<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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 July 31, 1999 was 165,194,971.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item
Number Page
- ------
PART I - FINANCIAL INFORMATION
<S> <C> <C>
1. Financial Statements
Consolidated Statements of Financial Condition --
June 30, 1999 and December 31, 1998........................................................ 1
Consolidated Statements of Income --
Three and six months ended June 30, 1999 and 1998.......................................... 2
Consolidated Statement of Changes in Shareholders' Equity --
Six months ended June 30, 1999............................................................. 3
Consolidated Statements of Cash Flows --
Six months ended June 30, 1999 and 1998.................................................... 4
Notes to Consolidated Financial Statements................................................... 5
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................... 7
3. Quantitative and Qualitative Disclosure About Market Risk........................................ 28
PART II - OTHER INFORMATION
5. Other Information................................................................................ 28
6. Exhibits and Reports on Form 8-K................................................................. 28
Signatures.................................................................................................. 29
</TABLE>
i
<PAGE> 3
PART I - FINANCIAL CONDITION
ITEM 1. FINANCIAL STATEMENTS
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
--------------- -----------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
ASSETS
<S> <C> <C>
Cash and deposits with banks ............................................ $ 220,686 $ 334,054
Federal funds sold and other ............................................ 446 65,453
------------ ------------
Total cash and cash equivalents .................................... 221,132 399,507
Investment securities:
Available for sale, at fair value ..................................... 174,897 253,317
Held to maturity (fair value of $21,474 and $42,554) .................. 21,425 42,256
Mortgage-backed securities:
Available for sale, at fair value ..................................... 3,155,462 2,299,204
Held to maturity (fair value of $2,053,007 and $2,716,740) ............ 2,026,597 2,668,980
Loans and leases, net ................................................... 17,553,669 17,502,729
Loans held for sale ..................................................... 76,570 175,107
Federal Home Loan Bank stock ............................................ 367,514 319,993
Premises and equipment .................................................. 237,815 218,788
Accrued interest receivable ............................................. 118,088 117,493
Real estate and other collateral owned .................................. 19,357 18,094
Loan servicing assets ................................................... 101,011 90,838
Goodwill ................................................................ 152,021 158,709
Other assets ............................................................ 727,046 202,240
------------ ------------
Total assets ....................................................... $ 24,952,604 $ 24,467,255
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Checking accounts:
Interest-bearing ................................................... $ 1,411,890 $ 1,204,221
Noninterest-bearing ................................................ 948,947 1,015,650
Money market accounts ................................................. 2,909,903 2,505,846
Savings accounts ...................................................... 1,503,989 1,828,087
Certificates of deposit ............................................... 8,312,876 8,611,260
------------ ------------
Total deposits ..................................................... 15,087,605 15,165,064
Federal Home Loan Bank advances ......................................... 7,256,870 6,186,118
Reverse repurchase agreements ........................................... 128,541 685,024
Other borrowings ........................................................ 130,933 130,336
Advance payments by borrowers for taxes and insurance ................... 59,237 60,383
Accrued interest payable ................................................ 39,726 45,584
Accrued expenses and other liabilities .................................. 294,277 319,634
------------ ------------
Total liabilities .................................................. 22,997,189 22,592,143
------------ ------------
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; 166,428,418 and 165,399,180 shares issued ............... 1,664 1,654
Additional paid-in capital ............................................ 1,138,426 1,130,398
Retained earnings ..................................................... 835,493 704,661
Less 1,165,000 and zero shares of common stock held in treasury, at cost (32,038) -
Borrowings of employee investment and stock ownership plan ............ (4,223) (5,288)
Accumulated other comprehensive income ................................ 16,093 43,687
------------ ------------
Total shareholders' equity ..................................... 1,955,415 1,875,112
------------ ------------
Total liabilities and shareholders' equity ..................... $ 24,952,604 $ 24,467,255
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
1
<PAGE> 4
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans and leases ....................... $ 336,342 $ 328,476 $ 678,475 $ 647,951
Mortgage-backed securities:
Available for sale ................... 45,965 29,464 80,257 57,694
Held to maturity ..................... 36,349 63,280 78,217 134,396
Investment securities:
Available for sale ................... 2,806 6,857 6,051 18,314
Held to maturity ..................... 409 1,112 1,076 2,235
Other interest-earning assets .......... 6,243 11,064 13,459 21,586
------------ ------------ ------------ ------------
Total interest income ............... 428,114 440,253 857,535 882,176
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Deposits ............................... 144,965 154,006 291,744 304,645
FHLB advances .......................... 84,378 71,903 162,253 146,208
Other borrowings ....................... 7,145 33,221 17,708 69,119
------------ ------------ ------------ ------------
Total interest expense .............. 236,488 259,130 471,705 519,972
------------ ------------ ------------ ------------
Net interest income ................. 191,626 181,123 385,830 362,204
Provision for loan and lease losses ...... 7,843 7,155 14,614 13,768
------------ ------------ ------------ ------------
Net interest income after provision
for loan and lease losses ......... 183,783 173,968 371,216 348,436
------------ ------------ ------------ ------------
OTHER INCOME:
Retail banking ......................... 38,710 28,848 70,931 51,762
Mortgage banking ....................... 11,317 16,115 22,573 31,550
Leasing operations ..................... 1,657 3,441 3,705 5,651
Net gains .............................. 4,668 4,348 9,832 8,612
Other .................................. 7,768 1,781 10,633 3,289
------------ ------------ ------------ ------------
Total other income .................. 64,120 54,533 117,674 100,864
------------ ------------ ------------ ------------
ADMINISTRATIVE EXPENSES:
Compensation and employee benefits ..... 52,803 51,089 105,690 101,546
Net occupancy and equipment ............ 16,848 17,348 34,494 34,356
Federal deposit insurance premiums ..... 1,553 1,528 3,144 3,245
Merger expenses ........................ 3,519 - 5,719 -
Amortization of goodwill ............... 3,300 3,369 6,663 6,732
Other administrative expenses .......... 33,682 37,281 65,826 74,594
------------ ------------ ------------ ------------
Total administrative expenses ....... 111,705 110,615 221,536 220,473
------------ ------------ ------------ ------------
Income before income taxes ............... 136,198 117,886 267,354 228,827
Income taxes ............................. 43,697 38,527 86,718 75,415
------------ ------------ ------------ ------------
Net income .......................... $ 92,501 $ 79,359 $ 180,636 $ 153,412
============ ============ ============ ============
Basic earnings per share ................. $ .56 $ .48 $ 1.09 $ .93
============ ============ ============ ============
Diluted earnings per share ............... $ .54 $ .46 $ 1.06 $ .89
============ ============ ============ ============
Average common shares outstanding(1) ..... 166,238,400 165,978,203 166,009,365 165,771,076
============ ============ ============ ============
Average common and common equivalent
shares outstanding(1) .................. 170,231,663 172,423,363 170,126,959 171,916,458
============ ============ ============ ============
Cash dividends declared per share(1) ..... $ .16 $ .13 $ .30 $ .26
============ ============ ============ ============
</TABLE>
- --------------
(1) Restated to reflect the 5% stock dividend issued September 30, 1998.
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, 1999 $ 1,654 $ 1,130,398 $ 704,661 $ - $ 43,687 $(5,288) $1,875,112
Comprehensive income:
Net unrealized holding loss
on securities................ - - - - (27,594) - (27,594)
Net income.................... - - 180,636 - - - 180,636
------- ------------ --------- --------- -------- ------- ----------
Comprehensive income............ - - 180,636 - (27,594) - 153,042
Treasury stock purchased
1,165,000 shares.............. - - - (32,038) - - (32,038)
EISOP loan payment.............. - - - - - 1,065 1,065
Issuance of common shares for
stock option plans,
1,029,238 shares.............. 10 8,028 - - - - 8,038
Dividends paid ($.30 per
share)........................ - - (49,804) - - - (49,804)
------- ------------ --------- --------- -------- ------- ----------
Balance, June 30, 1999.......... $ 1,664 $ 1,138,426 $ 835,493 $ (32,038) $ 16,093 $(4,223) $1,955,415
======= ============ ========= ========= ======== ======= ==========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 6
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
---- ----
(AS RESTATED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................................... $ 180,636 $ 153,412
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses ............................... 14,614 13,768
Net gains ......................................................... (7,011) (3,631)
Accretion of discounts, amortization of premiums,
amortization of goodwill and depreciation, net ................... 27,553 10,226
Origination of real estate loans held for sale .................... (971,060) (890,269)
Proceeds from sale of loans held for sale ......................... 968,359 885,276
Other ............................................................. (68,176) (68,088)
----------- -----------
Net cash provided by operating activities ....................... 144,915 100,694
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net principal disbursed on loans and leases ......................... (1,819,002) (1,850,754)
Proceeds from principal repayments and maturities of:
Mortgage-backed securities held to maturity ....................... 664,032 814,857
Investment securities held to maturity ............................ - 25,896
Mortgage-backed securities available for sale ..................... 291,236 41,382
Investment securities available for sale .......................... 101,511 741,646
Proceeds from sale of:
Mortgage-backed securities available for sale ..................... 673,311 418,198
Investment securities available for sale .......................... 64,176 -
Federal Home Loan Bank stock ...................................... 1,809 2,188
Loan servicing rights ............................................. - 13,937
Purchases of:
Investment securities available for sale .......................... (90,749) (138,179)
Investment securities held to maturity ............................ - (24,958)
Loans ............................................................. (11,513) (85,040)
Federal Home Loan Bank stock ...................................... (37,902) (4,456)
Loan servicing assets, including those originated ................. (16,892) (16,149)
Bank owned life insurance ......................................... (480,500) -
Other ............................................................. (26,687) 5,278
----------- -----------
Net cash used in investing activities ............................. (687,170) (56,154)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings .................... 233,337 (1,609,644)
Proceeds from long-term borrowings .................................. 500,711 2,041,301
Repayments of long-term borrowings .................................. (217,958) (1,052,155)
Increase (decrease) in deposits ..................................... (77,260) 679,636
Decrease in advance payments by borrowers for taxes and
insurance .......................................................... (1,146) (72,541)
Payment of dividends on common stock ................................ (49,804) (38,558)
Proceeds from issuance of common stock, net of options excercised ... 8,038 -
Purchase of treasury stock .......................................... (32,038) (11,608)
----------- -----------
Net cash provided by (used in) financing activities ................... 363,880 (63,569)
----------- -----------
Net decrease in cash and cash equivalents ............................. (178,375) (19,029)
Cash and cash equivalents, beginning of the period .................... 399,507 412,105
----------- -----------
Cash and cash equivalents, end of the period .......................... $ 221,132 $ 393,076
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on deposits and borrowings ................... $ 477,064 $ 513,489
Cash paid for income taxes .......................................... 8,000 44,455
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Transfers from loans to real estate owned ........................... 2,586 6,309
Loans exchanged for mortgage-backed securities ...................... 1,866,045 1,347,422
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 7
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. These interim 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") Annual Report on Form 10-K. 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 May 17, 1999, the boards of directors of Charter One and St. Paul
Bancorp, Inc. ("St.Paul"), the holding company of St. Paul Federal Bank,
For Savings entered into a definitive agreement to enter into a strategic
alliance through a stock-for-stock exchange. St. Paul Federal Bank For
Savings, headquartered in Chicago, Illinois, has an asset base of $6.0
billion ($3.8 billion in deposits) and operates 60 branch offices in the
metropolitan Chicago area.
