,178,352 32.83 Options exercised (1,933,669) (24.48) (759,164) (14.77) (437,680) (9.97) Options forfeited or canceled (292,479) (35.30) (74,251) (34.54) (63,303) (23.18) ---------- --------- ---------- Options outstanding at end of year 5,214,528 $30.44 4,584,324 $30.05 3,434,773 $20.26 ========== ========= ========== Weighted average estimated fair value of options granted in year $8.75 $10.86 $8.80 Exercisable at end of year 3,033,938 $30.50 2,858,759 $25.37 2,777,443 $18.07 ========== ========= ==========
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: 2000 1999 1998 ------- ------- --------- Dividend yield 2.0% 2.0% 2.0 % Expected average life (in years) 6 6 6 Expected volatility 27% 22% 23% Risk free interest rate 6.2-6.7% 5.8-6.3% 4.5-5.5% Options were outstanding at December 31, 2000 as follows:
OUTSTANDING STOCK OPTIONS EXERCISABLE OPTIONS ------------------------- ----------------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED NUMBER OF AVERAGE REMAINING AVERAGE LOWEST HIGHEST OPTIONS EXERCISE CONTRACTUAL NUMBER OF EXERCISE EXERCISE PRICE PER SHARE PRICE PRICE AT YEAR END PRICE LIFE (YEARS) OPTIONS PRICE - ------------------------ ----- ----- ----------- ----- ------------ ------- ----- Under $11 $6.87 $10.04 50,499 $8.29 0.9 50,499 $8.29 $11 -$18 11.80 17.78 291,708 13.76 4.5 291,708 13.76 $19 -$28 20.94 27.56 2,730,891 27.13 9.1 1,091,967 26.50 $29 -$39 29.42 38.80 589,146 32.66 7.7 561,614 32.77 Over $39 39.20 39.85 1,552,284 39.26 8.5 1,038,150 39.26 ---------- ---------- All options $6.87 $39.85 5,214,528 $30.44 8.4 3,033,938 $30.50 ========== ==========
21 23 NOTE 14. STOCK BASED COMPENSATION (CONTINUED) 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 2000, 1999, and 1998 option grants as if they had been recognized under SFAS No. 123, "Accounting for Stock Based Compensation." The 2000 and 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.
2000 1999 1998 -------------------------------------- ---------------------------------- --------------------------- NET BASIC DILUTED NET BASIC DILUTED NET BASIC DILUTED INCOME EPS EPS INCOME EPS EPS INCOME EPS EPS ----------------------------------------------------------------------------------------------------- (IN MILLIONS) (IN MILLIONS) (IN MILLIONS) As reported $278.3 $2.02 $2.00 $279.1 $2.00 $1.98 $261.1 $1.81 $1.79 Pro forma $263.1 $1.91 $1.89 $269.7 $1.94 $1.92 $256.3 $1.78 $1.76
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 2,357 or 25% of the Company's eligible employees participate in the Purchase Plan. The purchase price for each share is equal to 85% of the market value on the day of the purchase. A total of 2.2 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. During 2000, 68,653 shares were purchased by participants at prices ranging from $19.88 to $37.35 per share. The weighted average price of these shares was $25.65. As of December 31, 2000, 2.18 million shares of the Corporation's common stock are available for purchase under the Purchase Plan. 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 2000, 1999 or 1998. At December 31, 2000, there were 538,558 shares reserved for future deferred stock compensation plan awards. 22 24 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, 2000 and 1999 in accordance with the provisions of SFAS No. 132, "Employers' Disclosures about Pensions and Other Post-Retirement Benefits."
