<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 September 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 October 31, 1997 was 63,767,886.
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM
NUMBER PAGE
- --------- -----
PART I - FINANCIAL INFORMATION
<S> <C>
1. Financial Statements
Consolidated Statements of Financial Condition --
September 30, 1997 and December 31, 1996.................................................... 1
Consolidated Statements of Income --
Three and nine months ended September 30, 1997 and 1996..................................... 2
Consolidated Statement of Changes in Shareholders' Equity --
Nine months ended September 30, 1997........................................................ 3
Consolidated Statements of Cash Flows --
Nine months ended September 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............................................................................... 27
6. Exhibits and Reports on Form 8-K................................................................ 27
Signatures............................................................................................... 28
</TABLE>
i
<PAGE> 3
PART I - FINANCIAL CONDITION
ITEM 1. FINANCIAL STATEMENTS
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(AS RESTATED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
ASSETS
Cash and deposits with banks .................................. $ 117,104 152,301
Federal funds sold and other .................................. 72,235 118,003
------------ ------------
Total cash and cash equivalents .......................... 189,339 270,304
Investment securities available for sale, at fair value ....... 389,693 243,632
Mortgage-backed securities:
Available for sale, at fair value ........................... 1,077,974 1,070,705
Held to maturity (fair value of $3,151,150 and $3,652,547) .. 3,100,872 3,633,369
Loans and leases, net ......................................... 9,786,005 8,100,342
Federal Home Loan Bank stock .................................. 271,743 215,815
Premises and equipment ........................................ 126,699 114,145
Accrued interest receivable ................................... 81,488 77,193
Equipment on operating leases ................................. 14,451 22,599
Real estate owned ............................................. 6,399 7,337
Goodwill ...................................................... 87,466 64,496
Other assets .................................................. 64,864 73,904
------------ ------------
Total assets ............................................. $ 15,196,993 13,893,841
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Checking accounts ........................................... $ 892,270 859,438
Money market accounts ....................................... 1,375,053 1,344,973
Savings accounts ............................................ 817,517 868,361
Certificates of deposit ..................................... 4,855,956 4,768,425
------------ ------------
Total deposits ........................................... 7,940,796 7,841,197
Federal Home Loan Bank advances ............................... 3,882,648 3,194,333
Reverse repurchase agreements ................................. 1,841,670 1,549,778
Other borrowings .............................................. 215,478 211,180
Advance payments by borrowers for taxes and insurance ......... 43,098 39,346
Accrued interest payable ...................................... 54,357 35,298
Accrued expenses and other liabilities ........................ 147,016 100,985
------------ ------------
Total liabilities ........................................ 14,125,063 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; 48,422,248 and 47,472,486 shares issued ....... 484 475
Additional paid-in capital .................................. 377,543 321,991
Retained earnings ........................................... 731,940 637,356
Less 1,219,399 and 1,029,763 shares of common stock held in
treasury at cost .......................................... (49,934) (39,615)
Net unrealized gain on securities, net of tax expense
of $6,406 and $812 ........................................ 11,897 1,517
------------ ------------
Total shareholders' equity ........................... 1,071,930 921,724
------------ ------------
Total liabilities and shareholders' equity ........... $ 15,196,993 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
(AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans and leases ................................. $ 181,847 151,510 517,805 443,845
Mortgage-backed securities:
Available for sale ............................. 18,621 20,047 55,357 59,956
Held to maturity ............................... 57,681 70,677 182,822 211,993
Investment securities available for sale ......... 5,713 5,325 16,061 16,375
Other interest-earning assets .................... 6,273 6,768 16,767 16,886
------------ ------------ ------------ ------------
Total interest income ......................... 270,135 254,327 788,812 749,055
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Deposits ......................................... 87,037 85,332 258,005 241,129
Federal Home Loan Bank advances .................. 56,070 46,741 151,125 137,858
Other borrowings ................................. 30,192 25,075 87,353 81,980
------------ ------------ ------------ ------------
Total interest expense ........................ 173,299 157,148 496,483 460,967
------------ ------------ ------------ ------------
Net interest income ........................... 96,836 97,179 292,329 288,088
Provision for loan and lease losses ................ 260 1,001 740 3,001
------------ ------------ ------------ ------------
Net interest income after provision
for loan and lease losses ................... 96,576 96,178 291,589 285,087
------------ ------------ ------------ ------------
OTHER INCOME:
Loan servicing fees .............................. 3,228 3,463 8,594 8,485
Service fees and other charges ................... 14,138 9,761 37,445 24,955
Leasing operations ............................... 1,907 1,697 5,440 5,204
Net gains (losses):
Loans .......................................... 355 1,459 794 1,770
Mortgage-backed securities ..................... 2,403 (1,476) 2,403 (1,758)
Investment securities .......................... -- 1 -- (2,024)
Other gains .................................... (375) (55) (396) 403
Other ............................................ 198 125 642 344
------------ ------------ ------------ ------------
Total other income ............................ 21,854 14,975 54,922 37,379
------------ ------------ ------------ ------------
ADMINISTRATIVE EXPENSES:
Compensation and employee benefits ............... 23,384 23,784 70,803 68,434
Net occupancy and equipment ...................... 7,624 6,831 22,406 19,615
Federal deposit insurance premiums ............... 1,256 4,488 3,807 12,571
Amortization of goodwill ......................... 1,113 1,121 3,340 1,500
Other administrative expenses .................... 13,649 11,661 40,695 36,412
------------ ------------ ------------ ------------
Administrative expenses before federal deposit
insurance special assessment ................. 47,026 47,885 141,051 138,532
Federal deposit insurance special assessment ..... -- 56,258 -- 56,258
------------ ------------ ------------ ------------
Total administrative expenses ................. 47,026 104,143 141,051 194,790
------------ ------------ ------------ ------------
Income before federal income taxes ................. 71,404 7,010 205,460 127,676
Federal income taxes ............................... 23,595 1,979 67,834 42,825
------------ ------------ ------------ ------------
Net income .................................... $ 47,809 5,031 137,626 84,851
============ ============ ============ ============
Primary earnings per common and common
equivalent share(1) .............................. $ .95 .10 2.75 1.68
============ ============ ============ ============
Average common and common equivalent
shares outstanding(1) ............................ 50,318,725 50,305,526 50,067,444 50,462,517
============ ============ ============ ============
Cash dividends declared per share(1) ............... $ .24 .21 .70 .60
============ ============ ============ ============
</TABLE>
- ---------------------------
(1) Restated to reflect the 5% stock dividend issued October 31, 1997.
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)
(AS RESTATED)
<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)
Common stock issued in
connection with acquisition,
949,762 shares ............. 9 55,552 55,561
Treasury stock reissued in
connection with stock
options exercised, 345,364 . (9,281) 13,680 4,399
shares
Dividends paid ($.70
per share)(1) .............. (33,761) (33,761)
Change in net unrealized gain
on securities, net of tax
expense .................... 10,380 10,380
Net income ................... 137,626 137,626
--------- --------- --------- --------- --------- ---------
Balance, September 30, 1997 .... $ 484 377,543 731,940 (49,934) 11,897 1,071,930
========= ========= ========= ========= ========= =========
</TABLE>
- -------------
(1) Restated to reflect the 5% stock dividend issued October 31, 1997.
