<PAGE> 1
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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 March 31, 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 May 9, 1996 was 45,143,654.
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM
NUMBER PAGE
------ ----
<S> <C>
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Financial Condition --
March 31, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income --
Three months ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statement of Changes in Shareholders' Equity --
Three months ended March 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows --
Three months ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 5
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
PART II - OTHER INFORMATION
5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
i
<PAGE> 3
q PART I - FINANCIAL CONDITION
ITEM 1. FINANCIAL STATEMENTS
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA
<S> <C> <C>
ASSETS
Cash and deposits with banks . . . . . . . . . . . . . . . . . . . . . . $ 136,928 163,123
Federal funds sold and other . . . . . . . . . . . . . . . . . . . . . . 99,561 495,248
------------ ----------
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . 236,489 658,371
Investment securities available for sale, at fair value . . . . . . . . . 317,414 407,427
Mortgage-backed securities:
Available for sale, at fair value . . . . . . . . . . . . . . . . . . . 28,955 1,435,589
Held to maturity (fair value of $5,094,929 and $3,961,326) . . . . . . 5,059,293 3,879,160
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . - 4,340
Loans and leases, net . . . . . . . . . . . . . . . . . . . . . . . . . . 7,053,473 6,674,260
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . 187,268 178,136
Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . 98,218 96,581
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . 79,140 73,683
Equipment on operating leases . . . . . . . . . . . . . . . . . . . . . . 29,979 32,755
Real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,845 11,991
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,355 10,602
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,559 115,964
------------ ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,173,988 13,578,859
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Checking accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 742,259 733,962
Money market accounts . . . . . . . . . . . . . . . . . . . . . . . . . 958,856 829,087
Savings accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . 889,608 1,007,178
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . 4,420,074 4,442,264
------------ ----------
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 7,010,797 7,012,491
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . 3,337,623 3,163,144
Reverse repurchase agreements . . . . . . . . . . . . . . . . . . . . . . 1,509,641 2,089,520
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212,111 209,020
Advance payments by borrowers for taxes and insurance . . . . . . . . . . 46,107 47,738
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . 41,411 56,955
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . 106,865 155,593
------------ ----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 12,264,555 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; 45,119,014 shares issued . . . . . . . . . . . . . . . . . 451 451
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 235,889 235,889
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 665,052 642,197
Less 4,311 and 101,488 shares of common stock
held in treasury at cost . . . . . . . . . . . . . . . . . . . . . . . (131) (3,061)
Net unrealized gain (loss) on securities, net of tax (expense) benefit
of $(4,397) and $15,978 . . . . . . . . . . . . . . . . . . . . . . . 8,172 (31,078)
------------ ----------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . 909,433 844,398
------------ ----------
Total liabilities and shareholders' equity . . . . . . . . . . . $ 13,173,988 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 MARCH 31,
---------------------------------
1996 1995
---- ----
(DOLLARS IN THOUSANDS,
PER SHARE DATA)
<S> <C> <C>
INTEREST INCOME:
Loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 142,191 136,425
Mortgage-backed securities:
Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . 7,797 6,744
Held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . 81,810 109,935
Investment securities available for sale . . . . . . . . . . . . . . . 5,772 11,899
Other interest-earning assets . . . . . . . . . . . . . . . . . . . . . 5,478 8,369
---------- ----------
Total interest income . . . . . . . . . . . . . . . . . . . . . . . 243,048 273,372
---------- ----------
INTEREST EXPENSE:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,528 84,118
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,127 43,783
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,391 68,218
---------- ----------
Total interest expense . . . . . . . . . . . . . . . . . . . . . . 151,046 196,119
---------- ----------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . 92,002 77,253
Provision for loan and lease losses . . . . . . . . . . . . . . . . . . . 1,000 258
---------- ----------
Net interest income after provision for loan and lease losses . . . 91,002 76,995
---------- ----------
OTHER INCOME:
Loan servicing fees . . . . . . . . . . . . . . . . . . . . . . . . . . 2,259 2,501
Service fees and other charges . . . . . . . . . . . . . . . . . . . . 6,959 5,931
Leasing operations . . . . . . . . . . . . . . . . . . . . . . . . . . 1,788 1,712
Net gains:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 210
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . 57 -
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . - 1,313
Other gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330 572
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256 381
---------- ----------
Total other income . . . . . . . . . . . . . . . . . . . . . . . . 11,839 12,620
---------- ----------
ADMINISTRATIVE EXPENSES:
Compensation and employee benefits . . . . . . . . . . . . . . . . . . 22,037 22,943
Net occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . 6,404 6,279
Federal deposit insurance premiums . . . . . . . . . . . . . . . . . . 3,989 4,211
State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,114 1,595
Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . 189 196
Other administrative expenses . . . . . . . . . . . . . . . . . . . . . 9,850 9,987
---------- ----------
Total administrative expenses . . . . . . . . . . . . . . . . . . . 44,583 45,211
---------- ----------
Income before federal income taxes . . . . . . . . . . . . . . . . . . . 58,258 44,404
Federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 19,808 15,094
---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,450 29,310
========== ==========
Earnings per common and common equivalent share . . . . . . . . . . . . . $ .84 .64
========== ==========
Average common and common equivalent shares outstanding . . . . . . . . . 45,971,604 45,755,519
========== ==========
Dividends declared per share . . . . . . . . . . . . . . . . . . . . . . $ .20 .17
========== ==========
</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 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 214,400 shares
of treasury stock . . . . . - - - (6,527) - (6,527)
Treasury stock reissued in
connection with stock
exercised, 311,577 shares . - - (6,598) 9,457 - 2,859
Dividends paid ($.20
per share) . . . . . . . . . - - (8,997) - - (8,997)
Change in net unrealized gain
(loss) on securities, net of
tax expense/benefit . . . . - - - - 39,250 39,250
Net income . . . . . . . . . - - 38,450 - - 38,450
