<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-16311
CHARTER ONE FINANCIAL, INC.
---------------------------
(exact name of registrant as specified in its charter)
DELAWARE 34-1567092
-------- ----------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1215 SUPERIOR AVENUE, CLEVELAND, OHIO 44114
------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(216) 566-5300
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of the registrant's sole class of common
stock as of August 6, 1996 was 44,773,041.
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM
NUMBER PAGE
- ------ ----
PART I - FINANCIAL INFORMATION
<S> <C> <C>
1. Financial Statements
Consolidated Statements of Financial Condition --
June 30, 1996 and December 31, 1995 ............................. 1
Consolidated Statements of Income --
Three and six months ended June 30, 1996 and 1995 ............... 2
Consolidated Statement of Changes in Shareholders' Equity --
Six months ended June 30, 1996 .................................. 3
Consolidated Statements of Cash Flows --
Six months ended June 30, 1996 and 1995 ......................... 4
Notes to Consolidated Financial Statements ....................... 5
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 7
PART II - OTHER INFORMATION
5. Other Information .................................................. 26
6. Exhibits and Reports on Form 8-K ................................... 26
Signatures .................................................................. 27
</TABLE>
i
<PAGE> 3
PART I - FINANCIAL CONDITION
ITEM 1. FINANCIAL STATEMENTS
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
ASSETS
<S> <C> <C>
Cash and deposits with banks ............................................. $ 163,429 163,123
Federal funds sold and other ............................................. 84,869 495,248
----------- ----------
Total cash and cash equivalents .................................... 248,298 658,371
Investment securities available for sale, at fair value .................. 340,653 407,427
Mortgage-backed securities:
Available for sale, at fair value ...................................... 532,300 1,435,589
Held to maturity (fair value of $5,075,684 and $3,961,326) ............. 5,087,788 3,879,160
Loans held for sale ...................................................... -- 4,340
Loans and leases, net .................................................... 7,201,810 6,674,260
FHLB stock ............................................................... 197,242 178,136
Premises and equipment ................................................... 106,677 96,581
Accrued interest receivable .............................................. 80,107 73,683
Equipment on operating leases ............................................ 27,077 32,755
Real estate owned ........................................................ 9,885 11,991
Goodwill ................................................................. 67,058 10,602
Other assets ............................................................. 52,951 115,964
----------- ----------
Total assets ..................................................... $13,951,846 13,578,859
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Checking accounts ...................................................... $ 878,755 733,962
Money market accounts .................................................. 1,131,047 829,087
Savings accounts ....................................................... 939,059 1,007,178
Certificates of deposit ................................................ 4,868,265 4,442,264
----------- -----------
Total deposits ..................................................... 7,817,126 7,012,491
FHLB advances ............................................................ 3,267,103 3,163,144
Reverse repurchase agreements ............................................ 1,521,078 2,089,520
Other borrowings ......................................................... 210,780 209,020
Advance payments by borrowers for taxes and insurance .................... 65,786 47,738
Accrued interest payable ................................................. 39,993 56,955
Accrued expenses and other liabilities ................................... 95,502 155,593
----------- ----------
Total liabilities ................................................ 13,017,368 12,734,461
----------- ----------
Shareholders' equity:
Preferred stock - $.01 par value per share; 20,000,000 shares
authorized and unissued ............................................... -- --
Common stock - $.01 par value per share; 180,000,000 shares
authorized; 45,218,049 and 45,119,014 shares issued ................... 452 451
Additional paid-in capital ............................................. 237,219 235,889
Retained earnings ...................................................... 695,762 642,197
Less 208,285 and 101,488 shares of common stock held in treasury at cost (7,351) (3,061)
Net unrealized gain (loss) on securities, net of tax (expense)
benefit of $(4,521) and $15,978 ....................................... 8,396 (31,078)
----------- ----------
Total shareholders' equity ....................................... 934,478 844,398
----------- ----------
Total liabilities and shareholders' equity ....................... $13,951,846 13,578,859
=========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
1
<PAGE> 4
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans and leases ............................. $ 150,144 137,616 292,335 274,041
Mortgage-backed securities:
Available for sale ......................... 1,015 82,802 8,812 167,475
Held to maturity ........................... 90,603 33,313 172,413 65,319
Investment securities available for sale ..... 5,278 15,561 11,050 27,460
Other interest-earning assets ................ 4,640 6,243 10,118 14,612
---------- ---------- ---------- ----------
Total interest income .................... 251,680 275,535 494,728 548,907
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Deposits ..................................... 76,269 91,544 155,797 175,662
FHLB advances ................................ 45,990 44,263 91,117 88,046
Other borrowings ............................. 30,514 62,832 56,905 131,050
---------- ---------- ---------- ----------
Total interest expense ................... 152,773 198,639 303,819 394,758
---------- ---------- ---------- ----------
Net interest income ...................... 98,907 76,896 190,909 154,149
Provision for loan and lease losses ............ 1,000 258 2,000 516
---------- ---------- ---------- ----------
Net interest income after provision
for loan and lease losses ............... 97,907 76,638 188,909 153,633
---------- ---------- ---------- ----------
OTHER INCOME:
Loan servicing fees .......................... 2,763 2,089 5,022 4,590
Service fees and other charges ............... 8,235 6,370 15,194 12,301
Leasing operations ........................... 1,719 1,645 3,507 3,357
Net gains (losses):
Loans ...................................... 121 548 311 758
Mortgage-backed securities ................. (339) 23 (282) 23
Investment securities ...................... (2,025) 2,074 (2,025) 3,387
Other gains ................................ 128 377 458 949
Other ........................................ (37) 192 219 573
---------- ---------- ---------- ----------
Total other income ....................... 10,565 13,318 22,404 25,938
---------- ---------- ---------- ----------
ADMINISTRATIVE EXPENSES:
Compensation and employee benefits ........... 22,613 21,223 44,650 44,166
Net occupancy and equipment .................. 6,380 5,950 12,784 12,229
Federal deposit insurance premiums ........... 4,094 4,211 8,083 8,422
State taxes .................................. 1,852 1,511 3,966 3,106
Amortization of goodwill ..................... 190 188 379 384
Other administrative expenses ................ 10,935 9,736 20,785 19,723
---------- ---------- ---------- ----------
Total administrative expenses ............ 46,064 42,819 90,647 88,030
---------- ---------- ---------- ----------
Income before federal income taxes ............. 62,408 47,137 120,666 91,541
Federal income taxes ........................... 21,038 16,092 40,846 31,186
---------- ---------- ---------- ----------
Net income ............................... $ 41,370 31,045 79,820 60,355
========== ========== ========== ==========
Earnings per common and common equivalent share $ .90 .68 1.74 1.32
========== ========== ========== ==========
Average common and common equivalent
shares outstanding ............................ 46,041,344 45,935,095 46,001,965 45,849,796
========== ========== ========== ==========
Dividends declared per share ................... $ .23 .19 .43 .36
========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE> 5
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL NET UNREALIZED SHARE-
COMMON PAID-IN RETAINED TREASURY GAIN (LOSS) HOLDERS'
STOCK CAPITAL EARNINGS STOCK ON SECURITIES EQUITY
----- ---------- -------- -------- -------------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 ....... $451 235,889 642,197 (3,061) (31,078) 844,398
Purchase of 433,900 shares
of treasury stock ........... (14,269) (14,269)
Treasury stock reissued in
connection with stock options
exercised, 319,063 shares ... (6,776) 9,736 2,960
Treasury stock reissued in
connection with compensation
plans, 8,040 shares ......... (99) 243 144
Common stock issued in
connection with stock options
exercised, 99,035 shares .... 1 1,330 1,331
Dividends paid ($.43
per share) .................. (19,380) (19,380)
Change in net unrealized gain
(loss) on securities, net of
tax (expense) benefit ....... 39,474 39,474
Net income ................... 79,820 79,820
--- ------- ------- ------ ----- -------
Balance, June 30, 1996 ......... $452 237,219 695,762 (7,351) 8,396 934,478
=== ======= ======= ====== ===== =======
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 6
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................. $ 79,820 60,355
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan and lease losses ...................................... 2,000 516
Net (gains) losses ....................................................... 1,538 (5,117)
Accretion of discounts, amortization of premiums,
amortization of goodwill and depreciation, net .......................... 7,305 10,136
Origination of real estate loans held for sale ........................... (17,467) (36,680)
Proceeds from sale of loans held for sale ................................ 17,778 40,741
Change in deferred federal income taxes .................................. 3,120 39,564
Other .................................................................... 27,756 (5,757)
---------- ----------
Net cash provided by operating activities .............................. 121,850 103,758
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net principal (disbursed) repaid on loans and leases ....................... (1,023,020) 1,704
Proceeds from principal repayments and maturities of:
Mortgage-backed securities held to maturity .............................. 423,325 293,617
Mortgage-backed securities available for sale ............................ 10,061 17,043
Investment securities available for sale ................................. 123,238 8,749
Sales of mortgage-backed securities available for sale ..................... 323,662 59,924
Sales of investment securities available for sale .......................... 77,975 204,502
Purchases of:
Mortgage-backed securities held to maturity .............................. (569,577) (63,670)
Mortgage-backed securities available for sale ............................ -- (1,715)
Investment securities available for sale ................................. (141,525) (784,039)
Loans .................................................................... -- (22,516)
Federal Home Loan Bank stock ............................................. (15,819) (1,499)
Equipment on operating lease ............................................. (4,570) (17,281)
Net cash and cash equivalents received in connection with branch acquisition 731,170 (9,969)
Other ...................................................................... (3,758) 7,111
---------- ----------
Net cash used in investing activities .................................... (68,838) (308,039)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings ........................... (741,954) 391,587
Proceeds from long-term borrowings ......................................... 2,161,133 1,540,470
Repayments of long-term borrowings ......................................... (1,879,735) (1,995,842)
Increase in, net of acquisitions:
Deposits ................................................................. 8,638 193,198
Advance payments by borrowers for taxes and insurance .................... 18,048 34,575
Payment of dividends on common stock ....................................... (19,380) (13,713)
Purchase of treasury stock, net of options exercised ....................... (11,166) (4,698)
Common shares issued ....................................................... 1,331 --
---------- ----------
Net cash provided by (used in) financing activities .......................... (463,085) 145,577
---------- ----------
Net decrease in cash and cash equivalents .................................... (410,073) (58,704)
Cash and cash equivalents, beginning of the period ........................... 658,371 341,935
---------- ----------
Cash and cash equivalents, end of the period ................................. $ 248,298 283,231
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest on deposits and borrowings .......... $ 326,291 349,645
Refund received for income taxes ........................................... -- 13,419
Cash paid for income taxes ................................................. 29,000 --
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Securities transferred from available for sale to held to maturity ......... 1,064,722 --
Transfers from loans to real estate owned .................................. 1,192 2,624
Loans exchanged for mortgage-backed securities ............................. 510,435 28,250
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 7
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. The consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Charter
One Financial, Inc. ("the Company" or "Charter One") 1995 Annual Report to
Shareholders. The interim financial statements reflect all adjustments which
are, in the opinion of management, necessary for a fair presentation of the
results for the periods presented. Such adjustments are of a normal
recurring nature. The results of operations for the interim periods
disclosed herein are not necessarily indicative of the results that may be
expected for a full year.