See Notes to Consolidated Financial Statements
3
<PAGE> 6
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
----------- -----------
(AS
RESTATED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................... $ 137,626 84,851
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses ................................ 740 3,001
Net gains (losses) ................................................. (2,801) 1,609
Accretion of discounts, amortization of premiums,
amortization of goodwill and depreciation, net .................... 21,202 4,952
Origination of real estate loans held for sale ..................... (28,863) (52,887)
Proceeds from sale of loans held for sale .......................... 29,657 54,657
Other .............................................................. 62,548 69,527
----------- -----------
Net cash provided by operating activities ........................ 220,109 165,710
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net principal disbursed on loans and leases .......................... (1,389,073) (1,529,263)
Proceeds from principal repayments and maturities of:
Mortgage-backed securities held to maturity ........................ 454,469 586,711
Mortgage-backed securities available for sale ...................... 6,817 20,176
Investment securities available for sale ........................... 10,340 158,149
Sales of mortgage-backed securities available for sale ............... 4,452 832,401
Sales of mortgage-backed securities held to maturity ................. 75,551 --
Sales of investment securities available for sale .................... 175,101 240,520
Purchases of:
Mortgage-backed securities held to maturity ........................ -- (569,577)
Investment securities available for sale ........................... (300,400) (326,252)
Federal Home Loan Bank stock ....................................... (45,709) (15,842)
Equipment on operating lease ....................................... (4,383) (7,256)
Net cash and cash equivalents received in connection with acquisitions 4,829 731,170
Other ................................................................ (23,874) (9,276)
----------- -----------
Net cash (used in) provided by investing activities ................... (1,031,880) 111,661
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings ..................... 141,824 (741,954)
Proceeds from long-term borrowings ................................... 2,922,133 2,491,105
Repayments of long-term borrowings ................................... (2,116,513) (2,268,376)
Decrease in deposits ................................................. (164,917) (59,565)
Increase (decrease) in advance payments by borrowers for taxes and
insurance ........................................................... 1,640 (8,989)
Payment of dividends on common stock ................................. (33,761) (29,737)
Purchase of treasury stock, net of options exercised ................. (19,600) (28,940)
Common shares issued ................................................. -- 1,392
----------- -----------
Net cash provided by (used in) financing activities .................... 730,806 (645,064)
----------- -----------
Net decrease in cash and cash equivalents .............................. (80,965) (367,693)
Cash and cash equivalents, beginning of the period ..................... 270,304 658,371
----------- -----------
Cash and cash equivalents, end of the period ........................... $ 189,339 290,678
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on deposits and borrowings .................... $ 477,854 483,587
Cash paid for income taxes ........................................... 41,000 34,000
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Transfers from loans to real estate owned ............................ 3,018 1,902
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.
Subsequent to the issuance of the Company's 1996 consolidated financial
statements, the Company's management determined that approximately $1.1
billion of the mortgage-backed security portfolio previously reported as
held to maturity should have been classified as available for sale during
1996 and the related fair value adjustment recorded in 1996 aggregating
$40.5 million, net of tax, should have been recorded in 1995. As a result,
the Company's 1996 and 1995 consolidated financial statements have been
restated from the amounts previously reported to reflect the
reclassification. The restatement did not affect net income.
2. On September 19, 1997, Charter One Bank acquired Haverfield Corporation,
the holding company of Home Bank, F.S.B.. Home Bank, headquartered in
Cleveland, Ohio, was a federally chartered savings and loan with 10 branch
offices throughout the Cleveland area. The merger was accounted for as a
purchase under generally accepted accounting principles, whereby assets
acquired and liabilities assumed were recorded at their estimated fair
value as of the acquisition date. The acquisition was completed by
exchanging shares of Charter One's common stock valued at $55.6 million for
all of the outstanding shares of Haverfield. Charter One acquired $363.3
million in assets, primarily loans and investment securities, and $307.7
million in liabilities, primarily deposits. Charter One recorded $26.5
million of goodwill which will be amortized over a period of 15 years.
Results of operations for Haverfield Corporation have been included in
Charter One's consolidated statements of income since the acquisition date.
3. On October 3, 1997, Charter One completed a strategic alliance with RCSB
Financial, Inc. ("RCSB"), which was accounted for as a pooling of
interests. Headquartered in Rochester, New York, RCSB Financial, Inc. was
the holding company of Rochester Community Savings Bank, a $4 billion
savings bank with primary business lines in retail banking, mortgage
banking and automobile lending. The merger was effected through the
issuance of .91 shares of Company common stock for each share of RCSB
Financial, Inc. common stock resulting in the issuance of 14,179,385 shares
as adjusted for the 5% stock dividend issued October 31, 1997. Because the
transaction was completed after the close of the quarter, RCSB operations
did not affect the Company's third quarter results. Proforma restated
financial data reflecting the pooling is presented below:
<TABLE>
<CAPTION>
AT OR FOR THE NINE MONTHS ENDED
09/30/97
--------
<S> <C>
Shareholders equity $ 1,395,240
Total assets 19,303,713
Net income 160,444
Earnings per share 2.49
</TABLE>
For the 30 days subsequent to the merger date, the combined operations
of the Company and RCSB produced interest income of $120.5 million, other
income of $13.1 million and net income of $9.7 million, inclusive of
transaction related charges recorded to date.
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
5
<PAGE> 8
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. 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 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(2)..................... 48,754,178 49,164,227 48,640,372 49,390,821
Add common stock equivalents for shares
issuable under Stock Option Plan(1)(2)....... 1,512,144 1,090,707 1,375,191 1,020,755
----------- ------------ ----------- -----------
Weighted average number of shares
outstanding adjusted for common stock
equivalent................................... 50,266,322 50,254,934 50,015,563 50,411,576
=========== ============ =========== ===========
Net income.................................... $ 47,809 5,031 137,626 84,851
Basic earnings per share...................... .98 .10 2.83 1.72
Diluted earnings per share.................... .95 .10 2.75 1.68
</TABLE>
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.
(2) Restated to reflect the 5% stock dividend issued October 31, 1997.
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.
6
<PAGE> 9
8. Certain items in the consolidated financial statements for 1996 have been
reclassified to conform to the 1997 presentation.
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.
Following the October 3 acquisition of RCSB Financial, Inc. as discussed below,
the bank has 221 branch locations: 102 branches in Ohio operating under the name
Charter One Bank, 81 in Michigan under the name First Federal of Michigan
("First Federal"), and 38 in Western New York under the name Rochester Community
Savings Bank.
RESULTS OF OPERATIONS
PERFORMANCE OVERVIEW
The Company reported net income of $47.8 million, or $.95 per share, for the
three months ended September 30, 1997. For the three months ended September 30,
1996, the Company reported net income of $5.0 million, or $.10 per share. The
primary reason for this $42.8 million increase in net income was due to the
special assessment resulting from an act of Congress relating to the Savings
Association Insurance Fund ("SAIF") recapitalization. The Bank incurred an
after-tax charge of $37.1 million on September 30, 1996 as its share of the
effort to recapitalize the SAIF to the required level of 1.25% of deposits.
Exclusive of this SAIF assessment, earnings increased $5.6 million for the
quarter from $42.2 million in the third quarter of 1996. The $5.6 million, or
13.4%, increase was primarily due to increases in service fees and other charges
and gains on sale.
Net income for the nine months ended September 30, 1997 was $137.6 million, or
$2.75 per share, as compared to $84.9 million, or $1.68 per share, for the 1996
period. This $52.8 million increase in net income was also primarily
attributable to the $37.1 million special SAIF assessment in the 1996 period as
discussed above. The remaining $15.7 million, or 12.8%, increase in net income
was primarily due to increases in service fees and other charges, gains on sale
and net interest income as well as lower loan loss provisions.