----- ------- ------- ---- ----- -------
Balance, March 31, 1996 . . . . $ 451 235,889 665,052 (131) 8,172 909,433
===== ======= ======= ==== ===== =======
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 6
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1996 1995
---- ----
(dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,450 29,310
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan and lease losses . . . . . . . . . . . . . . . . . . 1,000 258
Net gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (578) (2,095)
Accretion of discounts, amortization of premiums,
amortization of goodwill and depreciation, net . . . . . . . . . . . . (660) 3,737
Origination of real estate loans held for sale . . . . . . . . . . . . - (11,939)
Proceeds from sale of loans held for sale . . . . . . . . . . . . . . . 14,168 13,706
Change in deferred federal income taxes . . . . . . . . . . . . . . . . 11,139 51,611
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,051 (14,721)
----------- ----------
Net cash provided by operating activities . . . . . . . . . . . . . . 89,570 69,867
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net principal (disbursed) repaid on loans and leases . . . . . . . . . . (396,300) 19,749
Proceeds from principal repayments and maturities of:
Mortgage-backed securities held to maturity . . . . . . . . . . . . . . 196,787 140,733
Mortgage-backed securities available for sale . . . . . . . . . . . . . 7,193 8,690
Investment securities available for sale . . . . . . . . . . . . . . . 193,092 450
Sales of mortgage-backed securities available for sale . . . . . . . . . 324,002 -
Sales of investment securities available for sale . . . . . . . . . . . . - 99,987
Purchases of:
Mortgage-backed securities held to maturity . . . . . . . . . . . . . . (313,472) (19,484)
Mortgage-backed securities available for sale . . . . . . . . . . . . . - (864)
Investment securities available for sale . . . . . . . . . . . . . . . (106,890) (143)
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . (7,605) (483,538)
Equipment on operating lease . . . . . . . . . . . . . . . . . . . . . (2,066) (13,102)
Net cash and cash equivalents paid in connection with acquisitions . . . - (9,969)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,231 11,801
----------- ----------
Net cash used in investing activities . . . . . . . . . . . . . . . . . (94,028) (245,690)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings . . . . . . . . . . . . (579,879) 1,513,717
Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . 409,484 78,515
Repayments of long-term borrowings . . . . . . . . . . . . . . . . . . . (231,393) (1,928,172)
Increase (decrease) in, net of acquisitions:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,340) 484,915
Advance payments by borrowers for taxes and insurance . . . . . . . . . (1,631) 189
Payment of dividends on common stock . . . . . . . . . . . . . . . . . . (8,997) (6,627)
Purchase of treasury stock, net of options exercised . . . . . . . . . . (3,668) (3,015)
----------- ----------
Net cash provided by (used in) financing activities . . . . . . . . . . . . (417,424) 139,522
----------- ----------
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . (421,882) (36,301)
Cash and cash equivalents, beginning of the period . . . . . . . . . . . . 658,371 341,935
----------- ----------
Cash and cash equivalents, end of the period . . . . . . . . . . . . . . . $ 236,489 305,634
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest on deposits and borrowings . . . . $ 170,366 184,865
Refund received for income taxes . . . . . . . . . . . . . . . . . . . . - (33,219)
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 . . . . . . . . . . . . . . . . 335 1,224
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 7
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMNTS
(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") 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 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.
3. 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, however 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.
4. 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.
5. 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 continue using the
APB No. 25 accounting method and include pro forma disclosures when
presenting complete financial statement footnotes in the future.
6. Certain items in the consolidated financial statements for 1995 have been
reclassified to conform to the 1996 presentation.
5
<PAGE> 8
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 155 branch locations: 94 branches in Ohio operating under the name
Charter One Bank and 61 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 March 31, 1996 was $38.5 million, or $.84
per share, up 31.2% from $29.3 million, or $.64 per share, for the first
quarter of 1995. The increase in net income was attributable to increases in
net interest income and service fees and other charges which were partially
offset by lower gains from the sale of investment securities. The increases
were in categories described by industry practice as core earnings. Core
earnings are recurring in nature. Thus, core earnings excludes nonrecurring
items such as gains on sales and merger-related costs. As Figure 1
illustrates, the first quarter of 1996 continued the Company's favorable trend
in core earnings.
QUARTERLY EARNINGS SUMMARY (Figure 1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------
3/31/96 12/31/95 9/30/95 6/30/95 3/31/95
------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net interest income . . . . . . . . . . $ 92,002 85,798 77,869 76,896 77,253
Provision for loan and lease losses . . (1,000) (258) (258) (258) (258)
Other income, excluding
gains and losses . . . . . . . . . . . 11,262 12,283 11,363 10,296 10,525
Administrative expenses, excluding
merger-related costs . . . . . . . . . (44,583) (46,426) (43,759) (42,819) (45,211)
-------- -------- -------- -------- --------
Pretax core earnings . . . . . . . . 57,681 51,397 45,215 44,115 42,309
Gains and losses, net . . . . . . . . . 577 (100,683) 3,263 3,022 2,095
Merger-related costs . . . . . . . . . - (37,528) - - -
-------- -------- -------- -------- --------
Income before federal income taxes 58,258 (86,814) 48,478 47,137 44,404
Federal income taxes . . . . . . . . . 19,808 (28,384) 16,371 16,092 15,094
-------- -------- -------- -------- --------
Net income . . . . . . . . . . . . . $ 38,450 (58,430) 32,107 31,045 29,310
======== ======== ======== ======== ========
Earnings per common and common
equivalent share . . . . . . . . . . . $ .84 (1.30) .70 .68 .64
======== ======== ======== ======== ========
</TABLE>
6
<PAGE> 9
The increase in net income in the first quarter of 1996 contributed to a 17.18%
annualized return on average equity and a 1.19% annualized return on average
assets. This compares to first quarter 1995 annualized returns of 13.97% and
.79%, respectively. These annualized returns and other selected ratios are set
forth in Figure 2.
SELECTED OPERATING RATIOS (Figure 2)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31, 1996 DECEMBER 31, 1995 MARCH 31, 1995
-------------- ----------------- --------------
<S> <C> <C> <C>
Annualized returns:
Return on average assets . . . . . . . . . . . . . . . 1.19% (1.67)% .79%
Return on average equity . . . . . . . . . . . . . . . 17.18 (27.14) 13.97
Average equity to average assets . . . . . . . . . . . 6.92 6.16 5.62
Annualized operating ratios(1):
Net interest income to administrative expenses . . . . 206.36 184.81 170.87
Administrative expenses to average assets . . . . . . . 1.38 1.33 1.21
Efficiency ratio . . . . . . . . . . . . . . . . . . . 42.99 47.14 51.28
- - ----------
<FN>
(1) Calculated using administrative expenses without merger-related costs.
