<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-16311
CHARTER ONE FINANCIAL, INC.
---------------------------
(exact name of registrant as specified in its charter)
DELAWARE 34-1567092
-------- ----------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1215 SUPERIOR AVENUE, CLEVELAND, OHIO 44114
- ------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(216) 566-5300
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months ( or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's sole class of common
stock as of April 30, 1998 was 128,154,118 as adjusted for the 2-for-1 stock
split issuable May 20, 1998.
================================================================================
<PAGE> 2
TABLE OF CONTENTS
ITEM
NUMBER PAGE
- --------- ----
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Financial Condition --
March 31, 1998 and December 31, 1997......................... 1
Consolidated Statements of Income --
Three months ended March 31, 1998 and 1997................... 2
Consolidated Statement of Changes in Shareholders' Equity --
Three months ended March 31, 1998............................ 3
Consolidated Statements of Cash Flows --
Three months ended March 31, 1998 and 1997................... 4
Notes to Consolidated Financial Statements..................... 5
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 6
3. Quantitative and Qualitative Disclosure About Market Risk........ 19
PART II - OTHER INFORMATION
5. Other Information................................................ 20
6. Exhibits and Reports on Form 8-K................................. 20
Signatures................................................................ 21
i
<PAGE> 3
PART I - FINANCIAL CONDITION
ITEM 1. FINANCIAL STATEMENTS
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
ASSETS
<S> <C> <C>
Cash and deposits with banks................................................. $ 167,360 214,716
Federal funds sold and other................................................. 253 25,000
----------- -----------
Total cash and cash equivalents......................................... 167,613 239,716
Investment securities available for sale, at fair value...................... 350,661 582,589
Mortgage-backed securities:
Available for sale, at fair value.......................................... 1,301,502 1,070,233
Held to maturity (fair value of $3,912,526 and $4,273,605)................. 3,859,366 4,215,249
Loans and leases, net........................................................ 12,572,861 12,360,134
Loans held for sale.......................................................... 262,336 341,671
Federal Home Loan Bank stock................................................. 370,259 366,647
Premises and equipment....................................................... 157,467 158,500
Accrued interest receivable.................................................. 103,951 110,181
Real estate and other collateral owned....................................... 15,960 13,726
Loan servicing assets........................................................ 84,989 81,836
Goodwill..................................................................... 88,626 90,471
Other assets................................................................. 121,425 129,312
----------- -----------
Total assets............................................................ $ 19,457,016 19,760,265
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Checking accounts.......................................................... $ 1,280,829 1,181,528
Money market accounts...................................................... 1,777,773 1,799,709
Savings accounts........................................................... 1,141,320 1,155,093
Certificates of deposit.................................................... 6,348,173 6,082,870
----------- -----------
Total deposits.......................................................... 10,548,095 10,219,200
Federal Home Loan Bank advances.............................................. 4,902,334 5,370,503
Reverse repurchase agreements................................................ 1,844,674 2,096,524
Other borrowings............................................................. 237,165 229,798
Advance payments by borrowers for taxes and insurance........................ 138,838 138,379
Accrued interest payable..................................................... 53,586 53,094
Accrued expenses and other liabilities....................................... 298,949 275,878
----------- -----------
Total liabilities....................................................... 18,023,641 18,383,376
----------- -----------
Shareholders' equity:
Preferred stock - $.01 par value per share; 20,000,000 shares
authorized and unissued.................................................. - -
Common stock - $.01 par value per share; 360,000,000 shares
authorized; 129,915,210 shares issued(1)................................. 1,299 1,299
Additional paid-in capital................................................. 706,155 706,155
Retained earnings.......................................................... 743,429 700,616
Less 1,779,512 and 2,217,536 shares of common stock held in
treasury at cost(1)...................................................... (36,465) (45,441)
Borrowings of employee investment and stock ownership plan................. (2,148) (2,349)
Accumulated other comprehensive income..................................... 21,105 16,609
----------- -----------
Total shareholders' equity.......................................... 1,433,375 1,376,889
----------- -----------
Total liabilities and shareholders' equity.......................... $ 19,457,016 19,760,265
=========== ===========
<FN>
- ---------------------------
(1) Restated to reflect the 2-for-1 stock split issuable on May 20, 1998.
</TABLE>
See Notes to Consolidated Financial Statements
1
<PAGE> 4
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
1998 1997
---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
INTEREST INCOME:
Loans and leases.......................................................... $ 255,163 207,980
Mortgage-backed securities:
Available for sale...................................................... 20,646 18,674
Held to maturity........................................................ 70,639 91,811
Investment securities available for sale.................................. 7,432 4,738
Other interest-earning assets............................................. 8,524 5,808
------------ -------------
Total interest income.................................................. 362,404 329,011
------------ -------------
INTEREST EXPENSE:
Deposits.................................................................. 111,336 110,410
Federal Home Loan Bank advances........................................... 74,041 48,817
Other borrowings.......................................................... 35,655 40,978
------------ -------------
Total interest expense................................................. 221,032 200,205
------------ -------------
Net interest income.................................................... 141,372 128,806
Provision for loan and lease losses......................................... 4,802 4,826
------------ -------------
Net interest income after provision
for loan and lease losses............................................ 136,570 123,980
------------ -------------
OTHER INCOME:
Mortgage banking.......................................................... 14,801 15,364
Retail banking............................................................ 18,258 13,547
Leasing operations........................................................ 2,210 2,089
Net gains................................................................. 4,104 582
Other..................................................................... 752 113
------------ -------------
Total other income..................................................... 40,125 31,695
------------ -------------
ADMINISTRATIVE EXPENSES:
Compensation and employee benefits........................................ 38,650 40,826
Net occupancy and equipment............................................... 12,464 12,818
Federal deposit insurance premiums........................................ 1,357 1,310
Amortization of goodwill.................................................. 1,791 1,362
Other administrative expenses............................................. 26,895 20,746
------------ -------------
Total administrative expenses.......................................... 81,157 77,062
------------ -------------
Income before income taxes.................................................. 95,538 78,613
Income taxes................................................................ 32,005 26,730
------------ -------------
Net income............................................................. $ 63,533 51,883
============ =============
Basic earnings per share(1)................................................. $ .50 .41
============ =============
Diluted earnings per share(1)............................................... $ .48 .40
============ =============
Average common shares outstanding(1)........................................ 127,906,684 125,591,344
============ =============
Average common and common equivalent shares outstanding -
assuming dilution(1)...................................................... 131,586,110 129,009,984
============ =============
Cash dividends declared per share(1)........................................ $ .125 .11
============ =============
<FN>
- ---------------------------
(1) Restated to reflect the 2-for-1 stock split issuable on May 20, 1998.