2. On June 28, 1996 the Company completed the acquisition of First Nationwide
Bank's 21 branch offices in the Detroit Metropolitan area. Four First
Nationwide offices directly overlapped existing branch offices and therefore
were consolidated into the existing branch facilities. The deposits of the
branches totaled $796.7 million and were assumed for a cost of $57.0
million. Such cost has been reflected as goodwill in the accompanying
financial statements.
3. On July 24, 1996 the Company's Board of Directors approved a 5% stock
dividend which will be distributed September 30, 1996, to shareholders of
record on September 13, 1996. It is the Board's intention, subject to
ongoing review of the Company's operating results and prospects, to maintain
the quarterly cash dividend at no less than $.23 per share subsequent to the
distribution of the stock dividend. If maintained at that level, this would
represent an increase of 5% in the cash dividend paid to common
shareholders. Par value will remain at $.01 per share. Pro forma earnings
per share, giving retroactive effect to the stock dividend, are presented
below.
<TABLE>
<CAPTION>
3 MONTHS ENDED JUNE 30, 6 MONTHS ENDED JUNE 30,
----------------------- -----------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary and fully diluted earnings per common
and common equivalent share ................... $.86 .64 1.65 1.25
</TABLE>
Financial information contained elsewhere in this Form 10Q has not been
adjusted to reflect the impact of the stock dividend.
4. On January 1, 1996, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." This Statement requires
that long-lived assets and certain identified intangibles held and used by
an entity, along with goodwill related to those assets, be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss must
be recognized if the estimate of the future cash flows (undiscounted and
without interest charges) resulting from the use of the asset and its
eventual disposition is less than the carrying amount of the asset. The
adoption of this Statement has not had a material effect on the Company's
financial condition or results of operations.
5. On January 1, 1996, the Company also adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights." SFAS No. 122 amends SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities," to require that a company recognize,
as a separate asset, rights to service mortgage loans for others, regardless
of how those servicing rights are acquired. A company that acquires mortgage
servicing rights through either the purchase or origination of mortgage
loans and sells or securitizes those loans with the servicing rights
retained should allocate the total cost of the mortgage loans to the
mortgage servicing rights and the loans (without the mortgage servicing
rights) based upon their relative values, if it is practicable to estimate
those fair values. This Statement also requires that a company periodically
assess its capitalized mortgage servicing rights for impairment based upon
the fair value of those rights. The adoption of this Statement has not had a
material effect on the Company's financial condition or results of
operations.
6. Effective January 1, 1996, Charter One adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which prescribes financial accounting and
reporting standards for stock-based employee compensation plans. The
Statement defines a fair value based method of accounting for employee stock
options or similar equity instruments and encourages all entities to adopt
that method of accounting for all employee stock compensation plans.
However, the Statement also allows an entity to continue to measure
compensation cost for these plans using an intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB
No. 25"). Entities electing to retain the accounting treatment under APB No.
25 must make pro forma footnote disclosures of net income and earnings per
share as if the fair value based method of accounting defined in this
Statement has been applied. Management has elected to
5
<PAGE> 8
continue using the APB No. 25 accounting method and include pro forma
disclosures when presenting complete financial statement footnotes in the
future.
7. On October 31, 1995, Charter One completed a merger of equals with FirstFed
Michigan Corporation ("FirstFed") which was accounted for as a pooling of
interests and, accordingly, the financial statements for the Company for all
periods prior to the merger have been restated to include the results of
FirstFed. FirstFed was the holding company for First Federal of Michigan
("First Federal"), a $7.7 billion savings and loan headquartered in Detroit,
Michigan. The merger was effected through the issuance of 1.2 shares of
Company common stock for each share of FirstFed common stock resulting in
the issuance of 22,506,201 shares.
8. Certain items in the consolidated financial statements for 1995 have been
reclassified to conform to the 1996 presentation.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HOLDING COMPANY BUSINESS
GENERAL
Charter One Financial, Inc. ("Charter One" or the "Company") is a unitary
savings and loan holding company incorporated in Delaware and is the parent
company of Charter One Bank, F.S.B. ("Charter One Bank" or the "Bank"), a
federally chartered stock savings bank headquartered in Cleveland, Ohio. The
bank has 172 branch locations: 94 branches in Ohio operating under the name
Charter One Bank and 78 branches in Michigan under the name First Federal of
Michigan ("First Federal"). The two-state branch franchise was created through a
merger of equals transaction in October 1995 when FirstFed Michigan Corporation
was combined with Charter One ("the Merger").
RESULTS OF OPERATIONS
PERFORMANCE OVERVIEW
Net income for the three months ended June 30, 1996 was $41.4 million, or $.90
per share, up 33.3% from $31.0 million, or $.68 per share, for the second
quarter of 1995. The increase in net income was attributable to increases in net
interest income and services fees and other charges which were partially offset
by losses on the sale of investment securities and increased administrative
expenses.
Net income for the six months ended June 30, 1996 was $79.8 million, or $1.74
per share, compared to $60.4 million, or $1.32 per share, in the same period of
1995. The 32.3% increase in net income was also attributable to increases in net
interest income and service fees and other charges which were partially offset
by losses on the sales of investment securities and increased administrative
expenses.
Net income for both the current quarter and the year-to-date periods increased
over the comparable 1995 periods as a result of overall improvement in
categories described by industry practice as core earnings. Core earnings are
recurring in nature. Thus, core earnings would exclude nonrecurring items such
as gains and losses on sales of assets and merger related expenses. As Figure 1
illustrates, the Company's favorable trend in core earnings continued as pretax
core earnings for the second quarter of 1996 increased by 11.9% over the first
quarter of 1996.
QUARTERLY EARNINGS SUMMARY (Figure 1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
6/30/96 3/31/96 12/31/95 9/30/95 6/30/95
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net interest income .................. $ 98,907 92,002 85,798 77,869 76,896
Provision for loan and lease losses .. (1,000) (1,000) (258) (258) (258)
Other income, excluding
gains and losses .................... 12,680 11,262 12,283 11,363 10,296
Administrative expenses, excluding
merger-related costs ................ (46,064) (44,583) (46,426) (43,759) (42,819)
--------- --------- --------- --------- ---------
Pretax core earnings ............... 64,523 57,681 51,397 45,215 44,115
Gains and losses, net ................ (2,115) 577 (100,683) 3,263 3,022
Merger-related costs ................. -- -- (37,528) -- --
--------- --------- --------- --------- ---------
Income before federal income taxes 62,408 58,258 (86,814) 48,478 47,137
Federal income taxes ................. 21,038 19,808 (28,384) 16,371 16,092
--------- --------- --------- --------- ---------
Net income ......................... $ 41,370 38,450 (58,430) 32,107 31,045
========= ========= ========= ========= =========
Earnings per common and common
equivalent share .................... $ .90 .84 (1.30) .70 .68
========= ========= ========= ========= =========
</TABLE>
7
<PAGE> 10
The increase in net income in the second quarter of 1996 contributed to a 17.80%
annualized return on average equity and a 1.22% annualized return on average
assets. This compares to second quarter 1995 annualized returns of 14.20% and
.84%, respectively. These annualized returns and other selected ratios are set
forth in Figure 2.
SELECTED OPERATING RATIOS (Figure 2)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ -------------------
6/30/96 6/30/95 6/30/96 6/30/95
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Annualized returns:
Return on average assets ..................... 1.22% .84% 1.21% .81%
Return on average equity ..................... 17.80 14.20 17.55 14.09
Average equity to average assets ............. 6.88 5.88 6.87 5.75
Annualized operating ratios:
Net interest income to administrative expenses 214.72 179.58 210.61 175.11
Administrative expenses to average assets .... 1.36 1.15 1.37 1.18
Efficiency ratio ............................. 41.11 48.89 42.01 50.09
</TABLE>
8
<PAGE> 11
NET INTEREST INCOME
Net interest income is the principal source of earnings for the Company. It is
affected by a number of factors including the level, pricing and maturity of
interest-earning assets and interest-bearing liabilities, as well as interest
rate fluctuations and asset quality.
Figure 3 sets forth information concerning Charter One's interest-earning
assets, interest-bearing liabilities, net interest income, interest rate spreads
and net yield on average interest-earning assets during the periods indicated
(including fees which are considered adjustments to yields). Average balance
calculations are based on daily balances.
AVERAGE BALANCES, INTEREST RATES AND YIELDS/COSTS (Figure 3)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------
1996 1995
--------------------------------------- ---------------------------------------
AVG. AVG.