NON-QUALIFIED QUALIFIED RETIREMENT RETIREMENT INCOME INCOME PLAN PLAN --------------------------- ------------------------- 2000 1999 2000 1999 --------- --------- -------- -------- (DOLLARS IN THOUSANDS) Change in Benefit Obligation Benefit obligation at prior measurement date $ 100,689 $ 116,040 $ 19,358 $ 22,194 Service cost 8,420 9,544 681 766 Interest cost 7,347 7,478 1,448 1,420 Amendments -- -- -- -- Actuarial (gain)/loss 2,215 (21,071) 1,425 (3,803) Benefits paid in current year (11,990) (11,302) (1,358) (1,219) --------- --------- -------- -------- Benefit obligation at measurement date $ 106,681 $ 100,689 $ 21,554 $ 19,358 ========= ========= ======== ======== Change in Plan Assets Market value of assets at prior measurement date $ 106,248 $ 114,661 $ -- $ -- Actual return on assets 8,223 880 -- -- Contributions made in current year 3,098 2,009 1,358 1,219 Benefits paid in current year (11,990) (11,302) (1,358) (1,219) --------- --------- -------- -------- Market value of assets at measurement date $ 105,579 $ 106,248 $ -- $ -- ========= ========= ======== ======== Reconciliation of Funded Status Funded status $ (1,102) $ 5,559 $(21,554) $(19,358) Unrecognized transition (asset)/obligation (7,138) (8,965) 67 157 Unrecognized prior service cost 3,817 4,225 1,805 2,062 Unrecognized net (gain)/loss (6,473) (10,374) 2,338 910 --------- --------- -------- -------- Accrued pension cost, December 31, 2000 $ (10,896) $ (9,555) $(17,344) $(16,229) ========= ========= ======== ========
At December 31, 2000, $16.7 million was held in "rabbi" trust accounts to fund and secure the benefits of the Non-Qualified Retirement Income Plan as described in Note 1. Net pension expense included the following components:
YEAR ENDED DECEMBER 31 --------------------------------------------------------------------- QUALIFIED RETIREMENT NON-QUALIFIED RETIREMENT INCOME PLAN INCOME PLAN -------------------------------------------------------------------- 2000 1999 1998 2000 1999 1998 -------- ------- ------- ------ ------ ------ (DOLLARS IN THOUSANDS) Service cost (benefits earned during the year) $ 8,420 $ 9,544 $ 9,085 $ 681 $ 766 $ 875 Interest cost on projected benefit obligation 7,347 7,478 7,582 1,448 1,420 1,448 Expected return on plan assets (10,042) (9,633) (9,365) -- -- -- Amortization of transition obligation (1,827) (1,827) (1,827) 89 89 89 Amortization of prior service cost 583 560 216 255 261 207 Recognized net actuarial (gain)/loss (42) 482 1,046 -- 284 316 -------- ------- ------- ------ ------ ------ Net periodic pension expense $ 4,439 $ 6,604 $ 6,737 $2,473 $2,820 $2,935 ======== ======= ======= ====== ====== ======
23 25 NOTE 15. EMPLOYEE BENEFITS (CONTINUED) The following assumptions were used in determining the actuarial present value of the projected benefit obligations as of the measurement date for each of the following years:
QUALIFIED RETIREMENT NON-QUALIFIED RETIREMENT INCOME PLAN INCOME PLAN ------------------------------ --------------------------- 2000 1999 1998 2000 1999 1998 ---- ---- ---- ---- ---- ---- Discount rate 8.00% 7.75% 6.75% 8.00% 7.75% 6.75% Rate of increase in future compensation levels 4.50 4.50 4.25 6.00 6.00 6.00 Expected long-term rate of return on plan assets 10.00 10.00 10.00 -- -- --