Terms of the agreement call for a tax-free exchange of common shares at a
fixed exchange ratio of .99225 shares of Charter One common stock for each
of St. Paul's common shares. Based on the current number of diluted St.
Paul shares, it is expected that approximately 38.7 million shares of
Charter One common stock will be added in conjunction with the merger, 37.7
million new shares to be issued and approximately one million additional
shares related to exercisable stock options. This results in an initial
transaction value of approximately $1.2 billion and a pro forma market
capitalization of the combined company of $6.2 billion.
The merger, which would be accounted for as a pooling of interests, is
expected to close in the fourth quarter of 1999. The transaction has
already been approved by the boards of directors of both companies and is
subject to approval by the Office of Thrift Supervision, the Federal
Reserve Board, the Illinois Commissioner of Banks and Real Estate and each
company's shareholders.
3. On May 4, 1999, the Company announced a definitive agreement with
Chittenden ("Chittenden") Corporation to purchase 14 Vermont National Bank
offices along with approximately $400 million in deposits and $120 million
in commercial real estate and business loans. The deposits will be assumed
for a deposit premium of approximately 10.5% and will result in
approximately $42 million in tax deductible goodwill. The purchase is
related to the branch divestiture required by federal regulators relative
to Chittenden's pending merger with Vermont Financial Services Corp., the
parent company of Vermont National Bank and United Bank in Massachusetts.
The transaction is expected to close during the fourth quarter of 1999.
4. On November 30, 1998, the Company completed the merger with ALBANK
Financial Corporation ("ALBANK"). ALBANK, the holding company of ALBANK,
F.S.B., a federally chartered savings bank, and ALBANK Commercial, a
state-chartered commercial bank, was headquartered in Albany, New York, had
$4.1 billion in assets ($3.5 billion in deposits), and operated 88 branches
in upstate New York and 21 in Massachusetts and Vermont. Terms of the
agreement called for a tax-free exchange of common shares at a fixed
exchange ratio of 2.268 shares (as adjusted for the 5% stock dividend
issued September 30, 1998) of Charter One common stock for each of ALBANK's
common shares, resulting in the issuance of 30,479,758 shares of Charter
One common stock.
5. On October 16, 1998, Charter One completed its acquisition of CS Financial,
Inc. ("CS Financial"), a $393.9 million privately-owned thrift holding
company headquartered in Cleveland, Ohio. As a result of the merger, which
was accounted for as a pooling of interests, Charter One issued an
additional 2,131,500 shares of its common stock. The transaction added
eight branches to the Ohio network, four of which have been consolidated,
resulting in a net increase of four branches.
6. On January 1, 1999, the Company adopted SFAS No. 134 "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise." This statement
amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities,"
and conforms the subsequent accounting for securities retained after the
securitization of mortgage loans by a mortgage banking enterprise with the
subsequent accounting for securities retained after the securitization of
other types of assets by a non-mortgage banking enterprise. The adoption of
this statement did not have a material effect on the Company's financial
position and results of operations.
5
<PAGE> 8
7. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. The FASB has delayed the effective date of
SFAS No. 133 for one year, to fiscal years beginning after June 15, 2000.
The delay, published as SFAS No. 137, applies to quarterly and annual
financial statements. Early application is still permitted. Management has
not completed the process of evaluating SFAS No. 133 and therefore has not
determined the impact that adopting this statement will have on the
financial position and results of operations.
8. Certain items in the consolidated financial statements for 1998 have been
reclassified to conform to the 1999 presentation.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
HOLDING COMPANY BUSINESS
GENERAL
Headquartered in Cleveland, Ohio, Charter One is now a bank holding company,
having converted from a unitary savings institution holding company on November
30, 1998. The conversion was undertaken in conjunction with our November 30,
1998 acquisition of ALBANK, which included the acquisition of ALBANK Commercial,
a New York chartered commercial bank. ALBANK Commercial was merged into Charter
One Bank on May 31, 1999 and New ALBANK Commercial was formed on the same date.
New ALBANK Commercial is a New York chartered commercial bank. Charter One is a
Delaware corporation and owns all of the outstanding capital stock of Charter
Michigan Bancorp, Inc. and New ALBANK Commercial. Charter Michigan Bancorp, Inc.
owns all of the outstanding capital stock of Charter One Bank, F.S.B., a
federally chartered thrift. The primary business of the company is operating
these financial institutions. Their operations are jointly referred to in the
following discussion as the bank. The bank's primary business is providing
consumer and business banking services to certain major markets in Ohio,
Michigan and New York and in some markets of Massachusetts and Vermont. At the
end of the second quarter of 1999, the Bank and its subsidiaries were doing
business through 340 full-service banking branches and 39 loan production
offices.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q and in future filings by Charter One with the
Securities and Exchange Commission (the "SEC"), in Charter One's press releases
or other public or shareholder communications, and in oral statements made with
the approval of an authorized executive officer, the words or phrases "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results and those presently anticipated or projected, including but
not limited to: (i) changes in economic conditions in our market area; (ii)
changes in policies by regulatory agencies; (iii) fluctuations in interest
rates; (iv) demand for loans in our market areas; (v) competition; (vi) the
possibility that expected cost savings from the proposed acquisition of St.
Paul and the Chittenden branch acquisition cannot be fully realized within the
expected time frame; (vii) the possibility that costs or difficulties relating
to the integration of St. Paul and Chittenden will be greater than expected;
(viii) the possibility that revenues following the St. Paul merger and
Chittenden branch acquisition will be lower than expected; (ix) the possibility
that expected cost savings from the acquisition of ALBANK cannot be fully
realized within the expected time frame; (x) the possibility that costs or
difficulties relating to the integration of our business and ALBANK will be
greater than expected; (xi) the possibility that revenues following the ALBANK
Merger will be lower than expected; and (xii) the possibility that year 2000
compliance failures could result in additional expense to Charter One and
significant disruption of its business and there can be no assurance that any
contingency plans will completely mitigate the effects of any such failure. We
wish to caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. We also wish to advise
readers that the factors listed above could affect Charter One's financial
performance and could cause Charter One's actual results for future periods to
differ materially from any opinions or statements expressed with respect to
future periods in any current statements.
We do not undertake--and specifically declines any obligation--to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events.
RESULTS OF OPERATIONS
PERFORMANCE OVERVIEW
Charter One reported net income of $92.5 million, or $0.54 per diluted share,
for the three months ended June 30, 1999. This was a $13.1 million, or 16.6%,
increase over the results of the second quarter of 1998 when net income was
$79.4 million, or $0.46 per diluted share. This increase was primarily
attributable to increases in net interest income, retail banking income and
income from bank owned life insurance ("BOLI"). The Company's net income
7
<PAGE> 10
for the second quarter of 1999 resulted in a return on average equity of 18.47%
and a return on average assets of 1.49%. The comparable returns for the second
quarter of 1998 were 16.97% and 1.31%, respectively.
For the six months ended June 30, 1999, Charter One reported net income of
$180.6 million, or $1.06 per diluted share. This was a $27.2 million, or 17.7%,
increase over the results for the same period in 1998. This increase, just as in
the second quarter results, was primarily attributable to increases in net
interest income, retail banking income and income from BOLI. This net income
resulted in a return on average equity of 18.40% and a return on average assets
of 1.47%. The comparable returns for the six months ended June 30, 1998 were
16.68% and 1.26%, respectively.
SELECTED OPERATING RATIOS (Figure 1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
ANNUALIZED RETURNS
Return on average assets ....................... 1.49% 1.31% 1.47% 1.26%
Return on average equity ....................... 18.47 16.97 18.40 16.68
Average equity to average assets ............... 8.07 7.71 7.98 7.58
ANNUALIZED OPERATING RATIOS
Net interest income to administrative expenses . 1.72x 1.64x 1.74x 1.64x
Administrative expenses to average assets ...... 1.80% 1.82% 1.80% 1.82%
Efficiency ratio ............................... 43.18 46.37 43.53 47.03
</TABLE>
NET INTEREST INCOME
Net interest income is the principal source of our earnings. Net interest
income is affected by a number of factors including the level, pricing and
maturity of interest-earning assets and interest-bearing liabilities, as well
as market 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.