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
---------- ---------- ------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and leases(1) ............. $ 7,338,109 $ 150,144 8.18% $ 6,629,563 $ 137,616 8.30%
Mortgage-backed securities:
Available for sale ............ 56,662 1,015 7.17 381,528 6,399 6.71
Held to maturity .............. 5,080,416 90,603 7.13 6,085,478 109,716 7.21
Investment securities
available for sale ............. 329,382 5,278 6.41 929,710 15,561 6.69
Other interest-earning
assets(2) ...................... 283,354 4,640 6.55 379,051 6,243 6.59
---------- ---------- ---------- ----------
Total interest-earning assets 13,087,923 251,680 7.69 14,405,330 275,535 7.65
---------- ----------
Noninterest-earning assets(3) ... 436,940 462,645
---------- ----------
Total assets .............. $13,524,863 $14,867,975
========== ==========
Interest-bearing liabilities(4)
Deposits:
Checking accounts ............. $ 746,249 2,381 1.28 $ 668,822 2,473 1.48
Savings accounts .............. 881,037 5,358 2.43 1,069,337 6,471 2.42
Money market accounts ......... 968,655 7,451 3.08 850,747 6,775 3.19
Certificates of deposit ....... 4,391,378 61,079 5.56 4,880,767 75,825 6.21
---------- ---------- ---------- ----------
Total deposits .............. 6,987,319 76,269 4.37 7,469,673 91,544 4.90
---------- ---------- ---------- ----------
FHLB advances ................... 3,301,927 45,990 5.57 2,846,942 44,263 6.22
Other borrowings ................ 2,135,279 30,514 5.72 3,434,746 62,832 7.32
---------- ---------- ---------- ----------
Total borrowings ............ 5,437,206 76,504 5.63 6,281,688 107,095 6.82
---------- ---------- ---------- ----------
Total interest-bearing
liabilities ................ 12,424,525 152,773 4.92 13,751,361 198,639 5.78
---------- ----------
Non interest-bearing liabilities 170,463 242,261
---------- ----------
Total liabilities ......... 12,594,988 13,993,622
Shareholders' equity .............. 929,875 874,353
---------- ----------
Total liabilities and
shareholders' equity ..... $13,524,863 $14,867,975
========== ==========
Net interest income ............... $ 98,907 $ 76,896
========== ==========
Interest rate spread .............. 2.77 1.87
Net yield on average interest-
earning assets(5) ................ 3.02 2.14
Average interest-earning assets
to average interest-bearing
liabilities ...................... 105.34% 104.76%
<FN>
- -----------------------
(1) Average balances include nonaccrual loans and interest income includes loan
fee amortization.
(2) Includes FHLB stock, federal funds sold, interest-bearing deposits with
banks and other.
(3) Includes mark-to-market adjustments on securities available for sale.
(4) The costs of liabilities include the annualized effect of interest rate risk
management instruments.
(5) Annualized net interest income divided by the average balance of
interest-earning assets.
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------------
1996 1995
-------------------------------------- -------------------------------------
AVG. AVG.
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and leases(1) ............. $ 7,081,626 $ 292,335 8.26% $ 6,624,499 $ 274,041 8.27%
Mortgage-backed securities:
Available for sale ............ 250,277 8,812 7.04 391,356 13,143 6.72
Held to maturity .............. 4,824,152 172,413 7.15 6,135,956 219,651 7.16
Investment securities
available for sale ............. 339,309 11,050 6.51 818,354 27,460 6.71
Other interest-earning
assets(2) ...................... 308,768 10,118 6.55 456,542 14,612 6.40
---------- ------- ---------- -------
Total interest-earning assets 12,804,132 494,728 7.73 14,426,707 548,907 7.61
------- -------
Noninterest-earning assets(3) ... 427,864 471,258
---------- ----------
Total assets .............. $13,231,996 $14,897,965
========== ==========
Interest-bearing liabilities(4)
Deposits:
Checking accounts ............. $ 721,374 4,683 1.30 $ 658,862 4,896 1.49
Savings accounts .............. 930,603 11,210 2.41 1,088,784 13,112 2.41
Money market accounts ......... 910,113 14,320 3.15 870,640 13,782 3.17
Certificates of deposit ....... 4,414,175 125,584 5.69 4,763,102 143,872 6.04
---------- ------- ---------- -------
Total deposits .............. 6,976,265 155,797 4.47 7,381,388 175,662 4.76
---------- ------- ---------- -------
FHLB advances ................... 3,243,958 91,117 5.62 2,851,237 88,046 6.18
Other borrowings ................ 1,932,251 56,905 5.89 3,582,992 131,050 7.32
---------- ------- ---------- -------
Total borrowings ............ 5,176,209 148,022 5.72 6,434,229 219,096 6.81
---------- ------- ---------- -------
Total interest-bearing
liabilities ................ 12,152,474 303,819 5.00 13,815,617 394,758 5.71
------- -------
Non interest-bearing liabilities 169,959 225,552
---------- ----------
Total liabilities ......... 12,322,433 14,041,169
Shareholders' equity .............. 909,563 856,796
---------- ----------
Total liabilities and
shareholders' equity ..... $13,231,996 $14,897,965
=========== ===========
Net interest income ............... $ 190,909 $ 154,149
========== =========
Interest rate spread .............. 2.73 1.90
Net yield on average interest-
earning assets(5) ................ 2.98 2.14
Average interest-earning assets
to average interest-bearing
liabilities ...................... 105.36% 104.42%
<FN>
- ---------------
(1) Average balances include nonaccrual loans and interest income includes loan
fee amortization.
(2) Includes FHLB stock, federal funds sold, interest-bearing deposits with
banks and other.
(3) Includes mark-to-market adjustments on securities available for sale.
(4) The costs of liabilities include the annualized effect of interest rate risk
management instruments.
(5) Annualized net interest income divided by the average balance of
interest-earning assets.
</TABLE>
10
<PAGE> 13
Figure 4 sets forth the changes in Charter One's interest income and interest
expense resulting from changes in interest rates and the volume of
interest-earning assets and interest-bearing liabilities. Changes not solely
attributable to volume or rate have been allocated in proportion to the changes
due to volume and rate.
RATE/VOLUME ANALYSIS (Figure 4)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1996 V. 1995 1996 V. 1995
--------------------------- ---------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
--------------------------- ---------------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL
---- ------ ----- ---- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans and leases ...... $ (1,994) 14,522 12,528 (578) 18,872 18,294
Mortgage-backed
securities:
Available for sale .. 408 (5,792) (5,384) 609 (4,940) (4,331)
Held to maturity .... (1,177) (17,936) (19,113) (354) (46,884) (47,238)
Investment securities
available for sale ... (637) (9,646) (10,283) (786) (15,624) (16,410)
Other interest-earning
assets ............... (36) (1,567) (1,603) 340 (4,834) (4,494)
-------- ------- ------- ----- ------- --------
Total ............. (3,436) (20,419) (23,855) (769) (53,410) (54,179)
-------- ------- ------- ----- ------- --------
Interest expense:
Checking accounts ..... (360) 268 (92) (653) 440 (213)
Savings accounts ...... 32 (1,145) (1,113) 3 (1,905) (1,902)
Money market accounts . (237) 913 676 (83) 621 538
Certificates of deposit (7,532) (7,214) (14,746) (8,090) (10,198) (18,288)
FHLB advances ......... (4,901) 6,628 1,727 (8,394) 11,465 3,071
Other borrowings ...... (11,842) (20,476) (32,318) (22,035) (52,110) (74,145)
-------- ------- ------- ----- ------- --------
Total ............. (24,840) (21,026) (45,866) (39,252) (51,687) (90,939)
-------- ------- ------- ----- ------- --------
Change in net interest
income ................. $ 21,404 607 22,011 38,483 (1,723) 36,760
======== ======= ======= ====== ======= ========
</TABLE>
Net interest income for the second quarter of 1996 was $98.9 million, a $22.0
million, or 28.6%, increase over net interest income for the second quarter of
1995. Net interest income increased primarily due to a lower cost of
interest-bearing liabilities. The cost of interest-bearing liabilities was 4.92%
in the 1996 period and 5.78% during the 1995 period. This 86 basis points
decrease in the cost of interest-bearing liabilities lowered interest expense by
$24.8 million. This improvement was primarily a result of the financial
restructuring undertaken in the fourth quarter of 1995 in conjunction with the
Merger. That financial restructuring included the termination of $750 million in
interest rate exchange agreements ("swaps") and $800 million in interest rate
cap agreements ("caps"). These off-balance sheet interest rate risk management
tools were being used to hedge interest-bearing liabilities which were
eliminated in the financial restructuring. At the time they were terminated,
they were having an adverse effect on net interest income. Terminating these
positions reduced the cost of interest-bearing liabilities in 1996. The interest
rate spread was 2.77% for the three months ended June 30, 1996, compared to
1.87% for the second quarter of 1995. Also, the net yield on interest-earning
assets improved to 3.02% for the 1996 period from 2.14% during the 1995 period.
Net interest income for the six months ended June 30, 1996 was $190.9 million, a
$36.8 million, or 23.8%, increase over the same period in 1995. This improvement
was also primarily attributable to a decrease in the cost of interest-bearing
liabilities. The cost of interest-bearing liabilities was 5.00% for the six
months ended June 30, 1996. This was 71 basis points less than the cost for the
same period in 1995. The lower cost of interest-bearing liabilities caused
interest expense to decrease by $39.3 million. This lower cost was also a result
of the financial restructuring undertaken in the fourth quarter of 1995 in
conjunction with the Merger as discussed in the previous paragraph. The
reduction in the cost of interest-bearing liabilities was the primary reason the
interest rate spread improved to 2.73% for the first six months of 1996 from
1.90% for the comparable period of 1995. Likewise, the net yield on
interest-earning assets improved to 2.98% for the six months ended June 30, 1996
from 2.14% in the 1995 period.
11
<PAGE> 14
Figure 5 sets forth the Company's yields and costs at period end for the dates
indicated.
YIELDS AND COSTS AT END OF PERIOD (Figure 5)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Weighted average yield:
Loans and leases ................... 8.12% 8.26%
Mortgage-backed securities ......... 7.23 7.27
Investment securities .............. 6.31 6.76
Other interest-earning assets ...... 6.74 5.86
Total interest-earning assets ...... 7.68 7.71
Weighted average cost(1):
Deposits ........................... 4.39 4.61
FHLB advances ...................... 5.65 5.90
Other borrowings ................... 6.00 6.08
Total interest-bearing liabilities.. 4.93 5.19
Interest rate spread ................. 2.75 2.52
Net yield on interest-earning assets.. 3.00 2.78
Interest-earning assets .............. $13,504,554 13,059,533
<FN>
- ---------------------------
(1) The costs of liabilities include the annualized effect of interest rate risk
management instruments.
</TABLE>
OTHER INCOME (Figure 6)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan servicing fees ............................. $ 2,763 2,089 5,022 4,590
Service fees and other charges:
Retail deposit account service charges and fees 6,077 5,297 11,653 10,302
Fees on insurance and annuity sales ........... 1,431 585 2,167 1,100
Other branch service fees ..................... 624 407 1,164 769
Miscellaneous ................................. 103 81 210 130
------ ------ ------ ------
Total ....................................... 8,235 6,370 15,194 12,301
------ ------ ------ ------
Leasing operations .............................. 1,719 1,645 3,507 3,357
Net gains (losses):
Real estate ................................... 47 134 329 385
Mortgage-backed securities .................... (339) 23 (282) 23
Investment securities ......................... (2,025) 2,074 (2,025) 3,387
Loans ......................................... 121 548 311 758
Other ......................................... 81 243 129 564
------ ------ ------ ------
Total ....................................... (2,115) 3,022 (1,538) 5,117
Other ........................................... (37) 192 219 573
------ ------ ------ ------
Total ..................................... $10,565 13,318 22,404 25,938
====== ====== ====== ======
</TABLE>
OTHER INCOME
Other income (as seen in Figure 6 above) for the three months ended June 30,
1996 was $10.6 million compared to $13.3 million for the second quarter of 1995.
