CHARTER ONE FINANCIAL INC
10-Q, 2000-08-09
SAVINGS INSTITUTION, FEDERALLY CHARTERED
Previous: ILX RESORTS INC, 10-Q, EX-27, 2000-08-09
 Next: CHARTER ONE FINANCIAL INC, 10-Q, EX-11, 2000-08-09

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
ITEM 1. Financial Statements
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
PART II – OTHER INFORMATION
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT 11
Exhibit 27

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, 2000

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-16311

CHARTER ONE FINANCIAL, INC.
(Exact name of registrant as specified in its charter)

     
Delaware 34-1567092
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
 
1215 Superior Avenue, Cleveland, Ohio 44114
(Address of principal executive offices) (Zip Code)

(216) 566-5300
(Registrant’s telephone number, including area code)

NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since report)

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes     X     No______

      The number of shares outstanding of the registrant’s sole class of common stock as of August 4, 2000 was 199,999,964.

Table of Contents

TABLE OF CONTENTS

             
Item
Number Page
PART I — FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Financial Condition — June 30, 2000 and December 31, 1999 1
Consolidated Statements of Income — Three months and six months ended June 30, 2000 and 1999 2
Consolidated Statements of Cash Flows — Six months ended June 30, 2000 and 1999 3
Notes to Consolidated Financial Statements 4
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 5
3. Quantitative and Qualitative Disclosure About Market Risk 21
PART II — OTHER INFORMATION
5. Other Information 21
6. Exhibits and Reports on Form 8-K 22
Signatures 22

i

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)

                         
6/30/00 12/31/99
(Dollars in thousands,
except per share data)
ASSETS
Cash and deposits with banks $ 531,636 $ 689,082
Federal funds sold and other 470 4,450
Total cash and cash equivalents 532,106 693,532
Investments securities:
Trading — 13,380
Available for sale, at fair value 432,674 482,695
Held to maturity (fair value of $27,875 and $52,858) 28,136 46,006
Mortgage-backed securities:
Available for sale, at fair value 3,701,980 4,193,134
Held to maturity (fair value of $1,711,721 and $1,909,313) 1,710,538 1,907,246
Loans and leases, net 23,455,358 22,276,862
Loans held for sale 31,516 35,988
Bank owned life insurance 724,425 709,173
Federal Home Loan Bank stock 520,288 471,191
Premises and equipment 322,252 317,205
Accrued interest receivable 190,310 156,244
Real estate and other collateral owned 29,421 36,358
Loan servicing assets 134,677 118,792
Goodwill 180,608 188,826
Other assets 227,973 172,431
Total assets $ 32,222,262 $ 31,819,063
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Checking accounts $ 3,739,100 $ 3,329,743
Money market accounts 3,921,289 3,170,435
Savings accounts 1,553,565 2,065,127
Certificates of deposit 9,355,003 10,508,670
Total deposits 18,568,957 19,073,975
Federal Home Loan Bank advances 10,151,761 9,226,150
Reverse repurchase agreements 53,087 283,297
Other borrowings 267,579 232,277
Advance payments by borrowers for taxes and insurance 83,784 80,309
Accrued interest payable 54,137 95,323
Accrued expenses and other liabilities 698,640 430,032
Total liabilities 29,877,945 29,421,363
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; 212,681,105 and 212,397,685 shares issued 2,127 2,124
Additional paid-in capital 1,740,020 1,736,726
Retained earnings 874,242 734,510
Less 10,307,140 and 3,140,000 shares of common stock held in treasury at cost (228,900 ) (65,502 )
Borrowings of employee investment and stock ownership plan (2,044 ) (3,138 )
Accumulated other comprehensive income (41,128 ) (7,020 )
Total shareholders’ equity 2,344,317 2,397,700
Total liabilities and shareholders’ equity $ 32,222,262 $ 31,819,063