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE> 5
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
BORROWINGS
OF
EMPLOYEE
ACCUMULATED INVESTMENT TOTAL
ADDITIONAL OTHER AND STOCK SHARE-
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE OWNERSHIP HOLDERS'
STOCK CAPITAL EARNINGS STOCK INCOME PLAN EQUITY
--------- --------- -------- ------- ------------ --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $ 1,299 706,155 700,616 (45,441) 16,609 (2,349) 1,376,889
Comprehensive income:
Net unrealized holding gain
on securities................. - - - - 10,817 - 10,817
Reclassification adjustment
for (gains) losses included
in net income................. - - - - (3,900) - (3,900)
Income tax expense related to
items of other comprehensive
income........................ - - - - (2,421) - (2,421)
Net income..................... - - 63,533 - - - 63,533
------ -------- -------- ------- --------- ------- ----------
Comprehensive income............. - - 63,533 - 4,496 - 68,029
EISOP loan repayment............. - - - - - 201 201
Treasury stock reissued in
connection with stock options
exercised, 438,024 shares(1)... - - (4,738) 8,976 - - 4,238
Dividends paid ($.125 per
share)(1)...................... - - (15,982) - - - (15,982)
------- -------- -------- ------- --------- ------- ----------
Balance, March 31, 1998.......... $ 1,299 706,155 743,429 (36,465) 21,105 (2,148) 1,433,375
======= ======== ======== ======= ========= ======= ==========
<FN>
- ---------------------------
(1) Restated to reflect the 2-for-1 stock split issuable on May 20, 1998.
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 6
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................... $ 63,533 51,883
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses ........................................ 4,802 4,826
Net losses ................................................................. (1,803) (2,339)
Accretion of discounts, amortization of premiums,
amortization of goodwill and depreciation, net ............................ (7,384) 12,444
Origination of real estate loans held for sale ............................. (403,020) (313,631)
Proceeds from sale of loans held for sale .................................. 400,719 352,326
Other ...................................................................... 35,418 60,320
------------ ----------
Net cash provided by operating activities ................................ 92,265 165,829
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net principal disbursed on loans and leases .................................. (762,502) (458,737)
Proceeds from principal repayments and maturities of:
Mortgage-backed securities held to maturity ................................ 355,265 198,654
Mortgage-backed securities available for sale .............................. 5,174 1,950
Investment securities available for sale ................................... 234,489 9,761
Sales of mortgage-backed securities available for sale ....................... 412,100 24,707
Redemption of Federal Home Loan Bank stock ................................... 1,138 -
Purchases of:
Mortgage-backed securities held to maturity ................................ - (469)
Mortgage-backed securities available for sale .............................. - (24,685)
Investment securities available for sale ................................... (1,000) (50,000)
Redemption of Federal Home Loan Bank stock ................................. - (1,664)
Loan servicing rights, including those originated .......................... (6,606) -
Other ........................................................................ (6,628) 15,254
------------ ----------
Net cash provided by (used in) investing activities ........................ 231,430 (285,229)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings ............................. (210,000) 263,156
Proceeds from long-term borrowings ........................................... 3,110,979 316,691
Repayments of long-term borrowings ........................................... (3,614,466) (559,513)
Increase (decrease) in deposits .............................................. 328,974 (1,654)
Increase in advance payments by borrowers for taxes and insurance ............ 459 14,690
Payment of dividends on common stock ......................................... (15,982) (12,905)
Purchase of treasury stock, net of options exercised ......................... - (33,749)
Reissue of treasury stock .................................................... 4,238 2,911
Other ........................................................................ - (2,746)
------------ ----------
Net cash used in financing activities .......................................... (395,798) (13,119)
------------ ----------
Net decrease in cash and cash equivalents ...................................... (72,103) (132,519)
Cash and cash equivalents, beginning of the period ............................. 239,716 334,596
Adjustment to convert Rochester to a calendar year end ......................... - 28,163
------------ ----------
Cash and cash equivalents, end of the period ................................... $ 167,613 230,240
============ ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on deposits and borrowings ............................ $ 220,619 275,426
Cash paid for income taxes ................................................... - 5,527
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Transfers from loans to real estate owned .................................... 2,311 1,419
Loans exchanged for mortgage-backed securities ............................... 641,995 -
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 7
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. The consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Charter One Financial, Inc. ("the Company" or "Charter One") Notice of 1998
Annual Meeting, Proxy Statement and Annual Financial Report. The interim
financial statements reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the
periods presented. Such adjustments are of a normal recurring nature. The
results of operations for the interim periods disclosed herein are not
necessarily indicative of the results that may be expected for a full year.
2. On April 24, 1998, the Company announced a definitive agreement to merge in
a stock-for-stock exchange with CS Financial Corporation, the holding
company of Cuyahoga Savings Association. CS Financial, headquartered in
Cleveland, Ohio, is a savings and loan holding company with $381 million in
assets and eight branch offices.
3. On October 3, 1997, Charter One completed a strategic alliance with RCSB
Financial, Inc. ("Rochester"), which was accounted for as a pooling of
interests. Headquartered in Rochester, New York, RCSB Financial, Inc. was
the holding company of Rochester Community Savings Bank, a $4 billion
savings bank with primary business lines in retail banking, mortgage
banking and automobile lending. The merger was effected through the
issuance of .91 shares of Company common stock for each share of Rochester
common stock resulting in the issuance of 28,358,770 shares as adjusted for
the 5% stock dividend issued October 31, 1997 and 2-for-1 stock split
issuable on May 20, 1998.
4. 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. The adoption of SFAS
No. 127 did not have a material effect on the Company's results of
operations.
5. 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
required 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 December 31, 1998.
6. Certain items in the consolidated financial statements for 1997 have been
reclassified to conform to the 1998 presentation.
5
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HOLDING COMPANY BUSINESS
GENERAL
Charter One Financial, Inc. ("Charter One" or the "Company") is a 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 the first quarter of 1998 the Bank and its subsidiaries were doing
business through 223 full-service banking branches and 39 loan production
offices.
