<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 June 30, 1997
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 4, 1997 was 46,221,061.
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<PAGE> 2
TABLE OF CONTENTS
ITEM
NUMBER PAGE
- --------- -----
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Financial Condition --
June 30, 1997 and December 31, 1996......................... 1
Consolidated Statements of Income --
Three and six months ended June 30, 1997 and 1996........... 2
Consolidated Statement of Changes in Shareholders' Equity --
Six months ended June 30, 1997.............................. 3
Consolidated Statements of Cash Flows --
Six months ended June 30, 1997 and 1996..................... 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
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, 1997 DECEMBER 31, 1996
--------------- ------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
ASSETS
Cash and deposits with banks.......................................... $ 120,378 152,301
Federal funds sold and other.......................................... 85,000 118,003
------------ ------------
Total cash and cash equivalents.................................. 205,378 270,304
Investment securities available for sale, at fair value............... 359,880 243,632
Mortgage-backed securities:
Available for sale, at fair value................................... 1,071,230 1,070,705
Held to maturity (fair value of $3,381,893 and $3,652,547).......... 3,341,684 3,633,369
Loans and leases, net................................................. 9,015,824 8,100,342
Federal Home Loan Bank stock.......................................... 235,686 215,815
Premises and equipment................................................ 120,749 114,145
Accrued interest receivable........................................... 83,207 77,193
Equipment on operating leases......................................... 16,954 22,599
Real estate owned..................................................... 5,196 7,337
Goodwill.............................................................. 62,163 64,496
Other assets.......................................................... 42,127 73,904
------------ ------------
Total assets..................................................... $ 14,560,078 13,893,841
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Checking accounts................................................... $ 899,042 859,438
Money market accounts............................................... 1,344,987 1,344,973
Savings accounts.................................................... 827,404 868,361
Certificates of deposit............................................. 4,706,142 4,768,425
------------ ------------
Total deposits................................................... 7,777,575 7,841,197
Federal Home Loan Bank advances....................................... 3,648,416 3,194,333
Reverse repurchase agreements......................................... 1,698,990 1,549,778
Other borrowings...................................................... 212,761 211,180
Advance payments by borrowers for taxes and insurance................. 51,944 39,346
Accrued interest payable.............................................. 41,870 35,298
Accrued expenses and other liabilities................................ 154,911 100,985
------------ ------------
Total liabilities................................................ 13,586,467 12,972,117
------------ ------------
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; 47,472,486 shares issued.............................. 475 475
Additional paid-in capital.......................................... 321,991 321,991
Retained earnings................................................... 698,011 637,356
Less 1,286,520 and 1,029,763 shares of common stock held in
treasury at cost.................................................. (52,726) (39,615)
Net unrealized gain on securities, net of tax expense
of $3,158 and $812................................................ 5,860 1,517
------------ ------------
Total shareholders' equity................................... 973,611 921,724
------------ ------------
Total liabilities and shareholders' equity................... $ 14,560,078 13,893,841
============ ============
</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,
-------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans and leases..................................... $ 171,976 150,144 335,958 292,335
Mortgage-backed securities:
Available for sale................................. 18,556 19,352 36,737 39,909
Held to maturity................................... 61,299 72,266 125,140 141,316
Investment securities available for sale............. 5,629 5,278 10,348 11,050
Other interest-earning assets........................ 5,424 4,640 10,494 10,118
------------ ------------ ----------- ------------
Total interest income............................. 262,884 251,680 518,677 494,728
------------ ------------ ----------- ------------
INTEREST EXPENSE:
Deposits............................................. 85,924 76,269 170,968 155,797
Federal Home Loan Bank advances...................... 50,129 45,990 95,055 91,117
Other borrowings..................................... 28,864 30,514 57,161 56,905
------------ ------------ ----------- ------------
Total interest expense............................ 164,917 152,773 323,184 303,819
------------ ------------ ----------- ------------
Net interest income............................... 97,967 98,907 195,493 190,909
Provision for loan and lease losses.................... 260 1,000 480 2,000
------------ ------------ ----------- ------------
Net interest income after provision
for loan and lease losses....................... 97,707 97,907 195,013 188,909
------------ ------------ ----------- ------------
OTHER INCOME:
Loan servicing fees.................................. 2,792 2,763 5,366 5,022
Service fees and other charges....................... 12,987 8,235 23,307 15,194
Leasing operations................................... 1,445 1,719 3,533 3,507
Net gains (losses):
Loans.............................................. 316 121 439 311
Mortgage-backed securities......................... - (339) - (282)
Investment securities.............................. - (2,025) - (2,025)
Other gains........................................ 15 128 (21) 458
Other................................................ 332 (37) 444 219
------------ ------------ ----------- ------------
Total other income................................ 17,887 10,565 33,068 22,404
------------ ------------ ----------- ------------
ADMINISTRATIVE EXPENSES:
Compensation and employee benefits................... 23,359 22,613 47,419 44,650
Net occupancy and equipment.......................... 7,449 6,380 14,782 12,784
Federal deposit insurance premiums................... 1,292 4,094 2,551 8,083
Amortization of goodwill............................. 1,114 190 2,227 379
Other administrative expenses........................ 14,114 12,787 27,046 24,751
------------ ------------ ----------- ------------
Total administrative expenses..................... 47,328 46,064 94,025 90,647
------------ ------------ ----------- ------------
Income before federal income taxes..................... 68,266 62,408 134,056 120,666
Federal income taxes................................... 22,535 21,038 44,239 40,846
------------ ------------ ----------- ------------
Net income........................................ $ 45,731 41,370 89,817 79,820
============ ============ =========== ============
Primary earnings per common and common equivalent
share(1)............................................. $ .96 .86 1.89 1.65
============ ============ =========== ============
Average common and common equivalent
shares outstanding(1)................................ 47,501,523 48,343,411 47,563,623 48,302,064
============ ============ =========== ============
Cash dividends declared per share(1)................... $ .25 .21 .48 .40
============ ============ =========== ============
<FN>
- ---------------------------
(1) Restated to reflect the 5% stock dividend issued September 30, 1996.
</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 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, 1997........ $ 475 321,991 637,356 (39,615) 1,517 921,724
Purchase of 535,000 shares
of treasury stock........... - - - (23,999) - (23,999)
Treasury stock reissued in
connection with stock
options exercised, 278,243
shares...................... - - (6,955) 10,888 - 3,933
Dividends paid ($.48
per share).................. - - (22,207) - - (22,207)
Change in net unrealized gain
on securities, net of tax
expense..................... - - - - 4,343 4,343
Net income.................... - - 89,817 - - 89,817
---- --------- --------- -------- ------ ---------
Balance, June 30, 1997.......... $ 475 321,991 698,011 (52,726) 5,860 973,611
==== ========= ========= ======== ====== =========
</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,
----------------------------
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................................................... $ 89,817 79,820
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses.............................................. 480 2,000
Net gains (losses)............................................................... (418) 1,538
Accretion of discounts, amortization of premiums,
amortization of goodwill and depreciation, net.................................. 14,471 7,305
Origination of real estate loans held for sale................................... (17,777) (17,467)
Proceeds from sale of loans held for sale........................................ 18,216 17,778
Other............................................................................ 80,630 30,876
---------- -----------
Net cash provided by operating activities...................................... 185,419 121,850
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net principal disbursed on loans and leases........................................ (913,864) (1,023,020)
Proceeds from principal repayments and maturities of:
Mortgage-backed securities held to maturity...................................... 291,992 423,325
Mortgage-backed securities available for sale.................................... 3,642 10,061
Investment securities available for sale......................................... 10,166 123,238
Sales of mortgage-backed securities available for sale............................. - 323,662
Sales of investment securities available for sale.................................. - 77,975
Purchases of:
Mortgage-backed securities held to maturity...................................... - (569,577)
Investment securities available for sale......................................... (126,000) (141,525)
Federal Home Loan Bank stock..................................................... (15,391) (15,819)
Equipment on operating lease..................................................... (3,201) (4,570)
Net cash and cash equivalents received in connection with branch acquisition....... - 731,170
Other.............................................................................. (9,576) (3,758)
---------- -----------
Net cash used in investing activities............................................ (762,232) (68,838)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings................................... 249,144 (741,954)
Proceeds from long-term borrowings................................................. 1,059,845 2,161,133
Repayments of long-term borrowings................................................. (704,143) (1,879,735)
Increase (decrease) in deposits.................................................... (63,284) 8,638
Increase in advance payments by borrowers for taxes and
insurance......................................................................... 12,598 18,048
Payment of dividends on common stock............................................... (22,207) (19,380)
Purchase of treasury stock, net of options exercised............................... (20,066) (11,166)
Common shares issued............................................................... - 1,331
---------- -----------
Net cash provided by (used in) financing activities.................................. 511,887 (463,085)
---------- -----------
Net decrease in cash and cash equivalents............................................ (64,926) (410,073)
Cash and cash equivalents, beginning of the period................................... 270,304 658,371
---------- -----------
Cash and cash equivalents, end of the period......................................... $ 205,378 248,298
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on deposits and borrowings.................................. $ 316,950 326,291
Cash paid for income taxes......................................................... 25,000 29,000
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Transfers from loans to real estate owned.......................................... 1,130 1,192
Loans exchanged for mortgage-backed securities..................................... - 510,435
</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") Notice of 1997
Annual Meeting, Proxy Statement and Annual Financial Report. 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. In April 1997, the boards of directors of Charter One Financial, Inc. and
Haverfield Corporation, the holding company of Home Bank, F.S.B. entered
into a definitive agreement to merge in a stock-for-stock exchange. Home
Bank, headquartered in Cleveland, Ohio, is a federally chartered savings
and loan with $346 million in assets ($271 million in deposits) and 10
branch offices throughout the Cleveland area.