8
<PAGE> 11
AVERAGE BALANCES, INTEREST RATES AND YIELDS/COSTS (Figure 2)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------
1999 1998
-------------------------------------- --------------------------------------
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) .................... $ 17,836,472 $ 336,342 7.55% $ 16,690,216 $ 328,476 7.88%
Mortgage-backed securities:
Available for sale ................... 2,739,571 45,965 6.71 1,675,332 29,464 7.03
Held to maturity ..................... 2,109,020 36,349 6.89 3,561,269 63,280 7.11
Investment securities:
Available for sale ................... 162,841 2,806 6.89 467,757 6,857 5.86
Held to maturity ..................... 26,001 409 6.30 67,868 1,112 6.55
Other interest-earning
assets(2) ............................. 364,254 6,243 6.78 656,361 11,064 6.67
------------ --------- ------------ ---------
Total interest-earning assets ....... 23,238,159 428,114 7.37 23,118,803 440,253 7.62
--------- ---------
Allowance for loan and lease losses .... (141,521) (141,942)
Noninterest-earning assets(3) .......... 1,730,263 1,291,070
------------ ------------
Total assets ...................... $ 24,826,901 $ 24,267,931
============ ============
Interest bearing liabilities(4):
Deposits:
Checking accounts .................... $ 2,320,342 5,259 0.91 $ 1,915,135 3,796 0.79
Savings accounts ..................... 1,638,021 7,829 1.92 1,929,152 11,393 2.37
Money market accounts ................ 2,779,672 23,394 3.38 2,172,717 18,051 3.33
Certificates of deposit .............. 8,412,337 108,483 5.17 8,600,735 120,766 5.63
------------ --------- ------------ ---------
Total deposits ..................... 15,150,372 144,965 3.84 14,617,739 154,006 4.23
------------ --------- ------------ ---------
FHLB advances .......................... 6,782,626 84,378 4.99 5,121,660 71,903 5.62
Other borrowings ....................... 436,814 7,145 6.50 2,095,899 33,221 6.28
------------ --------- ------------ ---------
Total borrowings .................... 7,219,440 91,523 5.08 7,217,559 105,124 5.82
------------ --------- ------------ ---------
Total interest-bearing
liabilities ........................ 22,369,812 236,488 4.24 21,835,298 259,130 4.75
--------- ---------
Non interest-bearing liabilities ....... 453,969 511,535
------------ -----------
Total liabilities ................... 22,823,781 22,346,833
Corporation-obligated mandatorily
redeemable capital securities of
subsidiary trust ..................... - 50,000
Shareholders' equity ..................... 2,003,120 1,871,098
------------ -----------
Total liabilities and
shareholders' equity ............... $ 24,826,901 $ 24,267,931
============ ============
Net interest income ...................... $ 191,626 $ 181,123
========= =========
Interest rate spread ..................... 3.13 2.87
Net yield on average interest-
earning assets(5) ....................... 3.30 3.13
Average interest-earning assets
to average interest-bearing
liabilities ............................. 103.88% 105.88%
</TABLE>
- --------------
(1) Average balances include nonaccrual loans and interest income includes loan
fee amortization.
(2) Includes FHLB stock, federal funds sold, interest-bearing deposits with
banks and other.
(3) Includes mark-to-market adjustments on securities available for sale.
(4) The costs of liabilities include the annualized effect of interest rate risk
management instruments.
(5) Annualized net interest income divided by the average balance of
interest-earning assets.
9
<PAGE> 12
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------
1999 1998
-------------------------------------- --------------------------------------
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) .................... $ 17,928,418 $ 678,475 7.58% $ 16,398,540 $ 647,951 7.91%
Mortgage-backed securities:
Available for sale ................... 2,397,057 80,257 6.70 1,647,759 57,694 7.00
Held to maturity ..................... 2,261,036 78,217 6.92 3,782,615 134,396 7.11
Investment securities:
Available for sale ................... 178,536 6,051 6.78 572,562 18,314 6.40
Held to maturity ..................... 34,027 1,076 6.32 66,477 2,235 6.72
Other interest-earning
assets(2) ............................. 413,957 13,459 6.47 634,922 21,586 6.76
------------ --------- ----------- ---------
Total interest-earning assets ....... 23,213,031 857,535 7.40 23,102,875 882,176 7.64
--------- ---------
Allowance for loan and lease losses .... (142,145) (141,992)
Noninterest-earning assets(3) .......... 1,528,725 1,307,314
------------ ------------
Total assets ...................... $ 24,599,611 $ 24,268,197
============ ============
Interest bearing liabilities(4):
Deposits:
Checking accounts .................... $ 2,208,692 8,973 0.82 $ 1,787,789 7,557 0.85
Savings accounts ..................... 1,706,533 16,386 1.94 1,937,363 22,964 2.39
Money market accounts ................ 2,668,819 44,678 3.38 2,163,578 35,769 3.33
Certificates of deposit .............. 8,502,684 221,707 5.26 8,523,788 238,355 5.64
------------ --------- ----------- ---------
Total deposits ..................... 15,086,728 291,744 3.90 14,412,518 304,645 4.26
------------ --------- ----------- ---------
FHLB advances .......................... 6,555,189 162,253 4.99 5,196,437 146,208 5.67
Other borrowings ....................... 564,961 17,708 6.25 2,190,787 69,119 6.28
------------ --------- ----------- ---------
Total borrowings .................... 7,120,150 179,961 5.09 7,387,224 215,327 5.85
------------ --------- ----------- ---------
Total interest-bearing
liabilities ........................ 22,206,878 471,705 4.28 21,799,742 519,972 4.80
--------- ---------
Non interest-bearing liabilities ....... 429,798 579,380
------------ -----------
Total liabilities ................... 22,636,676 22,379,122
Corporation-obligated mandatorily
redeemable capital securities of
subsidiary trust ..................... - 50,000
Shareholders' equity ..................... 1,962,935 1,839,075
------------ -----------
Total liabilities and
shareholders' equity ............... $ 24,599,611 $ 24,268,197
============ ============
Net interest income ...................... $ 385,830 $ 362,204
========= =========
Interest rate spread ..................... 3.12 2.84
Net yield on average interest-
earning assets(5) ....................... 3.32 3.14
Average interest-earning assets
to average interest-bearing
liabilities ............................. 104.53% 105.98%
</TABLE>
(1) Average balances include nonaccrual loans and interest income includes loan
fee amortization.
(2) Includes FHLB stock, federal funds sold, interest-bearing deposits with
banks and other.
(3) Includes mark-to-market adjustments on securities available for sale.
(4) The costs of liabilities include the annualized effect of interest rate risk
management instruments.
(5) Annualized net interest income divided by the average balance of
interest-earning assets.
10
<PAGE> 13
Figure 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------- --------------------------------------
1999 V. 1998 1999 V. 1998
-------------------------------------- --------------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------- --------------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL
---- ------ ----- ---- ------ -----
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans and leases ....................... $ (16,622) $ 24,488 $ 7,866 $ (32,422) $ 62,946 $ 30,524
Mortgage-backed securities:
Available for sale ................... (1,413) 17,914 16,501 (2,626) 25,189 22,563
Held to maturity ..................... (1,848) (25,083) (26,931) (3,454) (52,725) (56,179)
Investment securities:
Available for sale ................... 1,037 (5,088) (4,051) 1,031 (13,294) (12,263)
Held to maturity ..................... (42) (661) (703) (126) (1,033) (1,159)
Other interest-earning assets ........... 182 (5,003) (4,821) (906) (7,221) (8,127)
--------- -------- ------- --------- -------- --------
Total .............................. (18,706) 6,567 (12,139) (38,503) 13,862 (24,641)
--------- -------- ------- --------- -------- --------
Interest expense:
Checking accounts ...................... 591 872 1,463 (304) 1,720 1,416
Savings accounts ....................... (1,990) (1,574) (3,564) (4,042) (2,536) (6,578)
Money market accounts .................. 238 5,105 5,343 456 8,453 8,909
Certificates of deposit ................ (9,683) (2,600) (12,283) (16,059) (589) (16,648)
FHLB advances .......................... (8,825) 21,300 12,475 (18,931) 34,976 16,045
Other borrowings ....................... (2,730) (23,346) (26,076) (5,366) (46,045) (51,411)
--------- -------- ------- --------- -------- --------
Total .............................. (22,399) (243) (22,642) (44,246) (4,021) (48,267)
--------- -------- ------- --------- -------- --------
Change in net interest income ............ $ 3,693 $ 6,810 $ 10,503 $ 5,743 $ 17,883 $ 23,626
========= ======== ======= ========= ======== ========
</TABLE>
Net interest income for the second quarter of 1999 was $191.6 million, a $10.5
million, or 5.8%, increase as compared to $181.1 million for the second quarter
of 1998. The interest rate spread increased by 26 basis points to 3.13% and the
net-yield on interest-earning assets increased by 17 basis points to 3.30% for
the second quarter of 1999. The primary reason for these improvements related to
the cost of funds which decreased by 51 basis points to 4.24% for the three
months ended June 30, 1999. The lower cost of funds had the effect of reducing
interest expense and therefore increasing net interest income by $22.6 million.
The lower cost of funds is attributable to both a shift in the mix of
interest-bearing liabilities and lower market interest rates. As shown in Figure
4, Charter One was able to shift balances from higher costing borrowings to
lower cost retail deposits since June 30, 1998. This shift was achieved by
growing the retail deposit balances since June 30, 1998 while holding the
balance of borrowings steady. In addition, market interest rates were lower in
the second quarter of 1999 as compared to the same period in 1998. This
contributed to a lower cost of deposits in the 1999 period.
The improvement in net interest income resulting from the lower cost of funds
was partially offset by lower interest income. Interest income for the second
quarter of 1999 was $428.1 million as compared to $440.3 million for the second
quarter of 1998. This $12.1 million, or 2.8%, decline was primarily attributable
to lower market interest rates. The yield on interest-earning assets declined to
7.37% for the second quarter of 1999 as compared to 7.62% for the same period in
1998. The lower yield had the effect of reducing interest income by $18.7
million. Growth in the average balance of interest-earning assets lessened the
effect of the lower yield. The average balance of interest-earning assets
increased by $119.4 million which had the effect of increasing interest income
by $6.6 million. The increase in the average balance of interest-earning assets
was primarily in the loan portfolio as we continued our emphasis on growing the
balances of consumer and commercial loans. The average balance of the loan and
lease portfolio was $1.1 billion higher for the first three months of 1999 as
compared to the same period in 1998. This growth was partially funded by
repayments from the mortgage-backed security, investments and other
interest-earning assets portfolio.