7
<PAGE> 10
QUARTERLY EARNINGS SUMMARY (Figure 1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
9/30/97 6/30/97 3/31/97 12/31/96 9/30/96
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net interest income..................................... $ 96,836 97,967 97,526 95,304 97,179
Provision for loan and lease losses..................... (260) (260) (220) (1,000) (1,001)
Other income, excluding
gains and losses...................................... 19,471 17,556 15,094 16,257 15,046
Administrative expenses, excluding
the SAIF assessment................................... (47,026) (47,328) (46,697) (49,234) (47,885)
------- ------- ------- ------- -------
Pretax core earnings................................ 69,021 67,935 65,703 61,327 63,339
Gains and losses, net................................... 2,383 331 87 3,502 (71)
Federal deposit insurance special
assessment............................................ - - - - (56,258)
------- ------- ------- ------- -------
Income before federal income taxes.................. 71,404 68,266 65,790 64,829 7,010
Federal income taxes.................................... 23,595 22,535 21,704 21,958 1,979
------- ------- ------- ------- -------
Net income............................................ $ 47,809 45,731 44,086 42,871 5,031
======= ======= ======= ======= =======
Primary earnings per common and common
equivalent share(1)................................... $ .95 .91 .89 .86 .10
======= ======= ======= ======= =======
</TABLE>
- ---------------------------
(1) Restated to reflect the 5% stock dividend issued October 31, 1997.
The increase in earnings in the third quarter of 1997 contributed to an 18.97%
annualized return on average equity and a 1.30% annualized return on average
assets. This compares to third quarter 1996 annualized returns of 18.08% and
1.23% (excluding the SAIF special assessment), respectively. These annualized
returns and other selected ratios are set forth in Figure 2.
SELECTED OPERATING RATIOS (Figure 2)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ ------------------
9/30/97 9/30/96 9/30/97 9/30/96
------- ------- ------- -------
<S> <C> <C> <C> <C>
Annualized returns (excluding the SAIF special assessment):
Return on average assets......................................... 1.30% 1.23% 1.28% 1.21%
Return on average equity......................................... 18.97 18.08 18.68 17.73
Average equity to average assets................................. 6.87 6.78 6.86 6.84
Annualized operating ratios (excluding the SAIF special assessment):
Net interest income to administrative expenses................... 205.92 202.94 207.25 207.96
Administrative expenses to average assets........................ 1.28 1.39 1.31 1.38
Efficiency ratio................................................. 39.48 41.67 39.98 41.90
</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 SEPTEMBER 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)................ $ 9,315,773 $ 181,847 7.80% $ 7,500,770 $ 151,510 8.08%
Mortgage-backed securities:
Available for sale............... 1,068,980 18,621 6.97 1,172,413 20,047 6.84
Held to maturity................. 3,195,160 57,681 7.22 3,914,858 70,677 7.22
Investment securities
available for sale................ 334,178 5,713 6.84 310,464 5,325 6.86
Other interest-earning
assets(2)......................... 355,039 6,273 6.91 418,950 6,768 6.46
----------- --------- ----------- ---------
Total interest-earning assets... 14,269,130 270,135 7.56 13,317,455 254,327 7.64
--------- ---------
Allowance for loan losses.......... (66,341) (65,564)
Noninterest-earning assets(3)...... 482,055 505,961
----------- -----------
Total assets.................. $ 14,684,844 $ 13,757,852
=========== ===========
Interest bearing liabilities(4):
Deposits:
Checking accounts................ $ 883,063 2,557 1.15 $ 823,181 2,519 1.22
Savings accounts................. 815,781 4,577 2.23 916,086 5,568 2.43
Money market accounts............ 1,336,731 11,639 3.45 1,187,879 9,954 3.35
Certificates of deposit.......... 4,697,220 68,264 5.77 4,817,004 67,291 5.59
----------- --------- ----------- ---------
Total deposits................. 7,732,795 87,037 4.47 7,744,150 85,332 4.41
----------- --------- ----------- ---------
FHLB advances...................... 3,822,452 56,070 5.80 3,227,064 46,741 5.79
Other borrowings................... 1,920,412 30,192 6.18 1,680,699 25,075 5.97
----------- --------- ----------- ---------
Total borrowings................ 5,742,864 86,262 5.92 4,907,763 71,816 5.85
----------- --------- ----------- ---------
Total interest-bearing
liabilities.................... 13,475,659 173,299 5.09 12,651,913 157,148 4.97
--------- ---------
Non interest-bearing liabilities... 200,923 173,050
----------- -----------
Total liabilities............... 13,676,582 12,824,963
Shareholders' equity................. 1,008,262 932,889
----------- -----------
Total liabilities and
shareholders' equity........... $ 14,684,844 $ 13,757,852
=========== ===========
Net interest income.................. $ 96,836 $ 97,179
========= =========
Interest rate spread................. 2.47 2.67
Net yield on average interest-
earning assets(5)................... 2.71 2.92
Average interest-earning assets
to average interest-bearing
liabilities......................... 105.89% 105.26%
</TABLE>
- ---------------------------
(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.
9
<PAGE> 12
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 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)................ $ 8,816,291 $ 517,805 7.83% $ 7,266,055 $ 443,845 8.14%
Mortgage-backed securities:
Available for sale............... 1,076,906 55,357 6.85 1,153,801 59,956 6.93
Held to maturity................. 3,376,363 182,822 7.22 3,924,940 211,993 7.20
Investment securities
available for sale................ 309,501 16,061 6.92 329,624 16,375 6.62
Other interest-earning
assets(2)......................... 323,378 16,767 6.84 345,763 16,886 6.51
----------- --------- ----------- ---------
Total interest-earning assets... 13,902,439 788,812 7.57 13,020,183 749,055 7.67
--------- ---------
Allowance for loan losses.......... (66,028) (65,708)
Noninterest-earning assets(3)...... 474,652 454,085
----------- -----------
Total assets.................. $ 14,311,063 $ 13,408,560
=========== ===========
Interest bearing liabilities(4):
Deposits:
Checking accounts................ $ 877,113 7,398 1.13 $ 755,557 7,202 1.27
Savings accounts................. 834,969 14,077 2.25 925,729 16,778 2.42
Money market accounts............ 1,350,344 35,054 3.47 1,003,378 24,274 3.23
Certificates of deposit.......... 4,710,603 201,476 5.72 4,549,431 192,875 5.65
----------- --------- ----------- ---------
Total deposits................. 7,773,029 258,005 4.44 7,234,095 241,129 4.44
----------- --------- ----------- ---------
FHLB advances...................... 3,471,307 151,125 5.79 3,238,286 137,858 5.68
Other borrowings................... 1,902,972 87,353 6.07 1,847,788 81,980 5.92
----------- --------- ----------- ---------
Total borrowings................ 5,374,279 238,478 5.89 5,086,074 219,838 5.76
----------- --------- ----------- ---------
Total interest-bearing
liabilities.................... 13,147,308 496,483 5.03 12,320,169 460,967 4.99
--------- ---------
Non interest-bearing liabilities... 181,340 170,996
----------- -----------
Total liabilities............... 13,328,648 12,491,165
Shareholders' equity................. 982,415 917,395
----------- -----------
Total liabilities and
shareholders' equity........... $ 14,311,063 $ 13,408,560
=========== ===========
Net interest income.................. $ 292,329 $ 288,088
========= =========
Interest rate spread................. 2.54 2.68
Net yield on average interest-
earning assets(5)................... 2.80 2.95
Average interest-earning assets
to average interest-bearing
liabilities......................... 105.74% 105.68%
</TABLE>
- ---------------------------
(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.