This $2.8 million decrease was primarily due to losses on the sales of
investment securities from the Company's available-for-sale portfolio in the
second quarter of 1996 which were partially offset by increases in recurring fee
income. The loss on the sale of investment securities was $2.0 million in the
second quarter of 1996. The sales in the 1996 period were executed to reduce
interest rate risk and purchase higher yielding investments. In the second
quarter of 1995, the Company reported a net gain of $2.1 million on sales of
investment securities. When
12
<PAGE> 15
comparing the two second quarter periods, the net effect of investment
securities sales activity reduced other income by $4.1 million. That decrease
was partially offset by a $2.6 million increase in recurring fee income: $1.9
million in service fees and other charges, $674,000 in loan servicing fees and
$74,000 in leasing operations. The increase in fee income was primarily
attributable to fees from checking accounts, fees on servicing loans for others,
brokerage commissions earned by a subsidiary of the Bank, and penalties on
payoffs of commercial real estate loans. Checking account fees increased as a
result of an increase in the number of accounts open at June 30, 1996, compared
to June 30, 1995. The reasons for the increase included introducing the programs
in Michigan during the quarter, with no comparable activity in 1995, and the
continuing sales effort in Ohio. Loan servicing fees increased due to the higher
balance of loans serviced for others resulting from $330 million of mortgage
loans that were sold, with servicing retained, as part of the fourth quarter
1995 financial restructuring. Brokerage commissions were higher in 1996 because
brokerage services were only introduced in 1995 and have been expanded in 1996.
The prepayment penalty related to an early payoff on a $12.5 million commercial
real estate loan in 1996.
Other income for the six months ended June 30, 1996 was $22.4 million as
compared to $25.9 million for the 1995 period. This $3.5 million decrease was
also primarily due to losses on the sales of investment securities described in
the preceding paragraph that were partially offset by increases in recurring fee
income. In the comparable 1995 period, a gain of $3.4 million was recorded on
sales of investment securities. As a result, investment securities activity
accounted for a $5.4 million decrease in other income from the first half of
1995 to the first half of 1996. This decrease was partially offset by increases
of $2.9 million in service fees and other charges, $432,000 in loan servicing
fees and $150,000 in leasing operations. The primary reasons for these increases
were the same as explained in the previous paragraph concerning the
quarter-to-quarter comparisons.
ADMINISTRATIVE EXPENSES (Figure 7)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Compensation and employee benefits ................... $ 22,613 21,223 44,650 44,166
Net occupancy and equipment .......................... 6,380 5,950 12,784 12,229
Federal deposit insurance premiums ................... 4,094 4,211 8,083 8,422
State taxes .......................................... 1,852 1,511 3,966 3,106
Amortization of goodwill ............................. 190 188 379 384
Other administrative expenses ........................ 10,935 9,736 20,785 19,723
-------- ------ ------ ------
Total .............................................. $ 46,064 42,819 90,647 88,030
======== ====== ====== ======
Number of full-time equivalent employees
at end of period .................................... 2,499 2,442 2,499 2,442
Net interest income to administrative expenses ....... 214.72% 179.58% 210.61% 175.11%
Administrative expenses to average assets (annualized) 1.36% 1.15% 1.37% 1.18%
Efficiency ratio ..................................... 41.11% 48.89% 42.01% 50.09%
</TABLE>
ADMINISTRATIVE EXPENSES
As shown in Figure 7, administrative expenses for the second quarter of 1996
were $46.1 million, compared to $42.8 million in the second quarter of 1995.
This increase of $3.2 million was primarily attributable to increased lending
activities and merger-related conversion expenses. Overall, administrative
expenses remained at favorable levels as illustrated by the 41.1% efficiency
ratio for the second quarter of 1996, compared to 48.9% for the same period in
1995. Compensation and employee benefits expenses increased by $1.4 million due
to increased lending support functions, and the introduction of Charter One's
retail products into the Michigan market. The other administrative expenses
increased as a result of operational conversion expenses related to telephone
lines, office supplies and stationery, ATM fees and business travel expenses.
Other administrative expenses for the six months ended June 30, 1996 were $90.6
million, compared to $88.0 million in the 1995 period. This $2.6 million
increase was also primarily attributable to increased lending activities and
mergerrelated conversion expenses together with an increase in state tax
expense. ATM fees, office supplies and stationery expenses were the primary
reasons other administrative expenses were $1.1 million higher in the 1996
period. State taxes were $860,000 higher in 1996 than the first six months of
1995 due to higher assessment bases. The state of Ohio tax is based upon net
worth and the Michigan tax is based upon gross revenues. Both of these
assessment bases were higher when calculating
13
<PAGE> 16
the 1996 tax expense. Despite the increase in administrative expenses, the
Company's efficiency ratio for the six months ended June 30, 1996 improved to
42.0% from 50.1% for the first six months of 1995. This efficiency ratio is
among the best in the financial services industry.
FEDERAL INCOME TAXES
The provision for federal income taxes for the first half and second quarter of
1996 increased by $9.7 million and $4.9 million, respectively, over the 1995
periods due to higher pre-tax income for the 1996 periods. The effective tax
rates were comparable at 33.9% and 33.7% for the first half and second quarter
of 1996 and 34.1% for the first half and second quarter of 1995.
FINANCIAL CONDITION
Figure 8 sets forth information concerning the composition of the Company's
assets, liabilities and shareholders' equity at June 30, 1996 and December 31,
1995.
FINANCIAL CONDITION (Figure 8)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------------ ------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents ......... $ 248,298 1.8% $ 658,371 4.9%
Investment securities ............. 340,653 2.4 407,427 3.0
Mortgage-backed securities ........ 5,620,088 40.3 5,314,749 39.1
Loans and leases, net ............. 7,201,810 51.6 6,678,600 49.2
Other assets ...................... 540,997 3.9 519,712 3.8
----------- ----- ----------- -----
Total ........................... $13,951,846 100.0% $13,578,859 100.0%
=========== ===== =========== =====
Liabilities and shareholders' equity:
Deposits .......................... $ 7,817,126 56.0% $ 7,012,491 51.7%
Borrowings ........................ 4,998,961 35.8 5,461,684 40.2
Other liabilities ................. 201,281 1.5 260,286 1.9
Shareholders' equity .............. 934,478 6.7 844,398 6.2
----------- ----- ----------- -----
Total ........................... $13,951,846 100.0% $13,578,859 100.0%
=========== ===== =========== =====
</TABLE>
OVERVIEW
At June 30, 1996, total assets were $14.0 billion which was $373.0 million, or
2.7%, higher than at December 31, 1995. This growth was primarily in the loan
and lease portfolio as that portfolio grew by $527.6 million, or 7.9%, during
the first six months of 1996. The growth in the loan and lease portfolio was
primarily due to record levels of loan originations (see Figure 10).
Mortgage-backed securities stood at $5.6 billion at June 30, 1996 which was
$305.3 million, or 5.7%, higher than at December 31, 1995. This growth was
primarily due to a $510.4 million exchange of loans for Federal National
Mortgage Association ("FNMA") participation certificates in June. Those FNMA
participation certificates were committed to be sold as of June 30, 1996 with
settlement in July. A loss on sale of $289,000 was recorded in June 1996 on this
transaction.
Total deposits were $7.8 billion at June 30, 1996 which was $804.6 million, or
11.5%, higher than at December 31, 1995. The primary reason for this deposit
growth was the acquisition of First Nationwide Bank's 21 branch offices in the
Detroit Metropolitan Area as of the close of business on June 28, 1996. The
deposits acquired in this acquisition totaled $796.7 million. Four First
Nationwide offices directly overlapped existing Michigan branch offices so they
were consolidated into existing branch facilities. Borrowings declined by $462.7
million, or 8.5%, as a portion of the deposits obtained in the First Nationwide
acquisition were used to pay down higher cost borrowings.
14
<PAGE> 17
LOANS AND LEASES
COMPOSITION OF LOANS AND LEASES (Figure 9)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
---------------------- ----------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
--------- ----- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate:
One-to-four family ...... $5,351,072 74.3% $5,140,857 77.0%
Multifamily ............. 323,107 4.5 359,056 5.4
Commercial .............. 397,188 5.5 368,372 5.5
Construction ............ 230,253 3.2 182,863 2.7
---------- ----- ---------- -----
Total real estate ..... 6,301,620 87.5 6,051,148 90.6
Consumer .................. 809,962 11.3 594,609 8.9
Leases .................... 183,160 2.5 131,352 2.0
Business .................. 89,733 1.2 65,747 1.0
---------- ----- ---------- -----
Total loans and leases 7,384,475 102.5 6,842,856 102.5
Less net items ............ 182,665 2.5 168,596 2.5
---------- ----- --------- -----
Loans and leases, net $7,201,810 100.0% $6,674,260 100.0%
========== ===== ========== =====
</TABLE>
The loan and lease portfolio has increased $527.6 million, or 7.9%, since
December 31, 1995, with growth concentrated in the mortgage and consumer loan
portfolio. Real estate mortgage loans grew by $250.5 million, or 4.1%, and the
consumer loan portfolio grew by $215.4 million, or 36.2%, in the first six
months of 1996 (see Figure 10). One-to-four family loans led the mortgage loan
growth and closed-end loans secured by real estate was the primary leader of the
consumer loan growth. The expansion into the Michigan market of Charter One's
loan product line has been well received as the Michigan Division accounted for
approximately 37% of the one-to-four family loan origination volume and 24% of
the consumer loan origination volume. The growth in the one-to-four family loan
portfolio was achieved despite a $510.4 million exchange of mortgage loans for
FNMA participation certificates in June 1996.
