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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-K
(Mark One)
[X ] Annual Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 1997, or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
-------------- -------------
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)
(Registrant's telephone number, including area code) (216) 566-5300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
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
-------- ---------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Yes X No
-------- ---------
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 3, 1998 was $3,655,667,000. For this purpose, the
following holders are considered affiliates: directors and executive officers of
Charter One Financial, Inc. The number of shares outstanding of the registrant's
sole class of common stock as of February 27, 1998 was 63,992,762.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the April 22, 1998
Annual Meeting of Shareholders are incorporated by reference in Part III.
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM
NUMBER PAGE
- ------ ----
PART I
<S> <C>
1. Business
General................................................................................... 1
Market Area and Competition............................................................... 1
Discussion of Forward-looking Statements.................................................. 1
Lending Activities........................................................................ 2
Sources of Funds.......................................................................... 3
Regulation................................................................................ 4
Executive Officers........................................................................ 5
2. Properties.................................................................................. 5
3. Legal Proceedings........................................................................... 5
4. Submission of Matters to a Vote of Security Holders......................................... 6
PART II
5. Market for Registrant's Common Equity and Related Shareholder Matters....................... 6
6. Selected Financial Data..................................................................... 7
7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 8
7A. Quantitative and Qualitative Disclosure About Market Risk................................... 24
8. Financial Statements and Supplementary Data................................................. 24
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures....... 57
PART III
10. Directors and Executive Officers of the Registrant.......................................... 57
11. Executive Compensation...................................................................... 57
12. Security Ownership of Certain Beneficial Owners and Management.............................. 57
13. Certain Relationships and Related Transactions.............................................. 57
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 57
Signatures...............................................................................................
Exhibit Index............................................................................................
</TABLE>
i
<PAGE> 3
PART I
CHARTER ONE FINANCIAL, INC.
ITEM 1. BUSINESS
GENERAL
Charter One Financial, Inc. ("Charter One" or the "Company") is a unitary
savings institution holding company headquartered in Cleveland, Ohio. Charter
One's business has consisted primarily of the business of Charter One Bank (the
"Bank") and its subsidiaries. The Bank operates through 220 banking offices: 100
in Ohio (under the name Charter One Bank), 82 in Michigan (under the name First
Federal of Michigan), and 38 in Western New York (under the name Rochester
Community Savings Bank). The Bank and other subsidiaries are engaged in a
variety of financial services businesses. In addition to the general business of
attracting deposits and making real estate and other loans, the Company is
engaged in mortgage banking, automobile lending, equipment leasing, data
processing, real estate appraisal, and retail brokerage services. The executive
offices of Charter One are located at 1215 Superior Avenue, Cleveland, Ohio
44114, and the telephone number is (216) 566-5300. See Management's Discussion
and Analysis of Financial Condition and Results of Operations ("MD&A") -
"Holding Company Business" and "Acquisitions" set forth in Item 7 of this Form
10-K for additional discussion of the Company's business.
The Company has a long history of completing mergers and acquisitions, which
have had a significant effect on its business. See Note 2 of the "Notes to the
Consolidated Financial Statements" (the "Notes") set forth in Item 8 of this
Form 10-K for a discussion of the impact of recent business combinations and
asset acquisitions.
MARKET AREA AND COMPETITION
As of December 31, 1997, Charter One Bank was ranked among the five largest
thrift institutions in the country and operates 220 banking offices located
primarily in Northeast Ohio, Southeast Michigan and Western New York. The market
areas served by the Bank include approximately 41% of the population of Ohio,
51% of Michigan, and 12% of New York.
The consumer banking business is highly competitive. The Bank competes actively
with consumer and commercial banks, savings and loans, mortgage bankers and
other financial service entities.
DISCUSSION OF FORWARD-LOOKING STATEMENTS
When used or incorporated by reference in disclosure documents, the words
"anticipate," "estimate," "expect," "project," "target," "goal" and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act. Such forward-looking statements
are subject to certain risks, uncertainties and assumptions, including those set
forth below. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, expected or projected. These
forward-looking statements speak only as of the date of the document. The
Company expressly disclaims any obligation or undertaking to publicly release
any updates or revisions to any forward-looking statement contained herein to
reflect any change in the Company's expectation with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
Economic Conditions and Real Estate Risk. Charter One's lending operations
(exclusive of its mortgage banking and auto finance operations) are primarily
concentrated in Ohio, Michigan and Western New York. As a result, the financial
condition and results of operations of the Company will be subject to general
economic conditions prevailing in those states. If economic conditions in those
states worsen, the Company may experience higher default rates in its existing
portfolio as well as a reduction in the value of collateral securing individual
loans. Separately, the Company's ability to originate the volume of loans or
achieve the level of deposits currently anticipated could be affected. As a
result, the occurrence of any of these events could affect the accuracy of
previously made forward-looking statements.
Interest Rate Risk. Charter One realizes income principally from the
differential or spread between the interest earned on loans, investments and
other interest-earning assets and the interest paid on deposits and borrowings.
Loan volumes and yields, as well as the volume of and rates on investments,
deposits and borrowings, are affected
1
<PAGE> 4
by market interest rates. Additionally, because of the terms and conditions of
many of the Company's loan documents and deposit accounts, a change in interest
rates could also affect the duration of the loan portfolio and/or the deposit
base, which could alter the Company's sensitivity to future changes in interest
rates. As a result, significant shifts in interest rates could affect the
accuracy of previously made forward-looking statements. See MD&A - "Quantitative
and Qualitative Discussion About Market Risk."
LENDING ACTIVITIES
General. The composition of Charter One's loans and leases held for investment
is summarized below. Additional discussion of the Company's lending activities
is included in MD&A - "Financial Condition - Loans and Leases" and Notes 1 and 6
of the Notes.
<TABLE>
<CAPTION>
COMPOSITION OF LOANS AND LEASES
AT DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995
------------------- ---------------------- -------------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
----------- ----- ------------ ----- ------------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage
loans:
Permanent:
One-to-four family .......... $ 7,830,344 63.3% $ 6,667,514 66.9% $ 5,887,570 69.1%
Multifamily ................. 255,952 2.1 303,922 3.1 377,717 4.4
Commercial
real estate ............... 334,362 2.7 387,617 3.9 419,798 4.9
----------- ----- ------------ ----- ------------ -----
Total permanent ......... 8,420,658 68.1 7,359,053 73.9 6,685,085 78.4
Construction:
One-to-four family .......... 318,529 2.6 271,438 2.7 133,929 1.6
Multifamily ................. 34,058 .3 14,517 .1 11,495 .1
Commercial
real estate ............... 23,006 .2 19,122 .2 38,710 .5
----------- ----- ------------ ----- ------------ -----
Total
construction .......... 375,593 3.1 305,077 3.0 184,134 2.2
----------- ----- ------------ ----- ------------ -----
Total mortgage
loans ............... 8,796,251 71.2 7,664,130 76.9 6,869,219 80.6
Automobile loans .................. 1,543,728 12.5 991,802 10.0 807,629 9.5
Other consumer loans .............. 1,598,754 12.9 1,145,898 11.5 811,664 9.5
Lease financings .................. 439,004 3.5 251,133 2.5 131,352 1.5
Business loans .................... 172,039 1.4 108,992 1.1 74,511 .9
----------- ----- ------------ ----- ------------ -----
Total loans
and leases ......... 12,549,776 101.5 10,161,955 102.0 8,694,375 102.0
Less net items .................... (189,642) (1.5) (194,326) (2.0) (172,850) (2.0)
----------- ----- ------------ ----- ------------ -----
Loans and
leases, net......... $12,360,134 100.0% $ 9,967,629 100.0% $ 8,521,525 100.0%
=========== ===== ============ ===== ============ =====
COMPOSITION OF LOANS AND LEASES
AT DECEMBER 31,
-------------------------------------------------
1994 1993
------------------- ----------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
----------- ----- ------------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate mortgage
loans:
Permanent:
One-to-four family .......... $5,952,520 71.3% $6,333,757 73.1
Multifamily.................. 423,339 5.1 492,425 5.7
Commercial
real estate .............. 420,774 5.0 518,130 6.00
---------- ----- ---------- -----
Total permanent ........ 6,796,633 81.4 7,344,312 84.8
Construction:
One-to-four family ......... 133,659 1.6 125,198 1.5
Multifamily ................ 7,645 .1 3,281 -
Commercial
real estate .............. 33,907 .4 34,959 .4
---------- ----- ---------- -----
Total
construction ......... 175,211 2.1 163,438 1.9
---------- ----- ---------- -----
Total mortgage
loans ............... 6,971,844 83.5 7,507,750 86.7
Automobile loans .................. 748,707 9.0 560,386 6.5
Other consumer loans .............. 705,962 8.4 677,364 7.8
Lease financings .................. - - - -
Business loans .................... 100,149 1.2 120,334 1.4
---------- ----- ---------- -----
Total loans
and leases ......... 8,526,662 102.1 8,865,834 102.4
Less net items .................... (174,578) (2.1) (209,103) (2.4)
---------- ----- ---------- -----
Loans and
leases, net ................... $8,352,084 100.0% $8,656,731 100.0%
========== ===== ========== =====
</TABLE>
As of December 31, 1997, there was no concentration of loans or leases in any
type of industry which exceeded 10% of the Bank's total loans and leases that is
not included as a loan or lease category in the table above.
2
<PAGE> 5
The following table reflects the principal repayments contractually due
(assuming no prepayments) on the Bank's construction and business loan portfolio
at December 31, 1997. Management expects prepayments will cause actual
maturities to be shorter.
<TABLE>
<CAPTION>
CONTRACTUAL MATURITIES
PRINCIPAL REPAYMENTS CONTRACTUALLY DUE IN THE
YEAR(S) ENDED DECEMBER 31,
--------------------------------------------
1999- 2004 AND
1998 2003 THEREAFTER TOTAL
---- ---- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Construction loans................................................... $ 225,567 44,176 - 269,743
Business loans....................................................... 45,253 86,606 34,679 166,538
-------- -------- ---------- ------------
Total(1).......................................................... $ 270,820 130,782 34,679 436,281
======== ======== ========== ============
</TABLE>
- ---------------------------
(1) Of the $165.5 million of loans due after December 31,1998, 31% are fixed
rate and 69% are adjustable rate.
SOURCES OF FUNDS
General. Deposits have historically been the most important source of the Bank's
funds for use in lending and for general business purposes. The Bank also
derives funds from FHLB advances, reverse repurchase agreements and other
borrowings, principal repayments on loans and mortgage-backed securities, funds
provided by operations and proceeds from the sale of loans and securities. See
MD&A - "Financial Condition - Deposits and Other Sources of Funds" and
"Liquidity", and Notes 9, 10, 11 and 12 of the Notes for additional information
about deposits and borrowings.
Deposits. The following table indicates the amount of the Bank's certificates of
deposit and other deposits of $100,000 or more by the time remaining until
maturity as of December 31, 1997.
<TABLE>
<CAPTION>
CERTIFICATES CHECKING, SAVINGS AND
TIME TO MATURITY AS OF DECEMBER 31, 1997 OF DEPOSIT MONEY MARKET ACCOUNTS
---------------------------------------- ------------ ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less........................................................... $ 287,424 795,484
Three through six months....................................................... 206,863 -
Six through twelve months...................................................... 171,504 -
Over twelve months............................................................. 167,420 -
-------- --------
Total....................................................................... $ 833,211 795,484
======== ========
</TABLE>
3
<PAGE> 6
Borrowings.
The following table sets forth certain information regarding short-term
borrowings at the end of and during the periods indicated. The Company's
short-term borrowings consist entirely of reverse repurchase agreements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Borrowings outstanding at end of period.......................... $ 210,002 626,849 1,512,581
Weighted average rate at end of period(1)........................ 5.84% 5.49% 5.93%
Maximum month-end balance of borrowings during
the period..................................................... $ 361,182 1,451,267 3,447,114
Approximate average borrowings outstanding during
the period(2).................................................. 205,708 1,023,638 2,791,250
Approximate weighted average rate during the period(1)........... 5.80% 5.48% 5.98%
</TABLE>
- ---------------------------
(1) Does not include the annualized effect of interest rate risk management
instruments.
(2) Computed on a daily basis.
Further reference is made to Notes 10, 11 and 12 of the Notes for an analysis of
FHLB advances, reverse repurchase agreements and other borrowings. See also Note
13 of the Notes for information regarding the interest rate risk management
instruments used to modify the terms of liabilities.
REGULATION
General. Charter One is a savings and loan holding company and, as such, is
subject to regulation by the Office of Thrift Supervision ("OTS"). The Bank is a
federally chartered savings bank and is a member of the Federal Home Loan Bank
("FHLB") system, while its deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") through the Savings Association Insurance Fund ("SAIF").
The lending activities of the Bank must comply with various state and federal
regulatory requirements. The OTS periodically examines the Bank for compliance
with various regulatory requirements. The FDIC also conducts examinations of
SAIF members. The Bank must file reports with the OTS describing its activities
and financial condition. This supervision and regulation is intended primarily
for the protection of depositors.
The laws and regulations governing savings institutions have been through at
least two major revisions in recent years. First, the Riegle-Neal Interstate
Banking and Efficiency Act of 1994, effective June 1, 1997 provided commercial
banks interstate branching rights which could result in more intense competition
from out of state banks. Second, on September 30, 1996, the Regulatory Paperwork
Reduction Act was signed into law. Among other things this legislation
eliminated the premium differential between SAIF-insured institutions and Bank
Insurance Fund ("BIF") insured institutions. The new legislation also provides
for the merger of SAIF and BIF if certain conditions are met by January 1, 1999.
See MD&A - "Capital and Dividends" and Note 16 of the Notes for a discussion of
the Bank's capital calculation and its compliance with regulatory capital
requirements and the Prompt Corrective Action Act at December 31, 1997.
4
<PAGE> 7
EXECUTIVE OFFICERS
Executive Officers of the Registrant. The executive officers of the Company,
each of whom is currently an executive officer of the Bank, are identified
below. The executive officers of the Company are elected annually by its Board
of Directors to serve until the next annual election of officers following the
annual meeting of shareholders.
<TABLE>
<CAPTION>
AGE AT
DECEMBER 31, OFFICER
NAME 1997 POSITION SINCE
----- ------------ -------- -------
<S> <C> <C> <C>
Charles John Koch............... 51 Chairman of the Board, President and Chief Executive Officer 1987
Mark D. Grossi.................. 44 Executive Vice President 1992
John David Koch................. 45 Executive Vice President 1987
Richard W. Neu.................. 41 Executive Vice President and Chief Financial Officer 1995
Robert J. Vana.................. 47 Senior Vice President, Chief Corporate Counsel and
Corporate Secretary 1987
</TABLE>
Charles John Koch has been President of the Bank since 1980 and was Chief
Operating Officer of Charter One from 1980 to 1988, when he was appointed Chief
Executive Officer of Charter One. In February 1995, he was appointed Chairman of
the Board of the Company and of the Bank. Mr. Koch is the brother of John David
Koch.
Mark D. Grossi is an Executive Vice President of the Company and of the Bank,
and has been responsible for retail banking and branch administration since the
Company's merger with First American Savings Bank in 1992.
John David Koch joined the Bank in 1982 and is Executive Vice President of the
Company and of the Bank. Mr. Koch is responsible for the credit and lending
functions of the Bank and has management responsibility for numerous subsidiary
corporations. Mr. Koch is the brother of Charles John Koch.
Richard W. Neu is Executive Vice President and Chief Financial Officer of the
Company and the Bank. He joined Charter One in 1995 following the Company's
merger with FirstFed Michigan Corporation. Prior to the merger he had served as
FirstFed's Executive Vice President and Chief Financial Officer.
Robert J. Vana has been Chief Corporate Counsel and Corporate Secretary of the
Company since 1988 and joined the Bank as Senior Vice President and Corporate
Secretary in 1982.
ITEM 2. PROPERTIES
Charter One's and the Bank's executive offices are located at 1215 Superior
Avenue, Cleveland, Ohio in a seven-story office building owned by a subsidiary
of the Bank. The Bank also maintains an operations center in a single-story
building owned by the Bank and located in Cleveland, Ohio. The Bank owns various
other office buildings including a 23-story office building in Detroit, a
four-story office building in Rochester, a nine-story office building in Toledo,
and a four-story office building in downtown Canton. The buildings each include
space for a branch office and various divisional administrative functions, with
any remaining space leased to tenants.
As of December 31, 1997, in addition to the Bank's 220 banking locations, the
Bank and its subsidiaries operated 37 loan production offices in 14 states. At
December 31, 1997, the Bank owned 65 of these banking facilities and leased the
remainder. The Bank operates 221 ATMs at various banking offices and is a member
of the Money Access Center System ("MAC"), which provides its customers access
to ATMs nationwide. The lease terms for branch offices are not individually
material. Terms range from monthly to seven years.
ITEM 3. LEGAL PROCEEDINGS
The Bank and its subsidiaries are involved as plaintiff or defendant in various
actions incident to their business, none of which is believed to be material to
the financial condition of the Bank, except as discussed below.
Prior to the merger with FirstFed Michigan Corporation, Charter One and FirstFed
each filed a lawsuit against the United States based upon the breach of certain
agreements between Charter One and First Federal, respectively, and
5
<PAGE> 8
the government involving supervisory goodwill and capital credits in the
aggregate amount of approximately $126 million. FIRST FEDERAL OF MICHIGAN V.
UNITED STATES, No. 95-464C was filed in the United States Court of Federal
Claims on July 20, 1995. CHARTER ONE BANK, F.S.B. V. UNITED STATES, No. 95-528C
was filed in the same court on August 8, 1995. These actions, claiming damages
for the government's breach of four separate contractual agreements, have been
consolidated and the case is proceeding under docket number 95-464C pursuant to
the terms of a Case Management Order ("CMO") entered by the Court to govern all
similar goodwill/contract cases.
Pursuant to that CMO, Charter One filed a motion for summary judgment on
liability as to two of the four contractual agreements at issue on Charter One's
complaint. That motion is currently pending. On December 22, 1997 the Court
ruled in favor of four thrifts with pending motions for summary judgment on
liability. In the December 22, 1997 opinion the Court barred the government from
raising in the future certain defenses for breach of contract liability which
the Court rejected in the four cases. SEE CALIFORNIA FEDERAL BANK ET AL V. U.S.,
No. 92- 138C (December 22, 1997).
The status of the litigation is dependent to some degree upon factors which are
out of the control of Charter One, including, but not limited to, the outcome of
the damages litigation in GLENDALE FEDERAL BANK V. U.S., No. 90-772C and
STATESMAN SAVINGS BANK V. U.S., No. 90-773C in the United States Court of
Federal Claims. On July 1, 1996, the United States Supreme Court affirmed the
Court of Federal Claims' finding that the government had breached contractual
agreements with Glendale and with Statesman by reversing its prior agreement to
recognize supervisory goodwill and capital credits as assets includible in
regulatory capital. Those cases were remanded to the Court of Federal Claims for
a trial on damages. The Glendale damages trial is pending before Chief Judge
Smith. The trial in Statesman is scheduled to begin on May 11, 1998 before Judge
Miller. The Court had indicated that decisions in GLENDALE and in STATESMAN
should be expected approximately 90 days after the conclusion of the damages
trials.
Under the CMO, trials in other pending cases are expected to commence following
the conclusion of the trials in the GLENDALE and STATESMAN cases. However, due
to the number of pending cases, the CMO provides for a sequencing process
whereby a limited number of cases proceed to pre-trial discovery and to trial in
a given calendar year. Charter One's case has been assigned to the second group
of cases, and as such, is currently scheduled to begin pretrial discovery on
April 1, 1999. Due to the pendency of these other related cases, and the
uncertainty inherent in litigation, Charter One is not able to estimate either
the time frame for resolution of its claims, or the final outcome of its
litigation against the government, including the damages, if any, which could be
awarded if Charter One ultimately prevails on liability issues.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
A Special Meeting of Shareholders of the Company was held on October 3, 1997.
There were two proposals voted upon by proxies representing 42,327,383 shares of
common stock, or 92% of the total outstanding shares in the following manner:
Proposal I was to adopt the Agreement and Plan of Merger and Reorganization,
dated as of May 21, 1997, by and between Charter One, Charter Michigan Bancorp,
Inc., Charter One Bank, F.S.B., RCSB Financial, Inc. and Rochester Community
Savings Bank. There were 42,327,383 votes cast as follows: 39,572,744 for,
108,970 against, 135,297 abstain, and 2,510,372 broker no-vote.
Proposal II was to adopt an amendment to the Charter One Second Restated
Certificate of Incorporation authorizing the number of directors on the Charter
One Board of Directors to be fixed by the Charter One Bylaws. There were
42,327,383 votes cast as follows: 41,636,343 for, 520,434 against, 170,606
abstain and zero broker no-vote.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
See MD&A - "Capital and Dividends" for information required by this item.