Beginning with 1999, Old Kent changed its measurement date from December 31 to September 30. The effects of these changes are included in the actuarial gain for 1999. The amended assumptions reflect a change in outlook based on management's assessment of expected economic conditions for the foreseeable future. Eligible employees may elect to participate in Old Kent's retirement savings plans whereby the Corporation contributes a 50% matching contribution for each amount contributed by participating employees, within limits as defined in the plans. The cost of these retirement savings plans was $6,594,000, $8,881,000, and $10,238,000 for 2000, 1999 and 1998, 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: YEAR ENDED DECEMBER 31 ------------------------------------------- 2000 1999 1998 --------- -------- -------- (DOLLARS IN THOUSANDS) Federal income taxes: Current $ 134,969 $125,658 $106,801 Deferred (11,585) 14,382 23,017 State income taxes 3,403 9,423 6,334 --------- -------- -------- Total provision $ 126,787 $149,463 $136,152 ========= ======== ======== The preceding table excludes tax expense (benefit) of $21.4 million and $(43.4) million for 2000 and 1999 respectively, related to the market value adjustments on investment securities available-for-sale, which is recorded directly in shareholders' equity. Income tax expense differs from that computed at the federal statutory rate as follows: YEAR ENDED DECEMBER 31 ----------------------------------------------- 2000 1999 1998 --------- --------- --------- (DOLLARS IN THOUSANDS) Tax at 35% statutory rate $ 141,797 $ 149,904 $ 138,936 Tax effect of: Tax-exempt interest (15,233) (14,969) (13,006) Other, net 223 14,528 10,222 --------- --------- --------- Income tax expense $ 126,787 $ 149,463 $ 136,152 ========= ========= ========= Effective tax rate 31.3% 34.9% 34.3% 24 26 NOTE 16. TAXES ON INCOME (CONTINUED) Components of the deferred tax assets and liabilities were as follows: YEAR ENDED DECEMBER 31 ---------------------- 2000 1999 -------- -------- (DOLLARS IN THOUSANDS) Deferred tax assets: Allowance for credit losses $ 82,240 $ 76,007 Deferred compensation 26,346 25,585 Accrued expenses 9,665 9,273 Unrealized loss on securities available-for-sale -- 20,307 Other 15,103 14,758 -------- -------- Total deferred tax assets 133,354 145,930 Valuation allowance -- -- -------- -------- Deferred tax assets 133,354 145,930 -------- -------- Deferred tax liabilities: Mortgage servicing rights 69,421 81,827 Unrealized gain on securities available-for-sale 1,096 -- Realized gain on securities 10,110 -- Other 20,440 21,998 -------- -------- Deferred tax liabilities 101,067 103,825 -------- -------- Net deferred tax assets $ 32,287 $ 42,105 ======== ======== NOTE 17. REPORTABLE OPERATING SEGMENTS Under the provisions of SFAS No. 131, Old Kent has five reportable operating segments: Corporate Banking, Retail 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. 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 126 offices in 30 states. The Treasury function primarily manages Old Kent's liquidity and interest rate risk. With the exception of the Mortgage Banking segment which operates nationwide, Old Kent's segments operate primarily within the lower peninsula of Michigan and northern Illinois. The Treasury function administers intersegment funding using transfer pricing techniques, consistent with market rates. The elimination of intersegment funding interest income and expense is included in the Treasury line of business results. The accounting policies of the segments are essentially the same as those described in the summary of significant accounting policies. Old Kent evaluates performance based on profit and loss from operations. Management assesses performance of each segment based upon all relevant results as shown in the table below. Old Kent's revenues are derived almost entirely from sources within the United States. Old Kent does not rely on any customer to provide 10% or more of revenues. 25 27 NOTE 17. REPORTABLE OPERATING SEGMENTS (CONTINUED) The following table summarizes information about reportable operating segments' profit and loss and segments' assets as of December 31, 2000, 1999 and 1998:
YEAR ENDED DECEMBER 31, 2000 ----------------------------------------------------------------------------------------------- INVESTMENT CORPORATE RETAIL & MORTGAGE RECONCILING CONSOLIDATED BANKING BANKING INSURANCE BANKING TREASURY ITEMS* TOTAL ----------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Net interest revenues $ 219,779 $ 486,423 $ 24,960 $ 33,483 $ 19,561 $ -- $ 784,206 Provision for loan losses 34,319 22,524 1,190 3,737 (25,146) 12,000 48,624 Non-interest revenues and fees 16,238 125,501 132,307 180,584 2,163 (11,425) 445,368 Depreciation and amortization 1,237 20,058 2,723 8,706 35,787 -- 68,511 Segment income taxes 39,228 78,378 16,876 8,302 5,852 (21,849) 126,787 Net segment profit (after taxes) 75,407 145,289 30,329 13,824 57,075 (43,576) 278,348 Segment assets 6,455,597 8,074,479 469,106 2,384,063 6,459,044 -- 23,842,289 Segment loans 6,521,813 7,798,542 389,569 846,626 1,049,142 -- 16,605,692 Segment allowance for loan losses 136,058 111,289 5,731 7,159 (34,392) -- 225,845 Net segment loans 6,385,755 7,687,253 383,838 839,467 1,083,534 -- 16,379,847 Segment deposits 1,504,214 12,957,591 648,732 284,060 2,016,064 -- 17,410,661
YEAR ENDED DECEMBER 31, 1999 ------------------------------------------------------------------------------------------------ INVESTMENT CORPORATE RETAIL & MORTGAGE RECONCILING CONSOLIDATED BANKING BANKING INSURANCE BANKING TREASURY ITEMS* TOTAL ------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Net interest revenues $ 247,380 $ 465,141 $ 28,076 $ 47,294 $ (14,773) $ -- $ 773,118 Provision for loan losses 15,279 14,882 1,240 4,093 (106) -- 35,388 Non-interest revenues and fees 27,401 113,554 114,214 188,429 13,132 -- 456,730 Depreciation and amortization 11,653 37,670 5,213 11,590 3,125 -- 69,251 Segment income taxes 60,612 67,383 17,780 21,772 (9,684) (8,400) 149,463 Net segment profit (after taxes) 109,861 121,942 32,340 23,156 9,419 (17,600) 279,118 Segment assets 5,656,766 6,281,712 461,449 2,031,864 6,168,496 -- 20,600,287 Segment loans 5,666,325 5,718,979 398,928 649,718 1,467,713 -- 13,901,663 Segment allowance for loan losses 112,062 78,878 5,324 6,578 3,437 -- 206,279 Net segment loans 5,554,263 5,640,101 393,604 643,140 1,464,276 -- 13,695,384 Segment deposits 1,376,483 12,374,158 644,030 2,100 1,375,474 -- 15,772,245
YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------------------------------------------ INVESTMENT CORPORATE RETAIL & MORTGAGE RECONCILING CONSOLIDATED BANKING BANKING INSURANCE BANKING TREASURY ITEMS* TOTAL ------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Net interest revenues $ 253,461 $ 430,249 $ 23,538 $ 27,298 $ 5,657 $ -- $ 740,203 Provision for loan losses 20,379 25,968 1,118 1,251 714 3,500 52,930 Non-interest revenues and fees 19,756 107,584 100,021 147,621 38,638 -- 413,620 Depreciation and amortization 13,359 34,423 4,900 8,000 4,125 -- 64,807 Segment income taxes 49,501 64,209 12,665 15,193 3,399 (8,815) 136,152 Net segment profit (after taxes) 94,009 118,710 22,883 16,700 28,514 (19,678) 261,138 Segment assets 5,126,120 4,523,042 357,842 3,404,540 7,737,144 -- 21,148,688 Segment loans 5,087,294 4,130,551 314,622 261,569 1,993,904 -- 11,787,940 Segment allowance for loan losses 100,806 90,491 6,175 2,127 956 -- 200,555 Net segment loans 4,986,488 4,040,060 308,447 259,442 1,992,948 -- 11,587,385 Segment deposits 1,448,401 12,783,784 485,242 7,463 1,793,353 -- 16,518,243