Terms of the agreement call for the tax-free exchange of $27.00 in Charter
One common stock for each of Haverfield's common shares or a total
consideration of approximately $53.7 million. The price will stay fixed at
$27.00 per Haverfield share if Charter One's average stock price remains
between $41.09 and $55.60 per share during a 20-day pricing period ending
five business days before closing the transaction. The merger, which would
be accounted for as a purchase, is expected to close near the end of the
third quarter of 1997. Already approved by the boards of directors of both
companies, the transaction requires the approvals of the Office of Thrift
Supervision and Haverfield shareholders.
3. In May 1997, the boards of directors of Charter One Financial, Inc. and
RCSB Financial, Inc., the holding company of Rochester Community Savings
Bank, entered into a definitive agreement to enter into a strategic
alliance through a stock-for-stock exchange. Rochester Community Savings
Bank, headquartered in Rochester, New York, is a state-chartered savings
bank with $4 billion in assets ($2.4 billion in deposits) and 38 branch
offices in Rochester and Buffalo.
Terms of the agreement call for a tax-free exchange of shares at a fixed
exchange ratio of .91 shares in Charter One common stock for each of RCSB's
common shares. Based on current RCSB shares, it is expected that
approximately 13.6 million new shares of Charter One stock will be issued
in conjunction with the merger, bringing the initial value of the
transaction to $635 million and the pro forma market capitalization of the
combined company to $2.9 billion. The merger, which would be accounted for
as a purchase, is expected to close in the fourth quarter of 1997. Already
approved by the boards of directors of both companies, the transaction
requires the approvals of the Office of Thrift Supervision and each
company's shareholders. In addition, RCSB has granted Charter One an option
to purchase shares equal to 19.9% of RCSB's outstanding common stock under
certain conditions.
4. On January 1, 1997 the Company adopted SFAS No. 125. SFAS No. 125 amends
portions of SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," amends and extends to all servicing assets and
liabilities the accounting standards for mortgage servicing rights now in
SFAS No. 65, and supersedes SFAS No. 122. SFAS No. 125 provides consistent
standards for distinguishing transfers of financial assets that are sales
from transfers that are secured borrowings. Those standards are based upon
consistent application of a financial components approach that focuses on
control. The statement also defines accounting treatment for servicing
assets and other retained interests in the assets that are transferred.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996 and is
to be applied prospectively. The adoption of this statement has not had a
material effect on the Company's financial condition or results of
operations. The FASB has recently issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125," that
defers the effective date of certain provisions of SFAS No. 125 related to
secured borrowings and collateral, repurchase agreements, dollar rolls,
securities lending, and similar transactions until after December 31, 1997.
Management has not completed the process of evaluating this statement and
therefore has not determined the impact, if any, that adopting this
statement will have on the financial position and results of operations.
5
<PAGE> 8
5. In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This
statement establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock. This
statement simplifies the standards for computing earnings per share
previously found in Accounting Principles Board Opinion No. 15, "Earnings
Per Share," and makes them comparable to international EPS standards. It
replaces the presentation of primary EPS with a presentation of basic EPS.
It also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures. This
Statement is effective for financial statements for both interim and annual
periods ending after December 15, 1997.
The following presentation illustrates pro forma basic and diluted earnings
per share based on the provisions of SFAS No. 128:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding used in basic earnings
per share calculation.......................... 46,215,423 47,349,145 46,269,971 47,314,545
Add common stock equivalents for shares
issuable under Stock Option Plan(1)............ 1,236,955 946,475 1,244,491 938,838
----------- ------------ ----------- -----------
Weighted average number of shares
outstanding adjusted for common stock
equivalent..................................... 47,452,378 48,295,620 47,514,462 48,253,383
=========== ============ =========== ===========
Net income...................................... $ 45,731 41,370 89,817 79,820
Basic earnings per share........................ .99 .87 1.94 1.69
Diluted earnings per share...................... .96 .86 1.89 1.65
<FN>
Disclosure of earnings per share calculated in accordance with Accounting
Principles Board Opinion No. 15, "Earnings Per Share" is contained in
Exhibit 11.
---------------------------
(1) Additional shares issuable were derived under the "treasury stock
method" using the average market price during the period.
</TABLE>
6. In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." This statement establishes standards for
disclosing information about an entity's capital structure. It supersedes
specific disclosure requirements of APB Opinions No. 10, "Omnibus
Opinion-1966," and No. 15, "Earnings Per Share," and FASB Statement No. 47,
"Disclosure of Long-Term Obligations," and consolidates them in this
statement for ease of retrieval and for greater visibility to nonpublic
entities. This statement is effective for financial statements for periods
ending after December 15, 1997. It contains no changes in disclosure
requirements for entities that were previously subject to the requirements
of Opinions 10 and 15 and Statement 47 and, therefore, is not expected to
have a significant impact on the financial condition or results of
operations of the Company.
7. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, losses)
in a full set of general-purpose financial statements. This statement is
effective for fiscal years beginning after December 15, 1997.
8. Certain items in the consolidated financial statements for 1996 have been
reclassified to conform to the 1997 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 Michigan Bancorp, Inc. which owns all of the outstanding
capital stock 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 175 branch locations: 95 branches in Ohio operating under the name
Charter One Bank and 80 branches in Michigan under the name First Federal of
Michigan ("First Federal").
RESULTS OF OPERATIONS
PERFORMANCE OVERVIEW
The Company reported net income of $45.7 million, or $0.96 per share, for the
three months ended June 30, 1997. This was a $4.4 million, or 10.5% increase
over the net income for the second quarter of 1997 which was $41.4 million, or
$0.86 per share. The primary reason for this improvement was due to a $4.8
million, or 57.7%, increase in service fees and other charges. In addition, the
Company experienced increases in gains on sale and lower deposit insurance
premium expense which was partially offset by increases in administrative
expenses.
Net income for the six months ended June 30, 1997 was $89.8 million, or $1.89
per share, as compared to $79.8 million, or $1.65 per share, for the 1996
period. This $10.0 million, or 12.5%, increase in net income was primarily
attributable to increases in recurring fee income, net interest income and lower
deposit insurance premiums which were partially offset by increases in
administrative expenses.
QUARTERLY EARNINGS SUMMARY (Figure 1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
6/30/97 3/31/97 12/31/96 9/30/96 6/30/96
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net interest income..................................... $ 97,967 97,526 95,304 97,179 98,907
Provision for loan and lease losses..................... (260) (220) (1,000) (1,001) (1,000)
Other income, excluding
gains and losses...................................... 17,556 15,094 16,257 15,046 12,680
Administrative expenses, excluding
the SAIF assessment................................... (47,328) (46,697) (49,234) (47,885) (46,064)
------- ------- ------- ------- -------
Pretax core earnings................................ 67,935 65,703 61,327 63,339 64,523
Gains and losses, net................................... 331 87 3,502 (71) (2,115)
Federal deposit insurance special
assessment............................................ - - - (56,258) -
------- ------- ------- ------- -------
Income before federal income taxes.................. 68,266 65,790 64,829 7,010 62,408
Federal income taxes.................................... 22,535 21,704 21,958 1,979 21,038
------- ------- ------- ------- -------
Net income............................................ $ 45,731 44,086 42,871 5,031 41,370
======= ======= ======= ======= =======
Primary earnings per common and common
equivalent share...................................... $ .96 .93 .90 .11 .86
======= ======= ======= ======= =======
</TABLE>
The increase in earnings in the second quarter of 1997 contributed to an 18.85%
annualized return on average equity and a 1.28% annualized return on average
assets. This compares to second quarter 1996 annualized returns of 17.80% and
1.22%, respectively. These annualized returns and other selected ratios are set
forth in Figure 2.