</TABLE>
7
<PAGE> 10
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, 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 MARCH 31,
----------------------------------------------------------------------------
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) . . . . $ 6,825,143 $ 142,191 8.33% $ 6,619,379 $ 136,425 8.24%
Mortgage-backed securities:
Available for sale . . . 443,891 7,797 7.03 401,294 6,744 6.72
Held to maturity . . . . 4,567,887 81,810 7.16 6,186,994 109,935 7.11
Investment securities
available for sale . . . . 349,246 5,772 6.61 705,761 11,899 6.74
Other interest-earning
assets(2) . . . . . . . . 334,182 5,478 6.56 534,893 8,369 6.26
------------ ---------- ------------ ----------
Total interest-earning
assets . . . . . . . 12,520,349 243,048 7.76 14,448,321 273,372 7.57
Noninterest-earning
assets(3). . . . . . . . 418,788 ---------- 479,967 ----------
------------ ------------
Total assets . . . . $ 12,939,137 $ 14,928,288
============ ============
Interest-bearing
liabilities (4)
Deposits:
Checking accounts . . . . $ 696,499 2,302 1.32 $ 648,792 2,423 1.49
Savings accounts . . . . 980,169 5,852 2.39 1,108,447 6,641 2.40
Money market accounts . . 851,571 6,869 3.23 890,755 7,007 3.15
Certificates of deposit . 4,436,971 64,505 5.82 4,644,129 68,047 5.86
------------ ---------- ------------ ----------
Total deposits . . . . 6,965,210 79,528 4.57 7,292,123 84,118 4.61
------------ ---------- ------------ ----------
FHLB advances . . . . . . . 3,185,989 45,127 5.67 2,855,579 43,783 6.13
Other borrowings . . . . . 1,729,222 26,391 6.10 3,732,885 68,218 7.31
------------ ---------- ------------ ----------
Total borrowings . . . 4,915,211 71,518 5.82 6,588,464 112,001 6.80
------------ ---------- ------------ ----------
Total interest-bearing
liabilities . . . . . 11,880,421 151,046 5.09 13,880,587 196,119 5.65
Non interest-bearing
liabilities. . . . . . . 163,733 ---------- 208,658 ----------
------------ ------------
Total liabilities . . 12,044,154 14,089,245
Shareholders' equity . . . . 894,983 839,043
------------ ------------
Total liabilities and
shareholders' equity $ 12,939,137 $ 14,928,288
============ ============
Net interest income . . . . . $ 92,002 $ 77,253
Interest rate spread . . . . ========== 2.67 ========== 1.92
Net yield on average interest-
earning assets(5) . . . . . 2.94 2.14
Average interest-earning
assets to average interest-
bearing liabilities . . . . 1.05% 1.04%
- - ----------
<FN>
(1) Average balances include nonaccrual loans and interest income includes
loan fee amortization.
(2) Includes 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>
8
<PAGE> 11
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 MARCH 31,
----------------------------------------
1996 V. 1995
----------------------------------------
INCREASE (DECREASE) DUE TO
--------------------------
RATE VOLUME TOTAL
---- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest income:
Loans and leases . . . . . . . . . . . . . . . . . . . . . . . $ 1,491 4,275 5,766
Mortgage-backed securities:
Available for sale. . . . . . . . . . . . . . . . . . . . . . 315 738 1,053
Held to maturity . . . . . . . . . . . . . . . . . . . . . . 866 (28,991) (28,125)
Investment securities available for sale . . . . . . . . . . . (231) (5,896) (6,127)
Other interest-earning assets . . . . . . . . . . . . . . . . . 382 (3,273) (2,891)
--------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,823 (33,147) (30,324)
--------- ------- -------
Interest expense:
Checking accounts . . . . . . . . . . . . . . . . . . . . . . . (291) 170 (121)
Savings accounts . . . . . . . . . . . . . . . . . . . . . . . (23) (766) (789)
Money market accounts . . . . . . . . . . . . . . . . . . . . . 175 (313) (138)
Certificates of deposit . . . . . . . . . . . . . . . . . . . . (526) (3,016) (3,542)
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . (3,489) 4,833 1,344
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . (9,829) (31,998) (41,827)
--------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,983) (31,090) (45,073)
--------- ------- -------
Change in net interest income . . . . . . . . . . . . . . . . . . $ 16,806 (2,057) 14,749
========= ======= =======
</TABLE>
Net interest income for the first three months of 1996 was $92.0 million, a
19.1% increase over net interest income in the first quarter of 1995. Net
interest income increased primarily due to changes in interest rates and the
impact of the financial restructuring in the fourth quarter of 1995. The yield
on interest-earning assets during the 1996 quarter was 19 basis points above
the yield during the comparable 1995 period primarily as a result of the
financial restructuring undertaken in the fourth quarter of 1995 in conjunction
with the Merger. As part of the restructuring, the Bank sold $940 million of
low-yielding, fixed-rate mortgage-backed securities and $330 million of
low-yielding, fixed-rate mortgage loans in the fourth quarter of 1995. Net
interest income also benefitted as the cost of interest-bearing liabilities
dropped to 5.09% for the three months ended March 31, 1996, 56 basis points
below the cost during the first quarter of 1995. This decrease was also
primarily attributable to the financial restructuring which included
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 connection with the fourth quarter
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 the first quarter of 1996. These
favorable changes to the yield on interest-earning assets and the cost of
interest-bearing liabilities combined to increase net interest income by $16.8
million. As noted in Figure 4, this increase was partially offset by changes
in the volume of interest-earning assets and interest-bearing liabilities.
Financial assets and liabilities sold or terminated in conjunction with the
restructuring resulted in a $2 billion decline in average interest-earning
assets and in average interest-bearing liabilities from the 1995 period. These
changes in the level of balances caused net interest income to decline by $2.1
million. The net effect of these factors was a 75 basis point increase in the
interest rate spread which was 2.67% for the first quarter 1996 as compared to
1.92% for the first quarter of 1995. The net yield on interest-earning assets
was 2.94% for the three months ended March 31, 1996 as compared to 2.14% for
the 1995 period.
9
<PAGE> 12
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>
MARCH 31, DECEMBER 31,
--------- ------------
Weighted average yield:
<S> <C> <C>
Loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.17% 8.26%
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . 7.22 7.27
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.48 6.76
Other interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . 6.74 5.86
Total interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . 7.72 7.71
Weighted average cost(1):
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.46 4.61
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.51 5.90
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.88 6.08
Total interest-bearing liabilities . . . . . . . . . . . . . . . . . . . . . . 4.96 5.19
Interest rate spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.76 2.52
Net yield on interest-earning assets . . . . . . . . . . . . . . . . . . . . . . 3.04 2.78
Interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,744,220 $ 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 MARCH 31,
----------------------------
1996 1995
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loan servicing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,259 2,501
Service fees and other charges:
Retail deposit account service charges and fees . . . . . . . . . . . . . . . . . 5,575 5,005
Fees on insurance annuity sales . . . . . . . . . . . . . . . . . . . . . . . . . 476 515
Other branch service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480 362
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428 49
------- ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,959 5,931
------- ------
Leasing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,788 1,712
Net gains:
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282 251
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 -
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,313
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 210
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 321
------- ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 577 2,095
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256 381
------- ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,839 12,620
======= ======
</TABLE>
OTHER INCOME
Other income for the three months ending March 31, 1996 was $11.8 million as
compared to $12.6 million for the same period in 1995. As can be seen from the
detail provided in Figure 6 above, the decrease of $781,000 was primarily
attributable to lower net gains on sales in the 1996 period. Net gains from
sales were only $577,000 in the first quarter of 1996 as compared to $2.1
million for the first quarter of 1995 which caused Other Income to decrease by
$1.5 million. The decrease was partially offset by increases in service fees
and other charges. Service fees and other charges were $7.0 million for the
three months ended March 31, 1996, an increase of $1.0 million, or 17.3%, over
the first quarter of 1995. This increase was primarily due to increases in
checking account and debit card fee income. Management hopes to continue this
growth in checking account and debit card income along with ATM fee income
through the introduction of the Bank's
10
<PAGE> 13
checking account products in the Michigan market during the second quarter of
1996. The Bank's data processing systems for retail savings products were
fully implemented in the Michigan market by March 15, 1996. Also, as
previously announced, the Bank plans to acquire First Nationwide's 21-branch
Michigan franchise, with approximately $800 million in deposits, at the end of
the second quarter of 1996.