See Notes to Consolidated Financial Statements

1

Table of Contents

CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

                                     
Three Months Ended Six Months Ended
6/30/00 6/30/99 6/30/00 6/30/99
(Dollars in thousands, except per share data)
Interest income:
Loans and leases $ 447,109 $ 415,076 $ 875,219 $ 836,865
Mortgage-backed securities:
Available for sale 50,065 52,668 105,539 92,994
Held to maturity 30,908 39,758 63,262 85,830
Investment securities:
Trading — 58 38 58
Available for sale 8,202 6,000 17,213 12,923
Held to maturity 420 561 844 1,373
Other interest-earning assets 8,894 8,704 17,553 18,175
Total interest income 545,598 522,825 1,079,668 1,048,218
Interest expense:
Deposits 181,668 178,083 361,923 359,809
FHLB advances 125,425 102,156 239,124 196,996
Other borrowings 6,472 9,413 13,585 22,691
Total interest expense 313,565 289,652 614,632 579,496
Net interest income 232,033 233,173 465,036 468,722
Provision for loan and lease losses 11,509 7,843 20,107 14,613
Net interest income after provision for loan and lease losses 220,524 225,330 444,929 454,109
Other income:
Retail banking 61,760 50,825 113,498 94,416
Mortgage banking 14,238 11,483 27,953 22,852
Leasing operations 10,394 1,656 11,992 3,704
Net gains 3,064 6,989 6,611 13,806
Other 9,441 8,272 21,461 11,675
Total other income 98,897 79,225 181,515 146,453
Administrative expenses:
Compensation and employee benefits 71,215 67,867 141,479 136,381
Net occupancy and equipment 25,351 23,294 49,915 47,014
Federal deposit insurance premiums 1,001 2,048 2,006 4,149
Merger expenses 20,845 3,519 24,103 5,719
Amortization of goodwill 4,046 3,325 8,090 6,714
Other administrative expenses 45,071 45,150 84,664 88,388
Total administrative expenses 167,529 145,203 310,257 288,365
Income before income taxes 151,892 159,352 316,187 312,197
Income taxes 48,605 50,976 101,191 100,875
Net income $ 103,287 $ 108,376 $ 214,996 $ 211,322
Basic earnings per share $ .50 $ .51 $ 1.03 $ .99
Diluted earnings per share $ .49 $ .49 $ 1.02 $ .96
Average common shares outstanding 207,241,293 214,209,456 208,333,201 214,187,266
Average common and common equivalent shares outstanding 211,089,502 219,525,186 211,586,635 219,593,985
Cash dividends declared per share $ .18 $ .15 $ .34 $ .28

See Notes to Consolidated Financial Statements

2

Table of Contents

CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

                       
Six Months Ended
6/30/00 6/30/99
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 214,996 $ 211,322
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses 20,107 14,613
Net gains (6,094 ) (10,983 )
Accretion of discounts, amortization of premiums, amortization of goodwill and depreciation, net 58,296 37,152
Origination of real estate loans held for sale (819,016 ) (947,117 )
Proceeds from sale of loans held for sale 818,563 1,057,041
Proceeds from investment securities held for trading 13,418 (18,983 )
Other 120,986 (72,571 )
Net cash provided by operating activities 421,256 270,474
Cash flows from investing activities:
Net principal disbursed on loans and leases (2,677,535 ) (1,530,215 )
Proceeds from principal repayments and maturities of:
Mortgage-backed securities held to maturity 196,462 737,500
Investment securities held to maturity 3,401 230
Mortgage-backed securities available for sale 126,349 374,020
Investment securities available for sale 54,999 181,365
Proceeds from sale of:
Mortgage-backed securities available for sale 1,796,393 673,311
Investment securities available for sale 12,713 195,479
Federal Home Loan Bank stock 17,624 1,809
Purchase of:
Investment securities held to maturity (635 ) (725 )
Mortgage-backed securities available for sale — (210,000 )
Investment securities available for sale (10,696 ) (455,329 )
Loans (7,906 ) (372,003 )
Federal Home Loan Bank stock (50,735 ) (41,902 )
Loan servicing assets, including those originated (16,605 ) (16,892 )
Bank owned life insurance — (480,500 )
Other (20,912 ) (23,524 )
Net cash used in investing activities (577,083 ) (967,376 )
Cash flows from financing activities:
Net increase in short-term borrowings 1,159,760 339,253
Proceeds from long-term borrowings 555,057 705,711
Repayments of long-term borrowings (983,217 ) (372,573 )
Net decrease in deposits (505,309 ) (214,442 )
Increase (decrease) in advance payments by borrowers for taxes and insurance 3,475 (616 )
Payment of dividends on common stock (71,005 ) (65,798 )
Proceeds from issuance of common stock 9,452 14,606
Purchase of treasury stock (173,812 ) (54,726 )
Net cash provided by (used in) financing activities (5,599 ) 351,415
Net decrease in cash and cash equivalents (161,426 ) (345,487 )
Cash and cash equivalents, beginning of the period 693,532 722,260
Cash and cash equivalents, end of the period $ 532,106 $ 376,773
Supplemental disclosure of cash flow information:
Cash paid for interest on deposits and borrowings $ 656,109 $ 590,935
Cash paid for income taxes 6,000 21,441
Supplemental schedule of noncash activities:
Loans exchanged for mortgage-backed securities 1,471,076 1,866,045