RESULTS OF OPERATIONS
PERFORMANCE OVERVIEW
The Company reported net income of $63.5 million, or $0.48 per diluted share
(restated for the 2-for-1 stock split issuable on May 20, 1998), for the three
months ended March 31, 1998. This was an $11.7 million, or 22.5%, increase over
the net income for the first quarter of 1997 which was $51.9 million, or $0.40
per diluted share (restated for the 2-for-1 stock split issuable on May 20,
1998). The primary reason for this improvement was a $12.6 million, or 9.8%,
increase in net interest income for the first quarter of 1998. In addition, the
Company experienced increases in gains on sale and recurring fee income which
were partially offset by increases in administrative expenses. Overall, income
before the federal tax provision increased by $16.9 million for the first
quarter of 1998 as compared to the same period in 1997.
The increase in earnings in the first quarter of 1998 contributed to an 18.00%
annualized return on average equity and a 1.28% annualized return on average
assets. This compares to first quarter 1997 annualized returns of 16.50% and
1.16%, respectively. These annualized returns and other selected ratios are set
forth in Figure 1.
SELECTED OPERATING RATIOS (Figure 1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------
3/31/98 3/31/97
------- -------
<S> <C> <C>
Annualized returns:
Return on average assets ........................ 1.28% 1.16%
Return on average equity ........................ 18.00 16.50
Average equity to average assets ................ 7.13 7.01
Annualized operating ratios:
Net interest income to administrative expenses .. 1.74x 1.67x
Administrative expenses to average assets ....... 1.64% 1.72%
Efficiency ratio ................................ 44.74 47.34
</TABLE>
NET INTEREST INCOME
Net interest income is the principal source of earnings for the Company. It is
affected by a number of factors including the level, pricing and maturity of
interest-earning assets and interest-bearing liabilities, as well as interest
rate fluctuations and asset quality.
Figure 2 sets forth information concerning Charter One's interest-earning
assets, interest-bearing liabilities, net interest income, interest rate spreads
and net yield on average interest-earning assets during the periods indicated
(including fees which are considered adjustments to yields). Average balance
calculations are based on daily balances.
6
<PAGE> 9
AVERAGE BALANCES, INTEREST RATES AND YIELDS/COSTS (Figure 2)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------------
AVG. AVG.
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------------ --------- -------- ------------ --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and leases(1) .............. $ 12,924,130 $ 255,163 7.91% $ 10,374,899 $ 207,980 8.03%
Mortgage-backed securities:
Available for sale ............. 1,165,156 20,646 7.09 1,108,899 18,674 6.74
Held to maturity ............... 3,980,985 70,639 7.10 5,165,833 91,811 7.11
Investment securities
available for sale .............. 420,668 7,432 7.07 274,176 4,738 6.91
Other interest-earning
assets(2) ....................... 483,544 8,524 7.05 350,935 5,808 6.62
------------ --------- ------------ ---------
Total interest-earning assets . 18,974,483 362,404 7.65 17,274,742 329,011 7.63
--------- ---------
Allowance for loan losses ........ (112,707) (93,814)
Noninterest-earning assets(3) .... 945,922 757,833
------------ ------------
Total assets $ 19,807,698 $ 17,938,761
============ ============
Interest bearing liabilities(4):
Deposits:
Checking accounts .............. $ 1,197,484 2,939 1.00 $ 1,067,858 3,017 1.15
Savings accounts ............... 1,139,636 6,186 2.20 1,348,281 7,916 2.38
Money market accounts .......... 1,783,961 14,490 3.29 1,640,155 14,376 3.55
Certificates of deposit ........ 6,223,922 87,721 5.72 6,096,849 85,101 5.66
------------ --------- ------------ ---------
Total deposits ............... 10,345,003 111,336 4.36 10,153,143 110,410 4.41
------------ --------- ------------ ---------
FHLB advances .................... 5,252,818 74,041 5.71 3,387,409 48,817 5.81
Other borrowings ................. 2,244,732 35,655 6.35 2,804,752 40,978 5.84
------------ --------- ------------ ---------
Total borrowings .............. 7,497,550 109,696 5.90 6,192,161 89,795 5.83
------------ --------- ------------ ---------
Total interest-bearing
liabilities .................. 17,842,553 221,032 5.01 16,345,304 200,205 4.95
--------- ---------
Non interest-bearing liabilities . 553,078 336,004
------------ ------------
Total liabilities ............. 18,395,631 16,681,308
Shareholders' equity ............... 1,412,067 1,257,453
------------ ------------
Total liabilities and
shareholders' equity ......... $ 19,807,698 $ 17,938,761
============ ============
Net interest income ................ $ 141,372 $ 128,806
========= =========
Interest rate spread ............... 2.64 2.68
Net yield on average interest-
earning assets(5) ................. 2.98 2.98
Average interest-earning assets
to average interest-bearing
liabilities ....................... 106.34% 105.69%
<FN>
- ----------
(1) Average balances include nonaccrual loans and interest income includes loan
fee amortization.
(2) Includes FHLB stock, federal funds sold, interest-bearing deposits with
banks and other.
(3) Includes mark-to-market adjustments on securities available for sale.
(4) The costs of liabilities include the annualized effect of interest rate
risk management instruments.
(5) Annualized net interest income divided by the average balance of
interest-earning assets.
</TABLE>
7
<PAGE> 10
Figure 3 sets forth the changes in Charter One's interest income and interest
expense resulting from changes in interest rates and the volume of
interest-earning assets and interest-bearing liabilities. Changes not solely
attributable to volume or rate have been allocated in proportion to the changes
due to volume and rate.
RATE/VOLUME ANALYSIS (Figure 3)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------
1998 V. 1997
---------------------------------------
INCREASE (DECREASE) DUE TO
---------------------------------------
RATE VOLUME TOTAL
---- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest income:
Loans and leases ....................... $(4,578) 51,761 47,183
Mortgage-backed securities:
Available for sale ................... 1,000 972 1,972
Held to maturity ..................... (148) (21,024) (21,172)
Investment securities available for sale 108 2,586 2,694
Other interest-earning assets .......... 399 2,317 2,716
------- ------ ------
Total .............................. (3,219) 36,612 33,393
------- ------ ------
Interest expense:
Checking accounts ...................... (1,044) 966 (78)
Savings accounts ....................... (567) (1,163) (1,730)
Money market accounts .................. (583) 697 114
Certificates of deposit ................ 834 1,786 2,620
Federal Home Loan Bank advances ........ (1,259) 26,483 25,224
Other borrowings ....................... 2,999 (8,322) (5,323)
------- ------ ------
Total .............................. 380 20,447 20,827
------- ------ ------
Change in net interest income ........... $(3,599) 16,165 12,566
======= ====== ======
</TABLE>
Figure 4 sets forth the Company's yields and costs at period end for the dates
indicated.