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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 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.................. $ (5,435) 35,772 30,337 (17,017) 90,977 73,960
Mortgage-backed
securities:
Available for sale.............. 385 (1,811) (1,426) (640) (3,959) (4,599)
Held to maturity................ (4) (12,992) (12,996) 534 (29,705) (29,171)
Investment securities
available for sale............... (18) 406 388 852 (1,166) (314)
Other interest-earning
assets........................... 745 (1,240) (495) 1,952 (2,071) (119)
------- -------- -------- ------- ------- --------
Total......................... (4,327) 20,135 15,808 (14,319) 54,076 39,757
------- -------- -------- ------- ------- --------
Interest expense:
Checking accounts................. (105) 143 38 (499) 695 196
Savings accounts.................. (407) (584) (991) (1,125) (1,576) (2,701)
Money market accounts............. 398 1,287 1,685 1,884 8,896 10,780
Certificates of deposit........... 2,571 (1,598) 973 1,724 6,877 8,601
Federal Home Loan
Bank advances ................... 449 8,880 9,329 2,667 10,600 13,267
Other borrowings.................. 1,663 3,454 5,117 3,005 2,368 5,373
------- -------- -------- ------- ------- --------
Total......................... 4,569 11,582 16,151 7,656 27,860 35,516
------- -------- -------- ------- ------- --------
Change in net interest
income............................. $ (8,896) 8,553 (343) (21,975) 26,216 4,241
======= ======== ======== ======= ======= ========
</TABLE>
Net interest income for the third quarter of 1997 was $96.8 million, a decrease
of $343,000 as compared to the third quarter of 1996. The primary reason for
this decrease was due to a narrowing of interest rate spreads attributable, in
part, to competitive pressures and the flattening of the yield curve. The yield
on interest-earning assets decreased to 7.56% for the three months ended
September 30, 1997 as compared to 7.64% for the third quarter of 1996. The
primary reason for this decline was due to 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 12 basis points higher in the third
quarter of 1997 as compared to the same period in 1996 primarily due to borrowed
funds. 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 third quarter of 1997 to decline by 20 basis points to 2.47%. The net
yield on interest-earning assets declined by 21 basis points to 2.71% during the
third quarter of 1997 as compared to the third quarter of 1996. This decline in
the interest rate spread caused net interest income to decrease by $8.9 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 $8.6 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 $20.1 million. Due to high volumes of loan
and lease originations since September 30, 1996, the average balance of loans
and leases was $1.8 billion higher during the third quarter of 1997 as compared
to 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 third
quarter of 1997 was $951.7 million higher than in the third 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 borrowed funds,
increased $823.7 million.
For the nine months ended September 30, 1997, net interest income was $292.3
million, an increase of $4.2 million, or 1.5%, over the comparable period in
1996. This increase was primarily attributable to increased volumes of
interest-earning assets and interest-bearing liabilities. Increases in the
average balance of loans and
11
<PAGE> 14
leases caused the average balance of interest-earning assets to increase by
$882.3 million. The average balance of interest-bearing liabilities increased by
$827.1 for the first nine 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 when the Bank purchased 21 branch offices with $796.7 million in deposits
in the Detroit Metropolitan area. The increases in the balances of
interest-earning assets and interest-bearing liabilities caused net interest
income to increase by $26.2 million. This was partially offset by a declining
interest rate spread. The interest rate spread was 2.54% for the first nine
months of 1997 as compared to 2.68% for the first nine months of 1996. This
caused net interest income to decline by $22.0 million for the nine months 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
10 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>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Weighted average yield:
Loans and leases...................................................... 7.84% 7.96%
Mortgage-backed securities............................................ 7.18 7.22
Investment securities................................................. 6.79 6.89
Other interest-earning assets......................................... 7.35 7.21
Total interest-earning assets......................................... 7.61 7.66
Weighted average cost(1):
Deposits.............................................................. 4.48 4.48
Federal Home Loan Bank advances....................................... 5.83 5.81
Other borrowings...................................................... 6.27 6.15
Total interest-bearing liabilities.................................... 5.12 5.04
Interest rate spread.................................................... 2.49 2.62
Net yield on interest-earning assets.................................... 2.79 2.87
Interest-earning assets................................................. $14,744,989 $13,458,265
</TABLE>
- ---------------------------
(1) The costs of liabilities include the annualized effect of interest rate
risk management instruments.
12
<PAGE> 15
OTHER INCOME (Figure 6)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan servicing fees........................................... $ 3,228 3,463 8,594 8,485
Service fees and other charges:
Retail deposit account service charges and fees............. 11,509 8,044 29,143 20,012
Fees on insurance, annuity, and mutual fund sales........... 2,232 1,379 6,927 3,726
Other branch service fees................................... 352 331 1,222 1,180
Miscellaneous............................................... 45 7 153 37
-------- -------- -------- -------
Total..................................................... 14,138 9,761 37,445 24,955
Leasing operations............................................ 1,907 1,697 5,440 5,204
Net gains:
Real estate................................................. 136 73 215 402
Mortgage-backed securities.................................. 2,403 (1,476) 2,403 (1,758)
Investment securities....................................... - 1 - (2,024)
Loans....................................................... 355 1,459 794 1,770
Other....................................................... (511) (128) (611) 1
-------- -------- -------- -------
Total..................................................... 2,383 (71) 2,801 (1,609)
Other......................................................... 198 125 642 344
-------- -------- -------- -------
Total.................................................... $ 21,854 14,975 54,922 37,379
======== ======== ======== =======
</TABLE>
OTHER INCOME
Other income was $21.9 million for the third quarter of 1997 as compared to
$15.0 million for the same period in 1996. This $6.9 million, or 45.9%, increase
was primarily due to increases in recurring fee income as illustrated in figure
6 above and due to gains on mortgage-backed security sales in 1997. 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 services charges, primarily checking account
service charges, increased $3.5 million primarily due to a new fee for checking
accounts with sustained overdraft balances. 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; plus, moving into the Michigan
market with these products in early 1996 has resulted in higher fee income
during the current quarter as compared to the third quarter of 1996. The sale of
mortgage-backed securities from the Company's available for sale portfolio in
the third quarter of 1997 which resulted in a net gain of $2.4 million was
executed primarily to eliminate small pool securities in the portfolio.
Other income was $54.9 million for the nine months ended September 30, 1997 as
compared to $37.4 million for the same period in 1996. This $17.5 million, or
46.9%, increase was also primarily attributable to increases in recurring fee
income as illustrated in figure 6 above and due to gains on mortgage-backed
security sales in 1997. In addition to the discussion above relating to
increases in retail deposit fees and insurance, annuity and mutual funds sales,
the Bank acquired over 55,000 additional checking accounts in the acquisition of
21 branches from First Nationwide Bank on June 28, 1996. The sale of
mortgage-backed securities from the Company's available for sale portfolio in
1997 which resulted in a net gain of $2.4 million was executed primarily to
eliminate small pool securities in the portfolio
13
<PAGE> 16
ADMINISTRATIVE EXPENSES (EXCLUDING SAIF SPECIAL ASSESSMENT)(Figure 7)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
1997 1996 1997 1996
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Compensation and employee benefits............................ $ 23,384 23,784 70,803 68,434
Net occupancy and equipment................................... 7,624 6,831 22,406 19,615
Federal deposit insurance premiums............................ 1,256 4,488 3,807 12,571
Amortization of goodwill...................................... 1,113 1,121 3,340 1,500
Other administrative expenses................................. 13,649 11,661 40,695 36,412
------- ------- -------- --------
Administrative expenses before federal deposit
insurance special assessment............................... $ 47,026 47,885 141,051 138,532
======= ======= ======== ========
Number of full-time equivalent employees
at end of period............................................ 2,702 2,555 2,702 2,555
Net interest income to administrative expenses................ 205.92% 202.94% 207.25% 207.96%
Administrative expenses to average assets (annualized)........ 1.28 1.39 1.31 1.38
Efficiency ratio.............................................. 39.48 41.67 39.98 41.90
</TABLE>
ADMINISTRATIVE EXPENSES
Administrative expenses were $47.0 million during the third quarter of 1997.