7
<PAGE> 10
SELECTED OPERATING RATIOS (Figure 2)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ------------------
6/30/97 6/30/96 6/30/97 6/30/96
------- ------- ------- -------
<S> <C> <C> <C> <C>
Annualized returns:
Return on average assets......................................... 1.28% 1.22% 1.27% 1.21%
Return on average equity......................................... 18.85 17.80 18.61 17.55
Average equity to average assets................................. 6.79 6.88 6.84 6.87
Annualized operating ratios:
Net interest income to administrative expenses................... 207.00 214.72 207.92 210.61
Administrative expenses to average assets........................ 1.32 1.36 1.33 1.37
Efficiency ratio................................................. 40.00 41.11 40.24 42.01
</TABLE>
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.
8
<PAGE> 11
AVERAGE BALANCES, INTEREST RATES AND YIELDS/COSTS (Figure 3)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------
1997 1996
---------------------------------- --------------------------------------
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)................ $ 8,792,803 $ 171,976 7.83% $ 7,403,685 $ 150,144 8.11%
Mortgage-backed securities:
Available for sale............... 1,079,308 18,556 6.88 1,126,842 19,352 6.87
Held to maturity................. 3,397,791 61,299 7.22 4,010,236 72,266 7.21
Investment securities
available for sale................ 321,973 5,629 6.99 329,382 5,278 6.41
Other interest-earning
assets(2)......................... 312,053 5,424 6.88 283,354 4,640 6.55
----------- --------- ----------- ---------
Total interest-earning assets... 13,903,928 262,884 7.56 13,153,499 251,680 7.65
--------- ---------
Allowance for loan losses.......... (65,841) (65,576)
Noninterest-earning assets(3)...... 451,453 436,940
----------- -----------
Total assets.................. $ 14,289,540 $ 13,524,863
=========== ===========
Interest bearing liabilities(4):
Deposits:
Checking accounts................ $ 890,782 2,460 1.11 $ 746,249 2,381 1.28
Savings accounts................. 836,019 4,695 2.25 881,037 5,358 2.43
Money market accounts............ 1,360,903 11,600 3.42 968,655 7,451 3.08
Certificates of deposit.......... 4,686,807 67,169 5.75 4,391,378 61,079 5.56
----------- --------- ----------- ---------
Total deposits................. 7,774,511 85,924 4.43 6,987,319 76,269 4.37
----------- --------- ----------- ---------
FHLB advances...................... 3,452,866 50,129 5.80 3,301,927 45,990 5.57
Other borrowings................... 1,883,821 28,864 6.07 2,135,279 30,514 5.72
----------- --------- ----------- ---------
Total borrowings................ 5,336,687 78,993 5.90 5,437,206 76,504 5.63
----------- --------- ----------- ---------
Total interest-bearing
liabilities.................... 13,111,198 164,917 5.03 12,424,525 152,773 4.92
--------- ---------
Non interest-bearing liabilities... 208,005 170,463
----------- -----------
Total liabilities............... 13,319,203 12,594,988
Shareholders' equity................. 970,337 929,875
----------- -----------
Total liabilities and
shareholders' equity........... $ 14,289,540 $ 13,524,863
=========== ===========
Net interest income.................. $ 97,967 $ 98,907
========= =========
Interest rate spread................. 2.53 2.73
Net yield on average interest-
earning assets(5)................... 2.82 3.01
Average interest-earning assets
to average interest-bearing
liabilities......................... 106.05% 105.87%
<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,
--------------------------------------------------------------------------
1997 1996
---------------------------------- --------------------------------------
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)................ $ 8,562,410 $ 335,958 7.86% $ 7,147,407 $ 292,335 8.18%
Mortgage-backed securities:
Available for sale............... 1,080,936 36,737 6.80 1,144,080 39,909 6.98
Held to maturity................. 3,468,466 125,140 7.22 3,930,349 141,316 7.19
Investment securities
available for sale................ 296,958 10,348 6.97 339,309 11,050 6.51
Other interest-earning
assets(2)......................... 307,285 10,494 6.79 308,768 10,118 6.55
----------- --------- ----------- ---------
Total interest-earning assets... 13,716,055 518,677 7.57 12,869,913 494,728 7.69
--------- ---------
Allowance for loan losses.......... (65,869) (65,781)
Noninterest-earning assets(3)...... 470,889 427,864
----------- -----------
Total assets.................. $ 14,121,075 $ 13,231,996
=========== ===========
Interest bearing liabilities(4):
Deposits:
Checking accounts................ $ 874,088 4,841 1.12 $ 721,374 4,683 1.30
Savings accounts................. 844,723 9,500 2.27 930,603 11,210 2.41
Money market accounts............ 1,357,263 23,415 3.48 910,113 14,320 3.15
Certificates of deposit.......... 4,717,405 133,212 5.69 4,414,175 125,584 5.69
----------- --------- ----------- ---------
Total deposits................. 7,793,479 170,968 4.42 6,976,265 155,797 4.47
----------- --------- ----------- ---------
FHLB advances...................... 3,292,825 95,055 5.79 3,243,958 91,117 5.62
Other borrowings................... 1,894,106 57,161 6.01 1,932,251 56,905 5.89
----------- --------- ----------- ---------
Total borrowings................ 5,186,931 152,216 5.87 5,176,209 148,022 5.72
----------- --------- ----------- ---------
Total interest-bearing
liabilities.................... 12,980,410 323,184 5.00 12,152,474 303,819 5.00
--------- ---------
Non interest-bearing liabilities... 175,411 169,959
----------- -----------
Total liabilities............... 13,155,821 12,322,433
Shareholders' equity................. 965,254 909,563
----------- -----------
Total liabilities and
shareholders' equity........... $ 14,121,075 $ 13,231,996
=========== ===========
Net interest income.................. $ 195,493 $ 190,909
========= =========
Interest rate spread................. 2.57 2.69
Net yield on average interest-
earning assets(5)................... 2.85 2.97
Average interest-earning assets
to average interest-bearing
liabilities......................... 105.67% 105.90%
<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,
------------------------------------ -----------------------------------
1997 V. 1996 1997 V. 1996
------------------------------------ -----------------------------------
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.................. $ (5,228) 27,060 21,832 (11,413) 55,036 43,623
Mortgage-backed
securities:
Available for sale.............. 21 (817) (796) (1,008) (2,164) (3,172)
Held to maturity................ 82 (11,049) (10,967) 490 (16,666) (16,176)
Investment securities
available for sale............... 466 (115) 351 898 (1,600) (702)
Other interest-earning
assets........................... 295 489 784 424 (48) 376
-------- -------- ------- -------- -------- --------
Total......................... (4,364) 15,568 11,204 (10,609) 34,558 23,949
-------- -------- ------- -------- -------- --------
Interest expense:
Checking accounts................. (180) 259 79 (369) 527 158
Savings accounts.................. (399) (264) (663) (719) (991) (1,710)
Money market accounts............. 877 3,272 4,149 1,503 7,592 9,095
Certificates of deposit........... 1,898 4,192 6,090 (936) 8,564 7,628
Federal Home Loan
Bank advances ................... 1,543 2,596 4,139 2,546 1,392 3,938
Other borrowings.................. 2,032 (3,682) (1,650) 1,371 (1,115) 256
-------- -------- ------- -------- -------- --------
Total......................... 5,771 6,373 12,144 3,396 15,969 19,365
-------- -------- ------- -------- -------- --------
Change in net interest
income............................. $ (10,135) 9,195 (940) (14,005) 18,589 4,584
======== ======== ======= ======== ======== ========
</TABLE>
Net interest income for the second quarter of 1997 was $98.0 million, a decrease
of $940,000 or 1.0%, as compared to the second quarter of 1996. The primary
reason for this decrease was due to a narrowing of interest rate spreads. The
yield on interest-earning assets decreased to 7.56% for the three months ended
June 30, 1997 as compared to 7.65% for the second quarter of 1996, primarily due
to the decline in the yield on loans. New loan volumes were at lower rates than
the average yield on the loan portfolio due to lower market interest rates and
increases in variable rate loan production. The cost of the interest-bearing
liabilities was 11 basis points higher in the second quarter of 1997 as compared
to the same period in 1996. The increased cost of interest-bearing liabilities
coupled with the decline in the yield on interest-earning assets caused the
interest rate spread for the second quarter of 1997 to decline by 20 basis
points to 2.53%. The net yield on interest-earning assets declined by nineteen
basis points to 2.82% during the second quarter of 1997 as compared to the
second quarter of 1996. This decline caused net interest income to decrease by
$10.1 million. This decrease was almost entirely offset by higher balances of
interest-earning assets and interest-bearing liabilities. The volume increase
caused net interest income to increase by $9.2 million. While the yield on
interest-earning assets was declining, growth in interest-earning assets, mainly
loans and leases, caused interest income to increase by $15.6 million. Due to
high volumes of loan and lease originations in the second half of 1996 and the
first half of 1997, the average balance of loans and leases was $1.4 billion
higher during the second quarter of 1997 than in the same period in 1996. This
increase in the average balance of loans was the primary reason the average
balance of interest-earning assets in the second quarter of 1997 was $750.4
million higher than in the second quarter of 1996. The decrease in the remaining
components of interest-earning assets helped fund the loan and lease growth. The
primary funding for the remaining growth in the loan and lease portfolio came
from increases in interest-bearing liabilities. The average balance of
interest-bearing liabilities, primarily savings deposits, increased $787.2
million, as a result of the First Nationwide branch and deposit acquisition. On
June 28, 1996 the Bank acquired 21 branch offices and $796.7 million in deposits
in the Detroit Metropolitan area from First Nationwide Bank.