YIELDS AND COSTS AT END OF PERIOD (Figure 4)
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
YIELDS AND COSTS AT END OF PERIOD
Weighted average yield:
Real estate loans ............................ 7.62% 7.72%
Automobile loans ............................. 8.87 8.92
Consumer loans ............................... 8.40 8.40
Leases ....................................... 7.86 8.04
Business loans ............................... 9.15 8.86
Total loans and leases ..................... 7.92 8.00
Mortgage-backed securities ................... 7.15 7.20
Investment securities ........................ 6.52 6.67
Other interest-earning assets ................ 7.41 7.29
Total interest-earning assets ............ 7.68 7.73
Weighted average cost (1):
Checking ..................................... .90 1.02
Savings ...................................... 2.16 2.33
Money market ................................. 3.25 3.31
Certificates of deposit ...................... 5.72 5.73
Total deposits ............................. 4.34 4.37
FHLB advances ................................ 5.63 5.83
Other borrowings ............................. 6.43 6.38
Total interest-bearing liabilities ...... 4.95 5.07
Interest rate spread ........................... 2.73 2.66
Net yield on interest-earning assets ........... 3.06 2.96
<FN>
- ----------
(1) The costs of liabilities include the annualized effect of interest rate
risk management instruments.
</TABLE>
8
<PAGE> 11
Net interest income for the first quarter of 1998 was $141.4 million as compared
to $128.8 million for the first quarter of 1997. This $12.6 million, or 9.8%,
increase was primarily attributable to the growth in interest-earning assets,
mainly loans and leases, since the first quarter of 1997. Due to high volumes of
loan and lease originations in 1997 and the first quarter of 1998, the average
balance of loans and leases was $2.5 billion higher during the first three
months of 1998 as compared to the first quarter of 1997. This increase in the
balance of loans and leases caused interest income to increase by $51.8 million.
Overall, average interest-earning assets in the first quarter of 1998 were $1.7
billion higher than in the first quarter of 1997. The decrease in the remaining
components of interest-earning assets, primarily mortgage-backed securities,
helped fund the loan and lease growth. Mortgage-backed security balances were
$1.1 billion lower in the first quarter of 1998 as compared to the first quarter
of 1997, which caused interest income to decrease by $20.1 million, partially
offsetting the increase in interest income created by the loan and lease growth.
The primary funding for the remaining growth in the loan and lease portfolio
came from increases in interest-bearing liabilities. The average balance of
interest-bearing liabilities, primarily Federal Home Loan Bank advances, was
$1.5 billion higher in the first quarter of 1998 as compared to the same period
in 1997. This caused interest expense to increase by $20.4 million. Overall the
volume changes in interest-earning assets and interest-bearing liabilities
resulted in an increase of $16.2 million in net interest income, which was
partially offset by a narrowing of the interest rate spread. The interest rate
spread for the first three months of 1998 was 2.64%, 4 basis points lower than
the interest rate spread of 2.68% during the first quarter of 1997. The change
in the spread caused net interest income to decrease by $3.6 million. The
decrease in the spread was primarily due to the increased cost of
interest-bearing liabilities resulting from a shift in the mix of
interest-bearing liabilities towards borrowed funds as opposed to less costly
retail deposits. Borrowings were 42% of the average balance of interest-bearing
liabilities during the first quarter of 1998 as compared to 38% for the first
quarter of 1997. This caused the cost of interest-bearing liabilities to
increase by 6 basis points to 5.01% for the first quarter of 1998. The net yield
on interest-earning assets remained constant at 2.98% during the first quarter
of each year.
OTHER INCOME
Other income was $40.1 million for the first quarter of 1998 as compared to
$31.7 million for the first three months of 1997. This $8.4 million, or 26.6%,
increase was primarily due to increases in retail banking fee income and gains
from asset sales. Retail banking income increased $4.7 million primarily due to
checking account service charges, which increased $5.3 million. An increase in
the number of checking accounts in all market areas was the primary reason
checking account fee income increased. Gains on the sale of assets increased by
$3.5 million over the first quarter of 1997. These sales were executed to assist
the Bank in managing its interest rate risk as the assets sold primarily
consisted of long-term, fixed rate mortgage-backed securities.
ADMINISTRATIVE EXPENSES
Administrative expenses were $81.2 million during the first quarter of 1998.
This is a $4.1 million, or 5.3%, increase as compared to the first quarter of
1997 which had $77.1 million in administrative expenses. While the dollar level
of expenses increased, those increases were consistent with the expanded
operations of the Bank and its subsidiaries together with increased levels of
loan production. The ratio of administrative expenses to average assets was
1.64% for the first quarter of 1998 as compared to 1.72% during the first
quarter of 1997. Also, the Company's efficiency ratio of 44.74% for the first
quarter of 1998 compared favorably to the 47.34% efficiency ratio during the
first quarter of 1997. Since efficiency ratios are a calculation of
administrative expenses (excluding the amortization of goodwill) divided by net
interest income plus recurring fee income, the lower the ratio the better for
the Company.
INCOME TAXES
Income tax expense was $32.0 million for the three months ending March 31, 1998.
This was $5.3 million higher than the federal income tax expense during the same
period of 1997. This increase was primarily due to an increase in pretax income.
The effective tax rates were 33.5% for the 1998 period and 34.0% for the 1997
period.
9
<PAGE> 12
FINANCIAL CONDITION
OVERVIEW
At March 31, 1998, total assets were $19.5 billion which was $.3 billion lower
than at December 31, 1997. This decrease was primarily the result of decreases
in the balances of cash, investments, and mortgage-backed securities partially
offset by an increase in loans and leases.