This is an $859,000, or 1.8%, decrease as compared to the third quarter of 1996
which had $47.9 million in administrative expenses before the federal deposit
insurance special assessment. Other administrative expenses and net occupancy
and equipment expenses increased primarily due to expanded branch and subsidiary
operations in 1997. Those increases were offset by a reduction of $3.2 million
in the federal deposit insurance premium expense and reduced compensation and
employee benefits. 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.
That special assessment for recapitalization was incurred by the Bank in the
third quarter of 1996 resulting in an expense of $56.3 million.
Administrative expenses were $141.1 million for the nine months ended September
30, 1997. This is a $2.5 million, or 1.8%, increase as compared to the same
period in 1996 which had $138.5 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. 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
their subsidiary operations relating to insurance, annuity and mutual fund sales
during 1996 which fully impacted the 1997 period.
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 1.28% for the third quarter of
1997 and 1.31% for the first nine months of 1997. This compares favorably to the
1996 percentages of 1.39% and 1.38% for the third quarter and for the first nine
months of 1996, respectively. Also, the Company's efficiency ratio of 39.48% for
the third quarter of 1997 and 39.98% for the first nine months of 1997 compared
favorably to the 41.67% and the 41.90% efficiency ratio during the third quarter
and first nine 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 $23.6 million for the three months ending
September 30, 1997. This was $21.6 million higher than the federal income tax
expense during the same period of 1996. This increase was primarily due to an
increase in pretax income. The effective tax rates were 33.0% for the 1997
period and 28.2% for the 1996 period.
Federal income tax expense was $67.8 million for the nine months ended September
30, 1997 an increase of $25.0 million as compared to the federal income tax
expense of $42.8 million for the nine months ended September 30,
14
<PAGE> 17
1996. This increase was also primarily attributable to an increase in pretax
income. The effective tax rates were 33.0% for the 1997 period and 33.5% for the
1996 period.
FINANCIAL CONDITION
Figure 8 sets forth information concerning the composition of the Company's
assets, liabilities and shareholders' equity at September 30, 1997 and December
31, 1996.
FINANCIAL CONDITION (Figure 8)
<TABLE>
<CAPTION>
SEPTEMBER 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..................... $ 189,339 1.2% $ 270,304 1.9%
Investment securities......................... 389,693 2.6 243,632 1.8
Mortgage-backed securities.................... 4,178,846 27.5 4,704,074 33.9
Loans and leases, net......................... 9,786,005 64.4 8,100,342 58.3
Other assets.................................. 653,110 4.3 575,489 4.1
----------- ------ ----------- ------
Total...................................... $ 15,196,993 100.0% $ 13,893,841 100.0%
=========== ====== =========== ======
Liabilities:
Deposits...................................... $ 7,940,796 52.3% $ 7,841,197 56.4%
Borrowings.................................... 5,939,796 39.1 4,955,291 35.7
Other liabilities............................. 244,471 1.6 175,629 1.3
Shareholders' equity.......................... 1,071,930 7.0 921,724 6.6
----------- ------ ----------- ------
Total...................................... $ 15,196,993 100.0% $ 13,893,841 100.0%
=========== ====== =========== ======
</TABLE>
OVERVIEW
At September 30, 1997, total assets were $15.2 billion which was $1.3 billion
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 $1.7 billion to $9.8 billion at September 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.
15
<PAGE> 18
LOANS AND LEASES
COMPOSITION OF LOANS AND LEASES (Figure 9)
<TABLE>
<CAPTION>
SEPTEMBER 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..................................... $ 7,158,534 73.2% $ 6,072,927 75.0%
Multifamily............................................ 278,450 2.8 290,195 3.6
Commercial............................................. 353,383 3.7 348,787 4.4
Construction........................................... 373,395 3.9 302,405 3.7
---------- ------ ---------- -----
Total real estate................................... 8,163,762 83.6 7,014,314 86.7
Consumer................................................. 1,300,174 13.2 929,204 11.4
Leases................................................... 358,983 3.7 251,133 3.1
Business................................................. 160,207 1.6 100,302 1.2
---------- ------ ---------- -----
Total loans and leases................................ 9,983,126 102.1 8,294,953 102.4
Less net items........................................... 197,121 2.1 194,611 2.4
---------- ------ ---------- -----
Loans and leases, net............................... $ 9,786,005 100.0% $ 8,100,342 100.0%
========== ====== ========== =====
</TABLE>
LOAN AND LEASE ACTIVITY (Figure 10)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1997 1996 1997 1996
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Originations:
Real estate:
Permanent:
One-to-four family................................. $ 560,050 620,123 1,548,580 1,946,722
Multifamily........................................ 1,570 5,295 18,859 25,367
Commercial......................................... 15,816 9,993 53,907 56,107
---------- ----------- ----------- ----------
Total permanent.................................. 577,436 635,411 1,621,346 2,028,196
---------- ----------- ----------- ----------
Construction:
One-to-four family................................. 106,601 70,397 282,688 242,800
Multifamily........................................ 5,350 5,760 7,714 5,910
Commercial......................................... 5,630 8,600 15,225 15,800
---------- ----------- ----------- ----------
Total construction............................... 117,581 84,757 305,627 264,510
---------- ----------- ----------- ----------
Total real estate loans originated............. 695,017 720,168 1,926,973 2,292,706
---------- ----------- ----------- ----------
Consumer line of credit draws........................ 80,894 59,985 221,092 142,844
Consumer............................................. 137,175 91,402 386,411 351,324
Business line of credit draws........................ 30,097 17,337 73,931 53,736
Business............................................. 25,339 8,737 58,690 32,047
Leases(1)............................................ 67,838 60,189 159,029 129,664
---------- ----------- ----------- ----------
Total loans and leases originated.............. 1,036,360 957,818 2,826,126 3,002,321
---------- ----------- ----------- ----------
Loans purchased.......................................... 295,318 - 295,318 -
Sales and principal reductions:
Loans sold............................................. 11,086 35,420 28,863 52,887
Loans exchanged for MBS................................ - - - 510,435
Principal reductions................................... 559,249 398,001 1,404,408 1,372,983
---------- ----------- ----------- ----------
Total sales and principal reductions............. 570,335 433,421 1,433,271 1,936,305
---------- ----------- ----------- ----------
Increase before net items...................... $ 761,343 524,397 1,688,173 1,066,016
========== =========== =========== ==========
</TABLE>
- ---------------------------
(1) Not included herein are $1.2 and $2.7 million in operating leases
originated during the three months ended September 30, 1997 and 1996,
respectively and $4.4 million and $7.3 million for the nine months ended
September 30, 1997 and 1996.