26 28 NOTE 17. REPORTABLE OPERATING SEGMENTS (CONTINUED) * The reconciling items in the table reflect one-time charges related to Old Kent's mergers as detailed below:
Merger Date Amount ------ ---- ------ Grand Premier, Financial, Inc. April 1, 2000 $26.10 Million (after-tax); $5.3 million related to securities (pre-tax) Merchants Bancorp, Inc. February 11, 2000 $17.50 Million (after-tax); $6.125 million related to securities (pre-tax) Pinnacle Banc Group, Inc. September 3, 1999 $10.75 Million (after-tax) CFSB Bancorp, Inc. July 9, 1999 $6.85 Million (after-tax) First Evergreen Corporation October 1, 1998 $19.70 Million (after-tax)
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:
2000 1999 1998 ------------- ------------- ------------- Basic: Net Income $ 278,348,000 $ 279,118,000 $ 261,138,000 Less: Dividends on preferred stock (740,000) (740,000) (740,000) ------------- ------------- ------------- Income available to common shareholders $ 277,608,000 $ 278,378,000 $ 260,398,000 ============= ============= ============= Average common shares outstanding 137,621,000 139,003,000 143,962,000 Basic earnings per common share $2.02 $2.00 $1.81 ============= ============= ============= Diluted: Net income $ 278,348,000 $ 279,118,000 $ 261,138,000 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 $ 278,188,000 $ 278,958,000 $ 260,978,000 ============= ============= ============= Average common shares outstanding 137,621,000 139,003,000 143,962,000 Dilutive effect of: Employee stock plans 1,145,000 1,175,000 1,510,000 Convertible preferred stock 416,000 416,000 416,000 ------------- ------------- ------------- Total average shares and assumed conversions 139,182,000 140,594,000 145,888,000 ============= ============= ============= Diluted earnings per common share $2.00 $1.98 $1.79 ============= ============= =============
27 29 NOTE 19. COMMITMENTS AND CONTINGENCIES Certain facilities and equipment are leased under noncancelable operating lease agreements which expire at various dates through the year 2021. The aggregate minimum rental commitments are as follows: YEAR ENDED DECEMBER 31 ----------------------------------- PREMISES EQUIPMENT TOTAL -------- --------- ----- (DOLLARS IN THOUSANDS) 2001 $19,585 $ 5,626 $25,211 2002 16,465 4,784 21,249 2003 12,406 2,899 15,305 2004 8,445 914 9,359 2005 5,764 118 5,882 Thereafter 13,363 -- 13,363 ------- ------- ------- Total minimum payments $76,028 $14,341 $90,369 ======= ======= ======= Rental expense charged to operations in 2000, 1999 and 1998, amounted to approximately $21,697,000, $20,465,000 and $16,477,000, respectively, including amounts paid under short-term cancelable leases. Certain leases contain provisions for renewal and purchase options, and require payment of property taxes, insurance and related expenses. Included as a reduction of Old Kent's occupancy expense is building rental income of approximately $3,387,000, $4,733,000 and $4,519,000, for 2000, 1999 and 1998, respectively. At December 31, 2000, 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 securities 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's credit risk is swap and cap contract relates to the failure of conterparty 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, ongoing monitoring procedures, and in some cases bilateral collaterization requirements. Credit exposure is represented by the fair value of interest rate swaps and caps with a positive fair value, adjusted for accrued interest. 28 30 NOTE 20. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED) Old Kent had no interest rate swaps or caps outstanding at December 31, 2000 that were used for the management of interest rate risk.