LOANS AND LEASES
COMPOSITION OF LOANS AND LEASES(Figure 5)
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
------------------------- -----------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
------------- ----------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
LOAN AND LEASE PORTFOLIO, NET
One-to-four family:
Permanent:
Fixed rate .................................. $ 5,197,317 40.50% $ 5,281,533 41.59%
Adjustable rate ............................. 2,778,843 21.65 2,880,513 22.68
Construction .................................. 178,624 1.39 196,647 1.55
------------- -------- ------------ --------
8,154,784 63.54 8,358,693 65.82
Commercial real estate:
Multifamily ................................... 247,580 1.93 265,360 2.09
Other ......................................... 331,677 2.58 325,646 2.56
------------- -------- ------------ --------
579,257 4.51 591,006 4.65
Consumer:
Retail ........................................ 1,803,390 14.05 1,606,128 12.64
Automobile .................................... 1,642,453 12.79 1,542,230 12.14
------------- -------- ------------ --------
3,445,843 26.84 3,148,358 24.78
Business:
Leasing ....................................... 483,571 3.77 437,227 3.44
Corporate banking ............................. 171,742 1.34 166,521 1.31
------------- -------- ------------ --------
655,313 5.11 603,748 4.75
------------- -------- ------------ --------
$ 12,835,197 100.00% $ 12,701,805 100.00%
============= ======== ============ ========
Portfolio of loans serviced for others ............ $ 9,425,937 $ 9,084,871
============= ============
</TABLE>
10
<PAGE> 13
LOAN AND LEASE ACTIVITY (Figure 6)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Originations:
Real estate:
Permanent:
One-to-four family ................... $1,357,415 728,893
Multifamily .......................... 4,555 4,569
Commercial ........................... 11,848 14,580
---------- ----------
Total permanent .................... 1,373,818 748,042
---------- ----------
Construction:
One-to-four family ................... 88,142 58,613
Multifamily .......................... 3,137 1,400
Commercial ........................... 1,898 5,295
---------- ----------
Total construction ................. 93,177 65,308
---------- ----------
Total real estate loans originated 1,466,995 813,350
---------- ----------
Automobile ............................. 273,369 225,862
Retail consumer ........................ 377,759 167,892
Leases ................................. 79,911 44,917
Corporate banking ...................... 46,512 31,437
---------- ----------
Total loans and leases originated 2,244,546 1,283,458
---------- ----------
Sales and principal reductions:
Loans sold ............................... 403,020 354,035
Loans exchanged for MBS .................. 641,995 --
Principal reductions ..................... 1,152,268 529,451
---------- ----------
Total sales and principal reductions 2,197,283 883,486
---------- ----------
Increase before net items ........ $ 47,263 399,972
========== ==========
</TABLE>
- -----------------
INVESTMENT SECURITIES
The entire investment securities portfolio was classified as available for sale
at both March 31, 1998 and December 31, 1997. Figure 7 summarizes the fair
values of the portfolio at those dates.
INVESTMENT SECURITIES PORTFOLIO (Figure 7)
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. Treasury and agency securities ...... $336,970 571,363
Corporate notes and commercial paper ..... 12,692 10,188
Other .................................... 999 1,038
-------- --------
Total .................................. $350,661 582,589
======== ========
Weighted average rate .................. 6.52% 6.67%
======== ========
</TABLE>
MORTGAGE-BACKED SECURITIES
Figure 8 summarizes the mortgage-backed securities ("MBS") portfolios at March
31, 1998 and December 31, 1997. The amounts reflected represent the fair values
of securities available for sale and the amortized cost of securities held to
maturity.
11
<PAGE> 14
MORTGAGE-BACKED SECURITIES (Figure 8)
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31,
1997
---------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
AVAILABLE FOR SALE
Participation certificates:
Government agency issues:
FNMA .......................................................... $ 236,929 -
FHLMC 1,813 1,897
GNMA .......................................................... 91 102
Collateralized mortgage obligations:
Government agency issues:
FHLMC ......................................................... 355,708 360,732
FNMA .......................................................... 264,020 264,694
Private issues .................................................. 442,941 442,808
---------- -----------
Total mortgage-backed securities available for sale ........... 1,301,502 1,070,233
---------- -----------
HELD TO MATURITY
Participation certificates:
Government agency issues:
FNMA .......................................................... 956,758 1,013,757
FHLMC ......................................................... 403,516 439,816
GNMA .......................................................... 151,376 160,678
Private issues .................................................. 298,040 316,046
Collateralized mortgage obligations:
Government agency issues:
FNMA .......................................................... 328,620 359,664
FHLMC ......................................................... 164,751 176,074
Private issues .................................................. 1,556,305 1,749,214
---------- -----------
Total mortgage-backed securities held to maturity ........... 3,859,366 4,215,249
---------- -----------
Total .................................................... $5,160,868 5,285,482
========== ===========
</TABLE>
MORTGAGE-BACKED SECURITIES BY PAYMENT TYPE (Figure 9)
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
------------------------- -------------------------
BOOK AVERAGE BOOK AVERAGE
VALUE RATE VALUE RATE
---------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Adjustable rate:
Collateralized mortgage obligations ........... $1,058,050 7.05% $ 1,062,903 7.31%
---------- -----------
Total adjustable rate ....................... 1,058,050 7.05 1,062,903 7.31
---------- -----------
Fixed rate:
Participation certificates .................... 238,833 7.74 1,999 8.02
Collateralized mortgage obligations ........... 4,619 6.36 5,331 6.36
---------- -----------
Total fixed rate ............................ 243,452 7.71 7,330 6.81
---------- -----------
Total available for sale .................. 1,301,502 7.17 1,070,233 7.30
---------- -----------
HELD TO MATURITY
Adjustable rate:
Participation certificates .................... 739,055 7.18 792,765 7.18
Collateralized mortgage obligations ........... 320,695 7.48 326,864 7.76
---------- -----------
Total adjustable rate ....................... 1,059,750 7.27 1,119,629 7.35
---------- -----------
Fixed rate:
Participation certificates .................... 1,070,635 7.33 1,137,532 7.34
Collateralized mortgage obligations ........... 1,728,981 6.94 1,958,088 6.99
---------- -----------
Total fixed rate ............................ 2,799,616 7.09 3,095,620 7.12
---------- -----------
Total held to maturity .................... 3,859,366 7.14 4,215,249 7.18
---------- -----------
Total mortgage-backed securities ........ $5,160,868 7.15% $ 5,285,482 7.20%
========== ===========
</TABLE>
12
<PAGE> 15
ASSET QUALITY
ANALYSIS OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES (Figure 10)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance, beginning of period ................................................... $ 113,868 94,112
Provision for loan and lease losses ............................................ 4,802 4,826
Adjustment to convert Rochester to a calendar year end ......................... - 650
Loans and leases charged off:
Mortgage ..................................................................... (944) (3,196)
Automobile ................................................................... (6,060) (4,430)
Retail consumer .............................................................. (63) (712)
Leases ....................................................................... - -
Corporate banking ............................................................ - (39)
--------- ---------
Total charge-offs .......................................................... (7,067) (8,377)
--------- ---------
Recoveries:
Mortgage ..................................................................... 118 81
Automobile ................................................................... 1,060 1,002
Retail consumer .............................................................. 77 162
Leases ....................................................................... - -
Corporate banking ............................................................ 26 -
--------- ---------
Total recoveries .......................................................... 1,281 1,245
--------- ---------
Net loan and lease charge-offs .......................................... (5,786) (7,132)
--------- ---------
Balance, end of period ......................................................... $ 112,884 92,456
========= =========
Net charge-offs to average loans and leases (annualized) ....................... .18% .27%
</TABLE>
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES (Figure 11)
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage .................................................................. $ 58,967 59,794
Automobile ................................................................ 38,658 39,455
Retail consumer ........................................................... 8,603 8,255
Leases .................................................................... 2,042 1,777
Corporate banking ......................................................... 4,614 4,587
--------- ---------
Total ................................................................... $ 112,884 113,868
========= =========
Percent of loans and leases to ending loans and leases:
Mortgage ................................................................ 68.0% 70.0%
Automobile .............................................................. 12.8 12.2
Retail consumer ......................................................... 14.1 12.8
Leases .................................................................. 3.8 3.6
Corporate banking ....................................................... 1.3 1.4
--------- ---------
Total ................................................................. 100.0% 100.0%
========= =========
</TABLE>
The allowance for loan and lease losses as a percentage of ending loans and
leases (before the allowance) was .87% at March 31, 1998, down from .89% at
December 31, 1997. Credit quality remained high, with nonperforming assets at
only .38% of total assets at March 31, 1998. Net charge-offs totaled $5.8
million for the three months ended March 31, 1998. Net charge-offs for the
comparable period of 1997 was $7.1 million.