See Notes to Consolidated Financial Statements

3

Table of Contents

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 October 1, 1999, Charter One completed its acquisition of St. Paul Bancorp, Inc. (“St. Paul”), which was accounted for as a pooling of interests. Headquartered in Chicago, Illinois, St. Paul was the holding company of St. Paul Federal Bank for Savings, a $6.2 billion savings bank that operated 58 branch offices in the metropolitan Chicago area. The merger was effected through the issuance of .99225 shares of Charter One common stock for each share of St. Paul’s common stock, resulting in the issuance of 39,892,023 shares (as adjusted for the 5% stock dividend issued September 30, 1999).
 
3. On November 5, 1999, the Company completed its acquisition of 14 Vermont National Bank offices from Chittenden Corporation (“Chittenden”), which was accounted for as a purchase. The acquisition was 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. Charter One acquired $84.7 million in commercial real estate and business loans and assumed $357.5 million in deposits at fair value. The purchase resulted in $43.6 million in tax-deductible goodwill, which will be amortized over 15 years.
 
4. The Company has identified one reportable segment: consumer banking. Consumer banking includes retail banking, mortgage banking, and other related financial services that provide a full range of deposit products, consumer loans, business lending, and commercial real estate lending.
 
5. In June 1998, the Financial Accounting Standards Board (“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. In June 2000, the FASB issued SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133.” SFAS No.138 amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and certain hedging activities. It also amends SFAS No. 133 for decisions made by the FASB relating to the Derivatives Implementation Group process. Early application is still permitted. Management has not completed the process of evaluating SFAS No. 133 and SFAS No. 138 and therefore has not determined the impact that adopting these statements will have on the Company’s financial position and results of operations.
 
6. Certain items in the consolidated financial statements for 1999 have been reclassified to conform to the 2000 presentation.

4

Table of Contents

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

HOLDING COMPANY BUSINESS

The following financial review presents an analysis of the asset and liability structure of Charter One Financial, Inc. and a discussion of the results of operations for each of the periods presented.

General

Headquartered in Cleveland, Ohio, Charter One Financial, Inc., hereafter referred to as “Charter One” or the “Company” is a financial holding company. Charter One is a Delaware corporation and owns all of the outstanding capital stock of Charter Michigan Bancorp, Inc. and Charter One Commercial (formerly 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 Charter One is operating these financial institutions which we sometimes refer to in this document collectively as the “Bank.” The Bank’s primary business is providing consumer banking services to certain major markets in Ohio, Michigan, Illinois, New York, Vermont and in some markets of Massachusetts. As of June 30, 2000, the Bank and its subsidiaries were doing business through 418 full-service branches and 36 loan production offices.

Forward-Looking Statements

This document, including information included or incorporated by reference, contains, and future filings by the Company on Form 10-K, Form 10-Q and Form 8-K and future oral and written statements by the Company and its management may contain, forward-looking statements about Charter One and its subsidiaries which we believe are within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements with respect to anticipated future operating and financial performance, growth opportunities, interest rates, acquisition and divestiture opportunities, and synergies, efficiencies, cost savings and funding advantages expected to be realized from prior acquisitions. Words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” and similar expressions are intended to identify these forward-looking statements. Forward-looking statements by the Company and its management are based on beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions of management and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise. The factors we discuss in this document and identified in our filings with the Securities and Exchange Commission and those presented elsewhere by our management from time to time, could cause actual results to differ materially from those indicated by the forward-looking statements made in this document.