6
<PAGE> 9
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FIVE-YEAR SUMMARY
AT AND FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996(1) 1995(1) 1994(1) 1993(1)
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA(2):
<S> <C> <C> <C> <C> <C>
Interest income.................................. $ 1,377,687 1,293,883 1,356,831 1,262,829 1,331,566
Interest expense................................. 850,724 785,323 918,804 825,532 914,101
----------- ------- ------ ------ ------
Net interest income.............................. 526,963 508,560 438,027 437,297 417,465
Provision for loan and lease losses.............. 40,861 17,549 8,664 19,044 20,580
----------- ------- ------ ------ ------
Net interest income after provision
for loan and lease losses...................... 486,102 491,011 429,363 418,253 396,885
Other income:
Net gain (loss)................................ (3,074) 1,753 (93,527) (116,736) 8,991
Other.......................................... 113,885 114,484 90,343 82,409 96,426
Administrative expenses.......................... 373,930 357,193 322,637 305,502 404,794
----------- ------- ------ ------ ------
Income before income taxes and
extraordinary item............................. 222,983 250,055 103,542 78,424 97,508
Income taxes..................................... 71,847 82,628 31,757 18,485 52,534
----------- ------- ------ ------ ------
Income before extraordinary item................. 151,136 167,427 71,785 59,939 44,974
Extraordinary item - early
extinguishment of debt, net of tax
benefit...................................... (2,727) - - (12,348) -
----------- ------- ------ ------ ------
Net income....................................... $ 148,409 167,427 71,785 47,591 44,974
=========== ======= ====== ====== ======
BASIC EARNINGS PER SHARE:
Income before extraordinary item................. $ 2.40 2.64 1.06 .87 .68
Extraordinary item - early
extinguishment of debt.......................... (.04) - - (.20) -
----------- ------- ------ ------ ------
Net income....................................... $ 2.36 2.64 1.06 .67 .68
=========== ======= ====== ====== ======
DILUTED EARNINGS PER SHARE:
Income before extraordinary item................. $ 2.33 2.51 1.04 .87 .68
Extraordinary item - early extinguishment
of debt........................................ (.04) - - (.20) -
----------- ------- ------ ------ ------
Net income....................................... $ 2.29 2.51 1.04 .67 .68
=========== ======= ====== ====== ======
Dividends declared and paid per
common share(3)................................. $ .95 .82 .68 .53 .38
Common stock price range:
High........................................... 64.00 42.62 30.28 21.77 22.68
Low............................................ 39.17 25.85 17.12 16.10 15.42
Close.......................................... 63.13 40.00 27.78 17.23 17.91
Dividend payout ratio(3)......................... 41.48% 32.21% 100.00 * 18.34%
</TABLE>
- ---------------------------
* Not meaningful.
(1) As restated for applicable mergers and acquisitions. See Note 2 to the
Consolidated Financial Statements.
(2) Due to the effect of acquisitions, amounts are not necessarily indicative of
future results.
(3) The amounts presented herein are historical per share amounts declared and
paid by the Company, as adjusted for stock splits and stock dividends. No
adjustment has been made for mergers accounted for as pooling of interests.
7
<PAGE> 10
<TABLE>
<CAPTION>
FIVE-YEAR SUMMARY (CONTINUED)
AT AND FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1997 1996(1) 1995(1) 1994(1) 1993(1)
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION AND
OTHER DATA:
Cash, federal funds sold and other......... $ 239,716 334,596 753,161 426,040 473,046
Investment securities...................... 582,589 246,060 409,880 473,038 435,258
Mortgage-backed securities................. 5,285,482 6,359,463 6,794,491 7,915,186 7,872,284
Loans and leases, net...................... 12,701,805 10,118,066 8,649,620 8,449,525 9,111,694
Other assets............................... 950,673 827,377 843,147 684,433 744,484
------------ ---------- ---------- ---------- ----------
Total assets............................. $ 19,760,265 17,885,562 17,450,299 17,948,222 18,636,766
============ ========== ========== ========== ==========
Deposits................................... $ 10,219,200 10,209,847 9,235,461 9,165,967 9,970,224
FHLB advances.............................. 5,370,503 3,426,783 3,837,494 3,758,222 2,876,774
Other borrowings........................... 2,326,322 2,636,362 2,593,630 3,462,312 4,011,682
Other liabilities.......................... 467,351 366,983 522,951 391,051 563,535
Shareholders' equity....................... 1,376,889 1,245,587 1,260,763 1,170,670 1,214,551
------------ ---------- ---------- ---------- ----------
Total liabilities and shareholders'
equity.................................. $ 19,760,265 17,885,562 17,450,299 17,948,222 18,636,766
============ ========== ========== ========== ==========
Total assets as initially reported(2)...... $ 19,760,265 13,893,841 13,558,361 6,130,172 5,215,426
Loan servicing portfolio................... 9,084,871 10,653,969 9,176,432 6,479,604 4,860,865
Number of offices:
Full service branches.................... 220 207 189 187 214
Loan production offices.................. 37 49 56 48 43
Number of employees (FTEs)................. 4,327 4,199 3,873 3,895 4,448
Book value per share(3).................... $ 21.56 19.64 20.00 18.60 19.19
SELECTED RATIOS(4):
Net yield on average interest-
earning assets............................ 2.93% 3.02% 2.48% 2.50% 2.40%
Interest rate spread during
the period................................ 2.64 2.70 2.14 2.25 2.18
Return on average equity................... 11.28 13.25 5.85 4.08 3.88
Return on average assets................... .79 .96 .39 .26 .25
Average shareholders' equity to
average assets............................ 7.04 7.22 6.71 6.42 6.32
Total shareholders' equity to total
assets (at end of year)................... 6.97 6.96 7.22 6.52 6.52
</TABLE>
- ---------------------------
(1) As restated for applicable mergers and acquisitions. See Note 2 to the
Consolidated Financial Statements.
(2) The amounts presented represent amounts as initially reported by the Company
in the respective year's annual report to shareholders.
(3) Per share data has been restated to reflect the 5% stock dividend issued
September 30, 1996 and October 31, 1997.
(4) Due to the effect of acquisitions, amounts are not necessarily indicative of
future results.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following financial review presents an analysis of the asset and liability
structure of the Company and a discussion of the results of operations for each
of the periods presented in the annual report and sources of liquidity and
capital resources. Certain statements in this report that relate to Charter
One's plans, objectives, or future performance may be deemed to be
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are based on management's current
expectations. Actual strategies and results in future periods may differ
materially from those currently expected because of various risks and
uncertainties. Additional discussion of factors affecting Charter One's business
and prospects is contained in the Company's periodic filings with the Securities
and Exchange Commission.
8
<PAGE> 11
HOLDING COMPANY BUSINESS
Charter One Financial, Inc. ("Charter One" or the "Company") is a Delaware
corporation organized as a unitary savings and loan holding company and owns all
of the outstanding capital stock of Charter Michigan Bancorp, Inc. which is a
Michigan corporation organized as a unitary savings and loan holding company,
which in turn owns all of the outstanding capital stock of Charter One Bank,
F.S.B. (the "Bank".) The business of the Bank and, therefore, the primary
business of the Company is providing consumer and business banking services to
certain major markets in Ohio, Michigan, and, after October 1997, in New York.
At the end of 1997 the Bank and its subsidiaries were doing business through 220
full-service banking branches and 37 loan production offices.
ACQUISITIONS
On October 3, 1997, Charter One combined with RCSB Financial, Inc. ("Rochester")
in a strategic alliance (the "Rochester Merger") accounted for as a pooling of
interests and, accordingly, the financial statements for the Company for all
periods prior to the merger have been restated to include the results of
Rochester. Rochester was the holding company for Rochester Community Savings
Bank ("RCSB"), a $4.1 billion state-chartered bank under the laws of New York.
RCSB was also combined with Charter One Bank as of the merger date. RCSB had two
significant subsidiaries, American Home Funding ("AHF") a residential mortgage
banking subsidiary and American Credit Services, Inc. ("ACSI") an automobile
finance company. As of the merger date both became subsidiaries of the Bank.
Subsequent to the merger date, the name of AHF was changed to Charter One
Mortgage Corp. ACSI will be changing its name to Charter One Auto Finance
Corporation some time in the third quarter of 1998. See Note 2 to the
Consolidated Financial Statements.
On September 19, 1997, the Company completed the acquisition of Haverfield
Corporation ("Haverfield"). Haverfield was the holding company of Home Bank,
F.S.B. The acquisition was accounted for using the purchase method of
accounting. See Note 2 to the Consolidated Financial Statements.
In 1996, the only merger and acquisition activity was the acquisition of First
Nationwide's 21 Michigan branches on June 28 (the "First Nationwide
transaction"). The branch deposits totaled $796.7 million and were assumed at a
cost of $57.0 million which was reflected as goodwill.
On October 31, 1995, Charter One combined with FirstFed Michigan Corporation
("FirstFed") in a merger of equals (the "FirstFed Merger") which was accounted
for as a pooling of interests and, accordingly, the financial statements for the
Company for all periods prior to the FirstFed Merger have been restated to
include the results of FirstFed. FirstFed was the holding company for First
Federal of Michigan ("First Federal"), a $7.7 billion savings and loan
headquartered in Detroit, Michigan. See Note 2 to the Consolidated Financial
Statements.
RESULTS OF OPERATIONS
For the year ended December 31, 1997, Charter One reported net income of $148.4
million, compared to $167.4 million and $71.8 million in the years ended
December 31, 1996 and 1995, respectively. On a diluted per share basis, net
income was $2.29, $2.51 and $1.04 in 1997, 1996 and 1995 respectively. As
discussed below, 1997 and 1995 operating results were affected by merger-related
and other special charges. In addition, the 1996 results were adversely affected
by the SAIF assessment discussed below.
9
<PAGE> 12
1997 Merger-related and Other Special Charges
<TABLE>
<CAPTION>
EFFECT ON YEAR ENDED
DECEMBER 31, 1997
-----------------------
PRETAX AFTER
TAX
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Rochester merger-related charges:
Transaction costs................................................................... $ 16,807 13,872
Severance and other termination costs............................................... 22,227 14,892
Duplicate assets, lease terminations and other costs to combine operations.......... 21,583 14,461
--------- --------
Merger-related charges............................................................ 60,617 43,225
--------- --------
Other special charges:
Valuation adjustment on loan servicing assets....................................... 18,277 12,246
Additional loan loss reserves provided primarily on auto finance portfolio.......... 11,244 7,533
Asset/liability management actions and other special charges........................ 12,369 8,204
--------- --------
Other special charges............................................................ 41,890 27,983
--------- --------
Total merger-related charges and other special charges...................... $ 102,507 71,208
========= ========
</TABLE>
1996 Special Charges
During 1996, Congress recapitalized the SAIF through a one-time special
assessment of member institutions. The Bank's share of the assessment resulted
in an after-tax charge of $37.1 million. Due to the recapitalization, the Bank's
deposit insurance rate (including assessments by the Federal Housing Finance
Board's Finance Corporation) was reduced to 6.5 basis points in 1997 from 23
basis points in 1996.
1995 Merger-related and Other Special Charges
<TABLE>
<CAPTION>
EFFECT ON YEAR ENDED
DECEMBER 31, 1995
-----------------------
PRETAX AFTER
TAX
(DOLLARS IN THOUSANDS)
<S> <C> <C>
FirstFed merger-related charges:
Transaction costs................................................................... $ 5,900 5,900
Severance and other termination costs............................................... 18,715 12,163
Duplicate assets, lease terminations, and other costs to combine operations......... 12,913 8,392
--------- --------
Merger-related charges............................................................ 37,528 26,455
Asset/liability management actions and other special charges........................ 101,752 66,139
--------- --------
Total merger-related and other special charges................................. $ 139,280 92,594
========= ========
</TABLE>
PERFORMANCE OVERVIEW
As mentioned previously, the Company's reported results in each of the last
three years were significantly affected by merger-related and other special
charges. By excluding these charges a more comparable pretax core earnings can
be examined.
The following table summarizes the components of adjusted pretax core earnings.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net interest income.................................................. $ 526,963 508,560 438,027
Provision for loan and lease losses.................................. 29,617 17,549 8,664
Other income, excluding gains and losses............................. 132,162 114,484 90,343
Administrative expenses.............................................. 310,813 300,935 285,109
---------- ------- -------
Adjusted pretax core earnings...................................... $ 318,695 304,560 234,597
========== ======= =======
</TABLE>
In general, the above comparison reflects consistent growth in net interest
income, the Company's low credit risk (as characterized by modest provision
levels) and an increasing percentage of core earnings being derived by
non-interest income. Additionally, the Company's efforts to control overhead
costs are illustrated by an efficiency ratio (excluding the SAIF assessment,
merger-related charges, and special charges) of 46.6%, 47.6% and 53.4% for 1997,
10
<PAGE> 13
1996 and 1995, respectively. The efficiency ratio is the ratio of administrative
expenses (excluding goodwill amortization) to net interest income and other
income exclusive of net gains and losses.
NET INTEREST INCOME
The Bank's net income generally depends upon its net interest income, which is
the difference between the interest and dividend income earned on its loans and
investments and the interest expense on its deposits and borrowings. Net
interest income is the principal source of earnings for the Company. It is
affected by a number of factors including the level, pricing and maturity of
interest-earning assets and interest-bearing liabilities, interest rate
fluctuations and asset quality as well as general economic conditions and
regulatory policies.
Net interest income for 1997 was $527.0 million, an increase of $18.4 million,
or 3.6%, over the $508.6 million of net interest income in 1996. This increase
was primarily due to growth in interest-earning assets. The average balance of
interest-earning assets was $1.2 billion higher for the 12 months ended December
31, 1997 as compared to the same period in 1996. The higher balance of
interest-earning assets was achieved primarily with retail loan growth and the
acquisition on September 19, 1997 of Haverfield, which had $363.3 million in
assets. The higher balances of interest-earning assets caused interest income to
increase by $103.2 million for the 12 months ended December 31, 1997. This
increase was partially offset by a 2 basis point decrease in the yield on
interest-earning assets. The yield on interest-earning assets was 7.65% for 1997
as compared to 7.67% for 1996. The lower yield on assets caused interest income
to decrease by $19.4 million.
The growth in interest-earning assets was primarily funded by a $1.1 billion
increase in interest-bearing liabilities. The higher balances of
interest-bearing liabilities caused interest expense to increase by $53.4
million. The growth of interest-bearing liabilities came almost equally from
retail deposits, primarily through acquisitions, and increased borrowings. The
cost of interest-bearing liabilities was 5.01% for 1997 as compared to 4.97% for
1996. This increase in the cost of interest-bearing liabilities was primarily
driven by market interest rates which caused interest expense to increase by
$12.1 million. Overall, the net yield on interest-earning assets declined to
2.93% for 1997 as compared to 3.02% for 1996 and the interest rate spread
decreased to 2.64% for 1997 as compared to 2.70% for 1996. These margins
narrowed in 1997 primarily as a result of market interest rates, funding of a
portion of incremental asset growth by borrowings, and the flattening of the
yield curve.
Net interest income for 1996 was $508.6 million, an increase of $70.5 million,
or 16.1%, over the $438.0 million of net interest income for 1995. The increase
in net interest income was primarily due to a lower cost of interest-bearing
liabilities in 1996. The cost of interest-bearing liabilities decreased by 56
basis points to 4.97% for 1996. This lower cost of funds reduced interest
expense by $76.3 million to $785.3 million for 1996. The improvement in the cost
of funds was primarily the result of the financial restructuring undertaken in
the fourth quarter of 1995 in conjunction with the FirstFed Merger. The
financial restructuring also reduced the average balance of interest-earning
assets by $820 million and the average balance of interest-bearing liabilities
by $805 million.
The lower cost of funds for 1996 was the primary reason the interest rate spread
improved to 2.70% from 2.14% for 1995. Similarly, the net yield on
interest-earning assets increased to 3.02% for 1996 from 2.48% for 1995.
The following table shows average balances, interest earned or paid and average
interest rates for the years indicated. Average balances are calculated on a
daily basis.
11
<PAGE> 14
<TABLE>
<CAPTION>
AVERAGE BALANCES, INTEREST AND YIELDS/COSTS
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
AVG. AVG. AVG.
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
----------- --------- ---- ---------- --------- ---- ---------- --------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Loans and lease
financings(1) ...........$11,371,601 $ 910,368 8.01% $9,471,066 $ 775,197 8.18% $8,714,852 $ 724,488 8.31%
Mortgage-backed
securities:
Available for sale ..... 1,084,109 74,993 6.92 1,174,538 81,389 6.93 373,360 26,269 7.04
Held to maturity ....... 4,786,803 339,685 7.10 5,491,661 389,955 7.10 7,230,550 514,798 7.12
Investment
securities available
for sale ............... 354,565 24,160 6.81 321,711 21,285 6.62 897,186 59,964 6.68
Other interest-
earning assets .......... 418,007 28,481 6.72 400,643 26,057 6.50 463,663 31,312 6.75
----------- --------- ---------- --------- ---------- ---------
Total interest-
earning assets ...... 18,015,085 1,377,687 7.65 16,859,619 1,293,883 7.67 17,679,611 1,356,831 7.67
----------- --------- ---------- --------- ---------- ---------
Allowance for loan
and lease losses .......... (96,006) (92,421) (89,557)
Noninterest-earning
assets(2) ................. 759,153 714,294 683,894
--------- --------- ---------
Total assets .......$18,678,232 $17,481,492 $18,273,948
========= ========= =========
Interest-bearing
liabilities:
Deposits:
Checking
accounts .............$ 1,108,202 12,366 1.12 $ 975,637 12,457 1.28 $ 850,491 12,404 1.46
Money market
accounts ............. 1,655,548 57,234 3.46 1,343,085 45,546 3.39 1,126,853 37,063 3.29
Savings accounts ....... 1,310,958 31,003 2.36 1,418,157 34,850 2.46 1,592,499 39,088 2.45
Certificates of
deposit .............. 6,160,824 353,298 5.73 5,922,798 336,008 5.67 5,736,409 350,729 6.11
----------- --------- ---------- --------- ---------- ---------
Total deposits ...... 10,235,532 453,901 4.43 9,659,677 428,861 4.44 9,306,252 439,284 4.72
----------- --------- ---------- --------- ---------- ---------
FHLB advances ............ 3,941,310 229,341 5.80 3,546,310 204,265 5.76 3,557,888 217,350 6.11
Other borrowings ......... 2,759,090 167,482 6.00 2,593,276 152,197 5.87 3,740,498 262,170 7.01
----------- --------- ---------- --------- ---------- ---------
Total borrowings ..... 6,700,400 396,823 5.88 6,139,586 356,462 5.81 7,298,386 479,520 6.57
----------- --------- ---------- --------- ---------- ---------
Total interest-
bearing
liabilities ......... 16,935,932 850,724 5.01 15,799,263 785,323 4.97 16,604,638 918,804 5.53
-------- -------- --------
Noninterest-bearing
liabilities ............... 426,440 419,085 442,624
--------- --------- ---------
Total liabilities ..... 17,362,372 16,218,348 17,047,262
Shareholders' equity ....... 1,315,860 1,263,144 1,226,686
--------- --------- ---------
Total liabilities
and share-
holders' equity ...$18,678,232 $17,481,492 $18,273,948
=========== =========== ===========
Net interest income ........ $526,963 $ 508,560 $438,027
=========== ========= ========
Interest rate spread 2.64 2.70 2.14
===== ===== ======
Net yield on average
interest-earning
assets 2.93 3.02 2.48
===== ===== ======
Average interest-
earning assets to
average interest-
bearing liabilities 106.37% 106.71% 106.47%
====== ====== ======
</TABLE>
- ----------
(1) Nonaccrual loans are included in the average balance.
(2) Includes mark-to-market adjustments on securities available for sale.
12
<PAGE> 15
The following rate-volume analysis shows the approximate relative contribution
of changes in average interest rates and volume to changes in net interest
income for the years indicated.
<TABLE>
<CAPTION>
RATE/VOLUME ANALYSIS
YEAR ENDED DECEMBER 31, 1997 V. 1996 YEAR ENDED DECEMBER 31, 1996 V. 1995
------------------------------------ ------------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------- --------------------------
RATE(1) VOLUME(1) TOTAL RATE(1) VOLUME(1) TOTAL
------- --------- ----- ------- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans and leases $(20,946) 156,117 135,171 (11,186) 61,895 50,709
Mortgage-backed securities:
Available for sale (141) (6,255) (6,396) (391) 55,511 55,120
Held to maturity (251) (50,019) (50,270) (1,363) (123,480) (124,843)
Investment securities available
for sale 651 2,224 2,875 (599) (38,080) (38,679)
Other interest-earning assets 1,261 1,163 2,424 (1,122) (4,133) (5,255)
-------- ---------- ----------- --------- ----------- ----------
Total (19,426) 103,230 83,804 (14,661) (48,287) (62,948)
-------- ---------- ----------- --------- ----------- ----------
Interest expense:
Checking, savings and
money market accounts 785 6,965 7,750 935 3,363 4,298
Certificates of deposit 3,671 13,619 17,290 (26,791) 12,070 (14,721)
FHLB advances 2,180 22,896 25,076 (12,380) (705) (13,085)
Other borrowings 5,414 9,871 15,285 (38,111) (71,862) (109,973)
-------- ---------- ----------- --------- ----------- ----------
Total 12,050 53,351 65,401 (76,347) (57,134) (133,481)
-------- ---------- ----------- --------- ----------- ----------
Change in net interest income $(31,476) 49,879 18,403 61,686 8,847 70,533
======== ========== =========== ========= =========== ==========
</TABLE>
- ---------------------------
(1) Changes not solely attributable to volume or rate have been allocated in
proportion to the changes due to volume and rate.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses represents a charge against current
earnings in order for management to maintain the allowance for loan and lease
losses at a level that will absorb estimated future loan and lease charge-offs.
The provision for loan and lease losses was $40.9 million in 1997, $17.5 million
in 1996 and $8.7 million in 1995. The increase in the provision was primarily
due to consumer credit (primarily in the auto finance area) and auto
repossession loss trends in the second half of 1997. Due to the loss trends,
management has shifted the mix of future indirect auto financing business to a
higher concentration of prime credits than that previously originated. The
provision also increased due to growth in the loan and lease portfolio and the
change in the mix of the portfolio. Nonperforming loans and leases as a
percentage of total loans and leases was .49% at December 31, 1997. This was an
improvement over the December 31, 1996 and 1995 ratios of .56% and .78%,
respectively. Net loan and lease charge-offs have remained low. They were .22%,
.15% and .11% of average loan and lease balances for 1997, 1996 and 1995,
respectively. See "Financial Condition - Loans and Leases" for a further
discussion about nonperforming assets and the allowance for loan and lease
losses.