16
<PAGE> 19
INVESTMENT SECURITIES
The entire investment securities portfolio was classified as available for sale
at both September 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>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. Treasury and agency securities.................................... $ 382,166 238,135
Corporate notes and commercial paper................................... - 4,107
Other.................................................................. 7,527 1,390
-------- ---------
Total................................................................ $ 389,693 243,632
======== =========
Weighted average rate................................................ 6.79% 6.89%
======== =========
</TABLE>
MORTGAGE-BACKED SECURITIES
Figure 12 summarizes the mortgage-backed securities ("MBS") portfolios at
September 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>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
AVAILABLE FOR SALE
Participation certificates:
Government agency issues:
GNMA.................................................................. $ 110 -
FHLMC................................................................. 13,281 13,335
Collateralized mortgage obligations:
Government agency issues:
FHLMC................................................................. 352,786 350,158
FNMA.................................................................. 264,720 264,682
Private issues.......................................................... 447,077 442,530
---------- ----------
Total mortgage-backed securities available for sale................... 1,077,974 1,070,705
---------- ----------
HELD TO MATURITY
Participation certificates:
Government agency issues:
FNMA.................................................................. 1,069,820 1,246,398
FHLMC................................................................. 472,416 636,228
GNMA.................................................................. 164,521 188,057
Private issues.......................................................... 341,104 407,564
Collateralized mortgage obligations:
Government agency issues:
FNMA.................................................................. 159,974 162,646
FHLMC................................................................. 80,953 82,433
Private issues.......................................................... 812,084 910,043
---------- ----------
Total mortgage-backed securities held to maturity................... 3,100,872 3,633,369
---------- ----------
Total............................................................ $ 4,178,846 4,704,074
========== ==========
</TABLE>
17
<PAGE> 20
MORTGAGE-BACKED SECURITIES BY PAYMENT TYPE (Figure 13)
<TABLE>
<CAPTION>
SEPTEMBER 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.............. $1,064,344 7.00% $ 1,056,087 6.94%
--------- -----------
Total adjustable rate.......................... 1,064,344 7.00 1,056,087 6.94
--------- -----------
Fixed rate:
Participation certificates....................... 13,391 6.30 13,335 6.03
Collateralized mortgage obligations.............. 239 4.75 1,283 5.09
--------- -----------
Total fixed rate............................... 13,630 6.27 14,618 5.94
--------- -----------
Total available for sale..................... 1,077,974 6.99 1,070,705 6.93
--------- -----------
HELD TO MATURITY
Adjustable rate:
Participation certificates....................... 863,289 7.16 1,019,324 7.16
Collateralized mortgage obligations.............. 282,601 7.39 301,866 7.23
--------- -----------
Total adjustable rate.......................... 1,145,890 7.21 1,321,190 7.18
--------- -----------
Fixed rate:
Participation certificates....................... 1,184,572 7.34 1,458,923 7.51
Collateralized mortgage obligations.............. 770,410 7.12 853,256 7.15
--------- -----------
Total fixed rate............................... 1,954,982 7.25 2,312,179 7.38
--------- -----------
Total held to maturity....................... 3,100,872 7.24 3,633,369 7.31
--------- -----------
Total mortgage-backed securities........... $4,178,846 7.18% $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of period................................ $ 65,935 65,268 65,922 64,436
Provision for loan and lease losses......................... 260 1,001 740 3,001
Acquired through acquisition................................ 2,963 - 2,963 -
Loans and leases charged off:
Mortgage.................................................. (2,351) (504) (2,692) (1,484)
Consumer.................................................. (161) (114) (417) (531)
Leases.................................................... - - - -
Business.................................................. - (2) (42) (3)
-------- ------- ------- --------
Total charge-offs....................................... (2,512) (620) (3,151) (2,018)
-------- ------- ------- --------
Recoveries:
Mortgage.................................................. 37 10 167 102
Consumer.................................................. 30 52 67 190
Leases.................................................... - - - -
Business.................................................. 1 - 6 -
-------- ------- ------- --------
Total recoveries....................................... 68 62 240 292
-------- ------- ------- --------
Net loan and lease charge-offs....................... (2,444) (558) (2,911) (1,726)
-------- ------- ------- --------
Balance, end of period...................................... $ 66,714 65,711 66,714 65,711
======== ======= ======= ========
Net charge-offs to average loans and leases (annualized) .10% .03% .04% .03%
</TABLE>
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES (Figure 15)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage.................................................................... $ 53,661 53,133
Consumer.................................................................... 6,464 6,765
Leases...................................................................... 1,577 977
Business.................................................................... 5,012 5,047
------- -------
Total..................................................................... $ 66,714 65,922
======= =======
Percent of loans and leases to ending loans and leases:
Mortgage.................................................................. 81.4% 84.3%
Consumer.................................................................. 13.3 11.4
Leases.................................................................... 3.7 3.1
Business.................................................................. 1.6 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 .68% at September 30, 1997, down from .81% at
December 31, 1996. Credit quality remained high, with nonperforming assets at
only .27% of total assets at September 30, 1997. Net charge-offs totaled $2.4
million and $2.9 million for the three and nine months ended September 30, 1997,
respectively. Net charge-offs included $2.2 million related to two previously
classified commercial real estate loans. Net charge-offs for the comparable
periods of 1996 were $558,000 and $1.7 million.
Management believes that the allowance for loan and lease losses has been
established in accordance with generally accepted accounting principles based on
the best information available. However, future adjustments to reserves may be
necessary and net income could be significantly affected if circumstances and/or
economic conditions differ substantially from the assumptions used in making the
initial determinations. A downturn in the Ohio or Michigan real estate markets
could result in an increased level of nonperforming assets and charge-offs,
significant provisions for loan and lease losses and significant reductions in
income. Additionally, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for
19
<PAGE> 22
loan and lease losses. Such agencies may require the recognition of additions to
the allowance based on their judgments of information available to them at the
time of their examination.
Figure 16 sets forth information concerning nonperforming assets and the
allowance for loan lease losses. At September 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>
SEPTEMBER 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................................................. $ 12,650 10,264
Multifamily and commercial......................................... 1,011 2,372
Construction and land.............................................. 2,185 827
------- -------
Total mortgage loans............................................. 15,846 13,463
Consumer............................................................. - -
Business............................................................. - 95
Lease financings..................................................... - -
------- -------
Total nonaccrual loans and leases................................ 15,846 13,558
------- -------
Accruing loans and leases delinquent more than 90 days:
Mortgage loans:
One-to-four family................................................. 6,502 5,961
Multifamily and commercial......................................... - -
Construction and land.............................................. - -
------- -------
Total mortgage loans............................................. 6,502 5,961
Consumer............................................................. 3,333 544
Business............................................................. 1,584 58
Lease financings..................................................... - -
------- -------
Total accruing 90-day delinquent loans and leases................ 11,419 6,563
------- -------
Restructured real estate loans......................................... 8,390 15,294
------- -------
Total nonperforming loans and leases............................. 35,655 35,415
Real estate acquired through foreclosure and other..................... 6,087 7,030
------- -------
Total nonperforming assets....................................... $ 41,742 42,445
======= =======
Ratio of:
Nonperforming loans and leases to total loans and leases............. .36% .44%
Nonperforming assets to total assets................................. .27 .31
Allowance for loan and lease losses to:
Nonperforming loans and leases..................................... 187.11 186.14
Total loans and leases before allowance............................ .68 .81
</TABLE>
Nonperforming assets at September 30, 1997 totaled $41.7 million, down from
$42.4 million from December 31, 1996. The ratio of nonperforming loans to total
loans was .36% at September 30, 1997 as compared to .44% at December 31, 1996.
At September 30, 1997, there were $29.0 million of loans not reflected in the
table above, where known information about possible credit problems of borrowers
caused management to have doubts as to the ability of the borrower to comply
with present loan repayment terms and that may result in disclosure of such
loans in the future. The largest of these potential problem loans is a $5.2
million loan to a manufacturing company where the borrower is experiencing
operating losses 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 September 30, 1997 and December 31,
1996, 57% and 61% of interest-bearing liabilities were in the form of deposits
and 43% 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>
SEPTEMBER 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........................ $ 563,070 1.73% 7.1% $ 558,753 1.86% 7.1%
Noninterest-bearing..................... 329,200 - 4.1 300,685 - 3.8
Savings accounts.......................... 817,517 2.24 10.3 868,361 2.42 11.1
Money market accounts..................... 1,375,053 3.21 17.3 1,344,973 3.52 17.2
Certificates of deposit................... 4,854,444 5.94 61.2 4,766,369 5.85 60.8
----------- ------ ---------- ------
Deposits.............................. 7,939,284 4.54 100.0% 7,839,141 4.56 100.0%
====== ======
Plus unamortized premium
on deposits purchased.................... 1,512 2,056
----------- ----------
Deposits, net........................ $ 7,940,796 $ 7,841,197
=========== ==========
Weighted average cost
including the annualized
effect of applicable swaps,
floors, and amortization
of deferred gains on
terminated swaps......................... 4.48% 4.48%
===== =====
</TABLE>
BORROWINGS
At September 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 $6.1 billion in real estate
loans and $3.0 billion in mortgage-backed securities.