Loan and lease originations and repayments for the 1996 periods increased over
the comparable periods in 1995 due, in part, to increases in loan refinance
activity as customers responded to the favorable interest rate environment in
1996. The annualized level of principal repayments as a percent of the average
portfolio in the first and second quarters of 1996 was 25% and 29%,
respectively. This compared to 18% in both the first and second quarters of
1995. Although refinance activity was higher early in 1996 than it had been in
1995, it appears the level is declining mid-year. At March 31, 1996, 43% of the
single-family loan pipeline was attributable to refinance activity while at June
30, 1996, the level had declined to 18%.
15
<PAGE> 18
LOAN AND LEASE ACTIVITY (Figure 10)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Originations:
Real estate:
Permanent:
One-to-four family........................ $ 784,231 186,842 1,326,599 290,750
Multifamily............................... 4,570 9,411 20,072 15,803
Commercial................................ 37,940 17,337 46,114 20,654
---------- -------- --------- --------
Total permanent......................... 826,741 213,590 1,392,785 327,207
---------- -------- --------- --------
Construction:
One-to-four family........................ 125,082 45,516 172,403 75,860
Multifamily............................... 150 1,525 150 3,031
Commercial................................ 6,200 280 7,200 4,872
---------- -------- --------- --------
Total construction...................... 131,432 47,321 179,753 83,763
---------- -------- --------- --------
Total real estate loans originated.... 958,173 260,911 1,572,538 410,970
---------- -------- --------- --------
Consumer line of credit draws................. 43,276 39,076 82,859 68,523
Consumer...................................... 158,831 40,624 259,922 55,596
Business line of credit draws................. 18,202 8,775 36,399 16,647
Business...................................... 16,706 4,597 23,310 7,820
Leases(1)..................................... 37,229 7,753 69,475 29,632
---------- -------- --------- --------
Total loans and leases originated..... 1,232,417 361,736 2,044,503 589,188
---------- -------- --------- --------
Purchases:
Loans......................................... - - - -
Leases(1)..................................... - - - 76,912
---------- -------- --------- --------
Total purchases......................... - - - 76,912
---------- -------- --------- --------
Sales and principal reductions:
Loans sold.................................... 3,299 28,907 17,467 43,104
Loans exchanged for MBS....................... 510,435 - 510,435 -
Principal reductions.......................... 540,718 295,154 974,982 568,081
---------- -------- --------- --------
Total sales and principal reductions.... 1,054,452 324,061 1,502,884 611,185
---------- -------- --------- --------
Increase before net items............. $ 177,965 37,675 541,619 54,915
========== ======== ========= ========
<FN>
- -----------------------
(1) Not included herein are $2.1 and $4.2 million in operating leases originated
during the three months ended June 30, 1996 and 1995, respectively, and $4.1
million and $17.3 million for the six months ended June 30, 1996 and 1995.
(2) Not included herein are $29.0 million in operating leases purchased in the
acquisition of ICX Corporation which occurred in the first quarter of 1995.
</TABLE>
INVESTMENT SECURITIES
The entire investment securities portfolio was classified as available for sale
at both June 30, 1996 and December 31, 1995. Figure 11 summarizes the fair
values of the portfolio at those dates.
INVESTMENT SECURITIES PORTFOLIO (Figure 11)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. Treasury and agency securities............................................. $ 320,800 377,232
Corporate notes and commercial paper............................................ 17,397 30,033
Other........................................................................... 2,456 162
-------- --------
Total......................................................................... $ 340,653 407,427
======== ========
Weighted average rate......................................................... 6.31% 6.76%
======== ========
</TABLE>
At June 30, 1996, $162.5 million (with a yield of 6.07%) of the above agency
securities were committed to be sold with a pretax loss of $2.0 million recorded
in the three months ended June 30, 1996. On June 28, 1996, the Company entered
into a commitment to purchase $175.0 million of agency securities (with a yield
of 7.14%) for settlement on July 16, 1996 was entered into on June 28, 1996.
These transactions were executed to reduce interest rate risk and obtain higher
yielding investments securities.
16
<PAGE> 19
MORTGAGE-BACKED SECURITIES
Figure 12 summarizes the mortgage-backed securities ("MBS") portfolios at June
30, 1996 and December 31, 1995. The amounts reflected represent the fair values
of securities available for sale and the amortized cost of securities held to
maturity.
MORTGAGE-BACKED SECURITIES (Figure 12)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
MBS available for sale:
Participation certificates:
Government agency issues.................................................. $ 523,243 347,539
Private issues............................................................ 15 116
Collateralized mortgage obligations:
Government agency issues.................................................. 1,946 619,104
Private issues............................................................ 7,096 468,830
---------- ----------
Total MBS available for sale............................................ $ 532,300 1,435,589
---------- ----------
MBS held to maturity:
Participation certificates:
Government agency issues.................................................. $ 2,360,834 2,662,782
Private issues............................................................ 434,616 498,631
Collateralized mortgage obligations:
Government agency issues.................................................. 865,144 263,721
Private issues............................................................ 1,427,194 454,026
---------- ----------
Total MBS held to maturity.............................................. $ 5,087,788 3,879,160
---------- ----------
Total MBS............................................................. $ 5,620,088 5,314,749
========== ==========
</TABLE>
17
<PAGE> 20
MORTGAGE-BACKED SECURITIES BY PAYMENT TYPE (Figure 13)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
--------------------------- --------------------------
BOOK AVERAGE BOOK AVERAGE
VALUE RATE VALUE RATE
----------- ------------ ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
MBS available for sale:
Adjustable rate:
Collateralized mortgage obligations......... $ 7,029 7.40% $ 1,085,208 7.23%
Fixed rate:
Participation certificates.................. 523,258 7.36 347,655 6.23
Collateralized mortgage obligations......... 2,013 5.28 2,726 5.30
----------- ----------
Total fixed rate.......................... 525,271 7.35 350,381 6.22
----------- ----------
Total MBS available for sale............ 532,300 7.35 1,435,589 6.98
----------- ----------
MBS held to maturity:
Adjustable rate:
Participation certificates.................. 1,111,099 7.18 1,279,124 7.08
Collateralized mortgage obligations......... 1,404,816 6.85 357,816 7.48
----------- ----------
Total adjustable rate..................... 2,515,915 6.99 1,636,940 7.17
----------- ----------
Fixed rate:
Participation certificates.................. 1,684,351 7.59 1,882,289 7.56
Collateralized mortgage obligations......... 887,522 7.17 359,931 7.32
----------- ----------
Total fixed rate.......................... 2,571,873 7.44 2,242,220 7.52
----------- ----------
Total MBS held to maturity.............. 5,087,788 7.22 3,879,160 7.37
----------- ----------
Total MBS............................. $ 5,620,088 7.23% $ 5,314,749 7.27%
=========== ==========
</TABLE>
As previously disclosed, on December 31, 1995 management chose to reclassify
$1.1 billion of MBS from the held to maturity portfolio to available for sale in
accordance with the FASB special report, "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities." It was
also disclosed that, after a sufficient period of market value risk, management
intended to reclassify these same securities back to the held to maturity
portfolio. This reclassification occurred on January 31, 1996, and resulted in a
$42.2 million after-tax increase in shareholders' equity. During the first half
of 1996, $326.1 million of available for sale securities were sold for total
proceeds of $324.0 million, all at the beginning of the year. The loss of $2.2
million was recorded at the trade date in December 1995. Purchases of
mortgage-backed securities during the first half of 1996 totaled $567.1 million
and were primarily medium-term, fixed-rate collateralized mortgage obligations.
At June 30, 1996, the Bank had a commitment to sell $510.4 million of the FNMA
fixed-rate participation certificates included above. These participation
certificates were made up of seasoned 15- to 30-year fixed-rate mortgage loans
originated by the Bank and swapped to FNMA for participation certificates in
June 1996. The sale resulted in a $289,000 net loss and recognition of $2.7
million of originated mortgage servicing rights, both of which were recorded in
June 1996. Recognition of the servicing rights was in accordance with Statement
of Financial Accounting Standards No. 122 "Accounting for Mortgage Servicing
Rights" which Charter One adopted as of January 1, 1996.
18
<PAGE> 21
ASSET QUALITY
ANALYSIS OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES (Figure 14)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------- ------------------------
1996 1995 1996 1995
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of period.......................... $ 65,218 64,519 64,436 64,838
Provision for loan and lease losses................... 1,000 258 2,000 516
Other................................................. - - - 176
Loans and leases charged off:
Mortgage............................................ (946) (200) (980) (813)
Consumer............................................ (102) (360) (417) (732)
Leases.............................................. - - - -
Business............................................ - - (1) -
--------- ------- ------- --------
Total charge-offs................................. (1,048) (560) (1,398) (1,545)
--------- ------- ------- --------
Recoveries:
Mortgage............................................ 48 129 92 350
Consumer............................................ 50 15 138 26
Leases.............................................. - - - -
Business............................................ - 44 - 44
--------- ------- ------- --------
Total recoveries.................................. 98 188 230 420
--------- ------- ------- --------
Net loan and lease charge-offs.................. (950) (372) (1,168) (1,125)
--------- ------- ------- --------
Balance, end of period................................ $ 65,268 64,405 65,268 64,405
========= ======= ======= ========
Net charge-offs to average loans and leases .05% .02% .03% .03%
</TABLE>
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES (Figure 15)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage...................................................................... $ 52,386 51,607
Consumer...................................................................... 7,056 7,214
Leases........................................................................ 854 732
Business...................................................................... 4,972 4,883
--------- ----------
Total....................................................................... $ 65,268 64,436
========= ==========
Percent of loans and leases to ending loans and leases:
Mortgage.................................................................... 85.1 % 88.3%
Consumer.................................................................... 11.2 8.8
Leases...................................................................... 1.2 .9
Business.................................................................... 2.5 2.0
--------- ----------
Total..................................................................... 100.0 % 100.0%
========= ==========
</TABLE>
The allowance for loan and lease losses as a percentage of ending loans and
leases (before the allowance) was .90% at June 30, 1996, down slightly from .96%
at December 31, 1995, reflecting second quarter loan growth. Credit quality
remained high, with nonperforming assets at only .38% of total assets at June
30, 1996. Net charge-offs totaled $950,000 and $1.2 million (including $874,000
related to one commercial real estate loan) for the three and six months ended
June 30, 1996, respectively. Net charge-offs for the comparable periods of 1995
were $372,000 and $1.1 million.