OTHER INCOME
Other income for 1997 was $110.8 million, a decrease of $5.4 million, or 4.7%,
as compared to the 1996 amount of $116.2 million. This decrease was primarily
due to a pretax valuation adjustment of $18.3 million on the mortgage servicing
rights at the Bank's mortgage banking subsidiary, Charter One Mortgage Corp.
This valuation adjustment was recognized in the fourth quarter of 1997 as a
result of the then current interest rate environment and projected increases in
mortgage prepayments. Mortgage servicing assets had a net book value of $81.8
million at December 31, 1997 on a portfolio of loans serviced for others of $9.1
billion. As a result of this valuation adjustment, mortgage banking income was
down $14.1 million to $38.9 million for 1997. This was almost entirely offset by
an increase in retail banking income which increased by $13.8 million , or
25.9%, to $67.1 million for 1997. The increase in retail banking income was
primarily attributable to growth in checking account fee income which resulted
from an increase in the number of accounts as well as a revised fee structure.
13
<PAGE> 16
Other income was $116.2 million for 1996 as compared to a negative $3.2 million
in 1995. Other income for 1995 was negative as a result of the financial
repositioning implemented in conjunction with the FirstFed Merger. The swap
terminations in that repositioning resulted in a loss of $76.2 million in 1995.
There was no similar event in 1996. Other net gains and losses on the sales of
investments and mortgage-backed securities during 1996 improved by $34.9 million
as compared to 1995 also due to the financial repositioning that occurred in
1995. Mortgage banking income increased by $13.7 million in 1996 as a result of
increases in the portfolio of loans serviced for others as well as increases in
the sales of loan servicing. Retail banking fee income increased by $11.2
million in 1996 primarily as a result of the Bank rolling out its checking
account and tax deferred annuity products along with brokerage services to the
Michigan market in 1996.
ADMINISTRATIVE EXPENSES
Administrative expenses for 1997 were $373.9 million as compared to $357.2
million for 1996. Each year had some large nonrecurring expenses. There were
$60.6 million in merger-related expenses and $2.5 million in other special
charges recorded in 1997 and $56.3 million of expenses related to the SAIF
recapitalization in 1996. Excluding these transactions, administrative expenses
were $310.8 million in 1997, an increase of $9.9 million, or 3.3%, as compared
to $300.9 million for 1996. Expanded retail operations was the primary reason
for the increase in administrative expenses. The Bank increased retail
operations by 17 branches in the Detroit metropolitan area in June of 1996 due
to the First Nationwide Transaction and eight branches in the Cleveland
metropolitan area as a result of the Haverfield purchase in September of 1997.
Other cost increases were substantially offset by lower deposit insurance
premiums. Overall, the Bank's operating expenses to average assets, excluding
the merger expenses, other special charges and SAIF recapitalization cost
mentioned above, was 1.66% in 1997 and 1.72% in 1996.
Administrative expenses for 1996 were $357.2 million as compared to $322.6
million in 1995. Again, each year had significant nonrecurring expenses. As
mentioned above, the SAIF recapitalization resulted in a $56.3 million expense
in 1996 and the FirstFed Merger in 1995 resulted in $37.5 million of
merger-related expenses. Excluding these charges, administrative expenses were
$300.9 million in 1996, a $15.8 million, or 5.6%, increase over the 1995 total
of $285.1 million. Expansion of retail operations in the Michigan market,
including the First Nationwide Transaction, was the primary reason for this
increase in administrative expenses.
INCOME TAX EXPENSE
The provision for income taxes was $71.8 million for 1997 as compared to $82.6
million for 1996. This decrease was primarily attributable to a decrease in
pretax book income. The effective tax rate was 32% in 1997 and 33% in 1996. See
Note 14 to the Consolidated Financial Statements for a further analysis of the
effective tax rate.
The provision for income taxes for 1996 was $82.6 million as compared to $31.8
million for 1995. The primary reason was the increase in pretax book income. The
effective tax rates for 1996 and 1995 were 33% and 31%, respectively.
14
<PAGE> 17
FINANCIAL CONDITION
Consolidated assets of the Company were $19.8 billion at December 31, 1997, an
increase of $1.9 billion, or 10.6%, from December 31, 1996. The increase in
assets was primarily due to the growth in the loan and lease portfolio in 1997.
LOANS AND LEASES
Total loans and leases at December 31, 1997 totaled $12.7 billion, up from $10.1
billion at December 31, 1996. The $2.6 billion, or 25.5%, increase was primarily
due to significant growth in loan and lease originations as the Bank originated
$6.9 billion of new loans and leases in 1997 which represented a 13.8% increase
over the $6.1 billion of loan and lease originations in 1996. During 1997 the
consumer loan portfolio grew by $462.1 million, or 40.4%, and the auto loan
portfolio grew by $526.0 million, or 51.8%, over 1996. Over the past few years,
management has emphasized growth in the consumer and auto loan portfolio due to
the shorter terms and higher yields. The Bank's consumer loan portfolio is
primarily secured by residential real estate properties.
The following table summarizes the loan and lease activity for each of the past
three years.
LOAN AND LEASE ACTIVITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Originations:
Real estate:
Permanent:
One-to-four family................................................ $ 3,956,445 3,941,861 2,114,764
Multifamily....................................................... 23,932 48,224 29,093
Commercial........................................................ 81,099 74,319 56,743
---------- ---------- -----------
Total permanent................................................. 4,061,476 4,064,404 2,200,600
---------- ---------- -----------
Construction:
One-to-four family................................................ 373,379 320,967 176,503
Multifamily....................................................... 24,894 5,910 10,781
Commercial........................................................ 23,095 17,246 22,922
---------- ---------- -----------
Total construction.............................................. 421,368 344,123 210,206
---------- ---------- -----------
Total real estate loans originated............................ 4,482,844 4,408,527 2,410,806
Consumer line of credit draws......................................... 350,515 265,912 187,964
Consumer.............................................................. 534,565 446,265 183,303
Automobile............................................................ 1,089,546 609,644 391,112
Business line of credit draws......................................... 111,347 90,255 66,790
Business.............................................................. 82,564 44,487 21,290
Lease financings...................................................... 256,114 205,789 82,585
---------- ---------- -----------
Total loans and lease financings originated..................... 6,907,495 6,070,879 3,343,850
---------- ---------- -----------
Loans purchased....................................................... 295,318 92 258,020
---------- ---------- -----------
Sales and principal reductions:
Loans sold.......................................................... 1,741,078 2,026,024 1,400,687
Principal reductions................................................ 2,882,679 2,547,738 2,001,734
---------- ---------- -----------
Total sales and principal reductions............................ 4,623,757 4,573,762 3,402,421
---------- ---------- -----------
Increase before net items..................................... $ 2,579,056 1,497,209 199,449
========== ========== ===========
</TABLE>
15
<PAGE> 18
The following table sets forth certain information concerning Charter One's
nonperforming assets as of the past five year ends. The table illustrates there
has been a significant improvement in recent years in the balances and ratios of
nonperforming assets. While these trends are favorable, there are inherent risks
and uncertainties related to the operation of a financial institution.
Therefore, the possibility exists that an abrupt downturn in the economic
environment could result in higher levels of nonperforming assets.
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonperforming loans and leases:
Nonaccrual loans and leases:
Real estate loans:
One-to-four family..................................... $ 32,154 27,624 35,071 36,095 55,154
Multifamily and commercial............................. 3,794 3,867 4,409 7,273 18,195
Construction and land.................................. 1,943 827 1,463 2,596 2,717
------- ------- ------- ------- --------
Total real estate loans.............................. 37,891 32,318 40,943 45,964 76,066
Consumer................................................. - 690 1,993 1,641 3,840
Automobile............................................... - - - - -
Business................................................. 716 95 - 77 610
Lease financings......................................... - - 27 - -
------- ------- ------- ------- --------
Total nonaccrual loans and leases.................... 38,607 33,103 42,963 47,682 80,516
------- ------- ------- ------- --------
Accruing loans and leases delinquent more than 90 days:
Real estate loans:
One-to-four family..................................... 8,356 5,961 2,002 2,781 1,228
Multifamily and commercial............................. - - 893 855 1,527
Construction and land.................................. - - - 207 101
------- ------- ------- ------- --------
Total real estate loans.............................. 8,356 5,961 2,895 3,843 2,856
Consumer................................................. 4,671 716 305 546 1,621
Automobile............................................... 3,547 1,489 2,531 1,621 725
Business................................................. 290 58 - 17 222
Lease financings......................................... - - - - -
------- ------- ------- ------- --------
Total accruing loans and leases
delinquent more than 90 days....................... 16,864 8,224 5,731 6,027 5,424
------- ------- ------- ------- --------
Restructured real estate loans............................. 6,722 15,294 18,835 18,479 26,018
------- ------- ------- ------- --------
Total nonperforming loans and leases................. 62,193 56,621 67,529 72,188 111,958
Real estate acquired through foreclosure
and other repossessed assets............................... 13,414 16,189 15,615 20,868 79,857
------- ------- ------- ------- --------
Total nonperforming assets........................... $ 75,607 72,810 83,144 93,056 191,815
======= ======= ======= ======= ========
Ratio of:
Nonperforming loans and leases to total
loans and leases.......................................... .49% .56% .78% .85% 1.26%
Nonperforming assets to total assets....................... .38 .41 .48 .52 1.03
Allowance for loan and lease losses to:
Nonperforming loans and leases........................... 183.09 166.21 134.06 126.15 81.03
Total loans and leases before allowance.................. .89 .92 1.04 1.07 .99
</TABLE>
At December 31, 1997, there were $25.6 million of loans not reflected in the
table above, which are fully performing but 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.
Although loans may be classified as nonaccruing, many continue to pay interest
on an irregular basis or at levels less than the contractual amounts due. Income
recorded on nonaccruing and restructured loans amounted to $752,000 and the
potential income based upon full contractual yields was $3.3 million for the
year ended December 31, 1997.
16
<PAGE> 19
<TABLE>
<CAPTION>
ANALYSIS OF ALLOWANCE FOR LOAN AND LEASE LOSSES
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year.......................... $ 94,112 90,527 91,063 90,716 97,065
Adjustment to convert Rochester to a calendar
year end.......................................... 650 - - - -
Provision for loan and lease losses................. 40,861 17,549 8,664 19,044 20,580
Acquired through acquisition........................ 2,963 - - - 2,022
Other............................................... - - 176 - -
Allowance of subsidiary sold........................ - - - (4,718) -
Charge-offs:
Mortgage.......................................... (7,225) (6,244) (6,484) (9,852) (25,469)
Automobile........................................ (18,933) (11,036) (6,598) (4,693) (2,329)
Consumer.......................................... (2,778) (2,784) (2,863) (3,521) (4,534)
Business.......................................... (504) (16) (62) (343) (383)
Lease financings.................................. - - - - (370)
--------- -------- -------- -------- -------
Total charge-offs............................... (29,440) (20,080) (16,007) (18,409) (33,085)
--------- -------- -------- -------- -------
Recoveries:
Mortgage.......................................... 134 1,493 3,715 2,068 2,742
Automobile........................................ 3,831 3,815 2,243 1,628 1,051
Consumer.......................................... 713 808 629 676 340
Business.......................................... 44 - 44 58 1
Lease financings.................................. - - - - -
--------- -------- -------- -------- -------
Total recoveries................................ 4,722 6,116 6,631 4,430 4,134
--------- -------- -------- -------- -------
Net loan and lease charge-offs.................. (24,718) (13,964) (9,376) (13,979) (28,951)
--------- -------- -------- -------- -------
Balance, end of year................................ $ 113,868 94,112 90,527 91,063 90,716
========= ======== ======== ======== =======
Net charge-offs to:
Average loans and leases.......................... .22% .15% .11% .16% .31%
Provision for loan and lease losses............... 60.49 79.57 108.22 73.40 140.68
</TABLE>
<TABLE>
<CAPTION>
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage......................................... $ 59,794 67,910 67,194 67,693 67,524
Automobile....................................... 39,455 11,261 8,379 7,837 5,794
Consumer......................................... 8,255 8,917 9,339 10,813 13,058
Business......................................... 4,587 5,047 4,883 4,720 4,340
Lease financings................................. 1,777 977 732 - -
--------- ------- ------- ------- -------
Total........................................ $ 113,868 94,112 90,527 91,063 90,716
========= ======= ======= ======= =======
Percent of loans and leases to total loans and leases:
Mortgage....................................... 70.0% 74.8% 78.6% 81.4% 84.7%
Automobile..................................... 12.2 10.2 9.7 9.2 6.7
Consumer....................................... 12.8 11.5 9.5 8.3 7.6
Business....................................... 1.4 1.0 .7 1.1 1.0
Lease financings............................... 3.6 2.5 1.5 - -
--------- ------- ------- ------- -------
Total........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
========= ======= ======= ======= =======
</TABLE>
Net loan and lease charge-offs remained low in 1997 at only .22% of average loan
and lease balances. The allowance for loan and lease losses as a percentage of
ending loan and lease balances was .89%, .92% and 1.04% at December 31, 1997,
1996 and 1995, respectively. The allowance for loan and lease losses is
maintained at levels believed adequate by management to absorb estimated future
losses inherent in the loan and lease portfolio. Although management believes
that it uses the best information available to make such determinations and that
the allowance for loan losses was adequate at December 31, 1997, future
adjustments to the allowance may be necessary, and net income could be
significantly affected, if circumstances and/or economic conditions differ
17
<PAGE> 20
substantially from the assumptions used in making the determinations about the
levels of the loan and lease allowance. Additionally, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for losses. Such agencies may require the recognition of
additions to the allowance based upon their judgments of information available
to them at the time of their examination.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The securities portfolio is comprised primarily of mortgage-backed securities,
including government agency and AAA and AA rated private issues. The following
table details the aggregate carrying value and aggregate fair value at December
31, 1997 of private issue mortgage-backed securities of any single issuer where
the aggregate book value exceeds 10% of year-end shareholders' equity.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------
CARRYING FAIR
VALUE VALUE
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
GE Capital Mortgage Services, Inc.................................................... $368,419 367,280
Residential Funding Mortgage Securities I, Inc....................................... 431,335 433,226
California Federal Bank.............................................................. 197,961 197,088
The Prudential Home Mortgage Securities Company, Inc................................. 492,636 492,239
Countrywide Funding Corp............................................................. 175,788 178,069
</TABLE>
Charter One held no investment securities of any single nongovernmental issuer
which were in excess of 10% of shareholders' equity at December 31, 1997.
The present investment policy of the Company provides that new purchases of
mortgage-backed securities have an investment rating of AAA. At December 31,
1997, approximately 88% of the private issue mortgage-backed security portfolio
had an investment rating of AAA and approximately 11% had an investment rating
of AA. See Notes 4 and 5 to the Notes for further information concerning the
composition of the securities portfolio.
DEPOSITS AND OTHER SOURCES OF FUNDS
Deposits are generally the most important source of the Bank's funds for use in
lending and general business purposes. Deposit inflows and outflows are
significantly influenced by general interest rates and competitive factors.
Consumer and commercial deposits are attracted principally within the Bank's
primary market areas. The balance of deposits was $10.2 billion at December 31,
1997, relatively unchanged from year-end 1996.
In addition to deposits, the Bank derives funds from different borrowing
sources. The primary source of these borrowings is the Federal Home Loan Bank
("FHLB") system. Those borrowings were $5.4 billion and $3.4 billion at December
31, 1997 and 1996, respectively. The FHLB functions as a central bank providing
credit for member financial institutions. As a member of the FHLB of Cincinnati,
the Bank is required to own capital stock in the FHLB and it is authorized to
apply for advances on the security of such stock and certain home mortgages and
other assets, provided certain standards related to creditworthiness have been
met. Advances are made pursuant to several different credit programs, each of
which has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based upon either a fixed
percentage of the Bank's assets or on the FHLB of Cincinnati's assessment of the
Bank's creditworthiness. See Note 10 to the Notes for further information as to
the make-up, maturities and cost associated with these advances at December 31,
1997.
In addition to FHLB advances, the Company uses reverse repurchase agreements to
fund operations. Reverse repurchase agreements decreased by $328.2 million
during 1997. The Company uses its portfolio of investment securities, loans and
mortgage-backed securities as collateral for borrowings. Other borrowings were
$229.8 million at December 31, 1997, an increase of $18.1 million since December
31, 1996. See Notes 11 and 12 to the Notes for further information concerning
these borrowings.
18
<PAGE> 21
LIQUIDITY
The Bank's principal sources of funds are deposits, advances from the FHLB of
Cincinnati, reverse repurchase agreements, repayments and maturities of loans
and securities, proceeds from the sale of loans and securities, and funds
provided by operations. While scheduled loan, security and interest-bearing
deposit amortization and maturity are relatively predictable sources of funds,
deposit flow and loan and mortgage-backed security repayments 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 from time to time management may
decide 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 FHLB 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
average liquid assets at least equal to 4.0% 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
fourth quarter of 1997 was 10.92%.
Management anticipates that the Bank will have sufficient funds available to
meet current and future loan commitments. At December 31, 1997, the Bank and its
subsidiaries had outstanding commitments to originate loans and leases of $631.1
million, unfunded lines of consumer credit totaling $902.2 million (a
significant portion of which normally remains undrawn) and unfunded lines of
commercial (business loans) credit totaling $49.1 million. Outstanding letters
of credit totaled $35.9 million as of December 31, 1997. Certificates of deposit
scheduled to mature in one year or less at December 31, 1997 totaled $4.3
billion. Management believes that a significant portion of the amounts maturing
in 1998 will remain with the Bank because they are retail deposits. At December
31, 1997, the Bank had $2.5 billion of advances from the FHLB system and $1.1
billion in reverse repurchase agreements which mature in 1998. Management
intends to replace the majority of these borrowings when they mature with new
borrowings and believes it has significant additional borrowing capacity with
the FHLB and investment banking firms to meet any need for additional
borrowings.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company realizes income principally from the differential or spread between
the interest earned on loans, investments and other interest-earnings assets and
the interest paid on deposits and borrowings. Loan volumes and yields, as well
as the volume of and rates on investments, deposits and borrowings, are affected
by market interest rates. Additionally, because of the terms and conditions of
many of the Company's loan documents and deposit accounts, a change in interest
rates could also affect the projected maturities of the loan portfolio and/or
the deposit base which could alter the Company's sensitivity to future changes
in interest rates. Accordingly, management considers interest rate risk to be
the Company's most significant market risk.
Interest rate risk management focuses on maintaining consistent growth in net
interest income within Boardapproved policy limits while taking into
consideration, among other factors, the Company's overall credit, operating
income, operating cost, and capital profile. The Company's Asset/Liability
Management Committee (ALCO), which includes senior management representatives
and reports to the Board of Directors, together with the Investment Committee of
the Board, monitors and manages interest rate risk to maintain an acceptable
level of change to net interest income as a result of changes in interest rates.
The Company uses an internal earnings simulation model as its primary method to
identify and manage its interest rate risk profile. The model is based on actual
cash flows and repricing characteristics for all financial instruments and
incorporates market-based assumptions regarding the impact of changing interest
rates on future volumes and the prepayment rate of applicable financial
instruments. Assumptions based on the historical behavior of deposit rates and
balances in relation to changes in interest rates are also incorporated into the
model. These assumptions are inherently uncertain and, as a result, the model
cannot precisely measure net interest income or precisely predict the impact of
fluctuations in interest rates on net interest income. Actual results will
differ from simulated results due to timing, magnitude, and frequency of
interest rate changes as well as changes in market conditions and management
strategies.
19
<PAGE> 22
Using the aforementioned internal simulation model, net earnings projections
reflect continued growth in net income when applying the interest rate
environment as of December 31, 1997 ("Base Case"). The table below, which shows
the Company's estimated net earnings sensitivity profile as of December 31,
1997, assumes no changes in the operating environment, but assumes interest
rates increase/decrease gradually over the next year (parallel yield curve
shift) and remain unchanged thereafter. The table indicates the estimated impact
on net income under the various interest rate scenarios as a percentage of Base
Case earnings projections.
<TABLE>
<CAPTION>
CHANGES IN ESTIMATED PERCENTAGE CHANGE
INTEREST RATES IN FUTURE NET INCOME
(BASIS POINTS) 12 MONTHS 24 MONTHS
- --------------------- ----------------------------
<S> <C> <C>
Base Case - -
+100 over one year (1.47%) (3.00%)
+200 over one year (2.56) (5.09)
- -100 over one year (.01) .07
- -200 over one year 1.60 2.70
</TABLE>
A secondary method used to identify and manage the Company's interest rate risk
profile is the static gap analysis. Interest sensitivity gap ("gap") analysis
measures the difference between the assets and liabilities repricing or maturing
within specific time periods. An asset-sensitive position indicates that there
are more rate-sensitive assets than rate-sensitive liabilities repricing or
maturing within specific time horizons, which would generally imply a favorable
impact on net interest income in periods of rising interest rates and a negative
impact in periods of falling rates. A liability-sensitive position would
generally imply a negative impact on net interest income in periods of rising
rates and a positive impact in periods of falling rates.
Gap analysis has limitations because it cannot measure the effect of interest
rate movements and competitive pressures on the repricing and maturity
characteristics of interest-earning assets and interest-bearing liabilities. In
addition, a significant portion of the Company's adjustable-rate assets have
limits on their maximum yield, whereas most of its interest-bearing liabilities
are not subject to such limitations. As a result, certain assets and liabilities
indicated as repricing within a stated period may in fact reprice at different
times and at different volumes, and certain adjustable-rate assets may reach
their yield limits and not reprice.