ADMINISTRATIVE EXPENSES (Figure 7)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . $22,037 22,943
Net occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,404 6,279
Federal deposit insurance premiums . . . . . . . . . . . . . . . . . . . . . . . . 3,989 4,211
State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,114 1,595
Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 196
Other administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,850 9,987
------- ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $44,583 45,211
======= ======
Number of full-time equivalent employees . . . . . . . . . . . . . . . . . . . . . 2,360 2,416
Net interest income to administrative expenses . . . . . . . . . . . . . . . . . . 206.36% 170.87%
Administrative expenses to average assets (annualized) . . . . . . . . . . . . . . 1.38% 1.21%
Efficiency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42.99% 51.28%
</TABLE>
ADMINISTRATIVE EXPENSES
As shown in Figure 7, administrative expenses for the three months ended March
31, 1996 were $44.6 million, a decrease of $627,000, or 1.4%, over the same
period in 1995. This decrease was primarily due to a reduction in compensation
and employee benefits expenses and lower deposit insurance premiums, offset in
part by higher state taxes.
The decrease of $222,000, or 5.3%, in deposit insurance premiums for the first
quarter of 1996 as compared to the first quarter of 1995 is primarily
attributable to a lower assessment rate. Prior to the Merger, First Federal
was paying at a slightly higher assessment rate than was Charter One. In 1996,
the combined entity began paying at Charter One's lower assessment rate. The
higher assessment rate paid by First Federal in the first quarter of 1995 is
reflected in the pooled financial results for 1995.
State tax expense for the first quarter of 1996 was $2.1 million, a $519,000,
or 32.5%, increase over the expense recorded in the first quarter of 1995. The
increase was primarily due to higher assessment bases. The state of Ohio's
assessment base is primarily related to shareholders' equity and the state of
Michigan's assessment base is primarily related to gross revenues. Both of
these assessment bases were higher when calculating the 1996 expense.
FEDERAL INCOME TAXES
The provision for federal income taxes for the three months ended March 31,
1996 was $19.8 million as compared to $15.1 million for the 1995 period. The
primary reason for this $4.7 million, or 31.2%, increase was due to the
increase in pre-tax book income. Pre-tax book income was 31.2% higher in the
first quarter of 1996 as compared to the first quarter of 1995. The effective
tax rate was 34% for both the 1996 and 1995 periods presented.
11
<PAGE> 14
FINANCIAL CONDITION
Figure 8 sets forth information concerning the composition of the Company's
assets, liabilities and shareholders' equity at March 31, 1996 and December 31,
1995.
FINANCIAL CONDITION (Figure 8)
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
------------------------- --------------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
---------- ------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents . . . . . . . . . $ 236,489 1.8% $ 658,371 4.9%
Investment securities . . . . . . . . . . . 317,414 2.4 407,427 3.0
Mortgage-backed securities . . . . . . . . 5,088,248 38.6 5,314,749 39.1
Loans and leases, net . . . . . . . . . . . 7,053,473 53.6 6,678,600 49.2
Other assets . . . . . . . . . . . . . . . 478,364 3.6 519,712 3.8
------------ ----- ------------ -----
Total . . . . . . . . . . . . . . . . . . $ 13,173,988 100.0% $ 13,578,859 100.0%
============ ===== ============ =====
Liabilities and shareholders' equity:
Deposits . . . . . . . . . . . . . . . . . $ 7,010,797 53.2% $ 7,012,491 51.7%
Borrowings . . . . . . . . . . . . . . . . 5,059,375 38.4 5,461,684 40.2
Other liabilities . . . . . . . . . . . . . 194,383 1.5 260,286 1.9
Shareholders' equity . . . . . . . . . . . 909,433 6.9 844,398 6.2
------------ ----- ------------ -----
Total . . . . . . . . . . . . . . . . . . $ 13,173,988 100.0% $ 13,578,859 100.0%
============ ===== ============ =====
</TABLE>
OVERVIEW
Total assets decreased $404.9 million from December 31, 1995, mainly due to a
decline in mortgage-backed securities and investment securities partially
offset by higher levels of loans and leases. Loans and leases increased by
$374.9 million. These increases were largely the result of $812.1 million in
loan originations (see Figure 10).
LOANS AND LEASES
COMPOSITION OF LOANS AND LEASES (Figure 9)
<TABLE>
<CAPTION>
MARCH 31, 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 . . . . . . . . . . . . . $ 5,385,750 76.4% $ 5,140,857 77.0%
Multifamily . . . . . . . . . . . . . . . . . 352,882 5.0 359,056 5.4
Commercial . . . . . . . . . . . . . . . . . 377,028 5.3 368,372 5.5
Construction . . . . . . . . . . . . . . . . 184,237 2.5 182,863 2.7
----------- ----- ----------- -----
Total real estate . . . . . . . . . . . . . 6,299,897 89.2 6,051,148 90.6
Consumer . . . . . . . . . . . . . . . . . . . 675,307 9.6 594,609 8.9
Leases . . . . . . . . . . . . . . . . . . . . 154,849 2.2 131,352 2.0
Business . . . . . . . . . . . . . . . . . . . 76,457 1.1 65,747 1.0
----------- ----- ----------- -----
Total loans and leases . . . . . . . . . . 7,206,510 102.1 6,842,856 102.5
Less net items . . . . . . . . . . . . . . . . 153,037 2.1 168,596 2.5
----------- ----- ----------- -----
Loans and leases, net . . . . . . . . . . $ 7,053,473 100.0% $ 6,674,260 100.0%
=========== ===== =========== =====
</TABLE>
One-to-four family real estate loans increased $244.9 million, or 4.8%, from
December 31, 1995, as loan originations during the first three months of 1996
exceeded loan repayments (see Figure 10).
12
<PAGE> 15
Consumer loans at the end of the 1996 first quarter increased $80.7 million, or
13.6%, from December 31, 1995, reflecting increases in home equity and marine
loans outstanding. These increases are attributed to an increase in branch
cross-sell referrals of home equity loans, expansion of the Bank's marine
lending program, and the present interest rate environment.
Loan and lease originations and repayments for the first three months of 1996
were up from the comparable 1995 periods. Interest rate levels in 1996 have
resulted in an increase in loan refinancing volume which also increased overall
loan repayments.