RESULTS OF OPERATIONS

Performance Overview

Charter One reported net income of $103.3 million, or $.49 per diluted share, for the three months ended June 30, 2000. This was a $5.1 million, or 4.7%, decrease over the results of the second quarter of 1999 when net income was $108.4 million, or $.49 per diluted share. Both periods included merger-related charges. Excluding the after- tax impact of merger-related charges, our net income resulted in a return on average equity of 19.08% and a return on average assets of 1.51% for the three months ended June 30, 2000. The comparable returns for the second quarter of 1999 were 17.69% and 1.44%, respectively. The increase in our operating returns was primarily attributable to increases in income from retail banking and leasing operations.

For the six months ended June 30, 2000, Charter One reported net income of $215.0 million, or $1.02 per diluted share. This was a $3.7 million, or 1.7%, increase over the results for the same period in 1999. Both periods included merger-related charges. Our net income, excluding the after-tax impact of merger-related charges, resulted in a return on average equity of 18.84% and a return on average assets of 1.51% for the six months ended June 30, 2000. The comparable returns for the 1999 period were 17.46% and 1.41%, respectively. The increase in our operating returns, just as with the second quarter results, was primarily attributable to increases in income from retail banking and leasing operations. Additionally, the year-over-year comparison was affected by an increase in income from our Bank Owned Life Insurance (“BOLI”) program.

5

Table of Contents

Figure 1 sets forth selected annualized performance ratios for the three and six months ended June 30, 2000 and 1999, respectively. The table reflects these ratios on both an actual and operating return basis. Operating returns are computed using net income excluding the after-tax impact of merger-related charges for each of the periods presented. We believe that presentation of operating returns will provide comparability and insight into the operations of Charter One.

Selected Ratios (Figure 1)

                                   
Three Months Ended Six Months Ended
6/30/00 6/30/99 6/30/00 6/30/99
Actual:
Return on average assets 1.33 % 1.41 % 1.40 % 1.38 %
Return on average equity 16.78 17.33 17.51 17.16
Average equity to average assets 7.91 8.14 8.00 8.07
Net interest income to administrative expenses 1.39 x 1.61 x 1.50 x 1.63 x
Administrative expenses to average assets 2.15 % 1.89 % 2.02 % 1.89 %
Efficiency ratio 49.86 46.46 47.22 46.83
Operating:
Return on average assets 1.51 % 1.44 % 1.51 % 1.41 %
Return on average equity 19.08 17.69 18.84 17.46
Net interest income to administrative expenses 1.58 x 1.65 x 1.63 x 1.66 x
Administrative expenses to average assets 1.88 % 1.84 % 1.86 % 1.85 %
Efficiency ratio 43.50 45.30 43.45 45.88

Net Interest Income

Net interest income is the difference between the interest and dividend income earned on our loans and investments and the interest expense on our deposits and borrowings. Net interest income is our principal source of 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, interest rate fluctuations and asset quality, as well as general economic conditions and regulatory policies.

The following table shows average balances, interest earned or paid, and average interest rates for the periods indicated. Average balances are calculated on a daily basis. Nonaccrual loans are included in the average balance of loans. The mark-to-market adjustments on securities available for sale are included in noninterest-earning assets. The cost of liabilities includes the annualized effect of interest rate risk management instruments.

6

Table of Contents

Average Balances, Interest Rates and Yields/Costs (Figure 2)