For the six months ended June 30, 1997, net interest income was $195.5 million,
an increase of $4.6 million, or 2.4%, over the comparable period in 1996. This
increase was primarily attributable to increased volumes of
11
<PAGE> 14
interest-earning assets and interest-bearing liabilities. Increases in the
average balance of loans and leases caused the average balance of
interest-earning assets to increase by $846.1 million. The average balance of
interest-bearing liabilities increased by $827.9 for the first six months of
1997 as compared to the same period in 1996. This increase was primarily due to
increases in the average balance of deposits as a result of the First Nationwide
branch and deposit acquisition at June 28, 1996. The increases in the balances
of interest-earning assets and interest-bearing liabilities caused net interest
income to increase by $18.6 million. This was partially offset by a declining
interest rate spread. The interest rate spread was 2.57% for the first six
months of 1997 as compared to 2.69% for the first six months of 1996. This
caused net interest income to decline by $14.0 million for the first half of
1997 as compared to the same period in 1996. The decline in the interest rate
spread was primarily due to the yield on interest-earning assets decreasing by
12 basis points to 7.57%. This decrease was primarily attributable to new loan
volumes coming in at rates lower than the average portfolio yield due to lower
market interest rates and increased variable-rate loan production.
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, 1997 DECEMBER 31, 1996
--------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Weighted average yield:
Loans and leases...................................................... 7.84% 7.96%
Mortgage-backed securities............................................ 7.22 7.22
Investment securities................................................. 7.00 6.89
Other interest-earning assets......................................... 7.23 7.21
Total interest-earning assets......................................... 7.61 7.66
Weighted average cost(1):
Deposits.............................................................. 4.44 4.48
Federal Home Loan Bank advances....................................... 5.87 5.81
Other borrowings...................................................... 6.19 6.15
Total interest-bearing liabilities.................................... 5.08 5.04
Interest rate spread.................................................... 2.53 2.62
Net yield on interest-earning assets.................................... 2.84 2.87
Interest-earning assets................................................. $14,180,673 $13,458,265
<FN>
- ---------------------------
(1) The costs of liabilities include the annualized effect of interest rate risk
management instruments.
</TABLE>
12
<PAGE> 15
OTHER INCOME (Figure 6)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan servicing fees........................................ $ 2,792 2,763 5,366 5,022
Service fees and other charges:
Retail deposit account service charges and fees.......... 9,840 6,077 17,634 11,653
Fees on insurance, annuity, and mutual fund sales........ 2,561 1,431 4,695 2,167
Other branch service fees................................ 558 624 869 1,164
Miscellaneous............................................ 28 103 109 210
------- ------- ------- -------
Total.................................................. 12,987 8,235 23,307 15,194
Leasing operations......................................... 1,445 1,719 3,533 3,507
Net gains:
Real estate.............................................. 138 47 78 329
Mortgage-backed securities............................... - (339) - (282)
Investment securities.................................... - (2,025) - (2,025)
Loans.................................................... 316 121 439 311
Other.................................................... (123) 81 (99) 129
------- ------- ------- -------
Total.................................................. 331 (2,115) 418 (1,538)
Other...................................................... 332 (37) 444 219
------- ------- ------- -------
Total................................................. $ 17,887 10,565 33,068 22,404
======= ======= ======= =======
</TABLE>
OTHER INCOME
Other income was $17.9 million for the second quarter of 1997 as compared to
$10.6 million for the same period in 1996. This $7.3 million, or 69.3% increase
was primarily due to increases in recurring fee income as illustrated in Figure
6 above and due to losses on investment security sales in 1996. Increases in
retail deposit account service charges and fees on insurance, annuity and mutual
fund sales were the primary reasons that service fees and other charges
increased. Retail deposit account service charges, primarily checking account
service charges, increased $3.7 million primarily due to increases in the number
of checking accounts as a result of the First Nationwide acquisition on June 28,
1996. The Bank acquired over 55,000 additional checking accounts in this
acquisition. Fees on insurance, annuity and mutual fund sales increased as a
result of expanded operations. The Bank has subsidiaries that increased the
scope of their business to include mutual fund sales late in 1995. Those
expanded operations together with introducing these products into the Michigan
market in early 1996 has resulted in higher fee income during the current
quarter as compared to the second quarter of 1996. The sale of investments in
the Company's available for sale portfolio in the second quarter of 1996 which
resulted in a net loss of $2.0 million was executed to reduce interest rate risk
and purchase higher yielding investments.
Other income was $33.1 million for the six months ended June 30, 1997 as
compared to $22.4 million for the same period in 1996. This $10.7 million, or
47.6%, increase was also primarily attributable to increases in recurring fee
income as illustrated in Figure 6 above and due to losses on investment security
sales in 1996. The reasons for these changes are the same as those discussed in
the previous paragraph relative to the quarter to quarter comparisons.
13
<PAGE> 16
ADMINISTRATIVE EXPENSES (Figure 7)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Compensation and employee benefits............................ $ 23,359 22,613 47,419 44,650
Net occupancy and equipment................................... 7,449 6,380 14,782 12,784
Federal deposit insurance premiums............................ 1,292 4,094 2,551 8,083
Amortization of goodwill...................................... 1,114 190 2,227 379
Other administrative expenses................................. 14,114 12,787 27,046 24,751
-------- -------- -------- -------
Administrative expenses..................................... $ 47,328 46,064 94,025 90,647
======== ======== ======== =======
Number of full-time equivalent employees
at end of period............................................ 2,626 2,499 2,626 2,499
Net interest income to administrative expenses................ 207.00% 214.72% 207.92% 210.61%
Administrative expenses to average assets (annualized)........ 1.32% 1.36% 1.33% 1.37%
Efficiency ratio.............................................. 40.00% 41.11% 40.24% 42.01%
</TABLE>
ADMINISTRATIVE EXPENSES
Administrative expenses were $47.3 million during the second quarter of 1997.
This is a $1.3 million, or 2.7%, increase as compared to the second quarter of
1996 which had $46.1 million in administrative expenses. These increases were
primarily due to the expansion of the Bank's branch network in 1996 and expanded
subsidiary operations. On June 28, 1996 the Bank acquired 21 offices with $796.7
million in deposits from First Nationwide Bank. Four of these offices were
closed as a result of overlapping market areas. Also, the Bank expanded
subsidiary operations relating to insurance, annuity and mutual fund sales
during 1996. The increases were partially offset by a reduction of $2.8 million
in the federal deposit insurance premium expense. This reduction was due to the
Federal Deposit Insurance Corporation reducing the premium rate to 6.5 basis
points per $100 in deposits as a result of the Savings Association Insurance
Fund recapitalization in 1996.
Administrative expenses were $94.0 million for the six months ended June 30,
1997. This is a $3.4 million, or 3.7%, increase as compared to the same period
in 1996 which had $90.6 million in administrative expenses. These increases were
also primarily due to the expansion of the Bank's branch network in 1996 and
expanded subsidiary operations partially offset by lower federal deposit
insurance premiums. The reasons for these changes are the same as those
discussed in the previous paragraph relative to the quarter to quarter
comparisons.
While the dollar level of expenses increased, those increases were consistent
with the expanded operations of the Bank and its subsidiaries. The ratio of
administrative expenses to average assets was 1.32% for the second quarter of
1997 and 1.33% for the first six months of 1997. This compares favorably to the
1996 percentages of 1.36% and 1.37% for the second quarter and for the first six
months of 1996, respectively. Also, the Company's efficiency ratio of 40.00% for
the second quarter of 1997 and 40.24% for the first six months of 1997 compared
favorably to the 41.11% and the 42.01% efficiency ratio during the second
quarter and first six months of 1996, respectively. Since efficiency ratios are
a calculation of administrative expenses (excluding the amortization of
goodwill) divided by net interest income plus recurring fee income, the lower
the ratio the better for the Company.