The following table presents an analysis of the Company's interest-sensitivity
gap position at December 31, 1997. All interest-earning assets and
interest-bearing liabilities are shown based on the earlier of their contractual
maturity or repricing date adjusted by forecasted prepayment and decay rates.
Asset prepayment and liability decay rates are selected after considering the
current rate environment, industry prepayment and decay rates, the Company's
historical experience, and the repricing and prepayment characteristics of
portfolios acquired through merger.
20
<PAGE> 23
<TABLE>
<CAPTION>
MATURITY/RATE SENSITIVITY
DECEMBER 31, 1997
-------------------------------------------------------------------------
OVER
0-6 7-12 1-3 3-5 5-10 10
MONTHS MONTHS YEARS YEARS YEARS YEARS TOTAL
------ ------ ----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate mortgage
loans and mortgage-
backed securities:
Adjustable rate.................$3,104,701 1,207,631 1,252,973 83,123 1,243 - 5,649,671
Fixed rate...................... 1,387,693 1,007,642 2,847,814 1,608,171 1,399,245 372,524 8,623,089
Automobile loans.................. 417,655 302,259 867,276 - - - 1,587,190
Consumer loans.................... 766,119 110,047 312,547 254,078 164,883 6,709 1,614,383
Lease financings.................. 45,365 33,324 130,324 100,553 101,903 27,536 439,005
Business loans.................... 128,637 2,842 12,758 15,317 11,555 - 171,109
Investment securities, federal
funds sold, interest-bearing
deposits and other interest-
earning assets................... 910,783 53,010 36 - 9,484 5 973,318
--------- --------- --------- --------- --------- ------- ----------
Total....................... 6,760,953 2,716,755 5,423,728 2,061,242 1,688,313 406,774 19,057,765
--------- --------- --------- --------- --------- ------- ----------
Interest-bearing liabilities:
Deposits:
Checking and savings
accounts....................... 92,407 85,015 1,670,363 488,835 - - 2,336,620
Money market accounts........... 899,855 - 899,855 - - - 1,799,710
Certificates of deposit ........ 2,476,578 1,392,797 1,505,144 500,176 205,357 2,818 6,082,870
FHLB advances..................... 2,859,925 151,226 2,050,248 285,882 22,931 291 5,370,503
Reverse repurchase
agreements...................... 866,678 604,784 625,062 - - - 2,096,524
Other borrowings.................. 7,675 5,537 34,789 14,865 165,227 1,705 229,798
--------- --------- --------- --------- --------- ------- ----------
Total....................... 7,203,118 2,239,359 6,785,461 1,289,758 393,515 4,814 17,916,025
--------- -------- --------- --------- --------- ------- ==========
Excess (deficiency) of interest-
earning assets over interest-
bearing liabilities................ (442,165) 477,396 (1,361,733) 771,484 1,294,798 401,960
Impact of hedging .................. 97,191 64,936 (160,270) (1,857) - -
--------- ------- --------- ------- --------- -------
Adjusted interest-
sensitivity gap.................... $(344,974) 542,332 (1,522,003) 769,627 1,294,798 401,960
========= ======= ========= ======= ========= =======
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities....... $(344,974) 197,358 (1,324,645) (555,018) 739,780 1,141,740
======== ======== ========= ========= ======== =========
Cumulative interest-sensitivity
gap as a percentage of total
assets at December 31, 1997........ (1.7%) 1.0% (6.7%) (2.8%) 3.7% 5.8%
==== === ===== ===== ==== ====
</TABLE>
Management's goal is to manage the Company's interest rate risk by maintaining
the gap between interest-earning assets and interest-bearing liabilities
repricing in a one-year period within a range of plus to minus 5% of total
assets.
CAPITAL AND DIVIDENDS
The Bank is subject to certain regulatory capital requirements. Management
believes that as of December 31, 1997, the Bank met all capital requirements to
which it is subject. Refer to Note 16 to the Notes for an analysis of the Bank's
regulatory capital.
On May 15, 1996, the Board of Directors of the Company authorized management to
purchase 5% of the Company's outstanding common stock. The Company rescinded its
stock repurchase program on August 8, 1997 as a result of the Rochester merger.
The Company had 1,096,593 shares remaining unpurchased.
On August 20, 1997, the Board of Directors of the Company approved a 5% stock
dividend which was distributed October 31, 1997, to shareholders of record on
October 17, 1997. On July 24, 1996, the Directors of the Company approved a 5%
stock dividend which was distributed September 30, 1996, to shareholders of
record on September 13, 1996.
21
<PAGE> 24
The Company's common stock trades on the Nasdaq Stock Market under the symbol
COFI. As of January 31, 1998 there were approximately 11,800 shareholders of
record.
Quarterly stock prices and dividends declared are shown in the following table.
<TABLE>
<CAPTION>
MARKET PRICE AND DIVIDENDS
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
-------- --------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
1997(1)
High................................... $47.74 51.43 58.57 64.00 64.00
Low.................................... 39.17 40.24 49.05 54.13 39.17
Close.................................. 41.79 51.31 56.31 63.13 63.13
Dividends declared and paid............ .22 .24 .24 .25 .95
1996(1)
High................................... $31.97 34.47 38.63 42.62 42.62
Low.................................... 25.85 27.94 30.50 36.31 25.85
Close.................................. 30.61 31.64 38.10 40.00 40.00
Dividends declared and paid............ .18 .21 .21 .22 .82
</TABLE>
- ---------------------------
(1) Restated to reflect the 5% stock dividends issued October 31, 1997 and
September 30, 1996.
Cash dividend payout is continually reviewed by management and the Board of
Directors. The Company intends to continue its policy of paying quarterly
dividends; however, the payment will depend upon a number of factors, including
capital requirements, regulatory limitations, the Company's financial condition,
results of operations and the Bank's ability to pay dividends to its parent,
which in turn will pay dividends to the Company. The Company depends
significantly upon such dividends originating from the Bank to accumulate
earnings for payment of cash dividends to its shareholders. See Note 15 to the
Notes for a discussion of restrictions on the Bank's ability to pay dividends.
ACCOUNTING AND REPORTING DEVELOPMENTS
A discussion of recently issued accounting pronouncements and their impact on
the Company's Consolidated Financial Statements is provided in Note 1 to the
Notes.
FOURTH QUARTER RESULTS
The Company reported a net loss of $12.0 million, or $0.19 per share for the
fourth quarter of 1997. The Company had net income of $52.4 million, or $0.80
per share, for the fourth quarter of 1996. The primary reasons for the loss in
the 1997 period relate to merger-related expenses and other special charges
recorded in the fourth quarter of 1997. See "Results of Operations" for a
discussion of the merger-related expenses and other special charges.
22
<PAGE> 25
The following table presents summarized quarterly data for each of the years
indicated.
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
1997(1)
Total interest income........................... $329,011 338,766 347,030 362,880 1,377,687
Net interest income............................. 128,806 131,280 130,681 136,196 526,963
Provision for loan and lease losses............. 4,826 4,799 16,342 14,894 40,861
Net gains (losses).............................. 582 35 1,982 (5,673) (3,074)
Merger expenses................................. - - - 60,617 60,617
Income (loss) before extraordinary item......... 51,883 54,988 53,573 (9,308) 151,136
Net income (loss)............................... 51,883 54,988 53,573 (12,035) 148,409
Earnings per common share(2):
Income (loss) before extraordinary item....... .83 .88 .85 (.15) 2.40
Extraordinary item............................ - - - (.04) (.04)
Net income (loss)............................. .83 .88 .85 (.19) 2.36
Earnings per common and common equivalent
share -- assuming dilution(2):
Income (loss) before extraordinary item....... .80 .86 .83 (.15) 2.33
Extraordinary item............................ - - - (.04) (.04)
Net income (loss)............................. .80 .86 .83 (.19) 2.29
1996(1)
Total interest income........................... $313,217 325,252 327,706 327,708 1,293,883
Net interest income............................. 122,671 130,975 128,741 126,173 508,560
Provision for loan and lease losses............. 3,742 4,478 4,105 5,224 17,549
Net gains (losses).............................. 387 (1,241) (1,273) 3,880 1,753
SAIF assessment................................. - - 56,258 - 56,258
Net income...................................... 48,135 50,854 16,002 52,436 167,427
Earnings per common share(2).................... .76 .80 .26 .82 2.64
Earnings per common and common equivalent
share -- assuming dilution(2).................. .71 .75 .25 .80 2.51
</TABLE>
- ---------------------------
(1) Amounts presented for the first, second and third quarter of 1997, as well
as the amounts presented for each quarter of 1996 are restated due to the merger
with RCSB Financial, Inc. See Note 2 to the Consolidated Financial Statements.
(2) Restated to reflect the provisions of SFAS No. 128 and the 5% stock
dividends issued October 31, 1997 and September 30, 1996.
YEAR 2000
As with other companies, many of the Company's computer programs and other
applications were originally designed to recognize calendar years by their last
two digits. Calculations performed using these truncated fields will not work
properly with dates from the year 2000 and beyond. The Company began reviewing
its year 2000 conversion needs mid-1996 and has a project committee that meets
to review the status of the conversion. A comprehensive review to identify the
systems affected by this issue was completed, estimated cost projections were
determined and an implementation plan was compiled and is currently being
executed. As a result of the procedures already completed, the Company expects
to either modify or upgrade existing systems or replace some systems altogether.
Considerable progress has been made and it is anticipated that this project will
be largely completed by internal staff. The Company does not expect to spend any
significant amounts with outside contractors relative to the completion of this
task. Therefore, costs do not represent any material incremental costs, but
rather will represent the redeployment of existing technology resources. Many of
the systems are vendor-supplied, and most vendors have provided the Company with
certification or a delivery commitment letter. The Company presently believes
that with the planned modifications to existing systems, conversion to new
systems, and vendor delivery of millennium-compliant systems, all material year
2000 compliance issues will be resolved no later than the first quarter of 1999.
Additionally, the Company believes that any related costs will not have a
material impact on the operations, cash flows, or financial condition of future
periods.
23
<PAGE> 26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See MD&A - "Quantitative and Qualitative Disclosure About Market Risk" for
information required by this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
-----------------------------
1997 1996(1)
---- -------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
ASSETS
<S> <C> <C>
Cash and deposits with banks................................................. $ 214,716 216,594
Federal funds sold and other................................................. 25,000 118,002
------------ -----------
Total cash and cash equivalents......................................... 239,716 334,596
Investment securities available for sale..................................... 582,589 246,060
Mortgage-backed securities:
Available for sale......................................................... 1,070,233 1,087,124
Held to maturity (fair value of $4,273,605 and $5,286,919)................. 4,215,249 5,272,339
Loans held for sale.......................................................... 341,671 150,437
Loans and leases, net........................................................ 12,360,134 9,967,629
Federal Home Loan Bank stock................................................. 366,647 250,465
Premises and equipment....................................................... 158,500 153,728
Accrued interest receivable.................................................. 110,181 99,332
Real estate and other collateral owned....................................... 13,726 16,496
Loan servicing assets........................................................ 81,836 121,187
Goodwill..................................................................... 90,471 69,172
Other assets................................................................. 129,312 116,997
------------ -----------
Total assets............................................................ $ 19,760,265 17,885,562
============ ==========
LIABILITIES
Deposits..................................................................... $ 10,219,200 10,209,847
Federal Home Loan Bank advances.............................................. 5,370,503 3,426,783
Reverse repurchase agreements................................................ 2,096,524 2,424,684
Other borrowings............................................................. 229,798 211,678
Advance payments by borrowers for taxes and insurance........................ 138,379 105,551
Accrued interest payable..................................................... 53,094 42,191
Accrued expenses and other liabilities....................................... 275,878 219,241
------------ -----------
Total liabilities....................................................... 18,383,376 16,639,975
------------ -----------
Commitments and contingencies................................................
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; 64,957,605 and 61,475,823 shares issued........................ 650 615
Additional paid-in capital................................................... 706,804 496,723
Retained earnings............................................................ 700,616 795,338
Less 1,108,768 and 1,086,763 shares of common stock held in
treasury, at cost.......................................................... (45,441) (41,266)
Borrowings of employee investment and stock ownership plan................... (2,349) (3,181)
Accumulated other comprehensive income....................................... 16,609 (2,642)
------------ -----------
Total shareholders' equity.............................................. 1,376,889 1,245,587
------------ -----------
Total liabilities and shareholders' equity.............................. $ 19,760,265 17,885,562
============ ==========
</TABLE>
- ---------------------------
(1) As restated for applicable mergers and acquisitions. See Note 2 to the
Consolidated Financial Statements.
See Notes to Consolidated Financial Statements.
24
<PAGE> 27
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996(1) 1995(1)
---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME:
Loans and leases............................................. $ 910,368 775,197 724,488
Mortgage-backed securities:
Available for sale......................................... 74,993 81,389 26,269
Held to maturity........................................... 339,685 389,955 514,798
Investment securities available for sale..................... 24,160 21,285 59,964
Other interest-earning assets................................ 28,481 26,057 31,312
------------- ------------ -----------
Total interest income..................................... 1,377,687 1,293,883 1,356,831
------------- ------------ -----------
INTEREST EXPENSE:
Deposits..................................................... 453,901 428,861 439,284
FHLB advances................................................ 229,341 204,265 217,350
Other borrowings............................................. 167,482 152,197 262,170
------------- ------------ -----------
Total interest expense.................................... 850,724 785,323 918,804
------------- ------------ -----------
Net interest income....................................... 526,963 508,560 438,027
Provision for loan and lease losses............................ 40,861 17,549 8,664
------------- ------------ -----------
Net interest income after provision for
loan and lease losses.................................... 486,102 491,011 429,363
------------- ------------ -----------
OTHER INCOME (EXPENSE):
Mortgage banking............................................. 38,871 52,952 39,246
Retail banking............................................... 67,087 53,300 42,091
Leasing operations........................................... 8,043 7,421 7,903
Net gains (losses)........................................... (3,074) 1,753 (93,527)
Other........................................................ (116) 811 1,103
------------- ------------ -----------
Total other income (expense).............................. 110,811 116,237 (3,184)
------------- ------------ -----------
ADMINISTRATIVE EXPENSES:
Compensation and employee benefits........................... 164,446 152,818 143,681
Net occupancy and equipment.................................. 52,747 46,172 43,298
Federal deposit insurance premiums........................... 5,216 16,807 20,445
Federal deposit insurance special assessment................. - 56,258 -
Merger expenses.............................................. 60,617 - 37,528
Amortization of goodwill..................................... 5,880 4,619 3,017
Other administrative expenses................................ 85,024 80,519 74,668
------------- ------------ -----------
Total administrative expenses............................. 373,930 357,193 322,637
------------- ------------ -----------
Income before income taxes and extraordinary item.............. 222,983 250,055 103,542
Income taxes................................................... 71,847 82,628 31,757
------------- ------------ -----------
Income before extraordinary item.......................... 151,136 167,427 71,785
Extraordinary item, net of tax benefit of $1,468............... (2,727) - -
------------- ------------ -----------
Net income................................................ $ 148,409 167,427 71,785
============= ============ ===========
Earnings per common share:
Income before extraordinary item............................. $ 2.40 2.64 1.06
Extraordinary item........................................... (.04) - -
------------- ------------ -----------
Net income................................................ $ 2.36 2.64 1.06
============= ============ ===========
Earnings per common and common equivalent share
assuming dilution:
Income before extraordinary item............................. $ 2.33 2.51 1.04
Extraordinary item........................................... (.04) - -
------------- ------------ -----------
Net income................................................ $ 2.29 2.51 1.04
============= ============ ===========
Average common shares outstanding(2)........................... 62,971,823 62,473,715 62,904,942
Average common and common equivalent shares
outstanding(2)............................................... 64,755,231 66,645,938 68,864,066
</TABLE>
- ---------------------------
(1) As restated for applicable mergers and acquisitions. See Note 2 to the
Consolidated Financial Statements.
(2) Per share data has been restated to reflect the provision of SFAS No. 128
and the 5% stock dividends issued October 31, 1997 and September 30, 1996.
See Notes to Consolidated Financial Statements.
25
<PAGE> 28
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
BORROWINGS
OF
EMPLOYEE
ACCUMULATED INVESTMENT
ADDITIONAL OTHER AND STOCK
PREFERRED COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE OWNERSHIP
STOCK STOCK CAPITAL EARNINGS STOCK INCOME PLAN TOTAL
------ --- ------- ------- ---- ------- ------ ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995
(As restated-see Note 2) ........... $2,990 577 488,856 748,917 (841) (64,003) (5,826) 1,170,670
------ --- ------- ------- ---- ------- ------ ---------
Comprehensive income:
Change in net unrealized gain
(loss) on securities, net of tax
and reclassification
adjustment ........................ - - - - - 27,940 - 27,940
Net income ......................... - - - 71,785 - - - 71,785
------ --- ------- ------- ---- ------- ------ ---------
Comprehensive income ................. - - - 71,785 - 27,940 - 99,725
Purchase of 762,100 shares of
treasury stock ...................... - - - - (20,821) - - (20,821)
EISOP loan repayment ................. - - 72 - - - 1,455 1,527
Cash dividends:
Common ($.68 per share)(1) ......... - - - (35,845) - - - (35,845)
Preferred ($1.75 per share) ........ - - - (5,232) - - - (5,232)
Issuance of common shares:
Acquisition, 41,775 shares ......... - - - (7) 815 - - 808
Stock option plans, 792,200
shares ............................ - 2 2,317 (9,596) 16,796 - - 9,519
Other .............................. (1) - (25) - - - - (26)
------ --- ------- ------- ---- ------- ------ ---------
Balance, December 31, 1995 ........... 2,989 579 491,220 770,022 (4,051) (36,063) (4,371) 1,220,325
------ --- ------- ------- ---- ------- ------ ---------
Comprehensive income:
Change in net unrealized gain
(loss) on securities, net of tax
and reclassification
adjustment ........................ - - - - - 33,421 - 33,421
Net income - - - 167,427 - - - 167,427
------ --- ------- ------- ---- ------- ------ ---------
Comprehensive income ................. - - - 167,427 - 33,421 - 200,848
5% stock dividend .................... - 23 84,710 (84,733) - - - -
Purchase of 4,827,395 shares
of treasury stock ................... - - - - (135,101) - - (135,101)
EISOP loan repayment ................. - - 60 - - - 1,190 1,250
Cash Dividends:
Common ($.82 per share)(1) ......... - - - (47,445) - - - (47,445)
Preferred ($.51 per share) ......... - - - (2,600) - - - (2,600)
Issuance of common shares:
Conversion of 3,000,000
preferred shares to 1,100,000
newly issued common shares
and 3,500,000 common
shares from treasury .............. (2,989) 11 (82,806) - 85,766 - - (18)
Stock option plans, 625,849
shares - 2 3,539 (7,333) 12,120 - - 8,328
------ --- ------- ------- ---- ------- ------ ---------
Balance, December 31, 1996 ........... - 615 496,723 795,338 (41,266) (2,642) (3,181) 1,245,587)
Adjustment to convert RCSB
Financial, Inc. to a calendar
year end(2) ....................... - - 12 691 (4,992) 61 62 (4,166)
------ --- ------- ------- ---- ------- ------ ---------
Balance, January 1, 1997 ............. - 615 496,735 796,029 (46,258) (2,581) (3,119) 1,241,421
------ --- ------- ------- ---- ------- ------ ---------
Comprehensive income:
Change in net unrealized gain
(loss) on securities, net of tax
and reclassification
adjustment ........................ - - - - - 19,190 - 19,190
Net income ......................... - - - 148,409 - - - 148,409
------ --- ------- ------- ---- ------- ------ ---------
Comprehensive income ................. - - - 148,409 - 19,190 - 167,599
5% stock dividend .................... - 31 177,687 (177,978) 24 - - (236)
Purchase of 1,425,000 shares
of treasury stock .................. - - - - (46,268) - - (46,268)
EISOP loan repayment ................. - - - - - - 770 770
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
BORROWINGS
OF
EMPLOYEE
ACCUMULATED INVESTMENT
ADDITIONAL OTHER AND STOCK
PREFERRED COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE OWNERSHIP
STOCK STOCK CAPITAL EARNINGS STOCK INCOME PLAN TOTAL
------ --- ------- ------- ---- ------- ------ ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dividends paid ($.95 per
share)(1) ........................... - - - (54,032) - - - (54,032)
Issuance of common shares:
Acquisition, 949,511 shares ........ - 9 55,537 - - - - 55,546
Stock option plans, 822,441
shares ............................ - 3 5,076 (11,812) 18,920 - - 12,187
Other ................................ - (8) (28,231) - 28,141 - - (98)
----- --- ------- ------- ------- ------ ------ ---------
Balance, December 31, 1997 ........... $ - 650 706,804 700,616 (45,441) 16,609 (2,349) 1,376,889
===== === ======= ======= ======= ====== ====== =========
</TABLE>
- ---------------------------
(1) Restated to reflect the 5% stock dividends issued October 31, 1997 and
September 30, 1996.
(2) RCSB Financial, Inc. reported on a fiscal year end November 30th. Adjustment
reflects RCSB Financial activity for the month of December 1996.
See Notes to Consolidated Financial Statements.