DECEMBER 31 ------------------------------------------------- 2000 1999 --------------------- ------------------------ NOTIONAL CREDIT NOTIONAL CREDIT AMOUNT EXPOSURE AMOUNT EXPOSURE ------ -------- ------ -------- (DOLLARS IN THOUSANDS) Receive fixed/pay floating swaps $ -- $ -- $1,029,917 $2,556 Receive floating/pay fixed swaps -- -- 410,000 4,258 Interest rate caps -- -- 20,000 24 ----- ------ ---------- ------ $ -- $ -- $1,459,917 $6,838 ===== ====== ========== ======
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, ongoing monitoring procedures, and bilateral collateralization requirements. Credit exposure is represented by the fair value of interest rate contracts with a positive fair value, adjusted for accrued interest where applicable. DECEMBER 31 --------------------------------------------- 2000 1999 --------------------- ---------------------- NOTIONAL CREDIT NOTIONAL CREDIT AMOUNT EXPOSURE AMOUNT EXPOSURE ------ -------- ------ -------- (DOLLARS IN THOUSANDS) Interest rate caps sold $48,798 $ -- $26,000 $ -- Interest rate caps purchased 48,798 123 26,000 227 Interest rate floors sold 16,000 -- 26,000 -- Interest rate floors purchased 16,000 196 26,000 57 Receive fixed/pay floating swap -- -- 6,500 -- Receive floating/pay fixed swap -- -- 6,500 597 Mortgage Banking The Corporation uses forward sales, futures, and option contracts to protect the value of residential mortgage loans that are being underwritten or warehoused for future sale to investors in the secondary market. Adverse market interest rate changes, between the time that a customer receives a rate-lock commitment and when the fully-funded mortgage loan is sold to an investor, can erode the value of that mortgage. Therefore, Old Kent enters into forward sales and futures contracts and purchases exchange-traded option contracts to mitigate the interest rate risk associated with the origination and sale of mortgage loans. Old Kent accepts credit risk in forward sales contracts to the extent of nonperformance by a counterparty, in which case Old Kent would be compelled to sell the mortgages to another party at the current market price. The credit exposure of forward sales, futures, and option contracts represents the aggregate value of contracts with a positive fair value. DECEMBER 31 ------------------------------------------------- 2000 1999 ----------------------- ------------------------ CONTRACTUAL CREDIT CONTRACTUAL CREDIT AMOUNT EXPOSURE AMOUNT EXPOSURE ------ -------- ------ -------- (DOLLARS IN THOUSANDS) Mortgage forward sales $790,000 $36 $618,000 $5,290 Futures and options 834,000 -- 389,000 460 29 31 NOTE 20. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED) Old Kent periodically uses treasury futures and options 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 puts and calls with a positive fair value. The December 31, 2000 contracts are summarized below. There were no contracts of this type outstanding as of December 31, 1999.
DECEMBER 31, 2000 ------------------------------------------------------- NUMBER EXPIRATION OF NOTIONAL CREDIT DATE CONTRACTS AMOUNT EXPOSURE ---- --------- ------ -------- (DOLLARS IN THOUSANDS) Ten-year Treasury note futures March 2001 6,465 $646,500 $ -- Ten-year Treasury note put options March 2001 (4,300) 430,000 -- Ten-year Treasury note call options March 2001 4,505 450,500 3,057
Foreign Exchange Contracts Old Kent enters into foreign exchange forward contracts to purchase or sell foreign currencies at a future date at a predetermined exchange rate. These contracts are used to assist customers with international transactions denominated in foreign currencies. The Corporation manages its exposure to foreign currency fluctuations by entering into offsetting contracts with authorized counterparties, usually foreign banks. The credit risk inherent in these transactions relates to the possibility of failure by a counterparty to fulfill its purchase or delivery responsibility, whereby Old Kent would execute the transaction with another counterparty at the prevailing currency exchange rate. The credit exposure of Old Kent's foreign exchange contracts represents the aggregate value of contracts with a positive fair value. The extension of foreign exchange credit facilities to counterparties follows the same approval process as other credit facilities. The majority of Old Kent's foreign exchange contracts relate to major currencies such as Canadian Dollars, British Pounds Sterling, German Deutschemarks, Japanese Yen, Italian Lira, and French Francs.