Management believes that the allowance for loan and lease losses has been
established in accordance with generally accepted accounting principles based on
the best information available. However, future adjustments to reserves may be
necessary and net income could be significantly affected if circumstances and/or
economic conditions differ substantially from the assumptions used in making the
initial determinations. A downturn in the Ohio or Michigan real estate markets
could result in an increased level of nonperforming assets and charge-offs,
significant provisions for loan and lease losses and significant reductions in
income. Additionally, various regulatory agencies, as an integral part of
their examination process, periodically
19
<PAGE> 22
review the Bank's allowance for loan and lease losses. Such agencies may require
the recognition of additions to the allowance based on their judgments of
information available to them at the time of their examination.
Figure 16 sets forth information concerning nonperforming assets and the
allowance for loan and lease losses. At June 30, 1996, the Bank had no
outstanding commitments to lend additional funds to borrowers whose loans were
on nonaccrual or restructured status.
NONPERFORMING ASSETS (Figure 16)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonperforming loans and leases:
Nonaccrual loans and leases:
Mortgage loans:
One-to-four family....................................................... $ 8,891 15,145
Multifamily and commercial............................................... 5,749 3,014
Construction and land.................................................... 1,106 1,463
------- -------
Total mortgage loans................................................... 15,746 19,622
Consumer................................................................... 320 1,525
Lease financings........................................................... - 27
Business................................................................... 17 -
------- -------
Total nonaccrual loans and leases...................................... 16,083 21,174
------- -------
Accruing loans and leases delinquent more than 90 days:
Mortgage loans:
One-to-four family......................................................... 6,014 2,002
Multifamily and commercial................................................. 154 893
Construction and land...................................................... - -
------- -------
Total mortgage loans..................................................... 6,168 2,895
Consumer..................................................................... 487 147
Lease financings............................................................. 123 -
Business..................................................................... - -
------- -------
Total accruing 90-day delinquent loans and leases........................ 6,778 3,042
------- -------
Restructured real estate loans................................................. 20,941 18,835
------- -------
Total nonperforming loans and leases..................................... 43,802 43,051
Real estate acquired through foreclosure and other............................. 9,372 11,650
------- -------
Total nonperforming assets............................................... $ 53,174 54,701
======= =======
Ratio of:
Nonperforming loans and leases to total loans and leases..................... .61 % .65%
Nonperforming assets to total assets......................................... .38 .40
Allowance for loan and lease losses to:
Nonperforming loans and leases............................................. 149.01 149.67
Total loans and leases before allowance.................................... .90 .96
</TABLE>
Nonperforming assets at June 30, 1996 totaled $53.2 million, down slightly from
December 31, 1995. The ratios of nonperforming loans and leases to total loans
and leases declined at June 30, 1996 from December 31, 1995.
At June 30, 1996, there were $30.0 million of loans not reflected in the table
above, where known information about possible credit problems of borrowers
caused management to have doubts as to the ability of the borrower to comply
with present loan repayment terms and that may result in disclosure of such
loans in the future. Included in the total is a $12.3 million loan on apartment
buildings and $7.3 million loan on a hotel property in Illinois. The current
cash flow of the hotel property is sufficient to meet current debt service
requirements. The apartment building has experienced past cash flow shortfalls,
but the loan is current.
20
<PAGE> 23
SOURCES OF FUNDS
GENERAL
Deposits have historically been the most important source of the Bank's funds
for use in lending and for general business purposes. The Bank also derives
funds from Federal Home Loan Bank ("FHLB") advances, reverse repurchase
agreements and other borrowings, principal repayments on loans and
mortgage-backed securities, funds provided by operations and proceeds from the
sale of loans and loan participations. At June 30, 1996, 61% of interest-bearing
liabilities were in the form of deposits and 39% were in borrowings compared
with 56% and 44% for deposits and borrowings, respectively, at December 31,
1995.
DEPOSITS
Deposit inflows and outflows are significantly influenced by general interest
rates, market conditions and competitive factors. The Bank reprices its deposits
primarily based on competitive conditions. In order to decrease the volatility
of its deposits, the Bank imposes stringent early withdrawal penalties on its
certificates of deposit. Consumer and commercial deposits are attracted
principally within the Bank's primary market areas through the offering of a
broad range of deposit instruments.
COMPOSITION OF DEPOSITS (Figure 17)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------------------------------ ------------------------------------
WEIGHTED PERCENT WEIGHTED PERCENT
AVERAGE OF AVERAGE OF
AMOUNT RATE TOTAL AMOUNT RATE TOTAL
------ --------- ------- ------ --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Checking accounts:
Interest-bearing............. $ 554,768 1.86% 7.1% $ 513,933 1.98% 7.3%
Noninterest-bearing.......... 323,987 - 4.1 220,029 - 3.2
Savings accounts............... 939,059 2.42 12.0 1,007,178 2.41 14.4
Money market accounts.......... 1,131,047 3.21 14.5 829,087 3.19 11.8
Certificates of deposit........ 4,865,283 5.78 62.3 4,438,831 5.97 63.3
---------- ----- ---------- ------
Deposits................... 7,814,144 4.49 100.0 7,009,058 4.65 100.0
===== ======
Plus unamortized premium
on deposits purchased......... 2,982 3,433
---------- ----------
Deposits, net.............. $ 7,817,126 $ 7,012,491
========== ==========
Weighted average cost
including the annualized
effect of applicable swaps,
floors, and amortization
of deferred gains on
terminated swaps.............. 4.39% 4.61%
==== =====
</TABLE>
Total deposits were $7.8 billion at June 30, 1996 which was $804.6 million, or
11.5%, higher than at December 31, 1995. The primary reason for this deposit
growth was the acquisition of First Nationwide Bank's 21 branch offices in the
Detroit Metropolitan Area as of the close of business on June 28, 1996. The
deposits acquired in this acquisition totaled $796.7 million. Four First
Nationwide offices directly overlapped existing Michigan branch offices so they
were consolidated into existing branch facilities. The cost of the First
Nationwide deposits was 4.30% which contributed to the overall decline in the
cost of deposits to 4.39% at June 30, 1996 from 4.61% at December 31, 1995.
BORROWINGS
At June 30, 1996, borrowings primarily consisted of FHLB advances and reverse
repurchase agreements. These positions were secured by Charter One's investment
in the stock of the FHLB, as well as $5.3 billion in real estate loans and $2.2
billion in mortgage-backed securities.
21
<PAGE> 24
FEDERAL HOME LOAN BANK ADVANCES (Figure 18)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed-rate advances.............................. $ 1,505,091 5.78% $ 1,310,122 5.78%
Variable-rate advances........................... 1,762,000 5.54 1,853,000 5.87
--------- ---------
Advances....................................... 3,267,091 5.65 3,163,122 5.84
Unamortized premium.............................. 12 22
--------- ---------
Total advances, net............................ $ 3,267,103 $ 3,163,144
========= =========
Weighted average cost including the annualized
effect of applicable caps and amortization of
deffered gains on terminated swaps.............. 5.65% 5.90%
==== ====
</TABLE>
The variable-rate advances reprice based upon LIBOR at one- to six-month
intervals, and included $145 million with a 6.00% LIBOR cap, and $573 million
which are callable, at par, by the FHLB.
Charter One has also entered into stand-alone interest rate cap agreements
applicable to certain variable-rate and short-term, fixed-rate FHLB advances.
Reference is made to "Interest Rate Risk Management" for additional discussion.
Figure 19 presents a summary of outstanding reverse repurchase agreements. The
Bank enters into short-term reverse repurchase agreements for terms up to one
year, as well as longer term fixed- and variable-rate agreements.
REVERSE REPURCHASE AGREEMENTS (Figure 19)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
---------- ------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Short term........................................... $ 106,079 5.57 $ 848,033 5.86
Long term:
Fixed rate......................................... 745,000 5.04 575,000 5.28
Variable rate...................................... 669,999 5.77 666,487 6.01
----------- ----------
Weighted average cost including
amortization of fees................................ $ 1,521,078 5.40% $ 2,089,520 5.80%
=========== ==========
Weighted average cost including the annualized
effect of amortization of deferred gains
on terminated swaps................................. 5.31% 5.68%
===== ====
</TABLE>
Each long-term, variable-rate reverse repurchase agreement also contains an
interest rate cap provision based upon a three-month LIBOR of 6.00%. Long-term,
fixed-rate agreements include $75 million maturing in 1996 which are callable,
at par, and $200 million maturing in 1998 which are convertible, at the
counterparty's option, to a floating rate of three-month LIBOR, beginning June
1997 and quarterly thereafter.
INTEREST RATE RISK MANAGEMENT
The Company utilizes various types of interest rate contracts in managing its
interest rate risk on certain of its deposits and FHLB advances and reverse
repurchase agreements. The Company has utilized fixed payment swaps to convert
certain of its floating-rate or short-term, fixed-rate liabilities into longer
term, fixed-rate instruments. Under these agreements, the Company has agreed to
pay interest to the counterparty on a notional principal amount at a fixed rate
defined in the agreement, and receive interest at a floating rate indexed to
LIBOR. The amounts of interest exchanged are calculated on the basis of notional
principal amounts. The Company also utilizes fixed receipt swaps to convert
certain of its longer term callable certificates of deposit into short-term
variable instruments. Under these agreements the Company has agreed to
22
<PAGE> 25
receive interest from the counterparty on a notional amount at a fixed rate
defined in the agreement, and to pay interest at a floating rate indexed to
LIBOR.
INTEREST RATE SWAPS (Figure 20)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
---------------------------------- -------------------------------------
NOTIONAL RECEIVING PAYING NOTIONAL RECEIVING PAYING
PRINCIPAL INTEREST INTEREST PRINCIPAL INTEREST INTEREST
AMOUNT RATE RATE AMOUNT RATE RATE
-------- --------- ---------- ---------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Fixed payment and variable
receipt maturing in 1999....... $ 100,000 5.5%(a) 10.09% $ 100,000 6.02%(a) 10.09%
======== ===== ====== ======== ==== ======
Variable payment and fixed receipt:
Maturing in:
1997........................ $ 20,000 6.08% 5.55% $ 45,000 6.30% 5.63%
1998........................ 65,000 6.27 5.52 - - -
2000........................ 110,000 7.08 5.47 110,000 7.08 5.63
2001........................ 70,000 7.13 5.52 - - -
-------- ----- ------ -------- ---- ------
Total $ 265,000 6.82% 5.50%(a) $ 155,000 6.86% 5.63%(a)
======== ===== ====== ======== ==== ======
- -----------------------
<FN>
(a) Rates are based upon LIBOR.