27
<PAGE> 30
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------
1997 1996(1) 1995(1)
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................ $ 148,409 167,427 71,785
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses ..................... 40,861 17,549 8,664
Net (gains) losses ...................................... 13,733 (5,970) 92,037
Accretion of discounts, amortization of premiums,
amortization of goodwill and depreciation, net ......... 53,451 34,728 43,555
Origination of real estate loans held for sale .......... (1,741,078) (1,542,271) (1,094,391)
Proceeds from sale of loans held for sale ............... 1,728,296 1,517,629 1,063,854
Loss on extinguishment of debt .......................... 4,195 -- --
Other ................................................... 29,674 3,573 34,470
----------- ------- -------
Net cash provided by operating activities ............. 277,541 192,665 219,974
----------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net principal disbursed on loans and leases ............... (2,288,643) (1,961,406) (281,530)
Proceeds from principal repayments and maturities of:
Mortgage-backed securities held to maturity ............. 933,209 978,643 799,039
Mortgage-backed securities available for sale ........... 56,504 28,123 32,846
Investment securities available for sale ................ 93,686 231,405 865,753
Proceeds from sale of:
Mortgage-backed securities held to maturity ............. 128,009 71,226 --
Mortgage-backed securities available for sale ........... 14,670 911,549 1,370,283
Investment securities available for sale ................ 228,903 275,521 658,246
Federal Home Loan Bank stock ............................ 39,207 9,000 36,915
Loan servicing rights ................................... 29,699 23,705 --
Purchases of:
Mortgage-backed securities held to maturity ............. (469) (1,050,182) (671,784)
Mortgage-backed securities available for sale ........... (24,685) (17,921) (3,081)
Investment securities available for sale ................ (627,443) (346,252) (1,443,905)
Loans ................................................... -- (92) (181,108)
Federal Home Loan Bank stock ............................ (134,165) (35,814) (47,168)
Loan servicing rights, including those originated ....... (5,835) (49,920) (41,110)
Net cash and cash equivalents (paid) received in connection
with acquisitions ........................................ 4,814 731,170 (9,857)
Other ..................................................... (44,116) (24,252) (26,156)
----------- ------- -------
Net cash provided by (used in) investing activities ... (1,596,655) (225,497) 1,057,383
----------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in short-term borrowings ..................... (1,349,320) (813,243) (249,327)
Proceeds from long-term borrowings ........................ 6,695,773 3,290,594 4,349,676
Repayments of long-term borrowings ........................ (3,833,829) (2,844,756) (4,998,330)
Increase (decrease) in, net of acquisitions:
Deposits ................................................ (253,750) 179,057 69,918
Advance payments by borrowers for taxes and insurance ... 29,391 (19,240) 914
Payment of dividends on common stock ...................... (54,268) (47,445) (35,845)
Payment of dividends on preferred stock ................... -- (3,908) (5,232)
Proceeds from issuance of common stock .................... 5,079 1,392 1,072
Purchase of treasury stock, net of options exercised ...... (39,160) (128,184) (12,445)
Net payment to terminate interest rate risk management
instruments .............................................. (3,845) -- (70,637)
----------- ------- -------
Net cash provided by (used in) financing activities .... 1,196,071 (385,733) (950,236)
----------- ------- -------
Net (decrease) increase in cash and cash equivalents .... (123,043) (418,565) 327,121
Cash and cash equivalents, beginning of year ................ 334,596 753,161 426,040
Adjustment to convert Rochester to a calendar year end ...... 28,163 -- --
----------- ------- -------
Cash and cash equivalents, end of year ...................... $ 239,716 334,596 753,161
=========== ======= =======
</TABLE>
(1) As restated for applicable mergers and acquisitions. See Note 2 to the
Consolidated Financial Statements.
See Notes to Consolidated Financial Statements.
28
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Charter One Financial, Inc., ("Charter One" or
the "Company"), a unitary savings and loan holding company, and Charter One
Bank, F.S.B. (the "Bank"), conform to generally accepted accounting
principles and prevailing practices within the banking and thrift industry.
A summary of the more significant accounting policies follows:
NATURE OF OPERATIONS
Charter One is a Delaware corporation organized as a unitary savings and
loan holding company and owns all of the outstanding capital stock of
Charter Michigan Bancorp, Inc., a Michigan Corporation, which owns all of
the outstanding capital stock of the Bank. The Company's principal line of
business is retail banking which constitutes a single industry segment. The
business of the Bank is providing consumer and business banking services to
certain major markets in Ohio, Michigan, and New York. The Bank's
subsidiaries engage principally in mortgage banking, automobile lending,
equipment leasing, data processing, real estate appraisal and retail
brokerage services.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company,
the Bank and its subsidiaries. All significant intercompany transactions
and balances have been eliminated. Certain items in the consolidated
financials statements for 1996 and 1995 have been reclassified to conform
to the 1997 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
SECURITIES
Securities consist of mortgage-backed securities, U.S. Government and
federal agency obligations, floating-rate notes, corporate bonds,
commercial paper and state and local government obligations. Securities are
classified as trading, available for sale or held to maturity upon their
acquisition. Securities classified as trading would be carried at estimated
fair value with the unrealized holding gain or loss recorded in the
statement of income. Securities classified as available for sale are
carried at estimated fair value with the unrealized holding gain or loss
reflected as a component of shareholders' equity. Securities classified as
held to maturity are carried at amortized cost. Premiums and discounts are
recognized in interest income over the period to maturity by the level
yield method. Realized gains or losses on the sale of debt securities are
recorded based on the amortized cost of the specific securities sold.
Security sales are recorded on a trade date basis.
LOANS
Loans intended for sale are carried at the lower of cost or estimated
market value determined on an aggregate basis. Net unrealized losses are
recognized through a valuation allowance by a charge to income. Gains or
losses on the sale of loans are determined under the specific
identification method.
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their
outstanding unpaid principal balances. For balance sheet presentation, the
balances are presented net of deferred fees or costs on originated loans or
unamortized premiums or discounts on purchased loans. Discounts and
premiums are accreted or amortized using the interest method over the
remaining period to contractual maturity adjusted for anticipated
prepayments. Unamortized net fees or costs are recognized upon early
repayment of the loans. Unamortized net fees or costs on loans sold are
included in the basis of the loans in calculating gains and losses.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a
Loan," and SFAS No. 118, "Accounting by Creditors for
29
<PAGE> 32
Impairment of a Loan - Income Recognition and Disclosures," which impose
certain requirements on the measurement of impaired loans. A loan is
considered to be impaired when, based on current information and events, it
is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In general, the
Bank considers a loan on income-producing properties to be impaired when
the debt service ratio is less than 1.0 and principal recovery is in doubt.
Loans on non-income producing properties are considered impaired whenever
fair value is less than book value. The Bank performs a review of all loans
over $500,000 to determine if the impairment criteria have been met. If the
impairment criteria have been met, a reserve is calculated according to the
provisions of the SFAS No. 114. The adoption of SFAS No. 114 and SFAS No.
118 did not have a material effect on the Company's results of operations.
Loans and leases considered to be nonperforming include nonaccrual loans
and leases, accruing loans and leases delinquent more than 90 days, and
restructured loans. A loan (including a loan impaired under SFAS No. 114)
is classified as nonaccrual when collectability is in doubt (this is
generally when the borrower is 90 days past due on contractual principal or
interest payments). A loan may be considered impaired but remain on accrual
status when the borrower demonstrates (by continuing to make payments) a
willingness to keep the loan current. When a loan is placed on nonaccrual
status, unpaid interest is reversed and an allowance is established by a
charge to interest income equal to all accrued interest. Income is
subsequently recognized only to the extent that cash payments are received.
Loans are returned to accrual status when, in management's judgment, the
borrower has the ability and intent to make periodic principal and interest
payments (this generally requires that the loan be brought current in
accordance with its original contractual terms). Loans and leases are
classified as accruing loans or leases delinquent more than 90 days when
the loan or lease is more than 90 days past due and, in management's
judgment, the borrower has the ability and intent to make periodic interest
and principal payments. Loans are classified as restructured when
concessions are made to borrowers with respect to the principal balance,
interest rate or other terms due to the inability of the borrower to meet
the obligation under the original terms. The Bank charges off principal at
the earlier of (i) when a total loss of principal has been deemed to have
occurred as a result of the book value exceeding the fair value or net
realizable value, or (ii) when collection efforts have ceased.
LEASE ACCOUNTING
The Company classifies leases at the inception of the lease in accordance
with SFAS No. 13, "Accounting for Leases." Estimated residual values are
reviewed at least annually and reduced if necessary.
Direct Financing Leases - At lease inception, the present values of future
rentals and of the residual are recorded as net investment in direct
financing leases. Unearned interest income is amortized to interest income
over the lease term to produce a constant percentage return on the
investment.
Sales-Type Leases - At the inception of the lease, the present value of
future rentals is recorded as equipment sales. Equipment cost less the
present value of the residual is recorded as cost of equipment sold.
Accordingly, a dealer profit is recognized at lease inception. The present
values of future rentals and of the residual are recorded as net investment
in sales-type leases. Unearned income is amortized to interest income over
the lease term to produce a constant percentage return on the investment.
Leveraged Leases - Income on leveraged leases is recognized on a constant
rate of return on the outstanding investment in the lease, net of the
related deferred tax liability.
Operating Leases - Operating lease revenue includes monthly rentals. The
cost of equipment is recorded as equipment on operating leases and is
depreciated over the initial and succeeding lease terms, if any, to an
estimated residual value.
Initial Direct Costs - Sales commissions and other direct costs incurred in
direct financing and operating leases are capitalized and recorded as part
of the net investment in leases and of the equipment on operating leases
and are amortized over the lease term.
30
<PAGE> 33
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is established at a level believed
adequate by management to absorb estimated losses inherent in the loan and
lease portfolio. Management's determination of the adequacy of the
allowance is based upon estimates derived from an analysis of individual
credits, prior and current loss experience, loan and lease portfolio
delinquency levels, overall growth in the loan and lease portfolio and
current economic conditions. Consequently, these estimates are particularly
susceptible to changes that could result in a material adjustment to
results of operations. The provision for loan and lease losses represents a
charge against current earnings in order to maintain the allowance for loan
and lease losses at an appropriate level.
PREMISES AND EQUIPMENT
Premises and equipment and real estate held for investment are stated at
cost less accumulated depreciation and amortization. Depreciation is
computed using the straight-line method over the useful lives of the
related assets.
LOAN SERVICING ASSETS
Loan servicing assets are accounted for under the provisions of SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" which became effective January 1, 1997.
SFAS No. 125, which is applied prospectively from its effective date, does
not significantly change the Company's accounting for loan servicing
assets. The cost of mortgage loans sold, with servicing rights retained, is
allocated between the loans and the servicing rights based on their
estimated fair values at time of loan sale. The estimated fair value of
loan servicing assets is determined by reference to recent trades of
comparable servicing rights, or is determined based on expected future cash
flows discounted at an interest rate commensurate with the servicing risks
involved. In 1997 and 1996, virtually all such recorded assets relate to
residential mortgage loans. Servicing assets are presented in the
Consolidated Statement of Financial Condition net of accumulated
amortization, which is recorded in proportion to, and over the period of,
net servicing income. SFAS No. 125 also requires capitalized servicing
assets to be stratified based on predominant risk characteristics of
underlying loans for the purpose of evaluating impairment. An allowance is
then established in the event the recorded value of an individual stratum
exceeds fair value.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Interest rate risk management instruments used in asset/liability
management activities are accounted for using the accrual method.
Derivatives are utilized by the Company for hedging purposes and not for
trading. The net interest received or paid on these instruments is
recognized over the lives of the respective contracts as an adjustment to
interest expense. Fees paid or received at inception of the agreements are
amortized or accreted to interest expense over the lives of the related
agreements. Gains and losses on terminated agreements are deferred and
amortized to interest expense over the remaining original term of the
applicable agreement. If the assigned liability is eliminated, the gain or
loss on the terminated agreement is recognized immediately.
The Bank's residential mortgage banking subsidiary, Charter One Mortgage
Corp. ("COMC"), enters into forward contracts for the sale of
mortgage-backed securities for the purpose of hedging its portfolio of
closed loans held for sale and its pipeline of loans expected to close. As
loans are closed, they are typically pooled and securitized with the
resulting security delivered to national securities firms at prices
specified in the forward contracts. Gains or losses may arise if the yields
of the loans delivered vary from those specified in the forward contracts.
Unrealized gains and losses on the forward contracts are included in cost
values used in adjusting the carrying value of loans held for sale to the
lower of cost or market value. Realized gains and losses and adjustments to
the lower of cost or market value are included in mortgage banking
noninterest income in the statement of income.
In the ordinary course of business, the Company enters into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commercial letters of credit, standby letters of credit and
commitments to purchase or sell assets. Such financial instruments are
recorded in the financial statements when they are funded or the related
fees are incurred or received.
31
<PAGE> 34
REAL ESTATE OWNED
Real estate owned, including property acquired in settlement of foreclosed
loans, is carried at the lower of cost or estimated fair value less
estimated cost to sell at the date of foreclosure. Costs relating to the
development and improvement of real estate owned are capitalized, whereas
costs relating to holding and maintaining the property are charged to
expense.
GOODWILL
Goodwill represents the purchase price of acquired operations in excess of
the fair value of their net identifiable assets at the date of acquisition
and is being amortized using the straight-line method over 15 years or
less. Management periodically reviews intangible assets for possible
impairment.
LOAN FEES
Loan origination fees received for loans, net of direct origination costs,
are deferred and amortized to interest income over the contractual lives of
the loans using the level yield method. Fees received for loan commitments
that are expected to be drawn, based on the Bank's experience with similar
commitments, are deferred and amortized over the lives of the loans using
the level yield method. Fees for other loan commitments are deferred and
amortized over the loan commitment period on a straight-line basis.
Unamortized deferred loan fees or costs related to loans paid off are
included in income. Unamortized net fees or costs on loans sold are
included in the basis of the loans in calculating gains and losses.
Amortization of net deferred fees is discontinued for loans that are deemed
to be nonperforming.
INCOME TAXES
Income taxes have been provided using the liability method in accordance
with SFAS No. 109, "Accounting for Income Taxes." The Company files a
consolidated Federal income tax return.
STATEMENTS OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with a term of three months or less to be cash
equivalents. Cash flows from interest rate risk management instruments are
classified based on the on-balance-sheet assets or liabilities hedged.
EARNINGS PER SHARE
On December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share." All prior-period earnings per share data has been restated. 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 EPS 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. The
adoption of SFAS No. 128 did not have a material effect on previously
reported EPS.
Basic EPS is based on the weighted average number of common shares
outstanding during the year. Diluted EPS is based on the weighted average
number of common shares and common share equivalents outstanding during the
year. All shares and per share data have been restated to reflect the
provisions of SFAS No. 128, as well as the 5% stock dividends issued
September 30, 1996 and October 31, 1997.
COMPREHENSIVE INCOME
During the fourth quarter of 1997, the Company early adopted 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. The adoption of this statement required the reclassification of
prior periods.
32
<PAGE> 35
In accordance with SFAS No. 130, reclassification adjustments have been
determined for all components of other comprehensive income reported in the
Company's Consolidated Statements of Shareholders' Equity. Amounts
presented within those statements are net of the following reclassification
adjustments and related tax expense:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Other comprehensive income, before tax:
Net unrealized holding gain on securities.............................. $ 28,897 54,873 23,779
Reclassification adjustment for (gains) losses included
in net income......................................................... 626 (3,456) 19,206
-------- -------- -------
Other comprehensive income, before tax................................... 29,523 51,417 42,985
Income tax expense related to items of other comprehensive
income................................................................. 10,333 17,996 15,045
-------- -------- -------
Other comprehensive income, net of tax............................. $ 19,190 33,421 27,940
======== ======== =======
</TABLE>
NEW ACCOUNTING STANDARDS
On January 1, 1997 the Company adopted SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." 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. The adoption of this statement has not had a material
effect on the Company's financial condition or results of operations. The
FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125," that deferred 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 does not
believe this statement, upon adoption, will have a material effect on the
Company's financial condition or results of operations.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards
for the reporting of financial information about reportable operating
segments in annual and interim financial statements. This statement
requires that financial information be reported on the basis that it is
reported internally for evaluating segment performance and deciding how to
allocate resources to segments. This statement may result in additional
financial statement disclosures upon adoption; however, the Company does
not expect to make material changes to its current segment reporting. SFAS
No. 131 will become effective in 1998.
2. BUSINESS COMBINATIONS AND ASSET ACQUISITIONS
On October 3, 1997, Charter One combined with RCSB Financial, Inc.
("Rochester") in a strategic alliance (the "Rochester Merger"). The
Rochester Merger was effected through the issuance of .91 shares of Company
common stock for each share of Rochester Common stock resulting in the
issuance of 13,504,176 shares of company common stock. The Rochester Merger
was accounted for as a pooling of interests and, accordingly, the financial
statements for the Company for all periods prior to the Rochester Merger
have been restated to include the results of Rochester. Rochester paid
dividends on common stock of $4,327,000 during 1997, $6,950,000 in 1996 and
$5,883,000 in 1995 and preferred dividends of $2,600,000 in 1996 and
$5,232,000 in 1995. All per share dividend amounts are those of the Company
prior to the Rochester Merger. Also on the Rochester Merger date,
Rochester's principal subsidiary Rochester Community Savings Bank ("RCSB"),
was merged with and into the Bank. RCSB and its subsidiaries' primary lines
of business were retail banking, mortgage banking and automobile lending.
33
<PAGE> 36
Total assets and shareholders' equity of Rochester as of October 3, 1997
(unaudited) were $4.1 billion and $323.3 million, respectively. Total
income and net income of the Company and Rochester after reclassifications
to conform presentation are as follows:
<TABLE>
<CAPTION>
TOTAL INCOME NET INCOME
-------------------------------------------- ----------------------------------------
JANUARY 1, 1997 YEAR ENDED YEAR ENDED JANUARY 1, 1997 YEAR ENDED YEAR ENDED
TO DECEMBER 31, DECEMBER 31, TO DECEMBER 31, DECEMBER 31,
OCTOBER 3, 1997 1996(1) 1995(1) OCTOBER 3, 1997 1996(1) 1995(1)
----------------- ------------- ------------- -------------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Company............... $ 843,734 1,061,616 1,039,574 137,626 127,722 34,032
Rochester............. 272,190 348,504 314,073 22,818 39,705 37,753
---------- ---------- ---------- --------- -------- --------
Total............... $ 1,115,924 1,410,120 1,353,647 160,444 167,427 71,785
========== ========== ========== ========= ======== ========
</TABLE>
- ---------------------------
(1) Rochester amounts are for its fiscal year end, the twelve months ended
November 30.
Rochester operated under a fiscal year end November 30. Amounts presented in the
income statements for periods prior to 1997 include Rochester's results for the
respective fiscal period end. The components of the adjustment to retained
earnings to conform year ends is detailed below (dollars in thousands):
<TABLE>
<S> <C>
Retained earnings at December 31, 1996............................................... $ 795,338
Rochester activity for the month of December 1996:
Revenues...............................................................$ 29,755
Expenses............................................................... 26,756
--------
Net income.......................................................................... 2,999
Dividends declared.................................................................. (2,308)
--------
Retained earnings at January 1, 1997.................................................. $ 796,029
=========
</TABLE>
On September 19, 1997, the Company acquired Haverfield Corporation
("Haverfield"), the holding company of Home Bank, F.S.B.. Home Bank, F.S.B.
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 $26.0 million of goodwill. Results of operations for
Haverfield Corporation have been included in Charter One's Consolidated
Statements of Income since the acquisition date. The acquisition and
operations of Haverfield are not material to the Company.
On June 28, 1996, the Company completed the acquisition of First Nationwide
Bank's 21 branch offices in the Detroit Metropolitan area. The market areas
of four First Nationwide offices directly overlapped those of existing
branch offices and therefore were consolidated into the existing branch
facilities. The deposits of the branches totaled $796.7 million and were
assumed for a cost of $57.0 million. Such cost has been reflected as
goodwill in the accompanying financial statements.
On October 31, 1995, the Company completed a merger with FirstFed Michigan
Corporation ("FirstFed"), the holding company for First Federal of
Michigan, a federally chartered savings and loan association (the "FirstFed
Merger.") The FirstFed Merger was effected through the issuance of 1.2
shares of Company common stock for each share of FirstFed common stock
resulting in the issuance of 22,506,201 shares of Company common stock. The
FirstFed Merger has been accounted for as a pooling of interests and,
accordingly, the financial statements of the Company for all periods prior
to the merger have been restated to include the results of FirstFed. All
per share dividend amounts are those of the Company prior to the FirstFed
Merger.
In January 1995, the Company acquired a leasing company (ICX Corporation)
and purchased a controlling interest in a computer service bureau
(Accredited Computer Services) in which it previously had an equity
investment. ICX Corporation had $135.8 million in assets, primarily
financing leases and assets held under operating leases. Accredited
Computer Services had $2.7 million in assets, comprised primarily of
computer equipment.
34
<PAGE> 37
3. CASH AND CASH EQUIVALENTS
Federal Reserve Board regulations require depository institutions to
maintain certain minimum reserve balances. These reserves, which consisted
of vault cash and deposits at the Federal Reserve Bank, totaled $10.4
million and $113.8 million at December 31, 1997 and 1996, respectively.
4. INVESTMENT SECURITIES
Investment securities classified as available for sale at December 31, 1997
and 1996, were summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ------ ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities........................... $ 571,126 275 38 571,363
Corporate notes and commercial paper.......................... 5,244 4,944 - 10,188
Other......................................................... 1,036 2 - 1,038
--------- ------ ----- ---------
Total...................................................... $ 577,406 5,221 38 582,589
========= ====== ===== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ------- ------ ---------
(DOLLARS IN THOUSANDS)
------- ------ ---------
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities........................... $ 238,195 550 610 238,135
Corporate notes and commercial paper.......................... 2,499 2,984 63 5,420
Other......................................................... 2,522 1 18 2,505
--------- ------- ------ ---------
Total...................................................... $ 243,216 3,535 691 246,060
========= ======= ====== =========
</TABLE>
The weighted average interest rate on investment securities was 6.67% and 6.85%
at December 31, 1997 and 1996, respectively.