Management believes that the allowance for loan and lease losses has been
established in accordance with generally accepted accounting principles based on
the best information available. However, future adjustments to reserves may be
necessary and net income could be significantly affected if circumstances and/or
economic conditions differ substantially from the assumptions used in making the
initial determinations. Additionally, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
13
<PAGE> 16
allowance for loan and lease losses. Such agencies may require the recognition
of additions to the allowance based on their judgments of information available
to them at the time of their examination.
Figure 12 sets forth information concerning nonperforming assets and the
allowance for loan lease losses. At March 31, 1998, the Bank had no outstanding
commitments to lend additional funds to borrowers whose loans were on nonaccrual
or restructured status.
<TABLE>
<CAPTION>
NONPERFORMING ASSETS (Figure 12)
MARCH 31, 1998 DECEMBER 31, 1997
------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonperforming loans and leases:
Nonaccrual loans and leases:
Mortgage loans:
One-to-four family ............................................... $ 33,453 32,154
Multifamily and commercial ....................................... 3,321 3,794
Construction and land ............................................ 1,438 1,943
-------- --------
Total mortgage loans ........................................... 38,212 37,891
Retail consumer .................................................... - -
Automobile ......................................................... - -
Corporate banking .................................................. 1,635 716
Leases ............................................................. - -
-------- --------
Total nonaccrual loans and leases .............................. 39,847 38,607
-------- --------
Accruing loans and leases delinquent more than 90 days:
Mortgage loans:
One-to-four family ............................................... - 8,356
Multifamily and commercial ....................................... - -
Construction and land ............................................ - -
-------- --------
Total mortgage loans ........................................... - 8,356
Retail consumer .................................................... 7,010 4,671
Automobile ......................................................... 3,678 3,547
Corporate banking .................................................. 1,703 290
Leases ............................................................. - -
-------- --------
Total accruing 90-day delinquent loans and leases .............. 12,391 16,864
-------- --------
Restructured real estate loans ....................................... 6,696 6,722
-------- --------
Total nonperforming loans and leases ........................... 58,934 62,193
Real estate acquired through foreclosure and other ................... 15,648 13,414
-------- --------
Total nonperforming assets ..................................... $ 74,582 75,607
======== ========
Ratio of:
Nonperforming loans and leases to total loans and leases ........... .46% .49%
Nonperforming assets to total assets ............................... .38 .38
Allowance for loan and lease losses to:
Nonperforming loans and leases ................................... 191.54 183.09
Total loans and leases before allowance .......................... .87 .89
</TABLE>
Nonperforming assets at March 31, 1998 totaled $74.6 million, down from $75.6
million at December 31, 1997. The ratio of nonperforming loans to total loans
was .46% at March 31, 1998 as compared to .49% at December 31, 1997.
At March 31, 1998, there were $30.8 million of loans not reflected in the table
above, where known information about possible credit problems of borrowers
caused management to have doubts as to the ability of the borrower to comply
with present loan repayment terms and that may result in disclosure of such
loans in the future.
14
<PAGE> 17
SOURCES OF FUNDS
GENERAL
Deposits have historically been the most important source of the Bank's funds
for use in lending and for general business purposes. The Bank also derives
funds from Federal Home Loan Bank ("FHLB") advances, reverse repurchase
agreements and other borrowings, principal repayments on loans and
mortgage-backed securities, funds provided by operations and proceeds from the
sale of loans and securities. At March 31, 1998 and December 31, 1997, 60% and
57% of interest-bearing liabilities were in the form of deposits and 40% and 43%
were in borrowings.
DEPOSITS
Deposit inflows and outflows are significantly influenced by general interest
rates, market conditions and competitive factors. The Bank prices its deposits
primarily based on competitive conditions. In order to decrease the volatility
of its deposits, the Bank imposes stringent early withdrawal penalties on its
certificates of deposit. Consumer and commercial deposits are attracted
principally within the Bank's primary market areas through the offering of a
broad range of deposit instruments.
COMPOSITION OF DEPOSITS (Figure 13)
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
----------------------------------- --------------------------------
WEIGHTED PERCENT WEIGHTED PERCENT
AVERAGE OF AVERAGE OF
AMOUNT RATE TOTAL AMOUNT RATE TOTAL
------ --------- ---------- ------ --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Checking accounts:
Interest-bearing ................ $ 796,854 1.45% 7.55% $ 783,768 1.54% 7.67%
Noninterest-bearing ............. 483,975 - 4.59 397,760 - 3.89
Savings accounts .................. 1,141,320 2.16 10.82 1,155,093 2.33 11.30
Money market accounts ............. 1,777,773 3.25 16.86 1,799,709 3.31 17.61
Certificates of deposit ........... 6,346,816 5.93 60.18 6,081,434 5.95 59.53
------------- -------- ------------ -------
Deposits ...................... 10,546,738 4.46 100.00% 10,217,764 4.50 100.00%
======== =======
Plus unamortized premium
on deposits purchased ............ 1,357 1,436
------------- ------------
Deposits, net ................ $ 10,548,095 $ 10,219,200
============= ============
Including the annualized effect of
applicable interest rate risk
management instruments ........... 4.34% 4.37%
====== ======
</TABLE>
BORROWINGS
At March 31, 1998, borrowings primarily consisted of FHLB advances and reverse
repurchase agreements. These positions were secured by Charter One's investment
in the stock of the FHLB, as well as $7.0 billion in real estate loans and $2.8
billion in mortgage-backed securities.