FEDERAL INCOME TAXES
Federal income tax expense was $22.5 million for the three months ending June
30, 1997. This was $1.5 million, or 7.1%, higher than the federal income tax
expense during the same period of 1996. This increase was primarily due to a
$5.9 million, or 9.4%, increase in pretax income. The effective tax rates were
33.0% for the 1997 period and 33.7% for the 1996 period.
Federal income tax expense was $44.2 million for the six months ended June 30,
1997 an increase of $3.4 million, or 8.3%, as compared to the federal income tax
expense of $40.8 million for the six months ended June 30, 1996. This increase
was also primarily attributable to a $13.4 million, or 11.1% increase in pretax
income. The effective tax rates were 33.0% for the 1997 period and 33.9% for the
1996 period.
14
<PAGE> 17
FINANCIAL CONDITION
Figure 8 sets forth information concerning the composition of the Company's
assets, liabilities and shareholders' equity at June 30, 1997 and December 31,
1996.
FINANCIAL CONDITION (Figure 8)
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
---------------------- ---------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
----------- ------ ----------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents..................... $ 205,378 1.4% $ 270,304 1.9%
Investment securities......................... 359,880 2.5 243,632 1.8
Mortgage-backed securities.................... 4,412,914 30.3 4,704,074 33.9
Loans and leases, net......................... 9,015,824 61.9 8,100,342 58.3
Other assets.................................. 566,082 3.9 575,489 4.1
----------- ------ ----------- ------
Total...................................... $ 14,560,078 100.0% $ 13,893,841 100.0%
=========== ====== =========== ======
Liabilities:
Deposits...................................... $ 7,777,575 53.4% $ 7,841,197 56.4%
Borrowings.................................... 5,560,167 38.2 4,955,291 35.7
Other liabilities............................. 248,725 1.7 175,629 1.3
Shareholders' equity.......................... 973,611 6.7 921,724 6.6
----------- ------ ----------- ------
Total...................................... $ 14,560,078 100.0% $ 13,893,841 100.0%
=========== ====== =========== ======
</TABLE>
OVERVIEW
At June 30, 1997, total assets were $14.6 billion which was $660.1 million
higher than at December 31, 1996. This increase was primarily the result of
increases in the balances of loans and leases. The loan and lease portfolio grew
by $915.5 million to $9.0 billion at June 30, 1997, funded by reductions of cash
and cash equivalents and mortgage-backed securities along with increased
borrowing levels. The Company's loan and lease portfolio is growing due to the
Bank's ability to originate new loans and leases at levels that exceed
repayments as illustrated in Figure 10.
LOANS AND LEASES
COMPOSITION OF LOANS AND LEASES(Figure 9)
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
--------------------- --------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
---------- ------ ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate:
One-to-four family..................................... $ 6,672,944 74.0% $ 6,072,927 75.0%
Multifamily............................................ 286,060 3.2 290,195 3.6
Commercial............................................. 347,417 4.0 348,787 4.4
Construction........................................... 345,081 3.8 302,405 3.7
---------- ------ ---------- -----
Total real estate................................... 7,651,502 85.0 7,014,314 86.7
Consumer................................................. 1,128,756 12.4 929,204 11.4
Leases................................................... 310,337 3.4 251,133 3.1
Business................................................. 131,189 1.5 100,302 1.2
---------- ------ ---------- -----
Total loans and leases................................ 9,221,784 102.3 8,294,953 102.4
Less net items........................................... 205,960 2.3 194,611 2.4
---------- ------ ---------- -----
Loans and leases, net............................... $ 9,015,824 100.0% $ 8,100,342 100.0%
========== ====== ========== =====
</TABLE>
15
<PAGE> 18
LOAN AND LEASE ACTIVITY (Figure 10)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Originations:
Real estate:
Permanent:
One-to-four family................................. $ 570,192 784,231 988,530 1,326,599
Multifamily........................................ 12,720 4,570 17,289 20,072
Commercial......................................... 23,511 37,940 38,091 46,114
---------- ----------- ----------- ----------
Total permanent.................................. 606,423 826,741 1,043,910 1,392,785
---------- ----------- ----------- ----------
Construction:
One-to-four family................................. 117,474 125,082 176,087 172,403
Multifamily........................................ 964 150 2,364 150
Commercial......................................... 4,300 6,200 9,595 7,200
---------- ----------- ----------- ----------
Total construction............................... 122,738 131,432 188,046 179,753
---------- ----------- ----------- ----------
Total real estate loans originated............. 729,161 958,173 1,231,956 1,572,538
---------- ----------- ----------- ----------
Consumer line of credit draws........................ 79,588 43,276 140,198 82,859
Consumer............................................. 157,668 158,831 249,236 259,922
Business line of credit draws........................ 28,058 18,202 43,834 36,399
Business............................................. 17,690 16,706 33,351 23,310
Leases(1)............................................ 120,131 37,229 187,731 69,475
---------- ----------- ----------- ----------
Total loans and leases originated.............. 1,132,296 1,232,417 1,886,306 2,044,503
---------- ----------- ----------- ----------
Sales and principal reductions:
Loans sold............................................. 10,994 3,299 17,777 17,467
Loans exchanged for MBS................................ - 510,435 - 510,435
Principal reductions................................... 542,164 540,718 941,699 974,982
---------- ----------- ----------- ----------
Total sales and principal reductions............. 553,158 1,054,452 959,476 1,502,884
---------- ----------- ----------- ----------
Increase before net items...................... $ 579,138 177,965 926,830 541,619
========== =========== =========== ==========
<FN>
- ---------------------------
(1) Not included herein are $1.5 and $2.1 million in operating leases originated during the three months ended June 30, 1997 and
1996, respectively and $3.2 million and $4.1 million for the six months ended June 30, 1997 and 1996.
</TABLE>
16
<PAGE> 19
INVESTMENT SECURITIES
The entire investment securities portfolio was classified as available for sale
at both June 30, 1997 and December 31, 1996. Figure 11 summarizes the fair
values of the portfolio at those dates.