11
<PAGE> 14
AVERAGE BALANCE PORTFOLIO MIX (Figure 4)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
YIELD/ % OF YIELD/ % OF
BALANCE COST TOTAL BALANCE COST TOTAL
------------- -------- -------- ------------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and leases............................. $ 17,836,472 7.55% 76.8% $ 16,690,216 7.88% 72.2%
Other interest-earning assets................ 5,401,687 6.79 23.2 6,428,587 6.95 27.8
------------- ---- ---- ------------- ---- ----
Total..................................... $ 23,238,159 7.37% 100.0% $ 23,118,803 7.62% 100.0%
============= ==== ===== ============= ==== =====
Interest-bearing liabilities:
Deposits..................................... $ 15,150,372 3.84% 67.7% $ 14,617,739 4.23% 66.9%
Borrowings................................... 7,219,440 5.08 32.3 7,217,559 5.82 33.1
------------- ---- ---- ------------- ---- ----
Total..................................... $ 22,369,812 4.24% 100.0% $ 21,835,298 4.75% 100.0%
============= ==== ===== ============= ==== =====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
YIELD/ % OF YIELD/ % OF
BALANCE COST TOTAL BALANCE COST TOTAL
------------- -------- -------- ------------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and leases............................. $ 17,928,418 7.58% 77.2% $ 16,398,540 7.91% 71.0%
Other interest-earning assets................ 5,284,613 6.78 22.8 6,704,335 6.99 29.0
------------- ---- ---- ------------- ---- ----
Total..................................... $ 23,213,031 7.40% 100.0% $ 23,102,875 7.64% 100.0%
============= ==== ===== ============= ==== =====
Interest-bearing liabilities:
Deposits..................................... $ 15,086,728 3.90% 67.9% $ 14,412,518 4.26% 66.1%
Borrowings................................... 7,120,150 5.09 32.1 7,387,224 5.85 33.9
------------- ---- ---- ------------- ---- ----
Total..................................... $ 22,206,878 4.28% 100.0% $ 21,799,742 4.80% 100.0%
============= ==== ===== ============= ==== =====
</TABLE>
Net interest income for the six months ended June 30, 1999 was $385.8 million, a
$23.6 million, or 6.5%, increase as compared to the $362.2 million for the same
period in 1998. The interest rate spread increased by 28 basis points to 3.12%
for the first half of 1999 as compared to 2.84% for the same period in 1998. The
net-yield on interest-earning assets increased by 18 basis points to 3.32% for
the first six months of 1999 as compared to 3.14% for the same period in 1998.
These improvements were primarily attributable to the decrease in the cost of
interest-bearing liabilities. The average cost of interest-bearing liabilities
was 52 basis points lower for the first half of 1999 as compared to the first
six months of 1998. This had the effect of reducing interest expense and
therefore increasing net interest income by $44.2 million. The lower cost of
funds is attributable to both a shift in the mix of interest-bearing liabilities
and lower market interest rates. As shown in Figure 4, Charter One was able to
shift balances from higher costing borrowings to lower cost retail deposits
since June 30, 1998. This shift was achieved by growing the retail deposit
balances since June 30, 1998 while there was a decrease in the average balance
of borrowed funds.
The improvement in net interest income resulting from the lower cost of funds
was partially offset by lower interest income. Interest income for the first
half of 1999 was $857.5 million as compared to $882.2 million for the same
period in 1998. This $24.6 million, or 2.8%, decline was primarily attributable
to lower market interest rates. The yield on interest-earning assets declined to
7.40% for the first six months of 1999 as compared to 7.64% for the same period
in 1998. The lower yield had the effect of reducing interest income by $38.5
million. Growth in the average balance of interest-earning assets lessened the
effect of the lower yield. The average balance of interest-earning assets
increased by $110.2 million which had the effect of increasing interest income
by $13.9 million. The increase in the average balance of interest-earning assets
was primarily in the loan portfolio as we continued our emphasis on growing the
balances of consumer and commercial loans. The average balance of the loan and
lease portfolio was $1.5 billion higher for the first six months of 1999 as
compared to the same period in 1998. This growth was partially funded by
repayments from the mortgage-backed security, investments and other
interest-earning assets portfolio.
Figure 5 sets forth Charter One's yields and costs at period end for the dates
indicated.
12
<PAGE> 15
YIELDS AND COSTS AT END OF PERIOD (Figure 5)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
YIELDS AND COSTS AT END OF PERIOD
Weighted average yield:
Real estate loans .............................. 7.33% 7.45%
Automobile loans ............................... 8.55 8.70
Retail consumer loans .......................... 7.80 8.11
Leases (1) ..................................... 6.02 6.22
Corporate banking loans ........................ 8.63 8.40
Total loans and leases ....................... 7.57 7.69
Mortgage-backed securities ..................... 6.77 6.88
Investment securities .......................... 6.77 6.30
Other interest-earning assets .................. 6.95 6.38
Total interest-earning assets .............. 7.38 7.48
Weighted average cost (2):
Checking ....................................... 1.02 .67
Money market ................................... 3.29 3.36
Savings ........................................ 1.91 2.15
Certificates of deposit ........................ 5.07 5.46
Total deposits ............................... 3.78 4.02
FHLB advances .................................. 5.01 5.01
Other borrowings ............................... 7.29 6.15
Total interest-bearing liabilities ........ 4.22 4.37
Interest rate spread ............................. 3.16 3.11
Net yield on interest-earning assets ............. 3.32 3.34
</TABLE>
- ------------
(1) Excludes impact of related tax benefit.
(2) The costs of liabilities include the annualized effect of interest rate risk
management instruments.
OTHER INCOME
Other income for the three months ended June 30, 1999 was $64.1 million as
compared to $54.5 million for the second quarter of 1998. This $9.6 million, or
17.6%, increase was primarily attributable to increased retail banking income
which increased $9.9 million, or 34.2% and an increase in other income of $6.0
million. Retail banking income increased primarily due to increases in checking
account fee income and increases in commissions on the sale of annuities and
mutual funds. Checking account fee income increased as a result of increases in
the number of checking accounts and the effort to increase the revenues per
account. Commission income increased as a result of increasing sales of tax
deferred annuity and mutual fund products. The increase in other income was
attributable to the BOLI program. On March 9, 1999, the Company increased the
BOLI portfolio by $480.0 million bringing the total investment in BOLI to $535.1
million. This asset is classified with Other Assets on the balance sheet and the
income from BOLI is the primary reason for the $6.0 million increase in other
income. These increases in retail banking and other income were partially offset
by a $4.8 million, or 29.8%, decrease in mortgage banking income. There was a
gain on sale of servicing in the 1998 period that contributed $2.8 million of
mortgage banking income. There was no similar transaction in 1999.
Other income for the six months ended June 30, 1999 was $117.7 million as
compared to $100.9 million for the same period in 1998. This $16.8 million, or
16.7%, increase was primarily attributable to increased retail banking income
which increased $19.2 million, or 37.0% and an increase in other income of $7.3
million. These increases were partially offset by a decrease of $9.0 million, or
28.5%, in mortgage banking income.
13
<PAGE> 16
ADMINISTRATIVE EXPENSES
Administrative expenses were $111.7 million for the three months ended June 30,
1999, an increase of $1.1 million, or 1.0%, as compared to the second quarter
of 1998. The second quarter of 1999 also included $3.5 million of
merger-related expenses as we continue the process of combining back-office
operations associated with the ALBANK merger that was effective November 30,
1998. This consolidation process is expected to be completed by the end of the
third quarter of 1999 and we expect to incur a total of $7.0 to $10.0 million
of merger-related expenses associated with this consolidation in 1999. Our
administrative expenses, excluding the merger-related expenses, resulted in a
ratio of 1.74% of expenses to average assets for the three months ended June
30, 1999 as compared to 1.82% for the comparable period in 1998.
Administrative expenses were $221.5 million for the six months ended June 30,
1999, an increase of $1.1 million, or 0.5%, as compared to the same period in
1998. The 1999 period also included $5.7 million of merger related expenses as
we continue the process of combining back-office operations associated with the
ALBANK merger that was effective November 30, 1998. Our administrative
expenses, excluding the merger-related expenses, resulted in a ratio of 1.75%
of expenses to average assets for the six months ended June 30, 1999 as
compared to 1.82% for the comparable period in 1998.
FEDERAL INCOME TAXES
Federal income tax expense for the three months ended June 30, 1999 was $43.7
million as compared to $38.5 million for the same period in 1998. The primary
reason for this 13.4% increase in the provision for federal income tax expense
was a 15.5% increase in pre-tax book income. The effective tax rates were 32.1%
and 32.7% for the 1999 and 1998 periods, respectively.
Federal income tax expense for the six months ended June 30, 1999 was $86.7
million as compared to $75.4 million for the same period in 1998. The primary
reason for this 15.0% increase in the provision for federal income tax expense
was a 16.8% increase in pre-tax book income. The effective tax rates were 32.4%
and 33.0% for the 1999 and 1998 periods, respectively.
FINANCIAL CONDITION
OVERVIEW
At June 30, 1999, total assets were $25.0 billion relatively flat as compared
to total assets of $24.5 billion at December 31, 1998. However, our mix of
assets has changed during the quarter. See "Net Interest Income" discussion
above.