                                                       
Three Months Ended
6/30/00 6/30/99
Avg. Avg.
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
(Dollars in thousands)
Interest-earning assets:
Loans and leases $ 23,716,364 $ 447,109 7.55 % $ 22,398,262 $ 415,076 7.42 %
Mortgage-backed securities:
Available for sale 2,765,608 50,065 7.24 3,170,063 52,668 6.65
Held to maturity 1,745,421 30,908 7.08 2,317,263 39,758 6.86
Investment securities:
Trading — — — 7,680 58 3.02
Available for sale 452,191 8,202 7.26 424,988 6,000 5.65
Held to maturity 29,143 420 5.77 36,526 561 6.13
Other interest-earning assets 489,180 8,894 7.19 537,051 8,704 6.41
Total interest-earning assets 29,197,907 545,598 7.48 28,891,833 522,825 7.24
Allowance for loan and lease losses (183,514 ) (181,778 )
Noninterest-earning assets 2,136,747 2,016,638
Total assets $ 31,151,140 $ 30,726,693
Interest-bearing liabilities:
Deposits:
Checking accounts $ 3,674,891 13,376 1.46 % $ 2,974,490 7,206 .97 %
Savings accounts 1,694,620 6,385 1.52 2,446,915 12,197 2.00
Money market accounts 3,792,860 35,593 3.77 3,082,974 25,007 3.25
Certificates of deposit 9,607,596 126,314 5.29 10,439,968 133,673 5.14
Total deposits 18,769,967 181,668 3.89 18,944,347 178,083 3.77
FHLB advances 8,959,241 125,425 5.62 8,166,811 102,156 5.01
Other borrowings 309,641 6,472 8.33 554,400 9,413 6.76
Total borrowings 9,268,882 131,897 5.71 8,721,211 111,569 5.13
Total interest-bearing liabilities 28,038,849 313,565 4.49 27,665,558 289,652 4.20
Noninterest-bearing liabilities 649,547 559,476
Total liabilities 28,688,396 28,225,034
Shareholders’ equity 2,462,744 2,501,659
Total liabilities and shareholders’ equity $ 31,151,140 $ 30,726,693
Net interest income $ 232,033 $ 233,173
Interest rate spread 2.99 3.04
Net yield on average interest-earning assets 3.18 3.23
Average interest-earning assets to average interest-bearing liabilities 104.13 % 104.43 %

7

Table of Contents

                                                     
Six Months Ended
6/30/00 6/30/99
Avg. Avg.
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
(Dollars in thousands)
Interest-earning assets:
Loans and leases $ 23,305,600 $ 875,219 7.52 % $ 22,507,649 $ 836,865 7.45 %
Mortgage-backed securities:
Available for sale 2,952,867 105,539 7.15 2,804,606 92,994 6.63
Held to maturity 1,794,968 63,262 7.05 2,489,173 85,830 6.90
Investment securities:
Trading 368 38 20.56 3,840 58 3.02
Available for sale 468,654 17,213 7.35 457,416 12,923 5.65
Held to maturity 32,412 844 5.21 44,226 1,373 6.21
Other interest-earning assets 495,250 17,553 7.01 587,538 18,175 6.15
Total interest-earning assets 29,050,119 1,079,668 7.44 28,894,448 1,048,218 7.26
Allowance for loan and lease losses (184,330 ) (182,482 )
Noninterest-earning assets 1,838,397 1 ,820,632
Total assets $ 30,704,186 $ 30,532,598
Interest-bearing liabilities:
Deposits:
Checking accounts $ 3,553,099 24,962 1.41 % $ 2,927,410 12,321 .85 %
Savings accounts 1,870,826 14,328 1.54 2,505,845 25,232 2.03
Money market accounts 3,511,241 63,470 3.64 2,906,784 48,035 3.33
Certificates of deposit 9,942,252 259,163 5.24 10,573,124 274,221 5.23
   Total deposits 18,877,418 361,923 3.86 18,913,163 359,809 3.84
FHLB advances 8,754,401 239,124 5.49 7,910,712 196,996 5.02
Other borrowings 346,663 13,585 7.81 702,253 22,691 6.44
   Total borrowings 9,101,064 252,709 5.57 8,612,965 219,687 5.13
   Total interest-bearing liabilities 27,978,482 614,632 4.41 27,526,128 579,496 4.24
Noninterest-bearing liabilities 270,184 543,137
   Total liabilities 28,248,666 28,069,265
Shareholders’ equity 2,455,520 2,463,333
   Total liabilities and shareholders’ equity $ 30,704,186 $ 30,532,598
Net interest income $ 465,036 $ 468,722
Interest rate spread 3.03 3.02
Net yield on average interest-earning assets 3.20 3.24
Average interest-earning assets to average interest-bearing liabilities 103.83 % 104.97 %

8

Table of Contents

Figure 3 sets forth the approximate relative contribution of changes in average interest rates and volume to changes in net interest income for the periods indicated. 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)