Investment securities available for sale by contractual maturity, repricing or
expected call date are shown below:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------
WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE RATE
-------- --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Due in one year or less.............................................. $ 567,549 568,174 6.65%
Due after one year through two years................................. 2 2 7.75
Due after two years through five years............................... 139 139 7.56
Due after five years through ten years............................... 9,484 9,553 6.98
Due after ten years.................................................. 232 4,721 22.61
-------- ---------
Total............................................................. $ 577,406 582,589 6.67%
======== =========
</TABLE>
At December 31, 1997 and 1996, total adjustable-rate investment securities were
$8.2 million and $8.6 million, respectively.
Gains on sales were $6,000, $700,000 and $6.1 million for the years ended
December 31, 1997, 1996 and 1995, respectively. Losses were $266,000 and $2.0
million for the years ended December 31, 1997 and 1996, respectively. No losses
were recorded in 1995.
35
<PAGE> 38
5. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Participation certificates:
Government agency issues:
FHLMC................................................. $ 1,885 13 1 1,897
GNMA.................................................. 102 - - 102
Collateralized mortgage obligations:
Government agency issues:
FNMA.................................................. 258,271 6,423 - 264,694
FHLMC................................................. 352,318 8,509 95 360,732
Private issues.......................................... 432,795 10,088 75 442,808
----------- ------ ------ ---------
Total mortgage-backed securities
available for sale.................................. 1,045,371 25,033 171 1,070,233
----------- ------ ------ ---------
HELD TO MATURITY
Participation certificates:
Government agency issues:
FNMA.................................................. 1,013,757 16,817 56 1,030,518
FHLMC................................................. 439,816 16,331 25 456,122
GNMA.................................................. 160,678 4,201 2 164,877
Private issues.......................................... 316,046 3,473 1,334 318,185
Collateralized mortgage obligations:
Government agency issues:
FNMA.................................................. 359,664 12,060 1,278 370,446
FHLMC................................................. 176,074 5,572 1,253 180,393
Private issues.......................................... 1,749,214 13,124 9,274 1,753,064
----------- ------ ------ ---------
Total mortgage-backed securities
held to maturity.................................... 4,215,249 71,578 13,222 4,273,605
----------- ------ ------ ---------
Total............................................. $ 5,260,620 96,611 13,393 5,343,838
=========== ====== ====== =========
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Participation certificates:
Government agency issues:
FHLMC............................................... $ 13,404 6 75 13,335
Private issues........................................ 11,495 - 2,142 9,353
Collateralized mortgage obligations:
Government agency issues:
FNMA................................................ 268,023 3,811 86 271,748
FHLMC............................................... 347,869 2,379 90 350,158
Private issues........................................ 446,901 1,630 6,001 442,530
---------- -------- ------- ----------
Total mortgage-backed securities
available for sale................................ 1,087,692 7,826 8,394 1,087,124
---------- -------- ------- ----------
HELD TO MATURITY
Participation certificates:
Government agency issues:
FNMA................................................ 1,255,564 11,202 10,834 1,255,932
FHLMC............................................... 644,360 18,140 385 662,115
GNMA................................................ 194,463 4,372 421 198,414
Private issues........................................ 511,492 4,136 9,000 506,628
Collateralized mortgage obligations:
Government agency issues:
FNMA................................................ 350,248 10,052 2,037 358,263
FHLMC............................................... 196,984 5,151 1,827 200,308
Private issues........................................ 2,119,228 10,381 24,350 2,105,259
---------- -------- ------- ----------
Total mortgage-backed securities
held to maturity.................................. 5,272,339 63,434 48,854 5,286,919
---------- -------- ------- ----------
Total........................................... $ 6,360,031 71,260 57,248 6,374,043
========== ======== ======= ==========
</TABLE>
In 1997, the Bank reclassified $4.8 million of mortgage-backed securities
from held to maturity to available for sale in response to significant
deterioration in the issuer's creditworthiness uncovered during a routine
review of the portfolio. Subsequently, the security was sold for a loss of
$371,000.
In 1997, the Bank sold $127.4 million of mortgage-backed securities held to
maturity with outstanding balances less than 15% of the principal
outstanding at acquisition. A $2.3 million gain was recorded on the sale.
In 1996, the Bank reclassified $10.9 million of mortgage-backed securities
from held to maturity to available for sale in response to significant
deterioration in the issuer's creditworthiness uncovered during a routine
review of the portfolio. Subsequently, $8.1 million of these securities
were sold for a loss of $1.4 million.
In 1996, the Bank sold $68.7 million of mortgage-backed securities held to
maturity with outstanding balances less than 15% of the principal
outstanding at acquisition. A $2.6 million gain was recorded on the sale.
Sales of mortgage-backed securities available for sale and held to maturity
resulted in gains of $3.1 million in 1997, $7.5 million in 1996 and $2.6
million in 1995. Losses, including write-downs to fair value, were $2.9
million in 1997, $5.3 million in 1996 and $27.9 million in 1995.
37
<PAGE> 40
Mortgage-backed securities are classified by type of interest payment as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------
1997 1996
---------------------------------- --------------------------------
WEIGHTED WEIGHTED
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE RATE COST VALUE RATE
--------- ---- ------- --------- ---- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
Adjustable rate:
Collateralized
mortgage obligations............ $1,037,959 1,062,903 7.31% $ 1,054,361 1,056,087 6.94%
---------- ---------- ---------- ----------
Total adjustable rate.......... 1,037,959 1,062,903 7.31 1,054,361 1,056,087 6.94
---------- ---------- ---------- ----------
Fixed rate:
Participation
certificates.................... 1,937 1,999 8.02 24,899 22,688 6.64
Collateralized
mortgage obligations............ 5,475 5,331 6.36 8,432 8,349 5.79
---------- ---------- ---------- ----------
Total fixed rate.............. 7,412 7,330 6.81 33,331 31,037 6.41
---------- ---------- ---------- ----------
Total available for
sale.................... 1,045,371 1,070,233 7.30 1,087,692 1,087,124 6.93
---------- ---------- ---------- ----------
HELD TO MATURITY
Adjustable rate:
Participation
certificates.................... 792,765 809,726 7.18 1,058,527 1,066,812 7.20
Collateralized
mortgage obligations............ 326,864 345,824 7.76 301,866 317,055 7.23
---------- ---------- ---------- ----------
Total adjustable rate......... 1,119,629 1,155,550 7.35 1,360,393 1,383,867 7.21
---------- ---------- ---------- ----------
Fixed rate:
Participation
certificates.................... 1,137,532 1,159,979 7.34 1,547,352 1,556,277 7.51
Collateralized
mortgage obligations............ 1,958,088 1,958,076 6.99 2,364,594 2,346,775 7.05
---------- ---------- ---------- ----------
Total fixed rate.............. 3,095,620 3,118,055 7.12 3,911,946 3,903,052 7.47
---------- ---------- ---------- ----------
Total held to
maturity.................. 4,215,249 4,273,605 7.18 5,272,339 5,286,919 7.11
---------- ---------- ---------- ----------
Total mortgage-backed
securities.......................... $5,260,620 5,343,838 7.20% $ 6,360,031 6,374,043 7.07%
========== ========== =========== ==========
</TABLE>
38
<PAGE> 41
Adjustable-rate mortgage-backed securities are further classified by type of
repricing index as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------
WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE RATE
--------- ----- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Available for sale:
Collateralized mortgage obligations:
One-month LIBOR..................................................... $ 1,022,213 1,047,107 7.31%
Other............................................................... 15,746 15,796 7.38
----------- ----------
Total adjustable rate available for sale............................ 1,037,959 1,062,903 7.31
----------- ----------
Held to maturity:
Participation certificates:
One-year constant maturity treasury................................. 384,021 395,218 7.41
FHLB 11th District cost of funds.................................... 291,691 291,532 6.56
Other............................................................... 117,053 122,976 7.98
Collateralized mortgage obligations:
One-month LIBOR..................................................... 313,835 332,643 7.77
Other............................................................... 13,029 13,181 7.32
----------- ----------
Total adjustable rate held to maturity............................ 1,119,629 1,155,550 7.35
----------- ----------
Total adjustable rate........................................... $ 2,157,588 2,218,453 7.33%
=========== ==========
</TABLE>
The weighted average lifetime cap rate of the adjustable-rate participation
certificate portfolio and the adjustable-rate collateralized mortgage obligation
portfolio were 11.91% and 9.26%, respectively, at December 31, 1997.
6. LOANS AND LEASES
Loans and leases consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real Estate:
Permanent:
One-to-four family....................................................... $ 7,830,344 6,667,514
Multifamily.............................................................. 255,952 303,922
Commercial............................................................... 334,362 387,617
Construction:
One-to-four family....................................................... 318,529 271,438
Multifamily.............................................................. 34,058 14,517
Commercial............................................................... 23,006 19,122
------------ ---------
Total real estate...................................................... 8,796,251 7,664,130
Automobile................................................................... 1,543,728 991,802
Other consumer............................................................... 1,598,754 1,145,898
Business..................................................................... 172,039 108,992
Lease financings............................................................. 439,004 251,133
------------ ---------
Total loans and leases................................................... 12,549,776 10,161,955
------------ ---------
Less:
Loans in process......................................................... 138,001 141,834
Unamortized net discount (premium)....................................... (124) 1,169
Allowance for loan and lease losses...................................... 113,868 94,112
Net deferred loan costs.................................................. (25,467) (6,710)
Dealer reserve........................................................... (36,636) (36,079)
------------ ---------
Total.................................................................. 189,642 194,326
------------ ---------
Loans and leases held for investment, net............................ $ 12,360,134 9,967,629
============ =========
Loans held for sale.................................................. $ 341,671 150,437
============ =========
</TABLE>
39
<PAGE> 42
At December 31, 1997 and 1996, $10.7 billion and $9.1 billion,
respectively, of the Bank's gross loans were to borrowers located within
the states of Ohio, Michigan and New York, its primary market area.
Although the Bank has a diversified loan portfolio, its borrowers' ability
to honor their contracts is substantially dependent upon general economic
conditions of the region.
The Bank originates or purchases commercial real estate and business loans.
These loans are considered by management to be of somewhat greater risk of
uncollectibility than single-family residential real estate loans due to
the dependency on income production or future development of real estate.
The following table sets forth the Bank's commercial real estate and
commercial construction loan portfolios by type of collateral.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1997 1996
--------------------- ---------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
-------- ------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Strip shopping centers....................................... $ 123,972 34.7% $ 139,684 34.3%
Developed and undeveloped land............................... 76,098 21.3 54,891 13.5
Office buildings............................................. 66,498 18.6 71,836 17.7
Warehouses................................................... 47,483 13.3 54,397 13.4
Hotel property............................................... 11,942 3.3 31,418 7.7
Mobile home parks............................................ 2,156 .6 19,774 4.9
Other........................................................ 29,219 8.2 34,739 8.5
--------- ------- --------- -----
Total...................................................... $ 357,368 100.0% $ 406,739 100.0%
========= ======= ========= =====
</TABLE>
Business loans include loans to companies located in Ohio, Michigan, and
New York totaling $160.1 million and $101.1 million at December 31, 1997
and 1996, respectively. Business loans are collateralized by accounts
receivable, inventory and other assets used in the borrowers' business.
The Company normally has outstanding a number of commitments to extend
credit. At December 31, 1997, there were outstanding commitments to
originate $489.3 million of fixed-rate mortgage loans and other loans and
leases and $141.8 million of adjustable-rate loans, all at market rates.
Terms of the commitments extend up to nine months, but are generally less
than two months.
At December 31, 1997, there were also outstanding unfunded consumer lines
of credit of $902.2 million and business lines of credit of $49.1 million.
Substantially all of the consumer loans, including consumer lines of
credit, are secured by equity in the borrowers' residence. The Company does
not expect all of these lines to be used by the borrowers.
The Bank is engaged in equipment leasing through a subsidiary, ICX
Corporation ("ICX"). The equipment leased by ICX is for commercial and
industrial use only with primary lease concentrations to Fortune 1000
companies for large capital equipment acquisitions. A lessee is evaluated
from a credit perspective using the same underwriting standards and
procedures as for a borrower. It is expected to be able to make the rental
payments based on its business' cash flow and the strength of its balance
sheet. Leases are usually not evaluated as collateral based transactions
and, therefore, the lessee's overall financial strength is the most
important credit evaluation factor.
40
<PAGE> 43
A summary of the investment in lease financings is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Direct financing leases............................................................. $ 251,092 167,623
Sales-type.......................................................................... 94,609 69,334
Leveraged leases.................................................................... 93,303 14,176
-------- --------
Total lease financings........................................................... $ 439,004 251,133
======== ========
</TABLE>
The components of the investment in lease financings are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total future minimum lease rentals.................................................. $ 336,680 224,654
Estimated residual value of leased equipment........................................ 201,639 86,947
Initial direct costs................................................................ 3,333 2,597
Less unearned income on minimum lease rentals and estimated residual value
of leased equipment............................................................... (102,648) (63,065)
--------- --------
Total lease financings.......................................................... $ 439,004 251,133
========= ========
</TABLE>
At December 31, 1997, future minimum lease rentals on direct financing,
sales type and leveraged leases are as follows: $98.8 million in 1998;
$75.3 million in 1999, $55.8 million in 2000; $38.2 million in 2001; $25.9
million in 2002, and $42.7 million thereafter.
At December 31, 1997, future minimum lease rentals on noncancelable
operating leases are as follows: $5.5 million in 1998; $1.5 million in
1999; $258,000 in 2000, and $3,000 in 2001.
ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year.................................................. $ 94,112 90,527 91,063
Adjustment to convert Rochester to a calendar year end.................... 650 - -
Provision................................................................. 40,861 17,549 8,664
Amounts charged off....................................................... (29,440) (20,080) (16,007)
Recoveries................................................................ 4,722 6,116 6,631
Acquired through acquisition.............................................. 2,963 - -
Other..................................................................... - - 176
---------- ------ ------
Balance, end of year........................................................ $ 113,868 94,112 90,527
========== ====== ======
</TABLE>
Nonperforming loans and leases were $62.2 million, $56.6 million and $67.5
million at December 31, 1997, 1996 and 1995, respectively.
As of December 31, 1997, the total investment in impaired loans was $13.7
million. The entire $13.7 million was subject to allowances for credit
losses of $452,000 as of December 31, 1997. The average recorded investment
in impaired loans during 1997 was $23.2 million, and interest income
recognized in 1997 was $1.1 million. The interest income potential based
upon the original terms of the contracts for these impaired loans was $1.4
million for 1997.
As of December 31, 1996, the total investment in impaired loans was $13.2
million. The entire $13.2 million was subject to allowances for credit
losses of $615,000 as of December 31, 1996. The average recorded investment
in impaired loans during 1996 was $15.7 million, and interest income
recognized in 1996 was $927,000. The interest income potential based upon
the original terms of the contracts for these impaired loans was $1.6
million for 1996.
41
<PAGE> 44
7. MORTGAGE BANKING ACTIVITIES
At December 31, 1997, 1996 and 1995, loans serviced for the benefit of
others totaled $9.1 billion, $10.6 billion and $9.2 billion, respectively.
Included in these totals were loans sold on a recourse basis of $653.1
million, $659.5 million and $670.2 million, respectively. Custodial escrow
balances maintained in connection with the foregoing loan servicing were
$104.0 million and $87.6 million at December 31, 1997 and 1996,
respectively.
The following table displays, for the three most recent years, changes in
recorded loan servicing assets.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance.................................................. $ 121,187 106,889 77,290
Adjustment to convert Rochester to a calendar year end............. 1,133 - -
Originations....................................................... 11,737 21,428 7,453
Purchases.......................................................... 9,335 31,200 33,657
Sales.............................................................. (29,699) (23,705) -
Amortization....................................................... (13,770) (14,434) (11,511)
Net change in valuation allowance.................................. (18,087) (191) -
----------- ------- -------
Ending balance................................................... $ 81,836 121,187 106,889
=========== ======= =======
</TABLE>
The fair value of mortgage loan servicing assets totaled $82.4 million and
$136.8 million at December 31, 1997 and 1996, respectively. Valuation
allowances for loan servicing assets totaled $18.3 million and $191,000 as
of December 31, 1997 and 1996, respectively. The increase in the valuation
allowance was recognized as a result of the current interest rate
environment and projected increases in mortgage prepayments. Fair values
are subject to change over time based on movements in interest rates and
prepayment expectations and other market factors.
8. REAL ESTATE AND OTHER COLLATERAL OWNED
Real estate and other collateral owned consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real estate acquired in settlement of loans........................................... $ 7,909 13,242
Repossessed automobiles............................................................... 5,505 2,947
Real estate held for investment and acquired for development.......................... 312 307
------- -------
Total............................................................................... $ 13,726 16,496
======= =======
</TABLE>
42
<PAGE> 45
9. DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1997 1996
----------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
----------- ---- ------------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Checking accounts:
Interest-bearing..................................... $ 783,768 1.54% $ 739,456 1.76%
Noninterest-bearing.................................. 397,760 - 331,291 -
Savings accounts....................................... 1,155,093 2.33 1,363,087 2.46
Money market accounts.................................. 1,799,709 3.30 1,620,625 3.56
Certificates of deposit................................ 6,045,191 5.95 6,012,032 5.82
Nationally marketed certificates of deposit............ 36,243 5.84 141,300 5.45
------------ -------------
Total deposits..................................... 10,217,764 4.50 10,207,791 4.52
Plus unamortized premium on
deposits purchased................................... 1,436 2,056
------------ -------------
Total deposits, net................................ $ 10,219,200 $ 10,209,847
============ =============
Including the annualized effect of applicable interest
rate risk management instruments..................... 4.37% 4.46%
</TABLE>
Including the annualized effect of applicable interest rate risk management
instruments.
A summary of certificates of deposit by maturity follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Within 12 months......................................................................... $ 4,252,614
12 months to 24 months................................................................... 1,178,052
24 months to 36 months................................................................... 219,424
36 months to 48 months................................................................... 148,034
Over 48 months........................................................................... 283,310
----------
Total.................................................................................. $ 6,081,434
==========
</TABLE>
10. FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank advances at December 31, 1997, are secured by
the Company's investment in the stock of the Federal Home Loan Bank,
as well as certain real estate loans aggregating $7.8 billion and
mortgage-backed securities aggregating $995.5 million. FHLB advances
are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1997 1996
------------------------ ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
---------- ----- ---------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Fixed-rate advances....................................... $ 4,921,760 5.90% $ 2,023,783 6.01%
Variable-rate advances.................................... 448,743 5.76 1,403,000 5.56
----------- ----------
Total advances, net 5,370,503 5.89 3,426,783 5.81
=========== ==========
Including the annualized effect of applicable interest
rate risk management instruments........................ 5.83% 5.84%
</TABLE>
43
<PAGE> 46
Scheduled repayments of FHLB advances are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1997 1996
------------------------ ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
---------- ----- ---------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Maturing in:
1998.................................................. $ 2,460,000 5.84% $ 75,000 5.76%
1999.................................................. 1,395,000 5.96 200,000 5.72
2000.................................................. 550,000 5.85 - -
2001.................................................. 255,000 5.05 - -
2002.................................................. 225,000 5.95 - -
Thereafter............................................ 36,760 5.78 173,743 5.80
----------- -----------
Total FHLB advances, net............................ $ 4,921,760 5.90% $ 448,743 5.76%
=========== ===========
</TABLE>
At December 31, 1997, $200 million of the fixed rate agreements maturing in
2001 are convertible, at the counterparty's option, to a floating rate of
three-month LIBOR, beginning in February 1999 and quarterly thereafter.
In the fourth quarter of 1997, the Company prepaid $550 million of FHLB
advances and recognized a pre-tax extraordinary loss of $4.1 million.
11. REVERSE REPURCHASE AGREEMENTS
The Company enters into reverse repurchase agreements with the FHLB and
large investment banking firms. The agreements to repurchase assets
correspond with sales of the Company's mortgage-backed securities treated
as financings for financial statement purposes. The securities subject to
repurchase agreements were delivered to the FHLB or brokers arranging the
transactions who hold the collateral until maturity of the agreements.
The table below presents information regarding the carrying and fair values
of assets sold under agreements to repurchase, in addition to the amounts
and interest rates of the related borrowings.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------
ASSETS SOLD
----------------------- WEIGHTED
CARRYING ESTIMATED REPURCHASE AVERAGE
VALUE FAIR VALUE LIABILITY(1) RATE
-------- ---------- ------------ -------
(DOLLARS IN THOUSANDS)
---------- ---------- --
<S> <C> <C> <C> <C>
Type of mortgage-backed security and term of borrowing:
U.S. Government Agency Securities:
90 days to one year................................ $ 123,526 128,436 119,084 5.78%
Over one year...................................... 1,879,760 1,928,159 1,823,674 5.99
---------- ---------- ----------
Total.......................................... 2,003,286 2,056,595 1,942,758 5.98
---------- ---------- ----------
Private issues:
90 days to one year................................ 138,539 138,558 132,766 5.86
Over one year...................................... 18,118 18,362 21,000 5.59
---------- ---------- ----------
Total private issues........................... 156,657 156,920 153,766 5.83
---------- ---------- ----------
Total...................................... $ 2,159,943 2,213,515 2,096,524 5.96%
========== ========== ==========
</TABLE>
-----------------
(1) Excludes accrued interest payable of $19.2 million.