14
<PAGE> 17
LOANS AND LEASES
COMPOSITION OF LOANS AND LEASES(Figure 6)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------------------------- ----------------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL
-------------- ---------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
LOAN AND LEASE PORTFOLIO, NET
One-to-four family:
Permanent:
Fixed rate ...................................... $ 6,229,718 35.34% $ 6,909,161 39.08%
Adjustable rate ................................. 2,923,294 16.58 3,360,705 19.01
Construction ....................................... 265,263 1.50 294,893 1.67
----------- ------ ----------- ------
9,418,275 53.42 10,564,759 59.76
Commercial real estate:
Multifamily ......................................... 235,086 1.33 242,776 1.38
Other ............................................... 509,125 2.89 475,753 2.69
----------- ------ ----------- ------
744,211 4.22 718,529 4.07
Consumer:
Retail .............................................. 3,808,118 21.60 3,129,312 17.70
Automobile .......................................... 2,284,816 12.96 2,020,157 11.43
----------- ------ ----------- ------
6,092,934 34.56 5,149,469 29.13
Business:
Leasing ............................................. 803,147 4.56 730,415 4.13
Corporate banking ................................... 571,672 3.24 514,664 2.91
----------- ------ ----------- ------
1,374,819 7.80 1,245,079 7.04
----------- ------ ----------- ------
$17,630,239 100.00% $17,677,836 100.00%
=========== ====== =========== ======
Portfolio of loans serviced for others .................. $ 9,319,353 $ 9,308,294
=========== ===========
</TABLE>
15
<PAGE> 18
LOAN AND LEASE ACTIVITY (Figure 7)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ORIGINATIONS:
Real Estate:
Permanent:
One-to-four family ................................. $ 1,203,737 $ 1,641,305 $ 2,464,954 $ 3,092,852
Multifamily ........................................ 2,687 11,899 17,504 17,188
Commercial ......................................... 44,233 27,598 88,771 42,664
----------- ----------- ----------- -----------
Total permanent loans ........................... 1,250,657 1,680,802 2,571,229 3,152,704
----------- ----------- ----------- -----------
Construction:
One-to-four family ................................. 158,226 118,613 262,635 210,416
Multifamily ........................................ 28,648 2,831 41,950 7,270
Commercial ......................................... 36,739 7,480 47,065 9,681
----------- ----------- ----------- -----------
Total construction loans ........................ 223,613 128,924 351,650 227,367
----------- ----------- ----------- -----------
Total real estate loans originated ....... 1,474,270 1,809,726 2,922,879 3,380,071
----------- ----------- ----------- -----------
Retail consumer .......................................... 637,139 680,555 1,235,885 1,070,124
Automobile ............................................... 390,812 334,998 736,705 615,975
Leases ................................................... 82,253 137,537 132,520 217,448
Corporate banking ........................................ 160,034 46,365 284,048 92,877
----------- ----------- ----------- -----------
Total loans and leases originated ............... 2,744,508 3,009,181 5,312,037 5,376,495
----------- ----------- ----------- -----------
Loans purchased .......................................... 2,501 16,487 11,513 16,897
Sales and principal reductions:
Loans sold ............................................. 447,905 486,507 971,060 890,274
Loans exchanged for MBS ................................ 717,672 705,427 1,866,045 1,347,422
Principal reductions ................................... 1,118,487 1,300,651 2,445,957 2,574,032
----------- ----------- ----------- -----------
Total sales and principal reductions ............ 2,284,064 2,492,585 5,283,062 4,811,728
----------- ----------- ----------- -----------
Increase before net items ................... $ 462,945 $ 533,083 $ 40,488 $ 581,664
=========== =========== =========== ===========
</TABLE>
INVESTMENT SECURITIES
Figure 8 summarizes our investment portfolio at June 30, 1999 and December 31,
1998. The amounts reflected represent the fair values of securities available
for sale and the amortized cost of securities held to maturity.
INVESTMENT SECURITIES PORTFOLIO (Figure 8)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Available for Sale:
U.S. Treasury and agency securities .................................... $ 47,391 $ 48,999
Corporate notes and commercial paper ................................... 71,213 135,520
Other .................................................................. 56,293 68,798
-------- --------
Total investment securities available for sale ..................... 174,897 253,317
-------- --------
Held to maturity:
U.S. Treasury and agency securities .................................... 15,450 35,932
Other .................................................................. 5,975 6,324
-------- --------
Total investment securities held to maturity ....................... 21,425 42,256
-------- --------
Total ......................................................... $196,322 $295,573
======== ========
Weighted average rate .................................................. 6.77% 6.30%
======== ========
</TABLE>
16
<PAGE> 19
MORTGAGE-BACKED SECURITIES
Figure 9 summarizes our mortgage-backed securities portfolios at June 30, 1999
and December 31, 1998. The amounts reflected represent the fair values of
securities available for sale and the amortized cost of securities held to
maturity.
MORTGAGE-BACKED SECURITIES (Figure 9)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
----------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
AVAILABLE FOR SALE
Participation certificates:
Government agency issues:
FNMA ........................................................... $ 2,038,255 $ 1,053,324
FHLMC .......................................................... 80,054 140,273
GNMA ........................................................... 3,003 3,327
Collateralized mortgage obligations:
Government agency issues:
FHLMC .......................................................... 307,395 337,658
FNMA ........................................................... 238,725 255,238
GNMA ........................................................... 8,270 9,374
Private issues ................................................... 479,760 500,010
----------- -----------
Total mortgage-backed securities available for sale ............ 3,155,462 2,299,204
----------- -----------
HELD TO MATURITY
Participation certificates:
Government agency issues:
FNMA ........................................................... 616,977 741,828
FHLMC .......................................................... 229,081 285,131
GNMA ........................................................... 114,321 132,066
Private issues ................................................... 186,146 219,256
Collateralized mortgage obligations:
Government agency issues:
FNMA ........................................................... 227,056 261,528
FHLMC .......................................................... 94,257 126,279
Private issues ................................................... 558,759 902,892
----------- -----------
Total mortgage-backed securities held to maturity ............ 2,026,597 2,668,980
----------- -----------
Total ..................................................... $ 5,182,059 $ 4,968,184
=========== ===========
</TABLE>
17
<PAGE> 20
MORTGAGE-BACKED SECURITIES BY PAYMENT TYPE (Figure 10)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
----------------------------- ----------------------------
BOOK AVERAGE BOOK AVERAGE
VALUE RATE VALUE RATE
-------------- ------------ -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Adjustable rate:
Participation certificates ....................... $ 81,063 6.74% $ 104,582 6.77%
Collateralized mortgage obligations .............. 968,303 6.31 1,005,868 6.69
---------- ----------
Total adjustable rate .......................... 1,049,366 6.35 1,110,450 6.70
---------- ----------
Fixed rate:
Participation certificates ....................... 2,040,249 6.86 1,092,342 6.87
Collateralized mortgage obligations .............. 65,847 6.36 96,412 6.36
---------- ----------
Total fixed rate ............................... 2,106,096 6.85 1,188,754 6.83
---------- ----------
Total available for sale ..................... 3,155,462 6.68 2,299,204 6.76
---------- ----------
HELD TO MATURITY
Adjustable rate:
Participation certificates ....................... 459,745 6.64 547,989 6.92
Collateralized mortgage obligations .............. 243,593 6.86 278,841 7.30
---------- ----------
Total adjustable rate .......................... 703,338 6.72 826,830 7.05
---------- ----------
Fixed rate:
Participation certificates ....................... 685,974 7.29 830,292 7.30
Collateralized mortgage obligations .............. 637,285 6.65 1,011,858 6.65
---------- ----------
Total fixed rate ............................... 1,323,259 6.98 1,842,150 6.94
---------- ----------
Total held to maturity ....................... 2,026,597 6.89 2,668,980 6.98
---------- ----------
Total mortgage-backed securities............ $5,182,059 6.77% $4,968,184 6.88%
========== ==========
</TABLE>
ASSET QUALITY
ANALYSIS OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES (Figure 11)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ALLOWANCE FOR LOAN AND LEASE LOSSES
Balance, beginning of period ........................... $ 141,281 $ 142,635 $ 144,566 $ 142,985
Provision for loan and lease losses .................... 7,843 7,155 14,614 13,768
Loans and leases charged off:
Mortgage ............................................ (2,208) (1,470) (3,230) (2,809)
Automobile .......................................... (6,141) (6,791) (14,251) (12,920)
Retail consumer ..................................... (386) (1,079) (1,905) (2,003)
Leases .............................................. -- -- (900) --
Corporate banking ................................... -- (211) (264) (270)
--------- --------- --------- ---------
Total charge-offs ................................ (8,735) (9,551) (20,550) (18,002)
--------- --------- --------- ---------
Recoveries:
Mortgage ............................................ 505 186 627 320
Automobile .......................................... 1,670 1,137 3,040 2,212
Retail consumer ..................................... 72 265 243 461
Leases .............................................. -- -- -- --
Corporate banking ................................... 17 31 113 114
--------- --------- --------- ---------
Total recoveries ................................. 2,264 1,619 4,023 3,107
--------- --------- --------- ---------
Net loan and lease charge-offs .............. (6,471) (7,932) (16,527) (14,895)
--------- --------- --------- ---------
Balance, end of period ................................. $ 142,653 $ 141,858 $ 142,653 $ 141,858
========= ========= ========= =========
Net charge-offs to average loans and leases
(annualized) ......................................... .15% .19% .18% .18%
</TABLE>
18
<PAGE> 21
Figure 12 sets forth information concerning nonperforming assets and the
allowance for loan and lease losses. At June 30, 1999, we had no
outstanding commitments to lend additional funds to borrowers whose loans were
on nonaccrual or restructured status.