                                                       
Three Months Ended June 30, Six Months Ended June 30,
2000 v. 1999 2000 v. 1999
Increase (decrease) due to Increase (decrease) due to
Rate Volume Total Rate Volume Total
(Dollars in thousands)
Interest income:
Loans and leases $ 6,501 $ 25,532 $ 32,033 $ 6,143 $ 32,211 $ 38,354
Mortgage-backed securities:
Available for sale 4,471 (7,074 ) (2,603 ) 7,474 5,071 12,545
Held to maturity 1,240 (10,090 ) (8,850 ) 1,860 (24,428 ) (22,568 )
Investment securities:
Trading — (58 ) (58 ) 339 (359 ) (20 )
Available for sale 1,798 404 2,202 3,965 325 4,290
Held to maturity (33 ) (108 ) (141 ) (199 ) (330 ) (529 )
Other interest-earning assets 1,005 (815 ) 190 2,457 (3,079 ) (622 )
Total 14,982 7,791 22,773 22,039 9,411 31,450
Interest expense:
Checking accounts 4,203 1,967 6,170 9,573 3,068 12,641
Savings accounts (2,576 ) (3,236 ) (5,812 ) (5,290 ) (5,614 ) (10,904 )
Money market accounts 4,298 6,288 10,586 4,790 10,645 15,435
Certificates of deposit 3,506 (10,865 ) (7,359 ) 1,384 (16,442 ) (15,058 )
FHLB advances 12,457 10,812 23,269 19,480 22,648 42,128
Other borrowings 553 (3,494 ) (2,941 ) 580 (9,686 ) (9,106 )
Total 22,441 1,472 23,913 30,517 4,619 35,136
Change in net interest income $ (7,459 ) $ 6,319 $ (1,140 ) $ (8,478 ) $ 4,792 $ (3,686 )

Our net interest income for the three months ended June 30, 2000 was $232.0 million, a decrease of $1.1 million from the three months ended June 30, 1999. The net yield on interest-earning assets during the second quarter of 2000 declined slightly to 3.18% from 3.23% for the comparable period of 1999, reflecting in part, our stock buyback program and the short-term impact of our recent adjustable-rate residential and consumer loans originations at teaser rates. Additionally, as reflected in Figure 4, the net yield on interest-earning assets at June 30, 2000 declined to 3.02% from 3.19% at December 31, 1999. The compression in the net yield on interest-earning assets is primarily attributed to the fact that our liabilities have repriced more quickly than our assets. Interest rates have risen considerably over the past year, as evidenced by an aggregate 175 basis point increase in the federal funds rate. This increase has been accompanied by a flattening of the yield curve. Given this interest rate environment, management has decided to slow balance sheet growth, with particular emphasis on accelerating the shift away from residential loans and securities by selling more of those portfolios. Instead, balance sheet capacity will be preserved for a more favorable interest rate environment, and existing capital will be allocated toward our stock buyback program. See “Capital and Dividends” below for further discussion regarding our stock buyback program. Thus, in the current interest rate environment, management expects operating earnings per share levels for the remainder of 2000 to be approximately 10% over operating earnings per share levels for the comparable 1999 period. This is expected to result in returns on average assets and average equity consistent with such returns achieved in the first half of 2000.

Our net interest income for the six months ended June 30, 2000 was $465.0 million, a decrease of $3.7 million from the six months ended June 30, 1999. The net yield on average interest-earning assets decreased by four basis points during the six months ended June 30, 2000 to 3.20% from 3.24% in the comparable period of 1999. The reasons for the decrease in the net yield on average interest-earning assets are substantially the same as for the second quarter results discussed in the above paragraph. In addition, the year-over-year comparison was affected by our BOLI program initiated in 1999. This asset is classified in non-interest earning assets on the average balance sheet and the related income is recorded in other income on the consolidated statement of income. See “Other Income” below for further discussion regarding our BOLI program.

9

Table of Contents

Figure 4 sets forth Charter One’s yields and costs at period end for the dates indicated. The yields on leases excludes the impact of the related tax benefit. The cost of liabilities includes the annualized effect of interest rate risk management instruments.