21
<PAGE> 24
FEDERAL HOME LOAN BANK ADVANCES (Figure 18)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
----------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ --------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed-rate advances........................................ $ 3,080,342 5.86% $ 1,791,332 5.99%
Variable-rate advances..................................... 802,296 5.72 1,403,000 5.56
---------- ----------
Advances................................................. 3,882,638 5.83 3,194,332 5.80
Unamortized premium........................................ 10 1
---------- ----------
Total advances, net...................................... $ 3,882,648 $ 3,194,333
========== ==========
Weighted average cost including the annualized
effect of applicable caps and amortization of
deferred gains on terminated swaps....................... 5.83% 5.81%
===== ====
</TABLE>
The variable-rate advances reprice based upon three-month LIBOR at three-month
intervals, and included $48 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>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
----------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ --------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Short term............................................... $ 141,824 5.80% $ - -
Long term:
Fixed rate............................................. 1,379,846 5.78 1,374,784 5.58%
Variable rate.......................................... 320,000 5.83 174,994 5.93
---------- ----------
Weighted average cost including
amortization of fees................................... $ 1,841,670 5.79 $ 1,549,778 5.62
========== ==========
Weighted average cost including the annualized
effect of amortization of deferred gains
on terminated swaps.................................... 5.78% 5.59%
===== ====
</TABLE>
The long-term fixed-rate agreements include $250 million convertible, at the
counterparty's option, to a variable rate based on three-month LIBOR. The
agreements are convertible 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>
SEPTEMBER 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>
Fixed payment and variable
receipt maturing in 1999.......... $ 100,000 5.93%(1) 10.09% $ 100,000 5.77%(1) 10.09%
======== ========
Variable payment and
fixed receipt:
Maturing in:
1998.......................... $ 55,000 6.06% 5.74% $ 115,000 6.40% 5.53%
1999.......................... 110,000 6.55 5.75 - - -
2000.......................... 20,000 6.79 5.73 110,000 7.06 5.54
2001.......................... 275,000 7.14 5.53 140,000 7.28 5.53
-------- --------
Total....................... $ 460,000 6.85% 5.62%(1) $ 365,000 6.93% 5.53%(1)
======== ========
</TABLE>
- ---------------------------
(1) Rates are based upon LIBOR.
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
September 30, 1997, the notional principal amount outstanding was $34.3 million
with a weighted average receipt rate of 31.71% and payment rate of 5.75%. 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 September 30, 1997, interest received based on a 5.85%
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 $301,000 at September 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
September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest expense (income):
Deposits................................................. $ (4,429) (2,491) (12,626) (5,760)
FHLB advances............................................ (71) 420 115 1,339
Reverse repurchase agreements............................ (60) (443) (429) (1,616)
------- ------- -------- -------
Total.................................................. $ (4,560) (2,514) (12,940) (6,037)
======= ======= ======== =======
</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 September 30, 1997 was 5.59%.
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 September 30,
1997, the Bank and its subsidiaries had outstanding commitments to originate
loans and leases of $587.6 million, unfunded lines of consumer credit totaling
$609.3 million (a significant portion of which normally remains undrawn) and
unfunded lines of commercial (business loans) credit totaling $50.5 million.
Outstanding letters of credit totaled $17.1 million as of September 30, 1997.
Certificates of deposit scheduled to mature in one year or less at September 30,
1997 totaled $3.6 billion. Management believes that a significant portion of the
amounts maturing during the next 12 months will remain with the Bank because
they are retail deposits. At September 30, 1997, the Bank had $1.9 billion of
advances from the FHLB and $247 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 SEPTEMBER 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).......... $ 917,895 10.78% $ 680,959 8.0% $ 851,199 10.0%
Tier 1 capital (to risk-weighted assets)......... 855,530 10.05 N/A N/A 510,719 6.0
Tier 1 capital (to adjusted tangible assets)..... 855,530 5.64 455,146 3.0 758,577 5.0
Tangible capital (to adjusted tangible assets)... 855,530 5.64 227,573 1.5 N/A N/A
</TABLE>
<TABLE>
<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 September 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>
3RD QUARTER 2ND QUARTER 1ST QUARTER 4TH QUARTER 3RD QUARTER
1997 1997 1997 1996 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Market price of common stock(1):
High......................................... $ 58.57 51.43 47.74 42.62 38.63
Low.......................................... 49.05 40.24 39.17 36.31 30.50
Close........................................ 56.31 51.31 41.79 40.00 38.10
Dividends declared and paid.................... .24 .24 .22 .22 .21
</TABLE>
- ---------------------------
(1) Restated to reflect the 5% stock dividend issued October 31, 1997.
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 49,722,369 common shares outstanding (adjusted for
subsequent stock dividends). As a result of the pending merger with RCSB the
Company has rescinded its stock repurchase program. The Company had 908,731
shares remaining unpurchased.
On August 20, 1997, the Board of Directors of Charter One Financial, Inc.
approved a 5% stock dividend which was distributed October 31, 1997, to
shareholders of record on October 17, 1997.
26
<PAGE> 29
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
MERGER
On October 3, 1997, the Company completed a strategic alliance with RCSB
Financial, Inc. ("RCSB"). For the 30 days subsequent to the merger date, the
combined operations of the Company and RCSB produced interest income of $120.5
million, other income of $13.1 million and net income of $9.7 million,
inclusive of transaction related charges recorded to date.
DIVIDEND
On October 15, 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 November 20, 1997 to shareholders of record as of November 6, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 - Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed on July 29, 1997 relating to the
Charter One slide show presentation presented at a July 29,
1997 conference.
On August 8, 1997, the Company filed a report on Form 8-K to
file a press release announcing the recision of Charter One's
Stock Repurchase Program.
On August 27, 1997, the Company filed a report on Form 8-K
relating to a slide show presentation.
27
<PAGE> 30
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: 11/14/97 /s/ Robert J. Vana
----------------------------------------------------
Robert J. Vana
Chief Corporate Counsel and Secretary
Date: 11/14/97 /s/ Richard W. Neu
----------------------------------------------------
Richard W. Neu
Executive Vice President and Chief Financial Officer
28
<PAGE> 1
EXHIBIT 11
<TABLE>
<CAPTION>
CHARTER ONE FINANCIAL, INC.
COMPUTATION OF PER SHARE EARNINGS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
COMPUTATION OF PRIMARY EARNINGS PER SHARE(3):
Weighted average number of common shares
outstanding........................................ 48,754,178 49,164,227 48,640,372 49,390,821
Add common stock equivalents for shares
issuable under:
Stock Appreciation Rights Plan(1)................. 52,403 50,592 51,881 50,941
Stock Option Plan(1).............................. 1,512,144 1,090,707 1,375,191 1,020,755
------------ ------------ ----------- ------------
Weighted average number of shares outstanding
adjusted for common stock equivalents......... 50,318,725 50,305,526 50,067,444 50,462,517
============ ============ =========== ============
Net income............................................ $ 47,809 5,031 137,626 84,851
Primary earnings per share............................ $ .95 .10 2.75 1.68
COMPUTATION OF FULLY DILUTED EARNINGS
PER SHARE(3):
Weighted average number of common shares
outstanding........................................ 48,754,178 49,209,902 48,640,347 49,526,796
Add common stock equivalents for shares
issuable under:
Stock Appreciation Rights Plan(2)................. 52,620 51,306 52,129 52,527
Stock Option Plan(2).............................. 1,608,679 1,313,491 1,494,396 1,143,627
------------ ------------ ----------- ------------
Weighted average number of shares outstanding
adjusted for common stock equivalents......... 50,415,477 50,574,699 50,186,872 50,722,950
============ ============ =========== ============
Net income............................................ $ 47,809 5,031 137,626 84,851
Fully diluted earnings per share...................... $ .95 .10 2.74 1.67
</TABLE>
- ---------------------------
(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.