LOAN AND LEASE ACTIVITY (Figure 10)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Originations:
Real estate:
Permanent:
One-to-four family . . . . . . . . . . . . . . . . . . . . . . . . . $ 542,368 103,908
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,502 6,392
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,174 3,317
----------- --------
Total permanent . . . . . . . . . . . . . . . . . . . . . . . . . . 566,044 113,617
----------- --------
Construction:
One-to-four family . . . . . . . . . . . . . . . . . . . . . . . . . 47,321 30,344
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,506
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 4,592
----------- --------
Total construction . . . . . . . . . . . . . . . . . . . . . . . . 48,321 36,442
----------- --------
Total real estate loans originated . . . . . . . . . . . . . . . 614,365 150,059
----------- --------
Consumer line of credit draws . . . . . . . . . . . . . . . . . . . . . . 39,583 29,447
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101,091 14,972
Business line of credit draws . . . . . . . . . . . . . . . . . . . . . . 18,197 7,872
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,604 3,223
Leases(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,246 21,879
----------- --------
Total loans and leases originated . . . . . . . . . . . . . . . . 812,086 227,452
----------- --------
Purchases:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Leases(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 76,912
----------- --------
Total purchases . . . . . . . . . . . . . . . . . . . . . . . . . . - 76,912
----------- --------
Sales and principal reductions:
Loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,168 14,197
Principal reductions . . . . . . . . . . . . . . . . . . . . . . . . . . 434,264 301,321
----------- --------
Total sales and principal reductions . . . . . . . . . . . . . . . 448,432 315,518
----------- --------
Increase (decrease) before net items . . . . . . . . . . . . . . $ 363,654 (11,154)
=========== ========
- - ----------
<FN>
(1) Not included herein are $2.1 and $13.1 million in operating leases
originated during the three months ended March 31, 1996 and 1995,
respectively, and $29.0 million in operating leases purchased in the
acquisition of ICX Corporation.
</TABLE>
13
<PAGE> 16
INVESTMENT SECURITIES
The entire investment securities portfolio was classified as available for sale
at both March 31, 1996 and December 31, 1995. Figure 11 summarizes the fair
values of the portfolio at those dates.
INVESTMENT SECURITIES PORTFOLIO (Figure 11)
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. Treasury and agency securities . . . . . . . . . . . . . . . . . . . . $ 287,450 377,232
Corporate notes and commercial paper . . . . . . . . . . . . . . . . . . . 27,447 30,033
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,517 162
---------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 317,414 407,427
========== =======
Weighted average rate . . . . . . . . . . . . . . . . . . . . . . . . . . 6.48% 6.76%
========== =======
</TABLE>
No investment securities were sold during the three months ended March 31,
1996. Purchases of investment securities during the quarter totaled $106.9
million and primarily consisted of U.S. agency securities.
MORTGAGE-BACKED SECURITIES
Figure 12 summarizes the mortgage-backed securities ("MBS") portfolios at March
31, 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>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
MBS available for sale:
Participation certificates:
Government agency issues . . . . . . . . . . . . . . . . . . . . . . . $ 19,117 347,539
Private issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 116
Collateralized mortgage obligations:
Government agency issues . . . . . . . . . . . . . . . . . . . . . . . 2,268 619,104
Private issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,525 468,830
----------- ---------
Total MBS available for sale . . . . . . . . . . . . . . . . . . . . $ 28,955 1,435,589
----------- ---------
MBS held to maturity:
Participation certificates:
Government agency issues . . . . . . . . . . . . . . . . . . . . . . . $ 2,517,504 2,662,782
Private issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 464,028 498,631
Collateralized mortgage obligations:
Government agency issues . . . . . . . . . . . . . . . . . . . . . . . 872,522 263,721
Private issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,205,239 454,026
----------- ---------
Total MBS held to maturity. . . . . . . . . . . . . . . . . . . . . . $ 5,059,293 3,879,160
----------- ---------
Total MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,088,248 5,314,749
=========== =========
</TABLE>
14
<PAGE> 17
MORTGAGE-BACKED SECURITIES BY PAYMENT TYPE (Figure 13)
<TABLE>
<CAPTION>
MARCH 31, 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 . . . $ 7,430 7.15% $ 1,085,208 7.23%
Fixed rate:
Participation certificates . . . . . . . 19,162 6.28 347,655 6.23
Collateralized mortgage obligations . . . 2,363 5.26 2,726 5.30
------------ ------------
Total fixed rate . . . . . . . . . . . 21,525 6.17 350,381 6.22
------------ ------------
Total MBS available for sale . . . . 28,955 6.43 1,435,589 6.98
------------ ------------
MBS held to maturity:
Adjustable rate:
Participation certificates . . . . . . . 1,192,485 7.09 1,279,124 7.08
Collateralized mortgage obligations . . . 1,421,477 6.81 357,816 7.48
------------ ------------
Total adjustable rate . . . . . . . . . 2,613,962 6.94 1,636,940 7.17
------------ ------------
Fixed rate:
Participation certificates . . . . . . . 1,789,047 7.55 1,882,289 7.56
Collateralized mortgage obligations . . . 656,284 7.41 359,931 7.32
------------ ------------
Total fixed rate . . . . . . . . . . . 2,445,331 7.51 2,242,220 7.52
------------ ------------
Total MBS held to maturity . . . . . 5,059,293 7.22 3,879,160 7.37
------------ ------------
Total MBS . . . . . . . . . . . . . $ 5,088,248 7.22% $ 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 three months ended March 31, 1996, $326.1 million of
available for sale securities were sold for total proceeds of $324.0 million.
The loss of $2.2 million was recorded at the trade date in December 1995.
Purchases of mortgage-backed securities during the quarter totaled $313.5
million and were primarily medium-term, fixed-rate collateralized mortgage
obligations.
15
<PAGE> 18
ASSET QUALITY
ANALYSIS OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES (Figure 14)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . $ 64,436 64,838
Provision for loan and lease losses . . . . . . . . . . . . . . . . . . . . . 1,000 258
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 176
Loans and leases charged off:
Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (34) (613)
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (315) (372)
Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) -
--------- ------
Total charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . (350) (985)
--------- ------
Recoveries:
Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 221
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 11
Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
--------- ------
Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 232
--------- ------
Net loan and lease charge-offs . . . . . . . . . . . . . . . . . . . . (218) (753)
--------- ------
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,218 64,519
========= ======
Net charge-offs to average loans and leases (annualized) . . . . . . . . . . .01% .05%
</TABLE>
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES (Figure 15)
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $52,451 51,607
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,047 7,214
Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 793 732
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,927 4,883
------- ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $65,218 64,436
======= ======
Percent of loans and leases to ending loans and leases:
Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87.3 % 88.3%
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.5 8.8
Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 .9
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 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 .92% at March 31, 1996, down slightly from
.96% at December 31, 1995, reflecting first quarter loan growth.
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 market 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 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.