INVESTMENT SECURITIES PORTFOLIO (Figure 11)
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
---------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. Treasury and agency securities.................................... $ 352,869 238,135
Corporate notes and commercial paper................................... 5,868 4,107
Other.................................................................. 1,143 1,390
-------- ---------
Total................................................................ $ 359,880 243,632
======== =========
Weighted average rate................................................ 7.00% 6.89%
======== =========
</TABLE>
MORTGAGE-BACKED SECURITIES
Figure 12 summarizes the mortgage-backed securities ("MBS") portfolios at June
30, 1997 and December 31, 1996. 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, 1997 DECEMBER 31, 1996
--------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
AVAILABLE FOR SALE
Participation certificates:
Government agency issues:
FHLMC.................................................................... $ 11,941 13,335
Collateralized mortgage obligations:
Government agency issues:
FHLMC.................................................................... 351,195 350,158
FNMA..................................................................... 264,982 264,682
Private issues............................................................. 443,112 442,530
---------- ----------
Total mortgage-backed securities available for sale...................... 1,071,230 1,070,705
---------- ----------
HELD TO MATURITY
Participation certificates:
Government agency issues:
FNMA..................................................................... 1,141,586 1,246,398
FHLMC.................................................................... 561,435 636,228
GNMA..................................................................... 173,552 188,057
Private issues............................................................. 371,903 407,564
Collateralized mortgage obligations:
Government agency issues:
FNMA..................................................................... 161,687 162,646
FHLMC.................................................................... 81,848 82,433
Private issues............................................................. 849,673 910,043
---------- ----------
Total mortgage-backed securities held to maturity...................... 3,341,684 3,633,369
---------- ----------
Total............................................................... $ 4,412,914 4,704,074
========== ==========
</TABLE>
17
<PAGE> 20
MORTGAGE-BACKED SECURITIES BY PAYMENT TYPE (Figure 13)
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------------------ -------------------------
BOOK AVERAGE BOOK AVERAGE
VALUE RATE VALUE RATE
--------- ------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Adjustable rate:
Collateralized mortgage obligations.............. $1,058,695 7.05% $ 1,056,087 6.94%
--------- -----------
Total adjustable rate.......................... 1,058,695 7.05 1,056,087 6.94
--------- -----------
Fixed rate:
Participation certificates....................... 11,941 6.03 13,335 6.03
Collateralized mortgage obligations.............. 594 5.09 1,283 5.09
--------- -----------
Total fixed rate............................... 12,535 5.98 14,618 5.94
--------- -----------
Total available for sale..................... 1,071,230 7.03 1,070,705 6.93
--------- -----------
HELD TO MATURITY
Adjustable rate:
Participation certificates....................... 918,221 7.13 1,019,324 7.16
Collateralized mortgage obligations.............. 286,758 7.40 301,866 7.23
--------- -----------
Total adjustable rate.......................... 1,204,979 7.19 1,321,190 7.18
--------- -----------
Fixed rate:
Participation certificates....................... 1,330,255 7.45 1,458,923 7.51
Collateralized mortgage obligations.............. 806,450 7.12 853,256 7.15
--------- -----------
Total fixed rate............................... 2,136,705 7.33 2,312,179 7.38
--------- -----------
Total held to maturity....................... 3,341,684 7.28 3,633,369 7.31
--------- -----------
Total mortgage-backed securities........... $4,412,914 7.22% $ 4,704,074 7.22%
========= ===========
</TABLE>
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,
-------------------------- -----------------------
1997 1996 1997 1996
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of period................................ $ 65,833 65,218 65,922 64,436
Provision for loan and lease losses......................... 260 1,000 480 2,000
Loans and leases charged off:
Mortgage.................................................. (117) (946) (343) (980)
Consumer.................................................. (116) (102) (255) (417)
Leases.................................................... - - - -
Business.................................................. (3) - (42) (1)
-------- ------- ------- -------
Total charge-offs....................................... (236) (1,048) (640) (1,398)
-------- ------- ------- -------
Recoveries:
Mortgage.................................................. 62 48 131 92
Consumer.................................................. 11 50 37 138
Leases.................................................... - - - -
Business.................................................. 5 - 5 -
-------- ------- ------- -------
Total recoveries....................................... 78 98 173 230
-------- ------- ------- -------
Net loan and lease charge-offs....................... (158) (950) (467) (1,168)
-------- ------- ------- -------
Balance, end of period...................................... $ 65,935 65,268 65,935 65,268
======== ======= ======= =======
Net charge-offs to average loans and leases (annualized) .01% .05% .01% .03%
</TABLE>
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES (Figure 15)
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage......................................................................... $ 52,921 53,133
Consumer......................................................................... 6,626 6,765
Leases........................................................................... 1,377 977
Business......................................................................... 5,011 5,047
------- --------
Total.......................................................................... $ 65,935 65,922
======= ========
Percent of loans and leases to ending loans and leases:
Mortgage....................................................................... 82.6% 84.3%
Consumer....................................................................... 12.6 11.4
Leases......................................................................... 3.4 3.1
Business....................................................................... 1.4 1.2
------- --------
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 .73% at June 30, 1997, down slightly from .81%
at December 31, 1996. Credit quality remained high, with nonperforming assets at
only .27% of total assets at June 30, 1997. Net charge-offs totaled $158,000 and
$467,000 for the three and six months ended June 30, 1997, respectively. Net
charge-offs for the comparable periods of 1996 were $950,000 and $1,168,000.
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 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.
19
<PAGE> 22
Figure 16 sets forth information concerning nonperforming assets and the
allowance for loan lease losses. At June 30, 1997, 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, 1997 DECEMBER 31, 1996
------------ -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonperforming loans and leases:
Nonaccrual loans and leases:
Mortgage loans:
One-to-four family................................................... $ 11,024 10,264
Multifamily and commercial........................................... 5,216 2,372
Construction and land................................................ 1,397 827
------- -------
Total mortgage loans............................................... 17,637 13,463
Consumer............................................................... - -
Business............................................................... 656 95
Lease financings....................................................... - -
------- -------
Total nonaccrual loans and leases.................................. 18,293 13,558
------- -------
Accruing loans and leases delinquent more than 90 days:
Mortgage loans:
One-to-four family................................................... 5,495 5,961
Multifamily and commercial........................................... - -
Construction and land................................................ - -
------- -------
Total mortgage loans............................................... 5,495 5,961
Consumer............................................................... 2,630 544
Business............................................................... 297 58
Lease financings....................................................... - -
------- -------
Total accruing 90-day delinquent loans and leases.................. 8,422 6,563
------- -------
Restructured real estate loans........................................... 8,411 15,294
------- -------
Total nonperforming loans and leases............................... 35,126 35,415
Real estate acquired through foreclosure and other....................... 4,884 7,030
------- -------
Total nonperforming assets......................................... $ 40,010 42,445
======= =======
Ratio of:
Nonperforming loans and leases to total loans and leases............... .39% .44%
Nonperforming assets to total assets................................... .27 .31
Allowance for loan and lease losses to:
Nonperforming loans and leases....................................... 187.71 186.14
Total loans and leases before allowance.............................. .73 .81
</TABLE>
Nonperforming assets at June 30, 1997 totaled $40.0 million, down from $42.4
million from December 31, 1996. The ratio of nonperforming loans to total loans
was .39% at June 30, 1997 as compared to .44% at December 31, 1996.
At June 30, 1997, there were $41.3 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. The largest of these potential problem loans is a $15.5
million loan on apartment buildings where the borrower is experiencing cash flow
deficiencies 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, 1997 and December 31, 1996,
58% and 61% of interest-bearing liabilities were in the form of deposits and 42%
and 39% were in borrowings.
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, 1997 DECEMBER 31, 1996
--------------------------------- --------------------------------
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........................ $ 575,658 1.76% 7.4% $ 558,753 1.86% 7.1%
Noninterest-bearing..................... 323,384 - 4.2 300,685 - 3.8
Savings accounts.......................... 827,404 2.24 10.6 868,361 2.42 11.1
Money market accounts..................... 1,344,987 3.35 17.3 1,344,973 3.52 17.2
Certificates of deposit................... 4,704,425 5.93 60.5 4,766,369 5.85 60.8
----------- ------ ---------- ------
Deposits.............................. 7,775,858 4.54 100.0% 7,839,141 4.56 100.0%
====== ======
Plus unamortized premium
on deposits purchased.................... 1,717 2,056
----------- ----------
Deposits, net........................ $ 7,777,575 $ 7,841,197
=========== ==========
Weighted average cost
including the annualized
effect of applicable swaps,
floors, and amortization
of deferred gains on
terminated swaps......................... 4.44% 4.48%
===== =====
</TABLE>
BORROWINGS
At June 30, 1997, 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 $5.2 billion in real estate loans and $2.4
billion in mortgage-backed securities.
21
<PAGE> 24
FEDERAL HOME LOAN BANK ADVANCES (Figure 18)
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
----------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ --------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed-rate advances........................................ $ 2,527,916 5.91% $ 1,791,332 5.99%
Variable-rate advances..................................... 1,120,500 5.79 1,403,000 5.56
---------- ----------
Advances................................................. 3,648,416 5.87 3,194,332 5.80
Unamortized premium........................................ - 1
---------- ----------
Total advances, net...................................... $ 3,648,416 $ 3,194,333
========== ==========
Weighted average cost including the annualized
effect of applicable caps and amortization of
deferred gains on terminated swaps....................... 5.87% 5.81%
===== ====
</TABLE>
The variable-rate advances reprice based upon three-month LIBOR at three-month
intervals, and included $175 million which are callable, at par, by the FHLB.
The fixed-rate advances include $200 million and $225 million maturing in 2001
and 2002, respectively, which are convertible, at the counterparty's option, to
a variable rate of three-month LIBOR, beginning in February 1999 and March 1999,
respectively, and quarterly thereafter.
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, 1997 DECEMBER 31, 1996
----------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ --------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short term............................................... $ 249,144 5.78% $ - -
Long term:
Fixed rate............................................. 1,249,846 5.62 1,374,784 5.58%
Variable rate.......................................... 200,000 5.89 174,994 5.93
---------- ----------
Weighted average cost including
amortization of fees................................... $ 1,698,990 5.68 $ 1,549,778 5.62
========== ==========
Weighted average cost including the annualized
effect of amortization of deferred gains
on terminated swaps.................................... 5.66% 5.59%
===== ====
</TABLE>
The long-term fixed-rate agreements include $370 million convertible, at the
counterparty's option, to a variable rate based on three-month LIBOR. The
agreements are convertible as follows: $120 million beginning in August 1997 and
$250 million beginning in October 1997.
INTEREST RATE RISK MANAGEMENT
The company utilizes various types of interest rate contracts in managing its
interest rate risk on certain of its deposits. 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 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.