NONPERFORMING ASSETS (Figure 12)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
NONPERFORMING LOANS AND LEASES:
Nonaccrual loans and leases:
Real estate mortgage loans:
One-to-four family(1) ................................ $ 66,547 $ 73,175
Multifamily and commercial ........................... 2,253 3,958
Construction and land ................................ 278 1,178
-------- --------
Total real estate mortgage loans ................... 69,078 78,311
Retail consumer ........................................ 27,406 21,032
Automobile ............................................. 355 327
Leases ................................................. -- --
Corporate banking ...................................... 4,989 8,810
-------- --------
Total nonaccrual loans and leases .................. 101,828 108,480
-------- --------
Accruing loans and leases delinquent more than 90 days:
Real estate mortgage loans ............................. -- --
Retail consumer ........................................ 298 3,878
Automobile ............................................. 3,266 5,873
Leases ................................................. 341 --
Corporate banking ...................................... 872 904
-------- --------
Total accruing loans and leases more than 90 days .. 4,777 10,655
-------- --------
Restructured real estate mortgage loans .................. 682 3,936
-------- --------
Total nonperforming loans and leases ............... 107,287 123,071
Real estate acquired through foreclosure and other ....... 19,127 17,803
-------- --------
Total nonperforming assets ......................... 126,414 140,874
Less government guaranteed loans ................... 19,966 22,429
-------- --------
Nonperforming assets net of guaranteed loans ....... $106,448 $118,445
======== ========
Ratio of:
Nonperforming loans and leases to total loans and leases .61% .70%
Nonperforming assets to total assets ................... .51 .58
Allowance for loan and lease losses to:
Nonperforming loans and leases ....................... 132.96 117.47
Total loans and leases before allowance .............. .80 .81
Ratio of (excluding guaranteed nonperforming loans):
Nonperforming loans and leases to total loans and leases .50% .57%
Nonperforming assets to total assets ................... .43 .48
Allowance for loan and lease losses to:
Nonperforming loans and leases ....................... 163.37 143.64
Total loans and leases before allowance .............. .80 .81
</TABLE>
- ---------------
(1) Includes $20.0 million and $22.4 million of government guaranteed loans at
June 30, 1999 and December 31, 1998, respectively.
At June 30, 1999, there were $44 million of loans not reflected in the table
above, where known information about possible credit problems of borrowers
caused management to have doubts as to the ability of the borrower to comply
with present loan repayment terms and that may result in disclosure of such
loans in the future. The largest of these potential loans is a $5.7 million
loan to a trucking and warehousing company where the borrower is experiencing
operating losses but the loans is current.
19
<PAGE> 22
SOURCES OF FUNDS
GENERAL
Deposits have historically been the most important source of the our funds for
use in lending and for general business purposes. We also derive funds from
Federal Home Loan Bank ("FHLB") advances, reverse repurchase agreements and
other borrowings, principal repayments on loans and mortgage-backed securities,
funds provided by operations and proceeds from the sale of loans and loan
participations. At June 30, 1999 and December 31, 1998, 67% and 68% of
interest-bearing liabilities were in the form of deposits and 33% and 32% were
in the form of borrowings.
DEPOSITS
Deposit inflows and outflows are significantly influenced by general interest
rates, market conditions and competitive factors. We reprice our deposits
primarily based on competitive conditions. In order to decrease the volatility
of our deposits, we impose stringent early withdrawal penalties on our
certificates of deposit. Consumer and commercial deposits are attracted
principally from within our primary market areas through the offering of a
broad range of deposit instruments.
COMPOSITION OF DEPOSITS (Figure 13)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
----------------------------------- -----------------------------------
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 ....................... $ 1,411,890 1.71% 9.36% $ 1,204,221 1.22% 7.94%
Noninterest-bearing .................... 948,947 - 6.29 1,015,650 - 6.70
Money market accounts .................... 2,909,903 3.29 19.29 2,505,846 3.37 16.52
Savings accounts ......................... 1,503,989 1.91 9.97 1,828,087 2.15 12.06
Certificates of deposit .................. 8,311,993 5.25 55.09 8,610,177 5.62 56.78
----------- -------- ---------- --------
Total deposits ...................... 15,086,722 3.88 100.00% 15,163,981 4.10 100.00%
======== ========
Plus unamortized premium
on deposits purchased ................... 883 1,083
----------- -----------
Total deposits, net ................. $15,087,605 $15,165,064
=========== ===========
Including the annualized effect of
applicable interest rate risk
management instruments .................. 3.78% 4.02%
==== ====
</TABLE>
BORROWINGS
At June 30, 1999, borrowings primarily consisted of FHLB advances and reverse
repurchase agreements. These positions were secured by our investment
in the stock of the FHLB, as well as $8.5 billion in real estate loans and $2.4
billion in mortgage-backed securities.
20
<PAGE> 23
FEDERAL HOME LOAN ADVANCES (Figure 14)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
---------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------------- ----------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Short-term ................................................ $ 1,485,000 5.38% $ 803,000 5.10%
Long-term:
Fixed-rate advances ..................................... 5,408,140 5.04 5,109,388 4.99
Variable-rate advances .................................. 363,730 4.87 273,730 5.35
------------- --------------
Total advances, net ................................... $ 7,256,870 5.10 $ 6,186,118 5.02
============= ==============
Including the annualized effect of applicable interest
rate risk management instruments ........................ 5.01% 5.01%
</TABLE>
Figure 15 presents a summary of outstanding reverse repurchase agreements. We
enter 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>
JUNE 30, 1999 DECEMBER 31, 1998
---------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Short-term ................................................. $ 28,541 4.37% $ 39,962 4.57%
Long-term:
Fixed-rate ............................................... 100,000 5.96 275,062 5.99
Variable-rate ............................................ - - 370,000 5.30
------------- ------------
Weighted average cost including amortization
of fees ................................................. $128,541 5.61 $685,024 5.53
============= ============
Including the annualized effect of applicable interest
rate risk management instruments ......................... 5.67% 5.50%
</TABLE>
INTEREST RATE RISK MANAGEMENT
We utilize various types of interest rate contracts in managing our interest
rate risk on certain of our deposits. We have utilized fixed payment swaps to
convert certain of our floating-rate or short-term, fixed-rate liabilities into
longer term, fixed-rate instruments. Under these agreements, we have 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. We also utilize fixed receipt swaps to convert certain of our
longer term callable certificates of deposit into short-term variable
instruments. Under these agreements we have 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.
21
<PAGE> 24
INTEREST RATE SWAPS (Figure 16)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
--------------------------------- ---------------------------------
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>
Variable payment and fixed receipt:
Maturing in:
2000 ........................... $ 40,000 5.55% 5.14% $120,000 5.80% 5.31%
2001 ........................... 120,000 5.70 5.08 - - -
2003 ........................... 120,000 6.14 5.06 230,000 6.32 5.30
2004 ........................... 190,000 6.27 5.04 - - -
-------- ------ ---- -------- ---- ----
Total ........................ $470,000 6.03% 5.06% (1) $350,000 6.14% 5.30% (1)
======== ====== ==== ======== ==== ====
</TABLE>
- -----------------------
(1) Rates are based upon LIBOR.
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 JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest expense (income):
Deposits ......................................... $ (2,188) $ (2,246) $ (4,307) $ (4,353)
FHLB advances .................................... - (71) (63) (142)
Reverse repurchase agreements .................... (114) (120) (236) (109)
-------- -------- -------- --------
Total .......................................... $ (2,302) $ (2,437) $ (4,606) $ (4,604)
======== ======== ======== ========
</TABLE>
LIQUIDITY
Our 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. We utilize particular sources of funds based on comparative costs
and availability and may supplement deposits with longer term and/or less
expensive alternative sources of funds such as FHLB advances and reverse
repurchase agreements. Management also considers our interest-sensitivity
profile when deciding on alternative sources of funds. At June 30, 1999, our
one-year gap was a negative 4.43% of total assets.
We are required by regulation to maintain specific minimum levels of liquid
investments at the bank level. Regulations currently in effect require us to
maintain average liquid assets at least equal to 4.0% of the sum of the bank's
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. Our average regulatory liquidity ratio
for the second quarter of 1999 was 15.75%.
Management anticipates that we will have sufficient funds available to meet
current and future loan commitments. At June 30, 1999, we had outstanding
commitments to originate loans and leases of $1.1 billion, unfunded lines of
consumer credit totaling $1.8 billion (a significant portion of which normally
remains undrawn) and unfunded lines of commercial (business loans) credit
totaling $163.1 million. Outstanding letters of credit totaled $51.1 million as
of June 30, 1999. Certificates of deposit scheduled to mature in one year or
less at June 30, 1999 totaled $6.6 billion. Management believes that a
significant portion of the
22
<PAGE> 25
amounts maturing will remain with us because they are retail deposits. At
June 30, 1999, we had $1.5 billion of advances from the FHLB system and
$128.5 million 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
Following its November 1998 acquisition of ALBANK, Charter One became a bank
holding company, converting from a unitary savings and loan holding company. As
a bank holding company, Charter One is now subject to regulation by the FRB
under the Bank Holding Company Act of 1956, and the regulations of the FRB,
including various capital requirements. New ALBANK Commercial and Charter One
Bank, F.S.B. are subject to various regulatory capital requirements
administered by the Federal Deposit Insurance Corporation and the Office of
Thrift Supervision, respectively. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly discretionary, actions by each
regulator that, if undertaken, could have a direct material effect on our
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, specific capital guidelines must be met
that involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Quantitative measures established by regulation to ensure capital adequacy
require Charter One and New ALBANK Commercial to individually maintain minimum
amounts and ratios (set forth in the table below) of total and Tier 1 capital to
risk-weighted assets, and of Tier 1 capital to average assets. Charter One Bank,
F.S.B. is required to maintain minimum amounts and ratios (also set forth in the
table below) of total and Tier 1 capital to risk-weighted assets, of core
capital to adjusted tangible assets, and of tangible capital to tangible assets.