Yields and Costs at End of Period (Figure 4)

                     
6/30/00 12/31/99
Weighted average yield:
Real estate loans 7.36 % 7.28 %
Automobile loans 8.60 8.52
Retail consumer loans 7.93 7.93
Leases 6.24 6.08
Corporate banking loans 8.98 8.58
Total loans and leases 7.61 7.53
Mortgage-backed securities 7.25 7.04
Investment securities 7.37 7.26
Other interest-earning assets 7.30 6.97
Total interest-earning assets 7.53 7.41
Weighted average cost:
Checking 1.54 1.27
Money market 3.85 3.41
Savings 1.54 1.61
Certificates of deposit 5.43 5.13
Total deposits 3.99 3.79
FHLB advances 5.83 5.32
Other borrowings 7.91 6.99
Total interest-bearing liabilities 4.68 4.34
 
Interest rate spread 2.85 3.07
 
Net yield on interest-earning assets 3.02 % 3.19 %

Other Income

Other income for the three months ended June 30, 2000 was $98.9 million, an increase of $19.7 million, or 24.8%, over the $79.2 million for the three months ended June 30, 1999. The increase was primarily attributable to income from retail banking and leasing operations. Retail banking income increased $10.9 million, or 21.5%, as we continued to introduce our products into new markets acquired through mergers. Income from leasing operations increased $8.7 million, primarily driven by residual values on underlying equipment realized upon termination of leases.

Other income for the six months ended June 30, 2000 was $181.5 million, an increase of $35.1 million, or 23.9%, over the $146.5 million for the six months ended June 30, 1999. The increase was primarily attributable to income from retail banking, leasing operations, and the BOLI program. The reasons for the increases in income from retail banking and leasing operations are substantially the same as for the second quarter results discussed in the above paragraph. The increase in the line item “other” was attributable to the BOLI program. During the year ended December 31, 1999, we increased our BOLI portfolio by $630.0 million. The related income on the BOLI asset is recorded in the line item “other” and is the primary reason for the $9.8 million increase in the line item “other” over the comparable period in 1999.

Administrative Expenses

Administrative expenses were $167.5 million for the three months ended June 30, 2000, an increase of $22.3 million, or 15.4%, as compared to the second quarter of 1999. Each year included merger-related expenses. There were $20.8 million of merger-related expenses recorded in the three months ended June 30, 2000, and $3.5 million for the three months ended June 30, 1999. Excluding these merger-related charges, our administrative expenses were $146.7 million for the three months ended June 30, 2000 and $141.7 million for the three months ended June

10

Table of Contents

30, 1999. This resulted in a comparable ratio of administrative expenses to average assets (excluding the merger- related charges) of 1.88% and 1.84% for the three months ended June 30, 2000 and 1999, respectively. Our efficiency ratio (excluding the merger-related charges) was 43.50% for the three months ended June 30, 2000, an improvement when compared to 45.30% for the three months ended June 30, 1999. See the above discussion in “Other Income” regarding additional factors that contributed to the improvement in our efficiency ratio.

Administrative expenses were $310.3 million for the six months ended June 30, 2000, an increase of $21.9 million, or 7.6%, as compared to the six months ended June 30, 1999. Each year included merger-related expenses. There were $24.1 million of merger-related expenses recorded in the six months ended June 30, 2000, and $5.7 million for the six months ended June 30, 1999. Excluding these merger-related charges, our administrative expenses were $286.2 million for the six months ended June 30, 2000 and $282.6 million for the six months ended June 30, 1999. This resulted in a comparable ratio of administrative expenses to average assets (excluding the merger-related charges) of 1.86% and 1.85% for the six months ended June 30, 2000 and 1999, respectively. Our efficiency ratio (excluding the merger-related charges) was 43.45% for the six months ended June 30, 2000, an improvement when compared to 45.88% for the six months ended June 30, 1999. See the above discussion in “Other Income” regarding additional factors that contributed to the improvement in our efficiency ratio.

Federal Income Taxes

Federal income tax expense for the three months ended June 30, 2000 was $48.6 million, as compared to $51.0 million for the same period in 1999. The primary reason for this 4.7% decrease in the provision for federal income taxes was a 4.7% decrease in pre-tax book income. The effective tax rate was 32.0% for the 2000 and 1999 periods, respectively.

Federal income tax expense for the six months ended June 30, 2000 was $101.2 million, essentially unchanged when compared to federal income tax expense of $100.9 million for the same period in 1999. The effective tax rates were 32.0% and 32.3% for the 2000 and 1999 periods, respectively.

FINANCIAL CONDITION

Overview

At June 30, 2000, total assets were $32.2 billion, as compared to total assets of $31.8 billion at December 31, 1999. Contributing to the increase in total assets was the growth in our loan portfolio since December 31, 1999. Figure 5 illustrates our continued emphasis in originating consumer and commercial loans due to the higher yields and shorter terms provided by these types of loans. Additionally, the adjustable-rate portion of our one-to-four family portfolio increased by $835.7 million, or 14.7%, since December 31, 1999.