15
<PAGE> 18
FEDERAL HOME LOAN BANK ADVANCES (Figure 14)
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
------------------------ -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
---------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed-rate advances................................... $ 4,486,170 5.63% $ 4,921,760 5.90%
Variable-rate advances................................ 416,164 5.59 448,743 5.76
----------- -----------
Advances............................................ $ 4,902,334 5.63 $ 5,370,503 5.89
=========== ===========
Including the annualized effect of applicable interest
rate risk management instruments.................... 5.63% 5.83%
====== =====
</TABLE>
Figure 15 presents a summary of outstanding reverse repurchase agreements. The
Bank enters into short-term reverse repurchase agreements for terms up to one
year, as well as longer term fixed- and variable-rate agreements.
REVERSE REPURCHASE AGREEMENTS (Figure 15)
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Short term ............................................... $ - -% $ 210,002 5.84%
Long term:
Fixed rate ............................................. 1,274,674 6.03 1,316,522 6.02
Variable rate .......................................... 570,000 5.68 570,000 5.89
----------- -----------
Weighted average cost including amortization
of fees ................................................ $ 1,844,674 5.92 $ 2,096,524 5.96
=========== ===========
Including the annualized effect of applicable interest
rate risk management instruments ....................... 5.93% 5.96%
===== =====
</TABLE>
INTEREST RATE RISK MANAGEMENT
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.
16
<PAGE> 19
INTEREST RATE SWAPS (Figure 16)
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
------------------------------------ -------------------------------------
NOTIONAL RECEIVING PAYING NOTIONAL RECEIVING PAYING
PRINCIPAL INTEREST INTEREST PRINCIPAL INTEREST INTEREST
AMOUNT RATE RATE AMOUNT RATE RATE
--------- ----------- ------------ ---------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed payment and variable receipt:
1998 .............................. $ 125,000 5.71 6.22 $ 175,000 5.81% 5.96%
1999 .............................. 150,000 5.67 5.52 150,000 5.85 5.52
--------- ----------
Total........................ $ 275,000 5.69%(1) 5.84% $ 325,000 5.83%(1) 5.76%
========= ==========
Variable payment and fixed receipt:
Maturing in:
1998 .......................... $ - -% -% $ 25,000 5.70% 5.83%
1999 .......................... 35,000 6.40 5.63 115,000 6.42 5.83
2000 .......................... 95,000 6.10 5.66 - - -
2001 .......................... - - - 15,000 6.39 5.85
2002 .......................... 180,000 7.04 5.66 250,000 7.08 5.84
2003 .......................... 80,000 6.49 5.65 - - -
--------- ----------
Total ....................... $ 390,000 6.64% 5.66%(1) $ 405,000 6.78% 5.84%(1)
========= ==========
<FN>
- ----------
(1) Rates are based upon LIBOR.
</TABLE>
The cost (benefit) of interest rate risk management instruments included in
interest expense was as follows:
COST OF INTEREST RATE RISK MANAGEMENT (Figure 17)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Interest expense (income):
Deposits ............................................................................. $ (2,107) (3,800)
FHLB advances ........................................................................ (71) 257
Reverse repurchase agreements ........................................................ 11 (1)
-------- -------
Total .............................................................................. $ (2,167) (3,544)
======== =======
</TABLE>
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. Management also considers the Bank's interest-sensitivity profile
when deciding on alternative sources of funds. At March 31, 1998, the Bank's
one-year gap was a positive 6.02% of total assets.
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
17
<PAGE> 20
requirement may be changed from time to time to reflect current economic
conditions. The Bank's average regulatory liquidity ratio for the first quarter
of 1998 was 10.54%.
Management anticipates that the Bank will have sufficient funds available to
meet current and future loan commitments. At March 31, 1998, the Bank and its
subsidiaries had outstanding commitments to originate loans and leases of $1
billion, unfunded lines of consumer credit totaling $967 million (a significant
portion of which normally remains undrawn) and unfunded lines of commercial
(business loans) credit totaling $43 million. Outstanding letters of credit
totaled $38 million as of March 31, 1998. Certificates of deposit scheduled to
mature in one year or less at March 31, 1998 totaled $4.5 billion. Management
believes that a significant portion of the amounts maturing will remain with the
Bank because they are retail deposits. At March 31, 1998, the Bank had $902
million of advances from the FHLB system and $1.1 billion in reverse repurchase
agreements which mature in one year. 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.
CAPITAL AND DIVIDENDS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. The regulations require the Bank to meet
specific capital adequacy guidelines and the regulatory framework for prompt
corrective action that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital classification is also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total risk-based,
Tier 1 risk-based, Tier 1 leverage and tangible capital as set forth in the
tables below.
REGULATORY CAPITAL (Figure 18)
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
---------------------------------------------------------------------
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT
CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------------- --------------------- ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN
THOUSANDS)
Total capital (to risk-weighted assets) ....... $ 1,273,555 10.41% $ 978,459 GTE 8.0% $ 1,223,074 GTE 10.0%
Tier 1 capital (to risk-weighted assets) ...... 1,163,777 9.52 N/A N/A 733,844 GTE 6.0
Tier 1 capital (to adjusted tangible assets) .. 1,163,777 6.01 580,861 GTE 3.0 968,102 GTE 5.0
Tangible capital (to adjusted tangible assets) 1,163,777 6.01 290,431 GTE 1.5 N/A N/A
<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 GTE 8.0% 1,205,574 GTE 10.0%
Tier 1 capital (to risk-weighted assets) ...... 1,095,084 9.08 N/A N/A 723,344 GTE 6.0
Tier 1 capital (to adjusted tangible assets) .. 1,095,084 5.55 592,272 GTE 3.0 987,120 GTE 5.0
Tangible capital (to adjusted tangible assets) 1,095,084 5.55 296,136 GTE 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.