Each regulator of Charter One requires an institution to meet specific capital
adequacy guidelines and the regulatory framework for prompt corrective action
that involve quantitative measures of an institutions assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The institution's capital classification is also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
The actual regulatory capital ratios calculated for Charter One, New ALBANK
Commercial and Charter One Bank, F.S.B., along with the capital amounts and
ratios for capital adequacy purposes and the amounts required to be categorized
as well capitalized under the regulatory framework for prompt corrective action
are as follows:
REGULATORY CAPITAL (Figure 18)
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
------------------------------------------------------------------------------------
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>
CHARTER ONE:
Total capital to risk-weighted assets ......$1,932,999 10.79% 1,433,233 greater than 1,791,541 greater than
or equal to 8.00% or equal to 10.00%
Tier 1 capital to risk-weighted assets ..... 1,784,273 9.96 716,616 greater than 1,074,924 greater than
or equal to 4.00 or equal to 6.00
Tier 1 capital to average assets ........... 1,784,273 7.23 986,874 greater than 1,233,593 greater than
or equal to 4.00 or equal to 5.00
NEW ALBANK COMMERCIAL:
Total capital to risk-weighted assets ...... 40,145 44.95 7,144 greater than 8,930 greater than
or equal to 8.00 or equal to 10.00
Tier 1 capital to risk-weighted assets ..... 40,145 44.95 3,572 greater than 5,358 greater than
or equal to 4.00 or equal to 6.00
Tier 1 capital to average assets ........... 40,145 14.71 10,918 greater than 13,648 greater than
or equal to 4.00 or equal to 5.00
CHARTER ONE BANK, F.S.B.:
Total capital to risk-weighted assets ...... 1,790,786 10.10 1,417,997 greater than 1,772,496 greater than
or equal to 8.00 or equal to 10.00
Tier 1 capital to risk-weighted assets ..... 1,462,853 8.25 N/A N/A 1,063,498 greater than
or equal to 6.00
Core capital to adjusted tangible assets.... 1,471,318 5.89 749,605 greater than 1,249,342 greater than
or equal to 3.00 or equal to 5.00
Tangible capital to tangible assets......... 1,471,318 5.89 374,803 greater than N/A N/A
or equal to 1.50
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
AS OF DECEMBER 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)
<S> <C> <C> <C> <C> <C> <C>
CHARTER ONE:
Total capital to risk-weighted assets ......$1,812,053 10.86% $1,335,073 greater than $1,668,841 greater than
or equal to 8.00% or equal to 10.00%
Tier 1 capital to risk-weighted assets ..... 1,659,578 9.94 667,537 greater than 1,001,305 greater than
or equal to 4.00 or equal to 6.00
Tier 1 capital to average assets ........... 1,659,578 6.86 967,071 greater than 1,208,838 greater than
or equal to 4.00 or equal to 5.00
ALBANK COMMERCIAL(1):
Total capital to risk-weighted assets ...... 40,720 14.55 22,392 greater than 27,990 greater than
or equal to 8.00 or equal to 10.00
Tier 1 capital to risk-weighted assets ..... 39,037 13.95 11,196 greater than 16,794 greater than
or equal to 4.00 or equal to 6.00
Tier 1 capital to average assets ........... 39,037 5.92 26,375 greater than 32,969 greater than
or equal to 4.00 or equal to 5.00
CHARTER ONE BANK, F.S.B.:
Total capital to risk-weighted assets ...... 1,575,652 10.10 1,259,984 greater than 1,574,980 greater than
or equal to 8.00 or equal to 10.00
Tier 1 capital to risk-weighted assets ..... 1,246,542 7.91 N/A N/A 944,988 greater than
or equal to 6.00
Core capital to adjusted tangible assets.... 1,246,542 5.19 720,077 greater than 1,200,128 greater than
or equal to 3.00 or equal to 5.00
Tangible capital to tangible assets......... 1,246,542 5.19 360,038 greater than N/A N/A
or equal to 1.50
</TABLE>
- ------------------------
(1) As of May 31, 1999 ALBANK Commercial was merged into Charter One Bank,
F.S.B. and New ALBANK Commercial was formed.
As of June 8, 1998, the most recent notification from the Office of Thrift
Supervision categorized Charter One Bank, F.S.B. 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. Charter One's and New ALBANK Commercial's capital ratios
exceed the minimum required to be well capitalized. Management does not know of
any reasons why Charter One and New ALBANK Commercial would not be considered
well capitalized; however, as of June 30, 1999, Charter One and New ALBANK
Commercial had not received a classification from their respective regulators.
Management believes that, as of June 30, 1999, Charter One, New ALBANK
Commercial and Charter One Bank, F.S.B., individually met all capital adequacy
requirements to which they were subject. Events beyond management's control,
such as fluctuations in interest rates or a downturn in the economy in areas in
which the institution's loans and securities are concentrated could adversely
affect future earnings and, consequently, the institution's ability to meet its
future capital requirements.
QUARTERLY STOCK PRICES AND DIVIDENDS (Figure 19)
<TABLE>
<CAPTION>
2nd Qtr 1999 1st Qtr 1999 4th Qtr 1998 3rd Qtr 1998 2nd Qtr 1998
-------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Market price of common stock (1):
High ...................................... $32.13 $32.06 $30.56 $34.17 $34.89
Low ....................................... 26.44 25.19 17.63 21.84 28.57
Close ..................................... 27.81 28.86 27.75 24.88 32.09
Dividends declared and paid................ 0.16 .14 .14 .13 .13
</TABLE>
- ------------------------
(1) Restated to reflect the 2-for-1 stock split issued on May 20, 1998 and the
5% stock dividend issued September 30, 1998.
YEAR 2000
STATE OF Y2K READINESS
Preparing for the Year 2000 ("Y2K") is the result of the way certain computer
systems and related technologies process the century date change. Some systems
were designed to read only the last two digits of a year, thus the date change
from 12/31/99 to 01/01/00 could be interpreted as January 1, 1900, rather than
January 1, 2000. We have made substantial progress in the implementation
of our Y2K plan, which includes the remediation, testing and, if required, the
implementation of upgrades or replacements of those systems and equipment which
may
24
<PAGE> 27
be impacted by the century date change.
We have identified the following components of our Y2K project:
AWARENESS PHASE: Activities to identify the scope of our Y2K project have
been completed.
INVENTORY PHASE: Computer and related technology were inventoried and the
analysis of potential areas of Y2K risk have been identified and completed.
ASSESSMENT PHASE: The Y2K compliance status of computer systems and
related technology has been completed. Also, the analysis of risks of
major customers, vendors, suppliers of information and electronic data
exchange partners has been determined and completed, although we continue
to monitor this information.
CONVERSION PHASE: The methodology for the conversion of non-Y2K mission
critical compliant systems and equipment has been completed.
IMPLEMENTATION PHASE: Mission critical systems and related technology have
been upgraded or replaced and fully tested to ensure their Y2K compliance.
As of June 30, 1999 this phase has been completed.
POST IMPLEMENTATION: Follow-up and the monitoring of problem resolution of
Y2K solutions will be performed through December 31, 1999. This phase also
includes the creation, testing and continual monitoring of our Y2K business
resumption plan.
As of June 30, 1999, we had successfully completed 100% of our Y2K remediation,
testing and implementation for mission critical systems. We had Y2K remediated,
tested and implemented the majority of applications which were not classified
as being mission critical. We will complete, by August 31, 1999, Y2K testing on
all non-mission critical systems for which alternative systems/procedures have
not been developed.
In addition to evaluating the impact of mission critical systems and technology
upon Charter One, we have also performed an assessment of the impact posed by
major customers, vendors, suppliers of information and electronic data exchange
partners. As these assessments resulted in the identification of specific Y2K
exposures, specific action plans, to either eliminate or reduce this risk to an
acceptable level, were developed. At this time there appears to be no
significant Y2K risk associated with these groups, however, we will continue
to monitor these groups.
As of June 30, 1999, 99% of the computer systems requiring replacement or
upgrade have been fixed or replaced. The remaining computer systems will be
replaced or upgraded during the third quarter.
Efforts have been completed to insure that non-information technology systems
are also Y2K compliant. All ATM hardware and software has been certified as Y2K
compliant as of March 31, 1999. In addition an extensive review of branch
offices and other company facilities has been completed. As of March 31, 1999,
all three major telephone switches have been successfully Y2K tested. Security
monitoring systems have been certified as Y2K compliant and contingency plans
are being developed should they fail. All mission critical equipment (other
than personal computer systems) has been replaced. For equipment that cannot be
tested by us as Y2K compliant, contingency plans have been developed which will
be validated by September 30, 1999.
The merger of ALBANK has recently concluded with a data conversion in May 1999.
The remaining systems, a student loan processing system and an ATM front end
processing system have been Y2K tested and certified compliant. No other Y2K
issues remain with ALBANK equipment or facilities.
All merger and acquisition projects include Y2K assessment, conversion and
implementation tasks to insure that these newly acquired entities are certified
under the same standards applied to our existing facilities, equipment and
systems.
COSTS TO ADDRESS Y2K ISSUES
We estimate the out-of-pocket Y2K initiative to cost approximately $4 million.
This cost provided for the
25
<PAGE> 28
replacement or upgrade of hardware, software and the use of consultants. The
cost of internal resources for the Y2K initiative has not been estimated. Other
Y2K related costs are being accounted for as operating expenditures as they
represent an improvement in our operations. Management believes that there
will not be any additional expenses which will have a material impact on the
operations, cash flow, or financial condition of future periods.
RISKS OF Y2K ISSUES
Corporate wide efforts have been taken to identify and assess the risk and
adequacy of systems and equipment for Y2K readiness. We have implemented a
policy that all new systems or changes, which could be affected by the year
2000 date change, to existing systems will be Y2K certified and tested prior to
implementation thus eliminating the risks these changes could create. We have
also implemented a freeze date of November 15, 1999, where no additional
changes will be implemented to any system software unless approved by Executive
Management.
The Y2K risk of major customers and their impact on us has been determined to
be immaterial. We are continuing to monitor those major customers who, as of
June 30, 1999, are not fully Y2K compliant for mission critical systems or
processes. We have implemented credit approval procedures for large lending
relationships, which take into account the borrower's Y2K risks prior to the
loan being approved.
The risks presented by vendors and suppliers of information have been assessed
and, where applicable, corrective action taken. These actions ranged from
replacement to reducing risk to an acceptable level.