</TABLE>
The Company also utilizes swaps to hedge a special class of certificates of
deposit. These swaps provide for the receipt of variable interest based upon the
S&P 500 Index, and the payment of both fixed and variable interest. At June 30,
1996, the notional principal amount outstanding was $29.9 million with a
weighted average receipt rate of 15.72% and payment rate of 5.59%. At December
31, 1995, the outstanding principal was $24.2 million with receipt and payment
rates of 14.28% and 5.85%, respectively.
In 1995, the Company entered into $300 million of four-year interest rate floor
agreements maturing in March 1999, which provide for receipt of interest when
six-month LIBOR falls below 6.00%. The Company receives the difference between
6.00% and LIBOR at the time of repricing, calculated on the $300 million
notional amount. At June 30, 1996, interest received of 5.30% was partially
offset by a .07% per annum fee cost. Fees paid at inception of the agreements
are being amortized over the terms of the agreements. Unamortized fees totaled
$567,000 at June 30, 1996.
The Company has entered into caps with primary dealers to limit its exposure to
rising rates on certain of its variable-rate and short-term, fixed-rate
liabilities (Figure 21). These stand-alone agreements supplement the cap
provisions which have been incorporated into some of the Company's borrowings.
The agreements provide for receipt of interest when three-month LIBOR exceeds an
agreed upon base rate. The Company receives a rate of interest equal to the
excess of three-month LIBOR at the time of repricing over the 6.00% base rate,
calculated on a notional principal amount. The agreements reprice quarterly.
Fees paid at inception of the agreements are being amortized over the terms of
the agreements. Unamortized fees totaled $1.3 million at June 30, 1996.
INTEREST RATE CAPS (Figure 21)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
---------------------------------------- ------------------------------------------
PER PER
NOTIONAL INTEREST ANNUM NOTIONAL INTEREST ANNUM
PRINCIPAL BASE RATE COST OF PRINCIPAL BASE RATE COST OF
MATURING IN AMOUNT RATE RECEIVED FEE AMOUNT RATE RECEIVED FEE
------------ ---------- ------ -------- ------- ---------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996...................... $ - -% -% -% $ 200,000 6.00% -% .21%
1997...................... 650,000 6.00 - .30 650,000 6.00 - .30
-------- ---- ---- --- -------- ---- ----- ---
Total................. $ 650,000 6.00% -% .30% $ 850,000 6.00% -% .28%
======== ==== ==== === ======== ==== ===== ===
</TABLE>
23
<PAGE> 26
The cost of interesrte exchange, cap, floor and collar positions, including
amortization of gains and losses on terminated positions, was included in
interest expense as follows:
COST OF INTEREST RATE RISK MANAGEMENT (Figure 22)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED DECEMBER 31,
--------------------------- -----------------------------
1996 1995 1996 1995
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest expense:
Deposits........................... $(2,353) 4,955 (3,269) 10,838
FHLB advances...................... 420 253 919 496
Reverse repurchase agreements...... (537) 9,170 (1,173) 20,668
------ ----- ----- ------
Total............................ $(2,470) 14,378 (3,523) 32,002
====== ====== ===== ======
</TABLE>
LIQUIDITY
The Bank's principal sources of funds are deposits, FHLB advances, reverse
repurchase agreements, repayments and maturities on loans and securities,
proceeds from the sale of securities and funds provided by operations. While
scheduled loan, security and interest-bearing deposit amortization and
maturities are relatively predictable sources of funds, deposit flows and loan
and security prepayments are greatly influenced by economic conditions, the
general level of interest rates and competition. The Bank utilizes particular
sources of funds based on comparative costs and availability. The Bank generally
manages the pricing of its deposits to maintain a steady deposit balance, but
has from time to time decided not to pay rates on deposits as high as its
competition and, when necessary, to supplement deposits with longer term and/or
less expensive alternative sources of funds such as advances. Management also
considers the Bank's interest-sensitivity profile when deciding on alternative
sources of funds. At June 30, 1996, the Bank's one-year gap was a negative
5.00%.
The Bank is required by regulation to maintain specific minimum levels of liquid
investments. Regulations currently in effect require the Bank to maintain liquid
assets at least equal to 5.0% of the sum of its average daily balance of net
withdrawable accounts and borrowed funds due in one year or less. This
regulatory requirement may be changed from time to time to reflect current
economic conditions. The Bank's average regulatory liquidity ratio for the
quarter ended June 30, 1996 was 5.97%.
Liquidity management is both a daily and long-term responsibility of management.
The Bank adjusts its investments in cash and cash equivalents based upon
management's assessment of (i) expected loan and lease demand, (ii) projected
security maturities, (iii) expected deposit flows, (iv) yields available on
short-term investments, and (v) the objectives of its asset/liability management
program. Excess liquidity is invested generally in federal funds sold,
interest-bearing deposits and short-term agency and corporate debt securities.
If the Bank requires funds beyond its ability to generate them internally, it
has additional borrowing capacity with the FHLB and collateral eligible for
reverse repurchase agreements.
The Bank anticipates that it will have sufficient funds available during the
next 12 months to meet current and future loan commitments. At June 30, 1996,
the Bank and its subsidiaries had outstanding commitments to originate loans and
leases of $546.9 million, unfunded lines of consumer credit totaling $380.0
million (a significant portion of which normally remains undrawn) and unfunded
lines of commercial (business loans) credit totaling $83.3 million. Certificates
of deposit scheduled to mature in one year or less at June 30, 1996 totaled $3.6
billion. Management believes that a significant portion of the amounts maturing
during the next 12 months will remain with the Bank because they are retail
deposits. At June 30, 1996, the Bank had $1.1 billion of advances from the FHLB
and $250.0 million of reverse repurchase agreements which mature during the next
12 months. Management will review the need for advances and reverse repurchase
agreements when they mature and believes the Bank has significant additional
borrowing capacity.
CAPITAL AND DIVIDENDS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. The regulations require
the Bank to meet specific capital adequacy guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory practices. The Bank's capital classification is
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
24
<PAGE> 27
Quantitative measures established by the regulators to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of tangible, core and
total risk-based capital. Prompt Corrective Action regulations require specific
supervisory actions as capital levels decrease. To be considered adequately
capitalized under the regulatory framework for Prompt Corrective Action, the
Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based and total
risk-based capital ratios as set forth in Figure 23 below. The Bank's actual
capital and ratios are also presented in Figure 23.
REGULATORY CAPITAL (Figure 23)
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------------------------------
ACTUAL CAPITAL REQUIRED CAPITAL
----------------------- ------------------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Capital adequacy:
Tangible capital...................................... $ 794,247 5.80% $ 205,454 1.50%
Core capital.......................................... 794,247 5.80 410,908 3.00
Risk-based capital.................................... 849,863 12.78 531,818 8.00
Prompt corrective action:
Tier 1 leverage capital............................... 794,247 5.80 547,878 4.00
Tier 1 risk-based capital............................. 794,247 11.95 265,909 4.00
Total risk-based capital.............................. 849,863 12.78 531,818 8.00
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------
ACTUAL CAPITAL REQUIRED CAPITAL
----------------------- ------------------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Capital adequacy:
Tangible capital...................................... $ 822,670 6.11% $ 202,027 1.50%
Core capital.......................................... 822,670 6.11 404,053 3.00
Risk-based capital.................................... 875,176 14.29 489,835 8.00
Prompt corrective action:
Tier 1 leverage capital............................... 822,670 6.11 538,738 4.00
Tier 1 risk-based capital............................. 822,670 13.44 244,917 4.00
Total risk-based capital.............................. 875,176 14.29 489,835 8.00
</TABLE>
Management believes that as of June 30, 1996, the Bank meets all capital
requirements to which it is subject. Events beyond management's control, such as
significant fluctuations in interest rates or a significant downturn in the
economy in areas in which the Bank's loans and securities are concentrated,
could adversely affect future earnings and, consequently, the Bank's ability to
meet its future capital requirements.
QUARTERLY STOCK PRICES AND DIVIDENDS (Figure 24)
<TABLE>
<CAPTION>
2ND QUARTER 1ST QUARTER 4TH QUARTER 3RD QUARTER 2ND QUARTER
1996 1996 1995 1995 1995
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Market price of common stock:
High............................................. $ 38.00 35.25 33.38 30.75 27.00
Low.............................................. 30.81 28.50 28.13 24.38 20.00
Close............................................ 34.88 33.75 30.63 29.50 24.50
Dividends declared and paid........................ .23 .20 .20 .19 .19
</TABLE>
During the fourth quarter of 1994, the Board of Directors of the Company
authorized management to repurchase up to 1.2 million shares of the Company's
common stock. Shares repurchased under this authorization are held in treasury
and are available for issuance upon the exercise of stock options or for other
corporate purposes. As of June 30, 1996, all of the shares had been repurchased
under this authorization.
On May 15, 1996, the Board of Directors of the Company authorized management to
repurchase 5% of the Company's outstanding common stock in an additional buyback
program. As of that date, the Company had 45,099,654 common shares outstanding.
25
<PAGE> 28
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
DIVIDEND
On July 24, 1996, the Directors of Charter One Financial, Inc. declared a
quarterly cash dividend of 23 cents per common share. The dividend will be
payable on August 19, 1996 to shareholders of record as of August 7, 1996.
In addition, the Board approved a 5% stock dividend which will be distributed
September 30, 1996, to shareholders of record on September 13, 1996. It is the
Board's intention, subject to ongoing review of the Company's operating results
and prospects, to maintain the quarterly cash dividend at no less than $.23 per
share subsequent to the distribution of the stock dividend. If maintained at
that level, this would represent an increase of 5% in the cash dividend paid to
common shareholders.
RECENT DEVELOPMENTS
The deposits of savings associations such as Charter One Bank are presently
insured by the Savings Association Insurance Fund ("SAIF"), which along with the
Bank Insurance Fund ("BIF"), comprise the two insurance funds administered by
the Federal Deposit Insurance Corporation ("FDIC"). Financial institutions which
are members of the BIF have an insurance premium schedule which ranges from 0%
to .27% (with a $2,000 minimum annual assessment) of insured deposits as
compared to the current range of .23% to .31% of insured deposits for members of
SAIF. Therefore, well-capitalized and healthy BIF members pay a significantly
lower premium than comparable SAIF-insured institutions such as Charter One
Bank. The disparity is due to the BIF having reached its statutory reserve ratio
of 1.25% of insured deposits, while the SAIF is not anticipated to reach that
statutory reserve level until 2002, absent a substantial increase in the premium
rate or the imposition of special assessments or other significant developments,
such as the merger of the SAIF and BIF. As a result of this disparity,
management believes SAIF members have been placed at a competitive disadvantage
to BIF members with respect to pricing of loans and deposits and the ability to
achieve lower operating costs.