DECEMBER 31 --------------------------------------------------- 2000 1999 ------------------------- ------------------------- CONTRACTUAL CREDIT CONTRACTUAL CREDIT AMOUNT EXPOSURE AMOUNT EXPOSURE ------ -------- ------ -------- (DOLLARS IN THOUSANDS) Foreign exchange forward contracts $40,134 $1,119 $32,211 $798
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 funding. Since many of the commitments are expected to expire without being drawn upon, the total funding 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 30 32 NOTE 20. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED) 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 our customer is represented by the contractual amount of those instruments. Old Kent uses the same credit underwriting policies in making commitments and issuing letters of credit as it does for its other lending activities. CONTRACTUAL AMOUNT AT DECEMBER 31 ------------------- 2000 1999 ------ ------ (DOLLARS IN MILLIONS) Commitments to extend credit $6,094 $5,762 Standby and commercial letters of credit 580 539 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. Securities available-for-sale and securities held-to-maturity The estimated fair values were based upon quoted market or dealer prices. 31 33 NOTE 21. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) 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. 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. 32 34 NOTE 21. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The following summarizes the carrying value and estimated fair value of financial instruments:
DECEMBER 31 ------------------------------------------------------------------------ 2000 1999 ------------------------------- ------------------------------ CARRYING ESTIMATED CARRYING ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE -------- ---------- -------- ---------- (DOLLARS IN THOUSANDS) FINANCIAL ASSETS: Cash and cash equivalents ............ $ 732,442 $ 732,442 $ 709,416 $ 709,416 Interest-earning deposits ............ 23,878 23,878 2,167 2,167 Securities available-for-sale ........ 3,427,213 3,427,213 3,237,829 3,237,829 Securities held-to-maturity .......... 525,573 530,285 609,264 590,369 Mortgages held-for-sale .............. 1,101,732 1,126,438 901,130 924,980 Net loans ............................ 16,379,847 16,832,245 13,695,384 13,795,288 Interest receivable .................. 162,877 162,877 140,547 140,547 FINANCIAL LIABILITIES: Deposits ............................. 17,410,661 17,392,541 15,772,245 15,760,500 Other borrowed funds ................. 3,840,006 3,901,179 2,824,034 2,811,534 Interest payable ..................... 92,315 92,315 64,042 64,042 Subordinated debt .................... 349,790 353,743 100,000 95,910 Capital securities ................... 100,000 100,000 100,000 100,000 INTEREST RATE CONTRACTS RELATING TO: Assets: Commercial loans ............. -- -- 3,803 (8,420) Mortgages held-for-sale ...... -- (7,700) -- 5,007 Investments .................. -- -- -- 24 Liabilities .......................... -- -- (208) 4,516
33 35 NOTE 22. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY The condensed financial information of the parent company, Old Kent Financial Corporation, is summarized as follows: CONDENSED BALANCE SHEET
DECEMBER 31 --------------------------- 2000 1999 ---------- ---------- (DOLLARS IN THOUSANDS) ASSETS: Cash and cash equivalents $ 3,156 $ 8,887 Interest-earning deposits and other securities 99,637 95,143 Premises and equipment 21,665 13,487 Investment in and advances to subsidiaries 1,795,964 1,614,817 Other assets 157,215 63,142 ---------- ---------- Total Assets $2,077,637 $1,795,476 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Other borrowed funds $ -- $ 12,250 Long-term debt 203,093 203,093 Accrued expenses and other liabilities 103,401 94,369 ---------- ---------- Total Liabilities 306,494 309,712 Shareholders' Equity 1,771,143 1,485,764 ---------- ---------- Total Liabilities and Shareholders' Equity $2,077,637 $1,795,476 ========== ==========
CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 ----------------------------------------- 2000 1999 1998 -------- -------- --------- (DOLLARS IN THOUSANDS) INCOME: Dividends from subsidiaries $236,000 $254,466 $ 356,445 Service fees from subsidiaries 94,637 96,434 81,446 Interest and other 4,763 12,466 24,227 -------- -------- --------- Total income 335,400 363,366 462,118 -------- -------- --------- EXPENSES: Interest 14,602 14,855 18,620 Salaries and benefits 56,262 51,391 60,672 Occupancy 4,908 4,815 5,794 Equipment 9,028 7,768 7,838 Other 51,538 50,434 44,541 -------- -------- --------- Total expenses 136,338 129,263 137,465 -------- -------- --------- Income before income taxes and equity in undistributed net income of subsidiaries 199,062 234,103 324,653 Income tax benefit 12,793 4,993 10,105 -------- -------- --------- Income before equity in undistributed net income of subsidiaries 211,855 239,096 334,758 Equity in undistributed net income of subsidiaries 66,493 40,022 (73,620) -------- -------- --------- NET INCOME $278,348 $279,118 $ 261,138 ======== ======== =========
34 36 NOTE 22. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (CONTINUED) CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 --------------------------------------------- 2000 1999 1998 --------- --------- --------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 278,348 $ 279,118 $ 261,138 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries (66,493) (40,022) 73,620 Depreciation, amortization and accretion 10,585 9,725 11,563 Net gains on sales of assets 79 (6,855) (13,072) Net change in other assets (88,778) (1,381) (3,485) Net change in other liabilities 20,256 (6,013) (7,945) --------- --------- --------- Net cash provided by operating activities 153,997 234,572 321,819 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net change in interest-earning assets (2,864) 54,093 30,534 Net change in investment in and advances to subsidiaries (10,300) (9,878) (5,818) Purchases of leasehold improvements, premises & equipment, net (13,346) (5,850) (4,468) --------- --------- --------- Net cash provided by (used for) investing activities (26,510) 38,365 20,248 --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on other borrowed funds (12,250) (21,625) (30,950) Proceeds from other borrowings -- 7,000 23,825 Proceeds from common stock issuances 58,340 26,290 20,218 Repurchases of common stock (60,517) (178,692) (257,519) Dividends paid to shareholders (118,791) (108,769) (106,328) --------- --------- --------- Net cash used for financing activities (133,218) (275,796) (350,754) --------- --------- --------- Net decrease in cash and cash equivalents (5,731) (2,859) (8,687) Cash and cash equivalents at beginning of year 8,887 11,746 20,433 --------- --------- --------- Cash and cash equivalents at end of year $ 3,156 $ 8,887 $ 11,746 ========= ========= =========
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 2001, the subsidiary banks may distribute to the parent company, in addition to their 2001 net income, approximately $101.8 million in dividends without written approval from bank regulatory agencies. The remaining net assets of subsidiary banks, approximating $1.6 billion at December 31, 2000, 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. 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, 2000, that the Corporation and its subsidiary banks meet all capital adequacy requirements to which it is subject. 35 37 NOTE 23. RISK BASED CAPITAL (CONTINUED) 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, 2000 and 1999:
TO BE "WELL CAPITALIZED" UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ------------------- ------------------------ --------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------------------- ------------- ---------- -------------- ------------ (DOLLARS IN MILLIONS) AS OF DECEMBER 31, 2000: Total Capital (to Risk Weighted Assets) Consolidated $2,250 11.45% $1,572 8.00% $1,965 10.00% Old Kent Bank 2,041 10.60 1,541 8.00 1,926 10.00 Old Kent Bank, N.A. 16 11.82 11 8.00 13 10.00 Tier 1 Capital (to Risk Weighted Assets) Consolidated 1,705 8.68 786 4.00 1,179 6.00 Old Kent Bank 1,587 8.24 771 4.00 1,156 6.00 Old Kent Bank, N.A. 14 10.57 5 4.00 8 6.00 Leverage Ratio (to Average Assets) Consolidated 1,705 7.36 695 3.00 1,158 5.00 Old Kent Bank 1,587 7.06 675 3.00 1,124 5.00 Old Kent Bank, N.A. 14 10.24 4 3.00 7 5.00 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
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