16
<PAGE> 19
Figure 16 sets forth information concerning nonperforming assets and the
allowance for loan and lease losses. At March 31, 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>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonperforming loans and leases:
Nonaccrual loans and leases:
Mortgage loans:
One-to-four family . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,933 15,145
Multifamily and commercial . . . . . . . . . . . . . . . . . . . . . . 2,948 3,014
Construction and land . . . . . . . . . . . . . . . . . . . . . . . . . 1,380 1,463
-------- ------
Total mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . 20,261 19,622
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 804 1,525
Lease financings . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 27
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 -
-------- ------
Total nonaccrual loans and leases . . . . . . . . . . . . . . . . . . 21,074 21,174
-------- ------
Accruing loans and leases delinquent more than 90 days:
Mortgage loans:
One-to-four family . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,409 2,002
Multifamily and commercial . . . . . . . . . . . . . . . . . . . . . . . 680 893
Construction and land . . . . . . . . . . . . . . . . . . . . . . . . . . - -
-------- ------
Total mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . 4,089 2,895
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 147
Lease financings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 -
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
-------- ------
Total accruing 90-day delinquent loans and leases . . . . . . . . . . . 4,192 3,042
-------- ------
Restructured real estate loans . . . . . . . . . . . . . . . . . . . . . . . 18,794 18,835
-------- ------
Total nonperforming loans and leases . . . . . . . . . . . . . . . . . 44,060 43,051
Real estate acquired through foreclosure and other . . . . . . . . . . . . . 11,301 11,650
-------- ------
Total nonperforming assets . . . . . . . . . . . . . . . . . . . . . . $ 55,361 54,701
======== ======
Ratio of:
Nonperforming loans and leases to total loans and leases. . . . . . . . . . .62 % .65%
Nonperforming assets to total assets . . . . . . . . . . . . . . . . . . . .42 % .40%
Allowance for loan and lease losses to:
Nonperforming loans and leases . . . . . . . . . . . . . . . . . . . . . 148.02 149.67
Total loans and leases before allowance . . . . . . . . . . . . . . . . . .92 .96
</TABLE>
Nonperforming assets at March 31, 1996 totaled $55.4 million, up slightly from
December 31, 1995. The ratios of nonperforming loans and leases to total loans
and leases declined at March 31, 1996 from December 31, 1995.
At March 31, 1996, there were $28.6 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 a $7.3 million loan on a hotel property in Illinois.
The current cash flow on 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.
17
<PAGE> 20
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 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
March 31, 1996, 58% of interest-bearing liabilities were in the form of
deposits and 42% were in borrowings which compares 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 weekly or more frequently, if required, 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>
MARCH 31, 1996 DECEMBER 31, 1995
------------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Checking accounts:
Interest-bearing . . . . . . . . . . . . . . . $ 510,461 2.36% $ 513,933 1.98%
Non-interest bearing. . . . . . . . . . . . . . 231,798 - 220,029 -
Savings accounts. . . . . . . . . . . . . . . . . 889,608 2.43 1,007,178 2.41
Money market accounts . . . . . . . . . . . . . . 958,856 3.08 829,087 3.19
Certificates of deposit . . . . . . . . . . . . . 4,416,995 5.79 4,438,831 5.97
----------- -----------
Deposits . . . . . . . . . . . . . . . . . . 7,007,718 4.58 7,009,058 4.65
Plus unamortized premium on
deposits purchased . . . . . . . . . . . . . . . 3,079 3,433
----------- -----------
Deposits, net . . . . . . . . . . . . . . . . $ 7,010,797 $ 7,012,491
=========== ===========
Including the annualized effect of applicable
swaps, floors, and amortization of deferred
gains on terminated swaps . . . . . . . . . . . 4.46% 4.61%
==== ====
</TABLE>
Total deposits declined $1.7 million during the first quarter 1996. Growth in
retail deposits was more than offset by a $148.2 million decline in jumbo
certificates. The reduction in jumbo accounts is part of an intentional effort
to decrease the Bank's level of wholesale deposits. On March 31, 1996, jumbo
accounts represented 4.6% of total deposits, down from 6.9% at the end of 1995.
During the first quarter of 1996, the Bank converted the retail savings deposit
systems in Michigan to Charter One's data processing systems. As a result of
that conversion, $111.4 million of regular savings deposits in Michigan were
reclassified as money market deposit accounts in order to conform account
specifications and features. Those accounts previously had been classified as
statement savings accounts.
BORROWINGS
At March 31, 1996, borrowings primarily consisted of Federal Home Loan Bank
("FHLB") advances and reverse repurchase agreements. These positions are
secured by Charter One's investment in the stock of the Federal Home Loan Bank,
as well as certain real estate loans aggregating $5.0 billion and
mortgage-backed securities aggregating $1.8 billion.
18
<PAGE> 21
FEDERAL HOME LOAN BANK ADVANCES (Figure 18)
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ -------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed-rate advances . . . . . . . . . . . . . . . $ 1,504,606 5.66% $1,310,122 5.78%
Variable-rate advances. . . . . . . . . . . . . . 1,833,000 5.39 1,853,000 5.87
----------- ----------
Advances . . . . . . . . . . . . . . . . . . . 3,337,606 5.51 3,163,122 5.84
Unamortized premium . . . . . . . . . . . . . . . 17 22
----------- ----------
Total advances, net . . . . . . . . . . . . . . $ 3,337,623 $3,163,144
=========== ==========
Including the annualized effect of applicable
caps and amortization of deferred
gains on terminated swaps . . . . . . . . . . . 5.51% 5.90%
==== ====
</TABLE>
The variable-rate advances reprice based upon LIBOR at one- to six-month
intervals, and included $171 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>
MARCH 31, 1996 DECEMBER 31, 1995
-------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Short term . . . . . . . . . . . . . . . . . . . $ 150,297 5.45 $ 848,033 5.86
Long term:
Fixed rate . . . . . . . . . . . . . . . . . . 695,000 5.18 575,000 5.28
Variable rate . . . . . . . . . . . . . . . . . 664,344 5.50 666,487 6.01
----------- ----------
Weighted average cost including
amortization of fees . . . . . . . . . . . . . . $ 1,509,641 5.43% $2,089,520 5.80%
=========== ==========
Weighted average cost including the annualized
effect of amortization of deferred gains
on terminated swaps . . . . . . . . . . . . . . 5.29% 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 $275 million maturing in 1996 which
are callable, at par, by the Bank 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
19
<PAGE> 22
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>
MARCH 31, 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:
1999 . . . . . . . . . . . $ 100,000 5.59% 10.09% 100,000 6.02% 10.09%
---------- ---- ----- ------- ---- -----
Total . . . . . . . . . $ 100,000 5.59%(a) 10.09% 100,000 6.02%(a) 10.09%
========== ==== ===== ======= ==== =====
Variable payment and
fixed receipt:
1997 . . . . . . . . . . . $ 45,000 6.30% 5.47% 45,000 6.30 5.63
1998 . . . . . . . . . . . 25,000 5.70 5.39 - - -
2000 . . . . . . . . . . . 110,000 7.08 5.43 110,000 7.08 5.63
2001 . . . . . . . . . . . 20,000 6.54 5.44 - - -
---------- ---- ---- ------- ---- ----
Total $ 200,000 6.68% 5.44%(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
March 31, 1996, the notional principal amount outstanding was $28.0 million
with a weighted average receipt rate of 13.90% and payment rate of 5.65%. 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 March 31, 1996, interest received of .72% 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
$.6 million at March 31, 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. 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 $1.8 million at March 31, 1996.