22
<PAGE> 25
INTEREST RATE SWAPS (Figure 20)
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------------------------------ ------------------------------------
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> <C> <C>
Fixed payment and variable
receipt maturing in 1999.......... $ 100,000 5.63%(1) 10.09% $ 100,000 5.77%(1) 10.09%
======== ========
Variable payment and fixed receipt:
Maturing in:
1998.......................... $ 55,000 6.06% 5.81% $ 115,000 6.40% 5.53%
1999.......................... 90,000 6.62 5.82 - - -
2000.......................... 40,000 6.89 5.80 110,000 7.06 5.54
2001.......................... 235,000 7.27 5.82 140,000 7.28 5.53
-------- --------
Total....................... $ 420,000 6.94% 5.82%(1) $ 365,000 6.93% 5.53%(1)
======== ========
<FN>
- ---------------------------
(1) 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 either fixed or variable interest. At June 30,
1997, the notional principal amount outstanding was $34.9 million with a
weighted average receipt rate of 25.83% and payment rate of 5.77%. At December
31, 1996, the outstanding principal was $32.2 million with receipt and payment
rates of 19.58% and 5.59%, 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, 1997, interest received based on a 5.67% weighted
average LIBOR rate 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 $354,000 at June 30, 1997.
In the past, the Company 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. The agreements provided for receipt of interest when
three-month LIBOR exceeded an agreed upon base rate. The Company received 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. At December
31, 1996, the notional principal amount outstanding was $650 million. As of June
30, 1997, all interest rate caps had fully matured.
The cost (benefit) 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:
23
<PAGE> 26
COST OF INTEREST RATE RISK MANAGEMENT (Figure 21)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest expense (income):
Deposits................................................. $(4,397) (2,353) (8,197) (3,269)
FHLB advances............................................ (71) 420 185 919
Reverse repurchase agreements............................ (60) (537) (368) (1,173)
------ ------- ------- -------
Total.................................................. $(4,528) (2,470) (8,380) (3,523)
====== ======= ======= =======
</TABLE>
LIQUIDITY
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 securities. 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 and reverse repurchase agreements.
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, 1997 was 5.29%.
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 generally invested in federal funds sold, U.S.
Treasury and agency securities and commercial paper. 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. Because the Bank has a stable retail deposit base, management
believes that significant borrowings will not be necessary to maintain its
current liquidity position.
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, 1997,
the Bank and its subsidiaries had outstanding commitments to originate loans and
leases of $696.8 million, unfunded lines of consumer credit totaling $507.9
million (a significant portion of which normally remains undrawn) and unfunded
lines of commercial (business loans) credit totaling $20.8 million. Outstanding
letters of credit totaled $15.1 million as of June 30, 1997. Certificates of
deposit scheduled to mature in one year or less at June 30, 1997 totaled $2.2
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 June 30, 1997, the Bank had $1.9 billion of advances from the FHLB
and $249 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 with the FHLB and investment banking firms to meet any need
for replacement borrowings.
24
<PAGE> 27
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 mandatory, and possibly additional discretionary, 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 and the regulatory framework for prompt
corrective action that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting 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 regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total risk-based,
Tier 1 risk-based, Tier 1 leverage and tangible capital as set forth in the
tables below.
REGULATORY CAPITAL (Figure 22)
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-------------------------------------------------------------------
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- -------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets).......... $ 845,746 10.59% $ 638,932 8.0% $ 798,665 10.0%
Tier 1 capital (to risk-weighted assets)......... 784,132 9.82 N/A N/A 479,199 6.0
Tier 1 capital (to adjusted tangible assets)..... 784,132 5.36 438,918 3.0 731,530 5.0
Tangible capital (to adjusted tangible assets)... 784,132 5.36 219,459 1.5 N/A N/A
<CAPTION>
AS OF DECEMBER 31, 1996
-------------------------------------------------------------------
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- -------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets).......... $ 741,904 10.62% $559,080 8.0% $698,850 10.0%
Tier 1 capital (to risk-weighted assets)......... 679,967 9.73 N/A N/A 419,310 6.0
Tier 1 capital (to adjusted tangible assets)..... 679,967 5.00 407,700 3.0 679,500 5.0
Tangible capital (to adjusted tangible assets)... 679,967 5.00 203,850 1.5 N/A N/A
</TABLE>
As of December 31, 1996, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for Prompt Corrective Action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the table above. There are no conditions or
events since that notification that have changed the Bank's category.
Management believes, as of June 30, 1997, that the Bank meets all capital
requirements to which it is subject. Events beyond management's control, such as
fluctuations in interest rates or a 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.
25
<PAGE> 28
QUARTERLY STOCK PRICES AND DIVIDENDS (Figure 23)
<TABLE>
<CAPTION>
2ND QUARTER 1ST QUARTER 4TH QUARTER 3RD QUARTER 2ND QUARTER
1997 1997 1996 1996 1996
----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Market price of common stock(1):
High......................................... $ 54.00 50.13 44.75 40.56 36.19
Low.......................................... 42.25 41.13 38.13 32.03 29.34
Close........................................ 53.88 43.88 42.00 40.00 33.22
Dividends declared and paid.................... .25 .23 .23 .22 .21
<FN>
(1) Restated to reflect the 5% stock dividend issued September 30, 1996.
</TABLE>
On May 15, 1996, the Board of Directors of the Company authorized management to
repurchase 5% of the Company's outstanding common stock in a buyback program. As
of that date, the Company had 47,354,637 common shares outstanding (adjusted for
subsequent stock dividend). As a result of the pending merger with RCSB the
Company has rescinded its stock repurchase program. The Company had 865,458
shares remaining unpurchased.
On July 24, 1996, the Board of Directors of Charter One Financial, Inc. approved
a 5% stock dividend which was distributed September 30, 1996, to shareholders of
record on September 13, 1996.
26
<PAGE> 29
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In connection with the Annual Meeting of Shareholders of the Company held on
April 24, 1997 there were three proposals submitted to a vote of security
holders.
The first proposal concerned the election of nominees of the Board of Directors
as directors. The Board of Directors as previously reported to the Commission
was re-elected in its entirety.
Proposal two was to approve the Charter One Financial, Inc. 1997 Stock Option
and Incentive Plan. The vote was tabulated as follows:
For 35,056,238
Against 2,122,072
Abstain 331,499
Broker Non-Vote 4,139,319
------------
Total 41,649,128
============
The third proposal was to ratify the appointment by the Board of Directors of
the firm of Deloitte and Touche LLP as independent auditors of the Corporation
for the fiscal year ending December 31, 1997. The vote was tabulated as follows:
For 41,206,401
Against 218,205
Abstain 224,522
------------
Total 41,649,128
============
ITEM 5. OTHER INFORMATION
DIVIDEND
On July 16, 1997, the Directors of Charter One Financial, Inc. declared a
quarterly cash dividend of 25 cents per common share. The dividend will be
payable on August 20, 1997 to shareholders of record as of August 6, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 - Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule
Exhibit 99 - Selected Monthly Financial Highlights
(b) Reports on Form 8-K
On April 24, 1997 the Company filed an 8-K disclosing that the
boards of directors of Charter One Financial, Inc. and
Haverfield Corporation, the holding company of Home Bank,
F.S.B. entered into a definitive agreement to merge in a
stock-for-stock exchange. Home Bank, headquartered in
Cleveland, Ohio, is a federally chartered savings and loan with
$342 million in assets ($273 million in deposits) and 10 branch
offices throughout the Cleveland area.
Terms of the agreement call for the tax-free exchange of $27.00
in Charter One common stock for each of Haverfield's common
shares or a total consideration of approximately $53.7 million.
The price will stay fixed at $27.00 per Haverfield share if
Charter One's average stock price remains between $41.09 and
$55.60 per share during a 20-day pricing period ending five
business days before closing the transaction. The merger, which
would be accounted for as a pooling of interests, is expected
to close near the end of the third quarter of 1997. Already
approved by the
27
<PAGE> 30
boards of directors of both companies, the transaction requires
the approvals of the Office of Thrift Supervision and
Haverfield shareholders.
On May 21, 1997, the Company filed an 8-K disclosing that the
boards of directors of Charter One Financial, Inc. and RCSB
Financial, Inc., the holding company of Rochester Community
Savings Bank, entered into a definitive agreement to enter into
a strategic alliance through a stock-for-stock exchange.
Rochester Community Savings Bank, headquartered in Rochester,
New York, is a state-chartered savings bank with $4 billion in
assets ($2.4 billion in deposits) and 36 branch offices in
Rochester and Buffalo.
Terms of the agreement call for a tax-free exchange of shares
at a fixed exchange ratio of .91 shares in Charter One common
stock for each of RCSB's common shares. Based on current RCSB
shares, it is expected that approximately 13.6 million new
shares of Charter One stock will be issued in conjunction with
the merger, bringing the initial value of the transaction to
$635 million and the pro forma market capitalization of the
combined company to $2.9 billion. The merger, which would be
accounted for as a pooling of interests, is expected to close
in the fourth quarter of 1997. Already approved by the boards
of directors of both companies, the transaction requires the
approvals of the Office of Thrift Supervision and each
company's shareholders. In addition, RCSB has granted Charter
One an option to purchase shares equal to 19.9% of RCSB's
outstanding common stock under certain conditions.