44
<PAGE> 47
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
ASSETS SOLD
----------------------- WEIGHTED
CARRYING ESTIMATED REPURCHASE AVERAGE
VALUE FAIR VALUE LIABILITY(1) RATE
---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Type of mortgage-backed security and term of borrowing:
U.S. Government Agency Securities:
Under 30 days........................................ $ 107,418 107,576 101,996 5.37%
30 to 89 days........................................ 122,238 121,405 115,005 5.42
90 days to one year.................................. 207,861 212,151 208,106 5.62
Over one year........................................ 1,449,211 1,461,939 1,374,778 5.49
----------- ---------- ----------
Total............................................ 1,886,728 1,903,071 1,799,885 5.49
----------- ---------- ----------
Private issues:
Under 30 days........................................ 310,193 306,832 294,162 5.41
30 to 89 days........................................ 26,179 26,888 25,646 5.40
90 days to one year.................................. 321,300 319,952 304,991 5.53
---------- ---------- ----------
Total private issues............................. 657,672 653,672 624,799 5.47
----------- ---------- ----------
Total........................................ $ 2,544,400 2,556,743 2,424,684 5.49%
=========== ========== ==========
</TABLE>
---------------------------
(1) Excludes accrued interest payable of $15.4 million.
At December 31, 1997, there were no amounts at risk with any
counterparties exceeding 10% of shareholders' equity. The amount at risk
is equal to the excess of the carrying value (or market value if greater)
of the securities sold under agreements to repurchase over the amount of
the repurchase liability.
12. OTHER BORROWINGS
<TABLE>
<CAPTION>
Other borrowings consist of the following:
DECEMBER 31,
----------------------
1997 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Zero coupon bonds of $407.0 million due February 2005,
with yield to maturity of 11.36%................................................ $ 182,332 162,435
Mortgage loan sale agreement...................................................... 8,695 9,902
Variable-rate bonds, due December 1, 2015, interest payable semi-
annually at 4.75% with a ceiling of 9.50%....................................... 10,000 10,000
Installment obligations without recourse.......................................... 24,053 23,157
Other............................................................................. 4,718 6,184
--------- --------
Total........................................................................ $ 229,798 211,678
========= ========
</TABLE>
The zero coupon bonds are collateralized by mortgage-backed securities of
$376.2 million and $359.0 million at December 31, 1997 and 1996,
respectively.
The installment obligations are collateralized by leased equipment and
future lease revenues. The Company assigned the rentals under many leases
on a nonrecourse basis. In the event of a default by a lessee, there is no
recourse against the Company.
13. INTEREST RATE RISK MANAGEMENT INSTRUMENTS
The Company utilizes various types of interest rate risk management
instruments to manage its interest rate risk profile. 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.
45
<PAGE> 48
Information on the swaps, by maturity date, follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1997 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
1997..................................... - - - $ 100,000 5.56% 6.27%
1998..................................... $ 175,000 5.81% 5.96% 225,000 5.63 5.86
1999..................................... 150,000 5.85 5.52 225,000 5.63 7.52
---------- ---- ---- ------- ---- ----
$ 325,000 5.83% (1) 5.76% $ 550,000 5.62% (1) 6.61%
========== ==== ====== ========= ==== ====
VARIABLE PAYMENT AND FIXED RECEIPT
1998..................................... $ 25,000 5.70% 5.83% $ 115,000 6.40% 5.53%
1999..................................... 115,000 6.42 5.83 - - -
2000..................................... - - - 110,000 7.06 5.54
2001..................................... 15,000 6.39 5.85 140,000 7.28 5.53
2002..................................... 250,000 7.08 5.84 - - -
---------- ---- ---- ------- ---- ----
Total................................. $ 405,000 6.78% 5.84% (1) $ 365,000 6.93% 5.53%(1)
========== ==== ====== ========= ==== ====
</TABLE>
----------------------
(1) Rates are based upon LIBOR.
The Company is exposed to credit loss in the event of nonperformance by the
swap counterparties, however, the Company does not currently anticipate
nonperformance by the counterparties.
The cost of interest rate risk management instruments included in interest
expense was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest expense:
Consumer loans............................................... $ - 93 245
Deposits..................................................... (14,358) (9,515) 19,336
FHLB advances................................................ 44 1,760 2,201
Reverse repurchase agreements................................ (489) (1,840) 30,914
--------- ------- --------
Total..................................................... $ (14,803) (9,502) 52,696
========= ======= ========
</TABLE>
In addition to the above, swap termination losses recognized in 1995 in
connection with the FirstFed Merger were $76.2 million, on a pre-tax basis.
14. INCOME TAXES
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current........................................................ $ 45,852 53,521 48,286
Deferred....................................................... 25,995 29,107 (16,529)
------- ------- --------
Total....................................................... $ 71,847 82,628 31,757
======= ======= ========
</TABLE>
46
<PAGE> 49
A reconciliation from tax at the statutory rate to the income tax provision
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
DOLLARS RATE DOLLARS RATE DOLLARS RATE
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate............................. $ 78,044 35.0% $ 87,519 35.0% $ 36,240 35.0%
Increase (decrease) due to:
Change in valuation allowance for
deferred tax assets............................ (4,760) (2.1) (5,573) (2.2) (8,357) (8.1)
Other .......................................... (1,437) (.6) 682 .3 3,874 3.8
------- ---- ------- ----- ------- -----
Income tax provision ......................... $ 71,847 32.3% $ 82,628 33.1% $ 31,757 30.7%
======= ==== ======= ===== ======= =====
</TABLE>
Significant components of the deferred tax assets and liabilities are as
follows.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Book allowance for loan losses............................... $ 41,036 36,602 35,531
Accrued and deferred compensation............................ 6,415 8,757 6,862
Allowance for uncollected interest........................... 1,291 1,213 1,363
Net unrealized loss on securities............................ - 64 16,411
Other........................................................ 26,118 18,710 37,301
---------- ----- ------
Total deferred tax assets................................. 74,860 65,346 97,468
Less: Valuation allowance................................. - (4,760) (10,333)
---------- ----- ------
Deferred tax assets, net.............................. 74,860 60,586 87,135
---------- ----- ------
Deferred tax liabilities:
Leasing activities, net...................................... 62,738 28,375 11,822
FHLB stock dividends......................................... 19,565 15,124 12,668
Tax allowance for loan losses................................ 5,885 5,840 7,987
Net unrealized gain on securities............................ 8,943 - -
Depreciation................................................. 2,046 3,783 2,690
Purchase accounting.......................................... (2,412) 894 1,738
Other........................................................ 11,975 5,448 3,654
---------- ----- ------
Total deferred tax liabilities............................ 108,740 59,464 40,559
---------- ----- ------
Net deferred tax asset (liability)...................... $ (33,880) 1,122 46,576
========== ===== ======
</TABLE>
During 1996, legislation was passed that repealed Section 593 of the
Internal Revenue Code for taxable years beginning after December 31, 1995.
Section 593 allowed thrift institutions, including Charter One, to use the
percentage-of-taxable income bad debt accounting method, if more favorable
than the specific charge-off method, for federal income tax purposes. The
excess reserves (deduction based on the percentage-of-taxable income less
the deduction based on the specific charge-off method) accumulated
post-1987 are required to be recaptured ratably over a six-year period
beginning in 1996. The recapture has no effect on the Company's statement
of operations as taxes were provided for in prior years in accordance with
SFAS 109, "Accounting for Income Taxes." The timing of this recapture may
be delayed for a one or two-year period to the extent that Charter One
originates more residential loans than the average originations in the past
six years. Charter One will meet the origination requirement for 1997 and,
therefore, will delay recapture at least until the six-year period
beginning in 1998. The recapture amount of $16.7 million will result in
payments totaling $5.8 million which has been previously accrued. The
pre-1988 reserve provisions are subject only to recapture requirements in
the case of certain excess distributions to, and redemptions of
shareholders or if the Bank no longer qualifies as a "bank". Tax bad debt
deductions accumulated prior to 1988 by the Bank are approximately $203
million. No deferred income taxes have been provided on these bad debt
deductions and no recapture of these amounts is anticipated.
47
<PAGE> 50
15. SHAREHOLDERS' EQUITY
The Bank may not declare or pay cash dividends on its shares of common
stock if the effect thereof would cause shareholders' equity to be reduced
below applicable regulatory capital maintenance requirements or if such
declaration and payment would otherwise violate regulatory requirements. At
December 31, 1997, approximately $153.1 million of the Company's retained
earnings was available to pay dividends to shareholders or to be used for
other corporate purposes.
On May 15, 1996, the Board of Directors of the Company authorized
management to purchase 5% of the Company's outstanding common stock in an
additional buyback program. As of that date, the Company had 49,722,369
common shares outstanding (adjusted for subsequent stock dividends). In
connection with the Rochester Merger the stock repurchase program was
rescinded on August 8, 1997. Charter One had 1,096,593 shares remaining
unpurchased.
In May 1996, Rochester announced it would redeem all outstanding
convertible preferred stock at the close of business on July 15, 1996 for
$26.225 per share plus accrued dividends. Alternatively, preferred
shareholders had the option of converting their stock to common shares at
any time prior to the redemption at a ratio of 1.5625 shares of common for
each preferred share. Due to the excess of the market price for Rochester's
common shares over the pre-established redemption price, 3.0 million
preferred shares were converted to common and only 652 shares were
redeemed. Rochester reissued 3.5 million common shares held in treasury and
issued 1.1 million new common shares to those who elected to convert
preferred stock to common.
On August 20, 1997, the Board of Directors of the Company approved a 5%
stock dividend which was distributed October 31, 1997, to shareholders of
record on October 17, 1997. On July 24, 1996, the Board of Directors of the
Company approved a 5% stock dividend which was distributed September 30,
1996, to shareholders of record on September 13, 1996.
16. REGULATORY CAPITAL REQUIREMENTS
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.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 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)... $ 1,205,750 10.00% 964,459 Greater than =8.0% 1,205,574 Greater than =10.0%
Tier 1 capital (to risk-weighted assets).. 1,095,084 9.08 N/A N/A 723,344 Greater than = 6.0
Tier 1 capital (to adjusted tangible assets) 1,095,084 5.55 592,272 Greater than =3.0 987,120 Greater than = 5.0
Tangible capital (to adjusted
tangible assets)........................ 1,095,084 5.55 296,136 Greater than =1.5 N/A N/A
</TABLE>
48
<PAGE> 51
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 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)... $ 1,073,977 11.06% 776,723 Greater than = 8.0% 970,904 Greater than = 10.0%
Tier 1 capital (to risk-weighted assets).. 983,200 10.13 N/A N/A 582,545 Greater than = 6.0
Tier 1 capital (to adjusted tangible assets) 983,200 5.57 529,924 Greater than = 3.0 883,207 Greater than = 5.0
Tangible capital (to adjusted
tangible assets)........................ 983,200 5.57 264,962 Greater than =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 December 31, 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.
17. STOCK PURCHASE RIGHTS
Each share of the Company's common stock outstanding entitles the
shareholder to one stock purchase right. Each right will entitle the
registered holder to purchase one one-hundredth of a share of a new series
of preferred stock at a price of $40.00 (subject to adjustment). The rights
have additional provisions which, subject to the approval of the Board of
Directors, (1) will entitle the holder to purchase the Company's authorized
and unissued common stock at a price below its market value (as defined in
the agreement) in the event that any person or group acquires 20% or more
of the common stock of the Company without the consent of the Company, and
(2) will entitle the holder to purchase shares of common stock of the
acquiring company at a price below the market value (as defined in the
agreement) in the event that the Company is acquired in a merger or other
business combination transaction or 50% or more of its consolidated assets
or earnings power (as defined) are sold.
The rights expire on December 1, 1999, and may be redeemed by the Company
for $.01 per right at any time prior to an acquisition of 20% or more of
the common stock of the Company and thereafter under certain circumstances,
including in connection with a business combination consented to by the
Company. There are 63,848,837 rights outstanding at December 31, 1997 and
800,000 shares of preferred stock reserved for these rights.
18. BENEFIT PLANS
The Company sponsors several defined contribution plans covering
substantially all employees. Employees may contribute to these plans and
these contributions are matched in varying amounts by the Company. The
Company may also make additional contributions to eligible employees.
Defined contribution pension expense for the Company was $5.1 million, $5.0
million and $2.0 million for the years ended December 31, 1997, 1996 and
1995, respectively.
The Company generally does not provide health care and life insurance
benefits to retired employees. Rochester and FirstFed provided such
benefits to certain previously retired employees. The net periodic
postretirement benefit cost of the plans was $1.6 million, $2.1 million,
and $2.0 million for the years ended December 31, 1997, 1996, and 1995,
respectively.
19. STOCK OPTION PLANS
At December 31, 1997, the Company has five stock option plans under which
10,396,205 shares of common stock are reserved for grant to directors,
officers and key employees. The plans provide that option prices will not
be less than the fair market value of the stock at the grant date. The date
on which the options are first
49
<PAGE> 52
exercisable is determined by the Stock Option Committee of the Board of
Directors (the "Committee"). The options expire no later than 10 years from
the grant date. The Company applies APB No. 25 and related interpretations
in accounting for its plans. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation cost of the
Company's stock option plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of SFAS
No. 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net income:
As reported........................................................... $ 148,409 167,427 71,785
Pro forma............................................................. 142,958 164,380 71,688
Earnings per common share:
As reported........................................................... 2.36 2.64 1.06
Pro forma............................................................. 2.27 2.59 1.06
Earnings per common and common equivalent share assuming dilution:
As reported........................................................... 2.29 2.51 1.04
Pro forma............................................................. 2.21 2.47 1.04
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1995, 1996 and 1997:
dividend yield of 2.5% for the 1995 and 1996 grants and 2.0% for the 1997
grants; expected volatility of 34% for the 1995 option grants, 31% to 34%
for the 1996 option grants and 31% to 33% for the 1997 grants; risk-free
interest rates of 6.48% to 7.71% for the 1995 option grants, 5.48% to 6.56%
for the 1996 grants and 5.85% to 6.73% for the 1997 grants; and expected
lives of seven years for all grants.
The following is an analysis of the stock option activity for each of the
years in the three-year period ended December 31, 1997 and the stock
options outstanding at the end of the respective periods. Amounts have been
restated to reflect the 5% stock dividends in 1997 and 1996.
<TABLE>
<CAPTION>
EXERCISE PRICE
----------------------------------
NUMBER
OF SHARES PER SHARE TOTAL
---------- -------------- ------------
<S> <C> <C> <C>
Outstanding at January 1, 1995..................... 3,328,332 $ 2.83 -$ 27.98 $ 38,683,990
Granted............................................ 120,352 17.46 - 26.68 2,327,359
Exercised.......................................... (870,628) 3.23 - 18.37 (9,421,312)
Canceled - stock appreciation rights exercised..... (4,165) 5.86 (24,413)
Forfeited.......................................... (30,780) 14.06 - 17.33 (441,058)
---------- ------------
Outstanding at December 31, 1995................... 2,543,111 2.83 - 27.98 31,124,566
Granted............................................ 1,711,005 23.33 - 40.00 46,503,512
Exercised.......................................... (683,637) 3.23 - 27.98 (7,234,966)
Forfeited.......................................... (105,529) 16.00 - 26.98 (2,373,544)
---------- ------------
Outstanding at December 31, 1996................... 3,464,950 2.83 - 40.00 68,019,568
Granted............................................ 732,559 29.92 - 62.75 31,100,908
Exercised.......................................... (866,374) 3.23 - 40.03 (12,029,124)
Forfeited.......................................... (22,271) 26.98 - 42.14 (688,312)
---------- ------------
Outstanding at December 31, 1997................... 3,308,864 $ 2.83 -$ 62.75 $ 86,403,040
========== ===== ====== ============
Exercisable at December 31, 1997................... 1,525,994 $ 2.83 -$ 40.03 $ 29,486,449
========== ===== ====== ============
Shares available for future grants
at December 31, 1997.............................. 7,087,341
==========
</TABLE>
As of December 31, 1997, the weighted-average exercise price for options
outstanding was $18.27 with a weighted average remaining contractual life
of 5.8 years.
50
<PAGE> 53
The Committee may also award restricted shares of common stock and
performance units to officers and key employees. The terms of the grants
are determined by the Committee at the date of the award. As of December
31, 1997 no awards of restricted shares of common stock or performance
units had been made.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been determined by
the Company using available market information and appropriate valuation
methodologies. Considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the
Company could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
Cash, Cash Equivalents, Accrued Interest Receivable and Payable and Advance
Payments by Borrowers for Taxes and Insurance - The carrying amount as
reported in the Consolidated Statements of Financial Condition is a
reasonable estimate of fair value.
Mortgage-Backed and Investment Securities - Fair values are based on quoted
market prices, dealer quotes and prices obtained from independent pricing
services.
Loans and Leases - The fair value is estimated by discounting the future
cash flows using the current market rates for loans and leases of similar
maturities with adjustments for market and credit risks.
Federal Home Loan Bank Stock - The fair value is estimated to be the
carrying value which is par. All transactions in the capital stock of the
Federal Home Loan Bank are executed at par.
Loan Servicing Assets - The fair value is estimated by discounting the
future cash flows using current market rates for mortgage loan servicing
with adjustments for market and credit risks.
Deposits - The fair value of demand deposits, savings accounts and money
market deposit accounts is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
using rates currently offered for advances of similar remaining maturities.
Federal Home Loan Bank Advances, Reverse Repurchase Agreements, and Other
Borrowings - Rates currently available to the Bank for borrowings with
similar terms and remaining maturities are used to estimate fair value of
existing borrowings.
Interest Rate Risk Management Instruments - The fair value is estimated as
the difference in the present value of future cash flows between the
Company's existing agreements and current market rate agreements of the
same duration.
Forward Commitments - Quoted market prices are utilized to determine fair
value disclosures when such prices are available.
51
<PAGE> 54
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1997 and 1996.
Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts
have not been comprehensively revalued for purposes of these financial
statements since that date and, therefore, current estimates of fair
value may differ significantly from the amounts presented herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- ----------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents................. $ 239,716 239,716 334,596 334,596
Investment securities..................... 582,589 582,589 246,060 246,060
Mortgage-backed securities................ 5,285,482 5,343,838 6,359,463 6,374,043
Loans and leases.......................... 12,701,805 12,802,429 10,118,066 10,345,648
Federal Home Loan Bank stock.............. 366,647 366,647 250,465 250,465
Accrued interest receivable............... 110,181 110,181 99,332 99,332
Loan servicing assets..................... 81,836 82,364 121,187 136,808
Liabilities:
Deposits:
Checking, savings and money
market accounts....................... 4,136,330 4,136,330 4,054,459 4,054,459
Certificates of deposit................. 6,082,870 6,066,731 6,155,388 6,159,215
Federal Home Loan Bank advances........... 5,370,503 5,360,334 3,426,783 3,418,670
Reverse repurchase agreements............. 2,096,524 2,097,328 2,424,684 2,421,312
Other borrowings.......................... 229,798 279,514 211,678 257,114
Advance payments by borrowers for
taxes and insurance..................... 138,379 138,379 105,551 105,551
Accrued interest payable.................. 53,094 53,094 42,191 42,191
Off-Balance-Sheet Items:
Interest rate risk management
instruments.............................. - 17,519 - 9,229
Forward commitments to sell loans......... (1,662) (1,662) (2,694) (2,694)
</TABLE>
52
<PAGE> 55
21. STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURE
Supplemental disclosures of cash flow information are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowings.......................... $ 840,326 806,338 855,702
Income taxes................................................. 49,500 56,576 20,504
Supplemental schedule of noncash activities:
Loans exchanged for mortgage-backed securities................. - 510,435 331,426
Securities transferred from held to maturity to
available for sale........................................... - 10,861 2,224,382
Securities transferred from available for sale to
held to maturity............................................. 4,824 - 79,618
Transfers from loans to real estate owned...................... 11,293 16,331 12,779
Issuance of common shares to converting preferred shareholders:
From treasury................................................ - 85,766 -
New shares................................................... - 17,874 -
</TABLE>
22. PARENT COMPANY FINANCIAL INFORMATION
The summarized financial statements of Charter One Financial, Inc. (parent
company only) as of December 31, 1997 and 1996 and for the years ended
December 31, 1997, 1996 and 1995 follow:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Assets:
Deposits with subsidiary...................................................... $ 6,084 67
Cash equivalents.............................................................. 3,101 36,551
Investment in subsidiary, at equity........................................... 1,366,755 1,197,889
Securities and other.......................................................... 1,458 11,257
----------- ---------
Total...................................................................... $ 1,377,398 1,245,764
=========== =========
Liabilities:
Total liabilities............................................................. $ 509 177
----------- ---------
Shareholders' equity:
Common stock.................................................................. 650 615
Additional paid-in capital.................................................... 706,804 496,723
Retained earnings............................................................. 700,616 795,338
Treasury stock, at cost....................................................... (45,441) (41,266)
Borrowings of employee investment and stock ownership plan.................... (2,349) (3,181)
Accumulated other comprehensive income........................................ 16,609 (2,642)
----------- ---------
Total shareholders' equity.................................................. 1,376,889 1,245,587
----------- ---------
Total.................................................................... $ 1,377,398 1,245,764
=========== =========
</TABLE>
53
<PAGE> 56
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income:
Dividends from subsidiary............................................. $ 30,000 100,000 47,500
Interest and dividends on securities.................................. 1,331 2,081 2,068
-------- -------- --------
Total income....................................................... 31,331 102,081 49,568
Expenses................................................................ 3,868 998 12,064
-------- -------- --------
Income before undistributed net earnings of subsidiary................ 27,463 101,083 37,504
Equity in undistributed net earnings of subsidiary.................... 120,946 66,344 34,281
-------- -------- --------
Net income......................................................... $ 148,409 167,427 71,785
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 148,409 167,427 71,785
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net earnings of subsidiary............. 120,946 66,344 34,281
Other.......................................................... (213,255) (39,204) (55,354)
--------- --------- ---------
Net cash provided by operating activities.................... 56,100 194,567 50,712
--------- --------- ---------
Cash flows from investing activities:
Purchase of securities............................................. - (44,362) (233,756)
Maturity of securities............................................. 11,227 34,635 247,900
--------- --------- ---------
Net cash provided by (used in) investing activities............. 11,227 (9,727) 14,144
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock............................. 5,079 3,541 2,319
Payment of dividends on common stock............................... (54,268) (46,467) (35,845)
Payment of dividends on preferred stock............................ - (2,600) (5,232)
Net purchases of treasury stock.................................... (45,571) (131,292) (12,813)
--------- --------- ---------
Net cash used in financing activities........................... (94,760) (176,818) (51,571)
--------- --------- ---------
Increase (decrease) in deposits with subsidiary and
cash equivalents............................................ $ (27,433) 8,022 13,285
========= ========= =========
</TABLE>
54
<PAGE> 57
23. EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Basic Earnings Per Share:
Income before extraordinary item............................ $ 151,136 167,427 71,785
Less: Preferred stock dividends............................. - 2,600 5,232
------------- ------------ ------------
Income available to common stockholders..................... $ 151,136 164,827 66,553
============= ============ ============
Average common shares outstanding........................... 62,971,823 62,473,715 62,904,942
============= ============ ============
Earnings per common share before extraordinary item......... $ 2.40 2.64 1.06
============= ============ ============
Diluted Earnings Per Share:
Income before extraordinary item............................ $ 151,136 167,427 71,785
============= ============ ============
Average common shares outstanding........................... 62,971,823 62,473,715 62,904,942
Add common stock equivalents for shares issuable under:
Stock option plans........................................ 1,783,408 1,409,799 1,495,637
Preferred stock conversion................................ - 2,762,424 4,463,487
------------- ------------ ------------
Average common and common equivalent shares 64,755,231 66,645,938 68,864,066
outstanding...................................................