(3) Restated to reflect the 5% stock dividend issued October 31, 1997.
29
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL SATEMENTS OF CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 117,104
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 72,235
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,467,667
<INVESTMENTS-CARRYING> 3,100,872
<INVESTMENTS-MARKET> 3,151,150
<LOANS> 9,852,719
<ALLOWANCE> 66,714
<TOTAL-ASSETS> 15,196,993
<DEPOSITS> 7,940,796
<SHORT-TERM> 141,824
<LIABILITIES-OTHER> 244,471
<LONG-TERM> 5,797,972
0
0
<COMMON> 484
<OTHER-SE> 1,071,446
<TOTAL-LIABILITIES-AND-EQUITY> 15,196,993
<INTEREST-LOAN> 517,805
<INTEREST-INVEST> 254,240
<INTEREST-OTHER> 16,767
<INTEREST-TOTAL> 788,812
<INTEREST-DEPOSIT> 258,005
<INTEREST-EXPENSE> 496,483
<INTEREST-INCOME-NET> 292,329
<LOAN-LOSSES> 740
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 141,051
<INCOME-PRETAX> 205,460
<INCOME-PRE-EXTRAORDINARY> 205,460
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 137,626
<EPS-PRIMARY> 2.75
<EPS-DILUTED> 2.74
<YIELD-ACTUAL> 2.80
<LOANS-NON> 15,846
<LOANS-PAST> 11,419
<LOANS-TROUBLED> 8,390
<LOANS-PROBLEM> 29,000
<ALLOWANCE-OPEN> 65,922
<CHARGE-OFFS> 3,151
<RECOVERIES> 240
<ALLOWANCE-CLOSE> 66,714
<ALLOWANCE-DOMESTIC> 66,714
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99
CHARTER ONE FINANCIAL, INC.
SELECTED MONTHLY FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA AT MONTH END
9/30/97 8/31/97 7/31/97
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total assets...................................................... $ 15,196,993 14,702,406 14,915,224
Cash & cash equivalents........................................... 189,339 201,934 506,976
Investment securities............................................. 389,693 359,236 358,950
Mortgage-backed securities........................................ 4,178,846 4,266,459 4,325,309
Loans receivable.................................................. 9,786,005 9,293,986 9,149,157
Allowance for loss................................................ 66,714 65,979 65,983
Portfolio of loans serviced for others............................ 1,302,580 1,322,681 1,341,686
Common shares outstanding, net.................................... 47,202,849 42,249,711 46,215,136
Treasury shares................................................... 1,219,399 1,222,775 1,257,350
Deposits:
Checking........................................................ $ 892,270 918,712 863,705
Savings......................................................... 817,517 807,568 814,353
MMDA............................................................ 1,375,053 1,321,645 1,331,152
Certificates:
6 month or less............................................... 484,299 471,594 496,678
6 month to 1 year............................................. 1,494,085 1,415,007 1,417,232
Retail jumbos................................................. 243,265 236,284 231,733
Other......................................................... 2,634,307 2,538,504 2,534,407
----------- ------------ -----------
Total CDS................................................... 4,855,956 4,661,389 4,680,050
----------- ------------ -----------
Total deposits............................................ $ 7,940,796 7,709,314 7,689,260
=========== ============ ===========
Borrowings:
Reverse repurchase agreements................................... $ 1,841,670 1,690,545 1,690,545
FHLB advances................................................... 3,882,648 3,836,888 4,089,129
Other........................................................... 215,478 214,787 213,443
----------- ------------ -----------
Total borrowings.............................................. $ 5,939,796 5,742,220 5,993,117
=========== ============ ===========
Weighted average rates:
Loans........................................................... 7.84% 7.83% 7.84%
MBS............................................................. 7.18 7.19 7.20
Loans and MBS................................................. 7.64 7.63 7.63
Other investments............................................... 7.05 7.05 6.63
Total interest-earning assets................................. 7.61 7.60 7.56
Deposits........................................................ 4.48 4.43 4.45
Borrowings...................................................... 5.98 5.97 5.95
Total interest-bearing liabilities............................ 5.12 5.09 5.11
Interest rate spread.............................................. 2.49% 2.51% 2.45%
Net yield on interest-earning assets.............................. 2.79% 2.80% 2.75%
Number of employees (FTEs)........................................ 2,702 2,609 2,635
</TABLE>
31
<PAGE> 2
Selected Activity for the Month and Quarter
<TABLE>
<CAPTION>
ONE MONTH ENDED 3 MONTHS
--------------------------------------- ENDED
9/30/97 8/31/97 7/31/97 9/30/97
--------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan activity:
Originations:
Real Estate:
Permanent:
One-to-four family............................. $ 203,611 187,622 168,817 560,050
Multi-family................................... - 125 1,445 1,570
Commercial..................................... 7,741 4,675 3,400 15,816
--------- --------- --------- ----------
Total permanent.............................. 211,352 192,422 173,662 577,436
--------- --------- --------- ----------
Construction:
One-to-four family............................. 30,994 37,112 38,495 106,601
Multi family................................... - 4,030 1,320 5,350
Commercial..................................... 5,380 250 - 5,630
--------- --------- --------- ----------
Total construction........................... 36,374 41,392 39,815 117,581
--------- --------- --------- ----------
Total real estate loans originated......... 247,726 233,814 213,477 695,017
--------- --------- --------- ----------
Consumer line of credit draws...................... 26,752 25,266 28,876 80,894
Consumer........................................... 53,569 36,571 47,035 137,175
Business line of credit draws...................... 8,433 11,747 9,917 30,097
Lease financings................................... 33,462 24,512 9,864 67,838
Business........................................... 10,502 9,613 5,224 25,339
--------- --------- --------- ----------
Total originated................................ $ 380,444 341,523 314,393 1,036,360
========= ========= ========= ==========
Loans purchased...................................... $ 295,318 - - 295,318
Loans sold........................................... $ 4,183 3,827 3,076 11,086
Principal reductions................................. $ 191,205 190,017 178,027 559,249
Deposit portfolio activity:
Net increase (decrease):
Checking......................................... $ (26,442) 55,007 (35,337) (6,772)
Savings.......................................... 9,949 (6,785) (13,051) (9,887)
MMDA............................................. 53,408 (9,507) (13,835) 30,066
Certificates:
6 month or less................................ 12,705 (25,084) (29,985) (42,364)
6 month to 1 year.............................. 79,078 (2,225) (21,465) 55,388
Retail jumbos.................................. 6,981 4,551 (103) 11,429
Other.......................................... 95,803 4,097 25,461 125,361
--------- --------- --------- ----------
Total CDS.................................... 194,567 (18,661) (26,092) 149,814
--------- --------- --------- ----------
Net increase in deposits............................. $ 231,482 20,054 (88,315) 163,221
========= ========= ========= ==========
Interest credited to deposits included above......... $ 48,911 9,733 10,195 68,839
Total increase (decrease) as a percentage of
beginning deposits................................. 3.00% .26% -1.14% 2.12%
</TABLE>
32