28
<PAGE> 31
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: /s/ Robert J. Vana
---------------------------------------
Robert J. Vana
Chief Corporate Counsel and Secretary
Date: /s/ Richard W. Neu
---------------------------------------
Richard W. Neu
Executive Vice President and Chief Financial Officer
29
<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,
--------------------------- ---------------------------
1997 1996 1997 1996
---- ---- ---- ----
(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........................................ 46,215,423 47,349,145 46,269,971 47,314,545
Add common stock equivalents for shares
issuable under:
Stock Appreciation Rights Plan(1)................. 49,145 47,791 49,161 48,681
Stock Option Plan(1).............................. 1,236,955 946,475 1,244,491 938,838
------------ ----------- ----------- ------------
Weighted average number of shares outstanding
adjusted for common stock equivalents......... 47,501,523 48,343,411 47,563,623 48,302,064
============ =========== =========== ============
Net income............................................ $ 45,731 41,370 89,817 79,820
Primary earnings per share............................ $ .96 .86 1.89 1.65
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE:
Weighted average number of common shares
outstanding........................................ 46,215,351 47,349,145 46,269,935 47,324,013
Add common stock equivalents for shares
issuable under:
Stock Appreciation Rights Plan(2)................. 49,649 47,889 49,413 50,609
Stock Option Plan(2).............................. 1,483,601 977,417 1,368,813 1,008,282
------------ ----------- ----------- ------------
Weighted average number of shares outstanding
adjusted for common stock equivalents......... 47,748,601 48,374,451 47,688,161 48,382,904
============ =========== =========== ============
Net income............................................ $ 45,731 41,370 89,817 79,820
Fully diluted earnings per share...................... $ .96 .86 1.88 1.65
<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>
<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 SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 120,378
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 85,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,431,110
<INVESTMENTS-CARRYING> 3,341,684
<INVESTMENTS-MARKET> 3,381,893
<LOANS> 9,081,759
<ALLOWANCE> 65,935
<TOTAL-ASSETS> 14,560,078
<DEPOSITS> 7,777,575
<SHORT-TERM> 249,144
<LIABILITIES-OTHER> 248,725
<LONG-TERM> 5,311,023
<COMMON> 475
0
0
<OTHER-SE> 973,136
<TOTAL-LIABILITIES-AND-EQUITY> 14,560,078
<INTEREST-LOAN> 335,958
<INTEREST-INVEST> 172,225
<INTEREST-OTHER> 10,494
<INTEREST-TOTAL> 519,018
<INTEREST-DEPOSIT> 170,968
<INTEREST-EXPENSE> 323,184
<INTEREST-INCOME-NET> 195,493
<LOAN-LOSSES> 480
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 94,025
<INCOME-PRETAX> 134,056
<INCOME-PRE-EXTRAORDINARY> 134,056
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 89,817
<EPS-PRIMARY> 1.89
<EPS-DILUTED> 1.88
<YIELD-ACTUAL> 2.85
<LOANS-NON> 18,293
<LOANS-PAST> 8,422
<LOANS-TROUBLED> 8,411
<LOANS-PROBLEM> 41,300
<ALLOWANCE-OPEN> 65,922
<CHARGE-OFFS> 640
<RECOVERIES> 173
<ALLOWANCE-CLOSE> 65,935
<ALLOWANCE-DOMESTIC> 65,935
<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>
6/30/97 5/31/97 4/30/97
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total assets...................................................... $ 14,560,078 14,476,697 14,263,303
Cash & cash equivalents........................................... 205,378 251,455 267,635
Investment securities............................................. 359,880 357,432 282,214
Mortgage-backed securities........................................ 4,412,914 4,467,818 4,519,898
Loans receivable.................................................. 9,015,824 8,835,336 8,644,835
Allowance for loss................................................ 65,935 65,879 65,760
Portfolio of loans serviced for others............................ 1,361,566 1,380,664 1,401,715
Common shares outstanding, net.................................... 46,185,966 46,214,671 46,206,521
Treasury shares................................................... 1,286,520 1,257,815 1,265,965
Deposits:
Checking........................................................ $ 899,042 929,805 851,954
Savings......................................................... 827,404 833,296 834,132
MMDA............................................................ 1,344,987 1,363,873 1,355,816
Certificates:
6 month or less............................................... 526,663 548,564 560,633
6 month to 1 year............................................. 1,438,697 1,450,617 1,491,633
Retail jumbos................................................. 231,836 239,571 240,878
Other......................................................... 2,508,946 2,437,309 2,391,254
----------- ------------ -----------
Total CDS................................................... 4,706,142 4,676,061 4,684,398
----------- ------------ -----------
Total deposits............................................ $ 7,777,575 7,803,035 7,726,300
=========== ============ ===========
Borrowings:
Reverse repurchase agreements................................... $ 1,698,990 1,623,928 1,726,398
FHLB advances................................................... 3,648,416 3,600,903 3,401,089
Other........................................................... 212,761 212,236 212,080
----------- ------------ -----------
Total borrowings.............................................. $ 5,560,167 5,437,067 5,339,567
=========== ============ ===========
Weighted average rates:
Loans........................................................... 7.84% 7.86% 7.86%
MBS............................................................. 7.22 7.22 7.19
Loans and MBS................................................. 7.64 7.64 7.64
Other investments............................................... 7.11 6.95 6.82
Total interest-earning assets................................. 7.61 7.61 7.60
Deposits........................................................ 4.44 4.41 4.40
Borrowings...................................................... 5.98 5.95 5.92
Total interest-bearing liabilities............................ 5.08 5.04 5.04
Interest rate spread.............................................. 2.53% 2.57% 2.56%
Net yield on interest-earning assets.............................. 2.84% 2.85% 2.85%
Number of employees (FTEs)........................................ 2,626 2,590 2,583
</TABLE>
<PAGE> 2
Selected Activity for the Month and Quarter
<TABLE>
<CAPTION>
ONE MONTH ENDED 3 MONTHS
---------------------------------------- ENDED
6/30/97 5/31/97 4/30/97 6/30/97
--------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan and MBS activity:
Originations:
Real Estate:
Permanent:
One-to-four family............................. $ 193,135 193,496 183,561 570,192
Multi-family................................... 1,125 - 11,595 12,720
Commercial..................................... 10,976 3,115 9,420 23,511
--------- --------- --------- ----------
Total permanent.............................. 205,236 196,611 204,576 606,423
--------- --------- --------- ----------
Construction:
One-to-four family............................. 33,450 47,051 36,973 117,474
Multi family................................... - 55 909 964
Commercial..................................... 4,300 - - 4,300
--------- --------- --------- ----------
Total construction........................... 37,750 47,106 37,882 122,738
--------- --------- --------- ----------
Total real estate loans originated......... 242,986 243,717 242,458 729,161
--------- --------- --------- ----------
Consumer line of credit draws...................... 28,214 25,958 25,416 79,588
Consumer........................................... 47,865 57,600 52,203 157,668
Business line of credit draws...................... 13,960 6,192 7,906 28,058
Lease financings................................... 85,897 27,738 6,496 120,131
Business........................................... 5,583 8,714 3,393 17,690
--------- --------- --------- ----------
Total originated................................ $ 424,505 369,919 337,872 1,132,296
========= ========= ========= ==========
Loans sold........................................... $ 3,749 3,656 3,589 10,994
Principal reductions................................. $ 229,443 147,991 164,730 542,164
Deposit portfolio activity:
Net increase (decrease):
Checking......................................... $ (30,763) 77,850 (37,888) 9,199
Savings.......................................... (5,893) (835) (8,931) (15,659)
MMDA............................................. (18,886) 8,057 (9,602) (20,431)
Certificates:
6 month or less................................ (21,901) (12,069) (12,783) (46,753)
6 month to 1 year.............................. (11,920) (41,016) (36,604) (89,540)
Retail jumbos.................................. (7,735) (1,307) 3,392 (5,650)
Other.......................................... 71,638 46,055 (10,763) 106,930
--------- --------- --------- ----------
Total CDS.................................... 30,082 (8,337) (56,758) (35,013)
--------- --------- --------- ----------
Net increase in deposits............................. $ (25,460) 76,735 (113,179) (61,904)
========= ========= ========= ==========
Interest credited to deposits included above......... $ 61,012 10,093 10,875 81,980
Total increase (decrease) as a percentage of
beginning deposits................................. (.33)% .99% (1.45)% (.79)%
</TABLE>