Testing with electronic data exchange partners, identified as being critical to
continued operations, has been 100% completed. We have successfully participated
with the Mortgage Bankers Association (MBA) and Alltel as part of a nationwide
test for several software applications used for mortgage origination and
servicing as well as interfacing to third party investors.
We have identified business functions critical to the corporation and a Y2K
business resumption plan has been created for each of these functions. The plan
has been reviewed by our Internal Audit Department, who has developed a
methodology for validating this plan. The validation of the business resumption
plan is expected to be completed by September 30, 1999. In addition, Management
has scheduled a quarterly review of all business functions to ensure that all
critical business functions are accurately identified.
As a result of the above it is Management's belief that any of the most
reasonably likely worst case Y2K scenarios would not have a material effect on
our financial condition and results of operations. We recognize that if certain
government regulated third party providers experience significant Y2K failures,
the result could create a disruption to our business operations and adversely
affect our financial condition and results of operations. We have
received written assurances from these providers that they will be Y2K
compliant as well as tested many of the electronic interfaces with them and,
therefore, it is our opinion these types of disruptions are unlikely to occur.
CONTINGENCY PLAN
In the event the onset of Y2K causes business operations or customer service to
not properly function or prevents them from completely functioning, we have
developed and are prepared to implement contingency plans which would either
provide alternative means for servicing customers and processing data or
specifies the actions to be taken to restore the lost functionality.
We are also addressing global facilities issues such as electrical and heating
needs through a systematic review of all locations and, where warranted, have
developed contracts with alternate source vendors. We have also developed a
formal liquidity contingency plan. Increased cash monitoring will begin in the
fourth quarter of 1999.
To ensure Y2K preparedness of branches and corporate departments, training has
been scheduled to be conducted and completed in the fourth quarter of 1999. This
training will inform our employees about transition procedures and
alternative methods of servicing customers in the event that any portion of the
Y2K business resumption plan is required to be implemented.
We have also developed work plans for January 1, 2000 that will allow
for issues to be identified quickly
26
<PAGE> 29
and communicated to both regional and corporate coordination sites. From these
sites resources will be dispatched to resolve issues on a priority basis and
issue resolutions will be tracked.
CUSTOMER AND EMPLOYEE AWARENESS
We have recently implemented a new "Y2K Ready" campaign which has
included a corporate employee newsletter, outlining all of the material
available for customer awareness of Y2K issues. Included in this campaign is a
question and answer brochure, "Y2K Ready" buttons and stickers, a Y2K answerline
(a toll free number which allows customers to call in and listen to
pre-recorded, regularly updated, information regarding various Y2K topics) as
well as website information (available through www.charterone.com,
www.albank.com and www.ffom.com).
Branch and customer contact staff were given samples of all Y2K paper materials
and meetings were held with their managers to answer any questions and reinforce
the information being provided to customers. In these meetings they were
instructed how to handle customer inquiries and where to direct customers for
further information.
We have launched a "Y2K Ready" certificate of deposit product with a preferred
rate in order to entice customers into asking about the status of our Y2K
project.
Logs of customer questions are being maintained by our call center and main
reception area so that customer material content may be updated to include
answers to their most recent concerns.
27
<PAGE> 30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
A comprehensive qualitative and quantitative analysis regarding market risk was
disclosed in our December 31, 1998 Form 10-K. No material changes in the
assumptions used or results obtained from the model have occurred.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
DIVIDEND
On July 21,1999, the Directors of Charter One Financial, Inc. declared a
quarterly cash dividend of 16 cents per common share. The dividend will be
payable on August 20, 1999 to shareholders of record as of August 6, 1999.
On July 21, 1999, the Directors of Charter One Financial, Inc. declared a 5%
stock dividend, payable on September 30, 1999, to shareholders of record
on September 14, 1999.
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
On April 20, 1999, a Form 8-K was filed with the SEC (i) to
report the slide presentation to be delivered during our
annual meeting of shareholders held on April 21, 1999 and (ii)
to file a press release dated April 16, 1999 to announce that
the 1999 annual meeting of shareholders will be available via
a live webcast.
On May 3, 1999, a Form 8-K was filed with the SEC to announce
that Charter One was scheduled to speak at an investors
conference sponsored by Merrill Lynch in New York on May 4,
1999.
On May 17, 1999, a Form 8-K was filed with the SEC to report
an Agreement and Plan of Merger between Charter One and
St. Paul Bancorp, Inc.
On June 8, 1999, a Form 8-K was filed with the SEC to
file the press release announcing Charter One's intention to
repurchase up to 6 million shares of its outstanding common
stock in a buyback program.18
28
<PAGE> 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARTER ONE FINANCIAL, INC.
Date: August 13, 1999 /s/ Robert J. Vana
----------------------------------------------------
Robert J. Vana
Chief Corporate Counsel and Secretary
Date: August 13, 1999 /s/ Richard W. Neu
----------------------------------------------------
Richard W. Neu
Executive Vice President and Chief Financial Officer
29
<PAGE> 1
EXHIBIT 11
CHARTER ONE FINANCIAL, INC.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------- ------------------------------------
1999 1998 1999 1998
------------------ ----------------- ----------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE(1):
Weighted average number of common
shares outstanding ......................... 166,238,400 165,978,203 166,009,365 165,771,076
================== ================= ================= ================
Net income ................................... $ 92,501 $ 79,359 $ 180,636 $ 153,412
================== ================= ================= ================
Basic earnings per share ..................... .56 .48 1.09 .93
================== ================= ================= ================
DILUTED EARNINGS PER SHARE(1):
Weighted average number of common
shares outstanding ......................... 166,238,400 165,978,203 166,009,365 165,771,076
Add common stock equivalents for shares
issuable under Stock Option Plan ........... 3,993,263 6,445,160 4,117,594 6,145,382
------------------ ----------------- ----------------- ----------------
Weighted average number of common and
common equivalent shares outstanding ....... 170,231,663 172,423,363 170,126,959 171,916,458
================== ================= ================= ================
Net income ................................... $ 92,501 $ 79,359 $ 180,636 $ 153,412
================== ================= ================= ================
Diluted earnings per share ................... .54 .46 1.06 .89
================== ================= ================= ================
</TABLE>
- -----------------------
(1) Restated to reflect the 5% stock dividend issued September 30, 1998.
30
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF CHARTER ONE FINANCIAL, INC. AND
SUBSIDIARIES AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 215,473
<INT-BEARING-DEPOSITS> 5,214
<FED-FUNDS-SOLD> 446
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,330,359
<INVESTMENTS-CARRYING> 2,048,022
<INVESTMENTS-MARKET> 2,074,481
<LOANS> 17,772,892
<ALLOWANCE> 142,653
<TOTAL-ASSETS> 24,952,604
<DEPOSITS> 15,087,605
<SHORT-TERM> 1,513,541
<LIABILITIES-OTHER> 393,240
<LONG-TERM> 6,002,803
0
0
<COMMON> 1,664
<OTHER-SE> 1,953,751
<TOTAL-LIABILITIES-AND-EQUITY> 24,952,604
<INTEREST-LOAN> 678,475
<INTEREST-INVEST> 165,601
<INTEREST-OTHER> 13,459
<INTEREST-TOTAL> 857,535
<INTEREST-DEPOSIT> 291,744
<INTEREST-EXPENSE> 471,705
<INTEREST-INCOME-NET> 385,830
<LOAN-LOSSES> 14,614
<SECURITIES-GAINS> 9,832
<EXPENSE-OTHER> 221,536
<INCOME-PRETAX> 267,354
<INCOME-PRE-EXTRAORDINARY> 180,636
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 180,636
<EPS-BASIC> 1.09
<EPS-DILUTED> 1.06
<YIELD-ACTUAL> 3.32
<LOANS-NON> 101,828
<LOANS-PAST> 4,777
<LOANS-TROUBLED> 682
<LOANS-PROBLEM> 43,998
<ALLOWANCE-OPEN> 144,566
<CHARGE-OFFS> 20,550
<RECOVERIES> 4,023
<ALLOWANCE-CLOSE> 142,653
<ALLOWANCE-DOMESTIC> 142,653
<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 FINANCIAL, INC. AND
SUBSIDIARIES AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 263,543
<INT-BEARING-DEPOSITS> 4,533
<FED-FUNDS-SOLD> 125,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,725,366
<INVESTMENTS-CARRYING> 3,493,878
<INVESTMENTS-MARKET> 3,545,788
<LOANS> 16,609,120
<ALLOWANCE> 141,858
<TOTAL-ASSETS> 24,326,695
<DEPOSITS> 14,755,347
<SHORT-TERM> 969,105
<LIABILITIES-OTHER> 457,164
<LONG-TERM> 6,209,556
0
0
<COMMON> 1,689
<OTHER-SE> 1,883,834
<TOTAL-LIABILITIES-AND-EQUITY> 24,326,695
<INTEREST-LOAN> 647,951
<INTEREST-INVEST> 212,639
<INTEREST-OTHER> 21,586
<INTEREST-TOTAL> 882,176
<INTEREST-DEPOSIT> 304,645
<INTEREST-EXPENSE> 519,972
<INTEREST-INCOME-NET> 362,204
<LOAN-LOSSES> 13,768
<SECURITIES-GAINS> 8,074
<EXPENSE-OTHER> 220,473
<INCOME-PRETAX> 228,827
<INCOME-PRE-EXTRAORDINARY> 153,412
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 153,412
<EPS-BASIC> .93
<EPS-DILUTED> .89
<YIELD-ACTUAL> 3.13
<LOANS-NON> 90,337
<LOANS-PAST> 20,061
<LOANS-TROUBLED> 6,281
<LOANS-PROBLEM> 36,300
<ALLOWANCE-OPEN> 142,985
<CHARGE-OFFS> 18,002
<RECOVERIES> 3,107
<ALLOWANCE-CLOSE> 141,858
<ALLOWANCE-DOMESTIC> 141,858
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