INTEREST RATE CAPS (Figure 21)
<TABLE>
<CAPTION>
MARCH 31, 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% .41% .21%
1997 . . . . . . . . . . $ 650,000 6.00% -% .30% 650,000 6.00 .03 .30
---------- ---- --- --- ---------- ---- --- ---
Total . . . . . . . . $ 650,000 6.00% -% .30% $ 850,000 6.00 .07% .28%
========== ==== === === ========== ==== === ===
</TABLE>
20
<PAGE> 23
The cost of interest rate exchange, cap, floor and collar positions, including
amortization of gains and losses on terminated positions, was included in
interest expense as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Interest expense:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 471 5,883
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (137) 243
Reverse repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . - 11,498
--------- ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 334 17,624
========= ======
</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.
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 March 31, 1996 was 5.78%.
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 interest-bearing deposits, and (v) the objectives of its
asset/liability management program. Excess liquidity is invested generally in
federal funds sold, interest-bearing deposits and floating-rate 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 March 31, 1996,
the Bank and its subsidiaries had outstanding commitments to originate loans
and leases of $609.0 million, unfunded lines of consumer credit totaling $360.7
million (a significant portion of which normally remains undrawn) and unfunded
lines of commercial (business loans) credit totaling $37.3 million.
Certificates of deposit scheduled to mature in one year or less at March 31,
1996 totaled $3.2 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 March 31, 1996, the Bank had $1.3 billion
of advances from the FHLB and $425.3 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.
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
21
<PAGE> 24
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 22 below. The Bank's actual
capital and ratios are also presented in Figure 22.
REGULATORY CAPITAL (Figure 22)
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------------------------
ACTUAL CAPITAL REQUIRED CAPITAL
------------------- -------------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Capital adequacy:
Tangible capital . . . . . . . . . . . . . . . . . $ 835,488 6.43% $ 194,869 1.50%
Core capital . . . . . . . . . . . . . . . . . . . 835,488 6.43 389,739 3.00
Risk-based capital . . . . . . . . . . . . . . . . 889,120 14.35 495,696 8.00
Prompt corrective action:
Tier 1 leverage capital . . . . . . . . . . . . . . 835,488 6.43 519,652 4.00
Tier 1 risk-based capital . . . . . . . . . . . . . 835,488 13.48 247,848 4.00
Total risk-based capital . . . . . . . . . . . . . 889,120 14.35 495,696 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, as of March 31, 1996, that 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 23)
<TABLE>
<CAPTION>
1ST QUARTER 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
1996 1995 1995 1995 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Market price of common stock:
High . . . . . . . . . . . . . . . . . . . . $ 35.25 33.38 30.75 27.00 22.13
Low . . . . . . . . . . . . . . . . . . . . . 28.50 28.13 24.38 20.00 18.88
Close . . . . . . . . . . . . . . . . . . . . 33.75 30.63 29.50 24.50 20.25
Dividends declared and paid . . . . . . . . . . .20 .20 .19 .19 .17
</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 March 31, 1996, 980,500 shares had been repurchased
under this authorization.
22
<PAGE> 25
PART II - OTHER INFORMATION
ITEM 2. OTHER INFORMATION
DIVIDEND
On April 17, 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 May 20, 1996 to shareholders of record as of May 3, 1996.
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 healthly 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, SAIF members have been placed at a significant 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 and Legislature 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.
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
There were no reports on Form 8-K filed during the quarter
ended March 31, 1996.
23
<PAGE> 26
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: May 14, 1996 /s/ Robert J. Vana
---------------------------------------
Robert J. Vana
Chief Corporate Counsel and Secretary
Date: May 14, 1996 /s/ Richard W. Neu
---------------------------------------
Richard W. Neu
Senior Vice President and Treasurer
24
<PAGE> 1
EXHIBIT 11
CHARTER ONE FINANCIAL, INC.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
COMPUTATION OF PRIMARY EARNINGS PER SHARE:
Weighted average number of common shares outstanding . . . . . . . . . 45,037,536 44,924,190
Add common stock equivalents for shares issuable under:
Stock Appreciation Rights Plan(1) . . . . . . . . . . . . . . . . . . 47,211 62,972
Stock Option Plan(1) . . . . . . . . . . . . . . . . . . . . . . . . 886,857 768,357
------------ ----------
Weighted average number of shares outstanding adjusted
for common stock equivalents . . . . . . . . . . . . . . . . . . . 45,971,604 45,755,519
============ ==========
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,450 29,310
============ ==========
Primary earnings per share . . . . . . . . . . . . . . . . . . . . . . $ .84 .64
============ ==========
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE:
Weighted average number of common shares outstanding . . . . . . . . . 45,037,536 44,924,229
Add common stock equivalents for shares issuable under:
Stock Appreciation Rights Plan(1) . . . . . . . . . . . . . . . . . . 50,788 93,685
Stock Option Plan(1) . . . . . . . . . . . . . . . . . . . . . . . . 989,663 843,147
------------ ----------
Weighted average number of shares outstanding adjusted
for common stock equivalents . . . . . . . . . . . . . . . . . . . 46,077,987 45,861,061
============ ==========
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,450 29,310
============ ==========
Fully diluted earnings per share . . . . . . . . . . . . . . . . . . . $ .83 .64
============ ==========
- - ----------
<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>
25
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF CHARTER ONE FINANCIAL, INC. AND