Various segments of the United States Government have attempted to address the
insurance premium disparity through proposed legislation that has ranged from
recapitalizing the SAIF through a special assessment to merging the SAIF and BIF
and eliminating the thrift charter. Although a special assessment would reduce
the Bank's regulatory capital, it would not likely jeopardize its
well-capitalized status. Additionally, the reduced premium rate that is expected
to result would reduce administrative costs going forward. Finally, management
does not believe a SAIF/BIF combination or elimination of the thrift charter (as
currently proposed) would have a significant impact on future operations of the
Bank. No assurances can be given as to the likelihood that any of the proposed
legislation will become law.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 11 - Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule
Exhibit 99 - Selected Monthly Financial Highlights
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K dated May 15, 1996
disclosing the commencement of an open-market stock repurchase
program to purchase up to 5% of the shares of Registrant's
outstanding common stock.
26
<PAGE> 29
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 thereunto duly authorized.
CHARTER ONE FINANCIAL, INC.
Date: August 14, 1996 /s/ Robert J. Vana
------------------
Robert J. Vana
Chief Corporate Counsel and Secretary
Date: August 14, 1996 /s/ Richard W. Neu
------------------
Richard W. Neu
Senior Vice President and Treasurer
27
<PAGE> 1
EXHIBIT 11
CHARTER ONE FINANCIAL, INC.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------------
1996 1995 1996 1995
---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
COMPUTATION OF PRIMARY EARNINGS
PER SHARE:
Weighted average number of
common shares outstanding............. 45,094,424 44,948,349 45,061,471 44,935,999
Add common stock equivalents
for shares issuable under:
Stock Appreciation Rights Plan(1).... 45,515 48,403 46,363 55,688
Stock Option Plan(1)................. 901,405 938,343 894,131 858,109
----------- ----------- ------------ -----------
Weighted average number of
shares outstanding adjusted
for common stock equivalents...... 46,041,344 45,935,095 46,001,965 45,849,796
=========== =========== ============ ===========
Net income............................. $ 41,370 31,045 79,820 60,355
=========== =========== ============ ===========
Primary earnings per share............. $ .90 .68 1.74 1.32
=========== =========== ============ ===========
COMPUTATION OF FULLY DILUTED
EARNINGS PER SHARE:
Weighted average number of
common shares outstanding............. 45,094,424 44,948,349 45,070,489 44,935,999
Add common stock equivalents
for shares issuable under:
Stock Appreciation Rights Plan(2).... 45,609 48,570 48,199 71,128
Stock Option Plan(2)................. 930,873 993,754 960,268 997,403
----------- ----------- ------------ -----------
Weighted average number of
shares outstanding adjusted
for common stock equivalents...... 46,070,906 45,990,673 46,078,956 46,004,530
=========== =========== ============ ===========
Net income............................. $ 41,370 31,045 79,820 60,355
=========== =========== ============ ===========
Fully diluted earnings per share....... $ .90 .67 1.73 1.31
=========== =========== ============ ===========
<FN>
- -----------------------
(1) Additional shares issuable were derived under the "treasury stock method"
using average market price during the period.
(2) Additional shares issuable were derived under the "treasury stock method"
using the higher of the average market price during the period or the market
price at the end of the period.
</TABLE>
28
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The consolidated financial statements of Charter One.
Financial, Inc. and subsidiaries as of and for the six months ended June 30,
1996
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 163,429
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 84,869
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 872,953
<INVESTMENTS-CARRYING> 5,087,788
<INVESTMENTS-MARKET> 5,075,684
<LOANS> 7,267,078
<ALLOWANCE> 65,268
<TOTAL-ASSETS> 13,951,846
<DEPOSITS> 7,817,126
<SHORT-TERM> 106,079
<LIABILITIES-OTHER> 201,281
<LONG-TERM> 4,892,882
<COMMON> 452
0
0
<OTHER-SE> 934,026
<TOTAL-LIABILITIES-AND-EQUITY> 13,951,846
<INTEREST-LOAN> 292,335
<INTEREST-INVEST> 192,275
<INTEREST-OTHER> 10,118
<INTEREST-TOTAL> 494,728
<INTEREST-DEPOSIT> 155,797
<INTEREST-EXPENSE> 303,819
<INTEREST-INCOME-NET> 190,909
<LOAN-LOSSES> 2,000
<SECURITIES-GAINS> (2,307)
<EXPENSE-OTHER> 90,647
<INCOME-PRETAX> 120,666
<INCOME-PRE-EXTRAORDINARY> 120,666
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 79,820
<EPS-PRIMARY> 1.74
<EPS-DILUTED> 1.73
<YIELD-ACTUAL> 2.98
<LOANS-NON> 16,083
<LOANS-PAST> 6,778
<LOANS-TROUBLED> 20,941
<LOANS-PROBLEM> 30,000
<ALLOWANCE-OPEN> 64,436
<CHARGE-OFFS> 1,398
<RECOVERIES> 230
<ALLOWANCE-CLOSE> 65,268
<ALLOWANCE-DOMESTIC> 65,268
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99
CHARTER ONE FINANCIAL, INC.
SELECTED MONTHLY FINANCIAL HIGHLIGHTS
SELECTED FINANCIAL DATA AT MONTH END
<TABLE>
<CAPTION>
04/30/96 05/31/96 06/30/96
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total assets................................................ $ 13,528,222 13,666,754 13,951,846
Investment securities....................................... 322,477 317,233 340,653
Mortgage-backed securities.................................. 5,260,952 5,183,691 5,620,088
Loans receivable............................................ 7,277,889 7,494,110 7,201,810
Deposits.................................................... 6,936,646 6,969,300 7,817,126
Borrowings.................................................. 5,470,117 5,552,732 4,998,961
Portfolio of loans serviced for others...................... 1,143,478 1,119,037 1,602,634
Number of employees (FTEs).................................. 2,250 2,297 2,499
Deposits:
Checking.................................................. $ 729,417 761,572 878,755
Savings................................................... 878,209 876,138 939,059
Money market.............................................. 953,677 965,940 1,131,047
Certificates:
6 month or less......................................... 656,869 655,882 673,837
6 month to 1 year....................................... 1,207,978 1,221,901 1,492,729
Jumbo................................................... 298,069 297,140 294,749
Other................................................... 2,212,427 2,190,727 2,406,950
----------- ------------ -----------
Total CDS............................................. 4,375,343 4,365,650 4,868,265
----------- ------------ -----------
Total deposits...................................... $ 6,936,646 6,969,300 7,817,126
=========== ============ ===========
Borrowings:
Reverse repurchase agreements............................. $ 1,955,844 2,080,970 1,521,078
FHLB advances............................................. 3,302,451 3,260,277 3,267,103
Other..................................................... 211,822 211,485 210,780
----------- ------------ -----------
Total borrowings........................................ $ 5,470,117 5,552,732 4,998,961
=========== ============ ===========
Weighted average rates at period end:
Loans..................................................... 8.10% 8.08% 8.12%
MBS....................................................... 7.18% 7.25% 7.23%
Loans and MBS........................................... 7.71% 7.74% 7.73%
Other investments......................................... 6.66% 6.68% 6.50%
Total interest-earning assets........................... 7.67% 7.70% 7.68%
Deposits.................................................. 4.42% 4.40% 4.39%
Borrowings................................................ 5.62% 5.67% 5.77%
Total interest-bearing liabilities...................... 4.95% 4.96% 4.93%
Interest rate spread........................................ 2.72% 2.74% 2.75%
Net yield on interest-earning assets........................ 3.01% 3.02% 3.00%
Nonperforming assets and allowance for loss:
Nonperforming loans and leases............................ $ 25,266* 25,266* 22,861
Restructured loans........................................ 18,794* 18,794* 20,941
REO and other repossessed assets.......................... 11,335 9,460 9,372
----------- ------------ -----------
Total nonperforming assets.............................. $ 55,395 53,520 53,174
=========== ============ ===========
Allowance for loss........................................ $ 64,719 65,865 65,268
<FN>
* At March 31, 1996
</TABLE>
30
<PAGE> 2
SELECTED ACTIVITY FOR THE MONTH AND QUARTER
<TABLE>
<CAPTION>
3 MONTHS 6 MONTHS
ENDED ENDED
4/30/96 5/31/96 6/30/96 6/30/96 6/30/96
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loan and MBS activity:
Mortgage loan
originations:
One-to-four family.... $ 317,375 293,908 298,030 909,313 1,499,002
Multifamily........... 2,198 - 2,522 4,720 20,222
Commercial real estate 24,634 8,067 11,439 44,140 53,314
Consumer loan
originations......... 57,523 55,992 45,316 158,831 259,922
-------- -------- --------- ---------- ----------
Total originations.. 401,730 357,967 357,307 1,117,004 1,832,460
Loans sold.............. 457 2,500 342 3,299 17,467
Loans exchanged
for MBS................ - - 510,435 510,435 510,435
MBS purchased........... 253,631 - - 253,631 567,104
MBS sold................ - - - - 326,125
Average yield on
residential loans
originated (excludes
impact of fees and costs
associated with
origination)........... 7.26% 7.37% 7.41% 7.34% 7.30%
Deposit portfolio activity:
Net increase (decrease):
Checking.............. $ (12,842) 32,155 117,183 136,496 144,794
Savings............... (11,399) (2,071) 62,921 49,451 (68,119)
Money market.......... (5,179) 12,263 165,107 172,191 301,960
Certificates:
6 month or less..... 10,594 (987) 13,134 22,741 18,301
6 month to 1 year... 16,899 13,923 855,249 886,071 322,726
Jumbo............... (23,847) (929) (2,391) (27,167) (175,325)
Other............... (48,377) (21,700) (363,377) (433,454) 260,298
-------- -------- --------- ---------- ----------
Total CDS......... (44,731) (9,693) 502,615 448,191 426,000
-------- -------- --------- ---------- ----------
Net increase (decrease)
in deposits............ $ (74,151) 32,654 847,826 806,329 804,635
======== ======== ========= ========== ==========
Interest credited to
deposits included above $ 10,595 10,490 51,048 72,133 117,155
Total increase (decrease)
as a percentage of
beginning deposits..... (1.06)% .47% 12.09% 11.50% 11.47%
</TABLE>
31