18
<PAGE> 21
Management believes, as of March 31, 1998, 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.
QUARTERLY STOCK PRICES AND DIVIDENDS (Figure 19)
<TABLE>
<CAPTION>
1ST QUARTER 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
1998 1997 1997 1997 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Market price of common stock(1):
High ..................................... $ 34.06 32.00 29.29 25.72 23.87
Low ...................................... 24.00 27.06 24.53 20.12 19.59
Close .................................... 33.47 31.56 28.16 25.66 20.90
Dividends declared and paid(1) ............. .125 .125 .12 .12 .105
- ----------
(1) Restated to reflect the 2-for-1 stock split issuable on May 20, 1998.
</TABLE>
YEAR 2000
The Company's year 2000 conversion implementation, as discussed in the Company's
December 31, 1997 Form 10-K, is proceeding as planned.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
A comprehensive qualitative and quantitative analysis regarding market risk was
disclosed in the Company's December 31, 1997 Form 10-K. No material changes in
the assumptions used or results obtained from the model have occured.
19
<PAGE> 22
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
DIVIDEND
On April 22, 1998, the Directors of Charter One Financial, Inc. announced a
2-for-1 stock split in the form of a stock dividend and declared a quarterly
cash dividend of $.28 per common share ($.14 per common share post split). The
dividends will be payable on May 20, 1998 to shareholders of record as of May 6,
1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 - Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter
ended March 31, 1998.
20
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARTER ONE FINANCIAL, INC.
Date: May 15, 1998 /s/ Robert J. Vana
----------------------------------------------------
Robert J. Vana
Chief Corporate Counsel and Secretary
Date: May 15, 1998 /s/ Richard W. Neu
----------------------------------------------------
Richard W. Neu
Executive Vice President and Chief Financial Officer
21
<PAGE> 1
EXHIBIT 11
CHARTER ONE FINANCIAL, INC.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
---- ----
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
BASIC EARNINGS PER SHARE(1):
Weighted average number of common shares outstanding ......................... 127,906,684 125,591,344
============= =============
Net income ..................................................................... $ 63,533 51,883
============= =============
Basic earnings per share ....................................................... $ .50 .41
============= =============
DILUTED EARNINGS PER SHARE(1):
Weighted average number of common shares
outstanding ................................................................. 127,906,684 125,591,344
Add common stock equivalents for shares issuable under Stock Option Plan ..... 3,679,426 3,418,640
------------- -------------
Weighted average number of common and common equivalent
shares outstanding ..................................................... 131,586,110 129,009,984
============= =============
Net income ..................................................................... $ 63,533 51,883
============= =============
Diluted earnings per share ..................................................... $ .48 .40
============= =============
<FN>
- ----------
(1) Restated to reflect the 2-for-1 stock split issuable on May 20, 1998.
</TABLE>
22
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF CHARTER ONE FINANCIAL, INC. AND
SUBSIDIARIES AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 162,991
<INT-BEARING-DEPOSITS> 4,369
<FED-FUNDS-SOLD> 253
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,652,163
<INVESTMENTS-CARRYING> 3,859,366
<INVESTMENTS-MARKET> 3,912,526
<LOANS> 12,948,081
<ALLOWANCE> 112,884
<TOTAL-ASSETS> 19,457,016
<DEPOSITS> 10,548,095
<SHORT-TERM> 0
<LIABILITIES-OTHER> 491,373
<LONG-TERM> 6,984,173
1,299
0
<COMMON> 0
<OTHER-SE> 1,432,076
<TOTAL-LIABILITIES-AND-EQUITY> 19,457,016
<INTEREST-LOAN> 255,163
<INTEREST-INVEST> 98,717
<INTEREST-OTHER> 8,524
<INTEREST-TOTAL> 362,404
<INTEREST-DEPOSIT> 111,336
<INTEREST-EXPENSE> 221,032
<INTEREST-INCOME-NET> 141,372
<LOAN-LOSSES> 4,802
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 81,157
<INCOME-PRETAX> 95,538
<INCOME-PRE-EXTRAORDINARY> 95,538
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,533
<EPS-PRIMARY> .50
<EPS-DILUTED> .48
<YIELD-ACTUAL> 2.98
<LOANS-NON> 39,847
<LOANS-PAST> 12,391
<LOANS-TROUBLED> 6,696
<LOANS-PROBLEM> 30,800
<ALLOWANCE-OPEN> 113,868
<CHARGE-OFFS> 7,067
<RECOVERIES> 5,786
<ALLOWANCE-CLOSE> 112,884
<ALLOWANCE-DOMESTIC> 112,884
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF CHARTER ONE FINANICAL, INC. AND
SUBSIDIARIES AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 151,036
<INT-BEARING-DEPOSITS> 25,000
<FED-FUNDS-SOLD> 50,233
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,369,502
<INVESTMENTS-CARRYING> 5,084,037
<INVESTMENTS-MARKET> 5,084,037
<LOANS> 10,651,588
<ALLOWANCE> 92,456
<TOTAL-ASSETS> 18,032,500
<DEPOSITS> 10,204,050
<SHORT-TERM> 0
<LIABILITIES-OTHER> 411,328
<LONG-TERM> 6,167,487
1,230
0
<COMMON> 0
<OTHER-SE> 1,248,405
<TOTAL-LIABILITIES-AND-EQUITY> 18,032,500
<INTEREST-LOAN> 207,980
<INTEREST-INVEST> 115,223
<INTEREST-OTHER> 5,808
<INTEREST-TOTAL> 329,011
<INTEREST-DEPOSIT> 110,410
<INTEREST-EXPENSE> 200,205
<INTEREST-INCOME-NET> 128,806
<LOAN-LOSSES> 4,826
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 77,062
<INCOME-PRETAX> 78,613
<INCOME-PRE-EXTRAORDINARY> 78,613
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,883
<EPS-PRIMARY> .41
<EPS-DILUTED> .40
<YIELD-ACTUAL> 2.98
<LOANS-NON> 38,607
<LOANS-PAST> 16,864
<LOANS-TROUBLED> 6,722
<LOANS-PROBLEM> 25,600
<ALLOWANCE-OPEN> 94,112
<CHARGE-OFFS> 8,377
<RECOVERIES> 1,245
<ALLOWANCE-CLOSE> 92,456
<ALLOWANCE-DOMESTIC> 92,456
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