============= ============ ============
Earnings per common and common equivalent share
before extraordinary item................................. $ 2.33 2.51 1.04
============= ============ ============
</TABLE>
55
<PAGE> 58
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Charter One Financial, Inc.
We have audited the accompanying consolidated statements of financial condition
of Charter One Financial, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial statements give
retroactive effect to the merger of Charter One Financial, Inc. and RCSB
Financial, Inc. which has been accounted for as a pooling of interests as
described in Note 2 to the consolidated financial statements. We did not audit
the statement of financial condition of RCSB Financial, Inc. as of November 30,
1996, or the related statements of income, shareholders' equity, and cash flows
of RCSB Financial, Inc. for the years ended November 30, 1996 and 1995, which
statements reflect total assets of $4.0 billion as of November 30, 1996, and net
income of $39.7 million and $37.8 million for the years ended November 30, 1996
and 1995, respectively. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for RCSB Financial, Inc. for 1996 and 1995, is based solely on
the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Charter One Financial, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
Cleveland, Ohio
January 27, 1998
56
<PAGE> 59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the section captioned "Proposal 1 - Election of
Directors" in the Company's definitive proxy statement for the Company's 1998
Annual Meeting of Shareholders (the "Proxy Statement") is incorporated herein by
reference. Reference is also made to the information appearing in Part I -
"Executive Officers," which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the
sections of the Proxy Statement captioned "Compensation of Directors",
"Executive Compensation and Other Information", "1997 Compensation Committee
Report on Executive Compensation", and "Comparison of Cumulative Total Return
Among Charter One Financial, Inc., S & P 500 Index, KBW 50 Index, and Peer Group
Index."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to the
section of the Proxy Statement captioned "Outstanding Voting Securities."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the
section of the Proxy Statement captioned "Compensation of Directors" and
"Transactions with Related Parties."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. REPORTS OF INDEPENDENT ACCOUNTANTS
2. CONSOLIDATED FINANCIAL STATEMENTS
(a) Consolidated Statements of Financial Condition as of
December 31, 1997 and 1996
(b) Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995
(c) Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995
(d) Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995
(e) Notes to Consolidated Financial Statements
57
<PAGE> 60
All financial statement schedules are omitted because the required
information is not applicable or is included in the Consolidated
Financial Statements or related notes.
3. EXHIBITS
See Index to Exhibits
4. REPORTS ON FORM 8-K
On October 17, 1997, the Company filed a Form 8-K to report
consummation of its merger with RCSB Financial, Inc. on October
3, 1997 and the results of the special meeting of shareholders
held on that date during which shareholders approved the merger.
58
<PAGE> 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Cleveland, State of Ohio, as of the 20th day of March, 1998.
CHARTER ONE FINANCIAL, INC.
By: CHARLES JOHN KOCH
--------------------------------
Charles John Koch
Director, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and as
of the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------- ------ ------
<S> <C> <C>
/s/CHARLES JOHN KOCH Director, President and March 20, 1998
- ------------------------------------- Chief Executive Officer
Charles John Koch
(Principal Executive Officer)
/s/RICHARD W. NEU Director, Executive Vice March 20, 1998
- ------------------------------------- President
Richard W. Neu Chief Financial Officer
(Principal Financial Officer)
/s/EUGENE B. CARROLL, SR. Director March 20, 1998
- -------------------------------------
Eugene B. Carroll, Sr.
/s/PHILLIP WM. FISHER Director March 20, 1998
- -------------------------------------
Phillip Wm. Fisher
/s/DENISE M. FUGO Director March 20, 1998
- -------------------------------------
Denise M. Fugo
/s/MARK D. GROSSI Director March 20, 1998
- -------------------------------------
Mark D. Grossi
/s/CHARLES M. HEIDEL Director March 20, 1998
- -------------------------------------
Charles M. Heidel
/s/CHARLES F. IPAVEC Director March 20, 1998
- -------------------------------------
Charles F. Ipavec
/s/JOHN D. KOCH Director March 20, 1998
- -------------------------------------
John D. Koch
</TABLE>
<PAGE> 62
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------- ------ ------
<S> <C> <C>
/s/PHILIP J. MEATHE Director March 20, 1998
- -------------------------------------
Philip J. Meathe
/s/MICHAEL P. MORLEY Director March 20, 1998
- -------------------------------------
Michael P. Morley
/s/HENRY R. NOLTE, JR. Director March 20, 1998
- -------------------------------------
Henry R. Nolte, Jr.
/s/RONALD F. POE Director March 20, 1998
- -------------------------------------
Ronald F. Poe
/s/VICTOR A. PTAK Director March 20, 1998
- -------------------------------------
Victor A. Ptak
/s/MELVIN J. RACHAL Director March 20, 1998
- -------------------------------------
Melvin J. Rachal
/s/JEROME L. SCHOSTAK Director March 20, 1998
- -------------------------------------
Jerome L. Schostak
/s/MARK SHAEVSKY Director March 20, 1998
- -------------------------------------
Mark Shaevsky
/s/LEONARD S. SIMON Director March 20, 1998
- -------------------------------------
Leonard S. Simon
/s/JOHN P. TIERNEY Director March 20, 1998
- -------------------------------------
John P. Tierney
/s/ERESTEEN R. WILLIAMS Director March 20, 1998
- -------------------------------------
Eresteen R. Williams
</TABLE>
<PAGE> 63
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Registrant's Second Restated Certificate of Incorporation, as
amended and currently in effect, filed as Exhibit 4.2 to
Post-Effective Amendment Number One on Form S-8 to Form S-4
(File No. 333-33169), is incorporated herein by reference.
3.2 Registrant's Bylaws, as amended and currently in effect, filed
on August 8, 1997 as Exhibit 3.2 to Registrant's Registration
Statement on Form S-4 (File No. 333-33169), is incorporated
herein by reference.
4.1 Form of Certificate of Common Stock, filed on January 22, 1988
as Exhibit 4.2 to Registrant's Registration Statement on Form
S-1 (File No. 33-16207), is incorporated herein by reference.
4.2 Shareholder Rights Agreement dated November 21, 1989, between
Charter One Financial, Inc. and First National Bank of Boston,
as amended on May 26, 1995, filed as Exhibit 4.2 to
Registrant's Report on Form 10-K for the fiscal year ended
December 31, 1994 and December 31, 1995, respectively (File No.
0-16311), is incorporated herein by reference.
10.1 Registrant's Long-Term Stock Incentive Plan, filed on January
22, 1988 as Exhibit 10.1 to Registrant's Registration Statement
on Form S-1 (File No. 33-16207), is incorporated herein by
reference.
10.2 Registrant's Directors' Stock Option Plan, filed on January 22,
1988 as Exhibit 10.2 to Registrant's Registration Statement on
Form S-1 (File No. 33-16207), is incorporated herein by
reference.
10.3 Charter One Bank, F.S.B. Executive Incentive Goal Achievement
Plan, filed as Exhibit 10.8 to Registrant's Report on Form 10-K
for the fiscal year ended December 31, 1994 (File No. 0-16311),
is incorporated herein by reference.
10.4 Charter One Bank, F.S.B. Employee Savings Plan and Trust and
Amendments thereto, filed as Exhibit 10.10 to Registrant's
Report on Form 10-K for the fiscal year ended December 31, 1993
(File No. 0-16311), are incorporated herein by reference.
10.5 Amendments Number Three, Four, Five and Six to the Charter One
Bank, F.S.B. Employee Savings Plan and Trust, filed on August
8, 1997 as Exhibit 10.5 to Registrant's Registration Statement
on Form S-4 (File No. 333-33169), are incorporated herein by
reference.
10.6 Charter One Bank, F.S.B. Profit Sharing Plan and Amendments
thereto, filed as Exhibit 10.12 to Registrant's Report on Form
10-K for the fiscal year ended December 31, 1993 (File No.
0-16311), are incorporated herein by reference.
10.7 Amendments Number One through Seven to the Charter One Bank,
F.S.B. Profit Sharing Plan, filed on August 8, 1997 as Exhibit
10.7 to the Registrant's Registration Statement on Form S-4
(File No. 333-33169), are incorporated herein by reference.
10.8 First American Savings Bank, F.S.B. Nonqualified Retirement
Plan and First Amendment thereto, filed as Exhibit 10.17 to
Registrant's Report on Form 10-K for the fiscal year ended
December 31, 1993 (File No. 0-16311), are incorporated herein
by reference.
10.9 FirstFed Michigan Corporation 1983 Stock Option Plan, filed on
November 1, 1995 as an exhibit to Registrant's Registration
Statement on Form S-8 (File No. 33-61273), is incorporated
herein by reference.
10.10 FirstFed Michigan Corporation 1991 Stock Option Plan, filed on
November 1, 1995 as an exhibit to Registrant's Registration
Statement on Form S-8 (File No. 33-61273), is incorporated
herein by reference.
<PAGE> 64
10.11 Forms of Supplemental Retirement Agreements, dated October 31,
1995, between Charter One and Charles John Koch, Richard W.
Neu, John David Koch, Mark D. Grossi, and Robert J. Vana, filed
on July 25, 1995 as Exhibits 10.4 and 10.5 to Registrant's
Registration Statement on Form S-4 (File No. 33-61273), are
incorporated herein by reference.
10.12 Forms of Employment Agreements, dated October 31, 1995, between
Charter One and Charles John Koch, Richard W. Neu, John David
Koch, Mark D. Grossi, and Robert J. Vana, filed on July 25,
1995 as Exhibits 10.1, 10.2 and 10.3 to Registrant's
Registration Statement on Form S-4 (File No. 33-61273), are
incorporated herein by reference.
10.13 Employment Agreement, dated April 22, 1997, between Charter One
Investment, Inc. and William A. Valerian, filed on August 8,
1997 as Exhibit 10.13 to Registrant's Registration Statement on
Form S-4 (File No. 333-33169), is incorporated herein by
reference.
10.14 Forms of Employment Agreements between Charter One and Leonard
S. Simon, and Edward J. Pettinella, filed on August 8, 1997 as
Exhibits 10.14 and 10.15 to Registrant's Registration Statement
on Form S-4 (File No. 333-33259), are incorporated herein by
reference.
10.15 Charter One Financial, Inc. 1997 Stock Option and Incentive
Plan, filed on December 19, 1997, as an exhibit to Registrant's
Registration Statement on Form S-8 (File No. 333-42823), is
incorporated herein by reference.
10.16 1986 Stock Option Plan of RCSB Financial, Inc., filed on
October 8, 1997, as an exhibit to Post-Effective Amendment
Number One on Form S-8 to Form S-4 (File No. 333-33259), is
incorporated herein by reference.
10.17 1992 Stock-Based Compensation Plan of RCSB Financial, Inc.,
filed on October 8, 1997, as an exhibit to Post-Effective
Amendment Number One on Form S-8 to Form S-4 (File No.
333-33259), is incorporated herein by reference.
10.18 Home Federal Savings Bank Stock Compensation Program, filed on
September 29, 1997 as an exhibit to Post-Effective Amendment
Number One on Form S-8 to Form S-4 (File No. 333-33169), is
incorporated herein by reference.
10.19 Haverfield 1995 Stock Option Plan, filed on September 29, 1997
as an exhibit to Post-Effective Amendment Number One on Form
S-8 to Form S-4 (File No. 333-33169), is incorporated herein by
reference.
10.20 The RCSB Financial, Inc. Non-Employee Director Deferred
Compensation Plan, filed July 12, 1996 as an exhibit to RCSB
Financial's Report on Form 10-Q for the three months ended May
31, 1996 (File No. 00-17709), is incorporated herein by
reference.
11 Statement Regarding Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
99 Independent Auditors' Report from KPMG Peat Marwick LLP
<PAGE> 1
EXHIBIT 11
CHARTER ONE FINANCIAL, INC.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
FOR THE 3 FOR THE 3 FOR THE 12 FOR THE 12
MOS. ENDED MOS. ENDED MOS. ENDED MOS. ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Income before extraordinary item...... $ (9,308) 52,436 151,136 167,427
Less: Preferred stock dividends....... - - - (2,600)
------------ ------------ ------------ ------------
Income available to common
stockholders......................... $ (9,308) 52,436 151,136 164,827
============ ============ ============ ============
Average common shares
outstanding.......................... 63,777,240 63,620,968 62,971,823 62,473,715
============ ============ ============ ============
Earnings per common share before
extraordinary item................... $ (.15) .82 2.40 2.64
============ ============ ============ ============
Diluted Earnings Per Share:
Income before extraordinary item-
assuming dilution.................... $ (9,308) 52,436 151,136 167,427
============ ============ ============ ============
Average common shares
outstanding.......................... 63,777,240 63,620,968 62,971,823 62,473,715
Add:
Common stock equivalents for shares
issuable under Stock Option Plan(1). - 1,625,925 1,783,408 1,409,799
Common stock equivalents for shares
issuable upon preferred stock
conversion.......................... - - - 2,762,424
------------ ------------ ------------ ------------
Average common and common
equivalent shares outstanding........ 63,777,240 65,246,893 64,755,231 66,645,938
============ ============ ============ ============
Earnings per common and common
equivalent share -- assuming dilution
before extraordinary item........... $ (.15) .80 2.33 2.51
============ ============ ============ ============
</TABLE>
- ---------------------------
(1) For the three months ended December 31, 1997 the effect of common stock
equivalents for shares issuable under stock option plans are antidilutive.
<PAGE> 1
EXHIBIT 21
CHARTER ONE FINANCIAL, INC.
SUBSIDIARIES OF THE REGISTRANT
AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF
INCORPORATION OWNERSHIP
--------------- --------------
<S> <C> <C>
CHARTER MICHIGAN BANCORP, INC................................... Michigan 100%
SUBSIDIARY OF CHARTER MICHIGAN BANCORP, INC.
Charter One Bank, F.S.B....................................... United States 100%
SUBSIDIARIES OF CHARTER ONE BANK, F.S.B.
The Aplan Holding Company, Inc................................ New York 100%
First Financial Services and Development Corporation.......... Ohio 100%
Charter One Resources Ohio, Inc............................... Ohio 100%
Charter One Resources Michigan, Inc........................... Michigan 100%
GCCC, Inc. dba ACS............................................ Ohio 100%
Servco, Inc. ................................................. Ohio 100%
Shore Holdings, Inc........................................... New York 100%
FirstFed of Michigan International N.V. ...................... Michigan 100%
1215 Financial Center Associates Ltd.......................... Ohio 99%
Superior West Incorporated.................................... Nevada 100%
SUBSIDIARIES OF FIRST FINANCIAL SERVICES AND
DEVELOPMENT CORPORATION
American Credit Services, Inc................................. New York 100%
Charter One Mortgage Corp..................................... New York 100%
Equity One Credit Corporation................................. Ohio 100%
First Family Financial Services, Inc. dba Equity One.......... Ohio 100%
First Northern Insurance Agency, Inc.......................... Ohio 100%
Real Estate Appraisal Services, Inc. ......................... Ohio 100%
ICX Corporation. ............................................. Ohio 100%
Charter One Investments, Inc. ................................ Ohio 100%
Charter One Investments of New York, Inc...................... New York 100%
Renaissance Insurance Agency, Inc. ........................... Michigan 100%
1001 Insurance Agency, Inc. .................................. Michigan 100%
Bay Life Insurance Company, Inc. ............................. Arizona 100%
SUBSIDIARIES OF SERVCO, INC.
American Realty Finance Corporation........................... New York 100%
1001 Realty, Inc.............................................. Michigan 100%
1001 Services, Inc............................................ Michigan 100%
Thriftco, Inc................................................. Ohio 100%
SUBSIDIARIES OF CHARTER ONE MORTGAGE CORP.
AHF Securities Limited........................................ New York 100%
AHF Subordinated Securities Limited........................... New York 100%
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF DELOITTE & TOUCHE LLP
INDEPENDENT AUDITORS' CONSENT
Charter One Financial, Inc.
We consent to the incorporation by reference in Registration Statements No.
33-24070, No. 33-23805, No. 33-54508, No. 33-61273, No. 333-33259, No.
333-42823, and No. 333-33169 of Charter One Financial, Inc. on Forms S-8 of our
report dated January 27, 1998 (which expresses an unqualified opinion and refers
to the report of other auditors on the consolidated financial statements of a
company that was merged with Charter One Financial, Inc.) appearing in this
Annual Report on Form 10-K of Charter One Financial, Inc. for the year ended
December 31, 1997.
/s/Deloitte & Touche LLP
Cleveland, OH
March 20, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF KPMG PEAT MARWICK LLP
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Charter One Financial, Inc.
We consent to incorporation by reference in the annual report filed on Form 10-K
of Charter One Financial, Inc. and in Registration Statements Nos. 33-24070,
33-23805, 33-54508, 33-61273, 333-33259, 333-42823, and 333-33169 of Charter One
Financial, Inc. on forms S-8 of our report dated December 13, 1996 relating to
the consolidated statement of condition of RCSB Financial, Inc. and subsidiaries
as of November 30, 1996 and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the years in the
two-year period ended November 30, 1996, which report has been incorporated by
reference in the December 31, 1997 annual report on Form 10-K of Charter One
Financial, Inc. Our report refers to changes in accounting for mortgage
servicing rights in 1995.
/s/KPMG Peat Marwick LLP
Rochester, New York
March 19, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS OF CHARTER ONE FINANCIAL, INC. AND NOTES THERETO FOR THE
YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JAN-01-1997
<CASH> 210,437
<INT-BEARING-DEPOSITS> 4,279
<FED-FUNDS-SOLD> 25,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,652,822
<INVESTMENTS-CARRYING> 4,215,249
<INVESTMENTS-MARKET> 4,273,605
<LOANS> 12,815,673
<ALLOWANCE> 113,868
<TOTAL-ASSETS> 19,760,265
<DEPOSITS> 10,219,200
<SHORT-TERM> 210,002
<LIABILITIES-OTHER> 467,351
<LONG-TERM> 7,486,823
0
0
<COMMON> 650
<OTHER-SE> 1,376,239
<TOTAL-LIABILITIES-AND-EQUITY> 19,760,265
<INTEREST-LOAN> 910,368
<INTEREST-INVEST> 438,838
<INTEREST-OTHER> 28,481
<INTEREST-TOTAL> 1,377,687
<INTEREST-DEPOSIT> 453,901
<INTEREST-EXPENSE> 850,724
<INTEREST-INCOME-NET> 526,963
<LOAN-LOSSES> 40,861
<SECURITIES-GAINS> (60)
<EXPENSE-OTHER> 373,930
<INCOME-PRETAX> 222,983
<INCOME-PRE-EXTRAORDINARY> 151,136
<EXTRAORDINARY> (2,727)
<CHANGES> 0
<NET-INCOME> 148,409
<EPS-PRIMARY> 2.36
<EPS-DILUTED> 2.29
<YIELD-ACTUAL> 2.96
<LOANS-NON> 38,607
<LOANS-PAST> 16,864
<LOANS-TROUBLED> 6,722
<LOANS-PROBLEM> 25,600
<ALLOWANCE-OPEN> 94,762
<CHARGE-OFFS> 29,440
<RECOVERIES> 4,772
<ALLOWANCE-CLOSE> 113,868
<ALLOWANCE-DOMESTIC> 113,868
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99
INDEPENDENT AUDITORS' REPORT FROM KPMG PEAT MARWICK LLP
The Board of Directors of
Charter One Financial, Inc.
We have audited the consolidated statement of condition of RCSB Financial, Inc.
and subsidiaries as of November 30, 1996, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the years in the two-year period ended November 30, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RCSB Financial, Inc.
and subsidiaries as of November 30, 1996, and the results of their operations
and their cash flows for each of the years in the two-year period ended November
30, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1995, the
Company changed its method of accounting to adopt the provisions of Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights".
/s/KPMG Peat Marwick LLP
Rochester, New York
December 13, 1996