SUBSIDIARIES AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 136,928
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 99,561
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 346,369
<INVESTMENTS-CARRYING> 5,059,293
<INVESTMENTS-MARKET> 5,094,929
<LOANS> 7,118,691
<ALLOWANCE> 65,218
<TOTAL-ASSETS> 13,173,988
<DEPOSITS> 7,010,797
<SHORT-TERM> 150,297
<LIABILITIES-OTHER> 194,383
<LONG-TERM> 4,909,078
<COMMON> 451
0
0
<OTHER-SE> 908,982
<TOTAL-LIABILITIES-AND-EQUITY> 13,173,988
<INTEREST-LOAN> 142,191
<INTEREST-INVEST> 95,379
<INTEREST-OTHER> 5,478
<INTEREST-TOTAL> 243,048
<INTEREST-DEPOSIT> 79,528
<INTEREST-EXPENSE> 151,046
<INTEREST-INCOME-NET> 92,002
<LOAN-LOSSES> 1,000
<SECURITIES-GAINS> 57
<EXPENSE-OTHER> 44,583
<INCOME-PRETAX> 58,258
<INCOME-PRE-EXTRAORDINARY> 58,258
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,450
<EPS-PRIMARY> .84
<EPS-DILUTED> .83
<YIELD-ACTUAL> 2.94
<LOANS-NON> 21,074
<LOANS-PAST> 4,192
<LOANS-TROUBLED> 18,794
<LOANS-PROBLEM> 28,600
<ALLOWANCE-OPEN> 64,436
<CHARGE-OFFS> 350
<RECOVERIES> 132
<ALLOWANCE-CLOSE> 65,218
<ALLOWANCE-DOMESTIC> 65,218
<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>
JANUARY 31, 1996 FEBRUARY 29, 1996 MARCH 31, 1996
---------------- ----------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total assets . . . . . . . . . . . . . . . . . . . . . $ 12,737,163 12,905,345 13,173,987
Investment securities . . . . . . . . . . . . . . . . . 317,520 352,027 317,414
Mortgage-backed securities . . . . . . . . . . . . . . 5,014,347 5,029,800 5,088,248
Loans receivable . . . . . . . . . . . . . . . . . . . 6,769,259 6,882,847 7,053,473
Deposits . . . . . . . . . . . . . . . . . . . . . . . 6,932,163 6,924,065 7,010,797
Borrowings . . . . . . . . . . . . . . . . . . . . . . 4,724,110 4,888,884 5,059,375
Portfolio of loans serviced for others . . . . . . . . 1,214,377 1,196,012 1,173,550
Number of employees (FTEs) . . . . . . . . . . . . . . 2,369 2,426 2,360
Deposits:
Checking . . . . . . . . . . . . . . . . . . . . . . $ 661,589 678,351 742,259
Savings . . . . . . . . . . . . . . . . . . . . . . . 993,385 988,072 889,608
MMDA . . . . . . . . . . . . . . . . . . . . . . . . 826,432 832,739 958,856
Certificates:
6 month or less . . . . . . . . . . . . . . . . . . 661,248 671,731 646,275
6 month to 1 year . . . . . . . . . . . . . . . . . 1,762,175 1,743,780 1,191,079
Jumbo . . . . . . . . . . . . . . . . . . . . . . . 439,313 396,701 321,916
Other . . . . . . . . . . . . . . . . . . . . . . . 1,588,021 1,612,691 2,260,804
------------ --------- ---------
Total CDS . . . . . . . . . . . . . . . . . . . . 4,450,757 4,424,903 4,420,074
------------ --------- ---------
Total deposits . . . . . . . . . . . . . . . . $ 6,932,163 6,924,065 7,010,797
============ ========= =========
Borrowings:
Reverse repurchase agreements . . . . . . . . . . . . $ 1,352,772 1,536,386 1,509,641
FHLB advances . . . . . . . . . . . . . . . . . . . . 3,162,953 3,142,776 3,337,623
Other . . . . . . . . . . . . . . . . . . . . . . . . 208,385 209,722 212,111
------------ --------- ---------
Total borrowings . . . . . . . . . . . . . . . . . $ 4,724,110 4,888,884 5,059,375
============ ========= =========
Weighted average rates at period end:
Loans . . . . . . . . . . . . . . . . . . . . . . . . 8.25% 8.24% 8.17%
MBS . . . . . . . . . . . . . . . . . . . . . . . . . 7.24 7.26 7.22
Loans and MBS . . . . . . . . . . . . . . . . . . . 7.82 7.83 7.77
Other investments . . . . . . . . . . . . . . . . . . 6.88 6.78 6.60
Total interest-earning assets . . . . . . . . . . . 7.78 7.78 7.72
Deposits . . . . . . . . . . . . . . . . . . . . . . 4.61 4.56 4.46
Borrowings . . . . . . . . . . . . . . . . . . . . . 5.90 5.86 5.64
Total interest-bearing liabilities . . . . . . . . 5.13 5.03 4.96
Interest rate spread . . . . . . . . . . . . . . . . . 2.65 2.75 2.76
Net yield on interest-earning assets . . . . . . . . . 2.96% 3.06% 3.04%
Nonperforming assets and allowance for loss:
Nonperforming loans . . . . . . . . . . . . . . . . . $ 24,189* 24,189* 25,266
Restructured loans . . . . . . . . . . . . . . . . . 18,835* 18,835* 18,794
REO and other repossessed assets . . . . . . . . . . 12,119 11,300 11,301
------------ --------- ---------
Total nonperforming assets . . . . . . . . . . . . $ 55,143 54,324 55,361
============ ========= =========
Allowance for loss . . . . . . . . . . . . . . . . . $ 64,760 64,987 65,218
<FN>
* At December 31, 1995
</TABLE>
26
<PAGE> 2
SELECTED ACTIVITY FOR THE MONTH AND QUARTER
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
JANUARY 31, 1996 FEBRUARY 29, 1996 MARCH 31, 1996 MARCH 31, 1996
---------------- ----------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan and MBS activity:
Mortgage loan originations:
One-to-four family . . . . . . $ 140,089 181,595 268,005 589,689
Multifamily . . . . . . . . . . 5,909 - 9,593 15,502
Commercial real estate . . . . 4,885 3,840 449 9,174
Consumer loan originations . . 21,750 33,939 45,402 101,091
------------- -------- -------- ------
Total originations . . . . . 172,633 219,374 323,449 715,456
Loans sold . . . . . . . . . . . 6,431 3,878 3,859 14,168
MBS purchased . . . . . . . . . . 91,326 86,311 135,839 313,476
MBS sold . . . . . . . . . . . . 326,125 - - 326,125
Average yield on residential loans
originated (excludes impact of
fees and costs associated with
origination) . . . . . . . . . . 7.21% 7.37% 7.40% 7.31%
Deposit portfolio activity:
Net increase (decrease):
Checking . . . . . . . . . . . $ (72,372) 16,762 63,908 8,298
Savings . . . . . . . . . . . . (13,793) (5,313) (98,464) (117,570)
Money market . . . . . . . . . (2,655) 6,307 126,117 129,769
Certificates:
6 month or less . . . . . . . 10,533 10,483 (25,456) (4,440)
6 month to 1 year . . . . . . 7,751 (18,395) (552,701) (563,345)
Jumbo . . . . . . . . . . . . (30,761) (42,612) (74,785) (148,158)
Other . . . . . . . . . . . . 20,969 24,670 648,113 693,752
------------- -------- -------- ------
Total CDS . . . . . . . . . 8,492 (25,854) (4,829) (22,191)
Net increase (decrease) in
deposits . . . . . . . . . . . . $ (80,328) (8,098) 86,732 (1,694)
============= ======== ======== ======
Interest credited to deposits
included above . . . . . . . . . $ 15,670 13,937 15,415 45,022
Total increase (decrease) as a
percentage of beginning
deposits . . . . . . . . . . . . (1.15)% (.12)% 1.25% (.02)%
</TABLE>
27