11

Table of Contents

Loans and Leases

Composition of Loans and Leases (Figure 5)

                         
6/30/00 12/31/99
(Dollars in thousands)
Loan and lease portfolio, net
One-to-four family:
Permanent:
Fixed rate $ 5,077,841 $ 5,755,393
Adjustable rate 6,538,729 5,703,042
Construction 294,784 276,172
11,911,354 11,734,607
Commercial real estate:
Multifamily 1,202,393 1,276,004
Other 772,498 673,972
1,974,891 1,949,976
Consumer:
Retail 5,052,418 4,502,023
Automobile 2,697,127 2,497,956
7,749,545 6,999,979
Business:
Leasing 1,354,663 1,137,895
Corporate banking 682,615 676,793
2,037,278 1,814,688
Loans and leases before allowance for loan and lease losses 23,673,068 22,499,250
Allowance for loan and lease losses (186,194 ) (186,400 )
Loans and leases, net $ 23,486,874 $ 22,312,850
Portfolio of loans serviced for others $ 11,616,497 $ 10,798,563

12

Table of Contents

Loan and Lease Activity (Figure 6)

                                         
Three Months Ended Six Months Ended
6/30/00 6/30/99 6/30/00 6/30/99
(Dollars in thousands)
Originations:
Real estate:
Permanent:
One-to-four family $ 1,394,433 $ 1,314,184 $2,414,702 $ 2,692,622
Multifamily 9,374 45,324 14,256 144,199
Commercial 52,613 53,394 109,537 135,042
Total permanent loans 1,456,420 1,412,902 2,538,495 2,971,863
Construction:
One-to-four family 169,119 158,226 268,517 262,635
Multifamily 34,299 28,648 43,863 41,950
Commercial 19,130 36,806 52,784 51,358
Total construction loans 222,548 223,680 365,164 355,943
Total real estate loans originated 1,678,968 1,636,582 2,903,659 3,327,806
Retail consumer 714,285 664,111 1,204,817 1,281,466
Automobile 464,193 393,644 744,195 741,104
Leases 203,137 82,253 307,499 132,520
Corporate banking 210,271 170,667 358,232 297,218
Total loans and leases originated 3,270,854 2,947,257 5,518,402 5,780,114
Loans purchased 4,142 112,249 7,906 372,003
Sales and principal reductions:
Loans sold 488,898 485,772 819,016 1,059,742
Loans exchanged for mortgage-backed securities 1,471,076 717,672 1,471,076 1,866,045
Principal reductions 1,006,671 1,491,285 2,004,540 3,228,479
Total sales and principal reductions 2,966,645 2,694,729 4,294,632 6,154,266
Increase (decrease) before net items $ 308,351 $ 364,777 $1,231,676 $ (2,149)

Investment Securities

Figure 7 summarizes our investment portfolios at June 30, 2000 and December 31, 1999. The amounts reflected represent the fair values of investment securities held for trading and available for sale and the amortized cost of investment securities held to maturity.

Investment Securities (Figure 7)

                         
6/30/00 12/31/99
(Dollars in thousands)
Trading
Other $ — $ 13,380
Total investment securities held for trading — 13,380
Available for Sale
U.S. Treasury and agency securities 331,378 339,687
Corporate notes and commercial paper 66,335 88,368
Other 34,961 54,640
Total investment securities available for sale 432,674 482,695
Held to Maturity
U.S. Treasury and agency securities 15,000 17,058
Corporate notes and commercial paper — 15,659
Other 13,136 13,289
Total investment securities held to maturity 28,136 46,006
Total $ 460,810 $ 542,081
Weighted average rate 7.37 % 7.26 %

13

Table of Contents

Mortgage-Backed Securities

Figure 8 summarizes our mortgage-backed securities portfolios at June 30, 2000 and December 31, 1999. The amounts reflected represent the fair values of mortgage-backed securities available for sale and the amortized cost of securities held to maturity.

Mortgage-Backed Securities (Figure 8)

                         
6/30/00 12/31/99
(Dollars in thousands)
Available for Sale
Participation certificates:
Government agency issues:
FNMA $ 2,585,049 $ 3,023,228
FHLMC 60,625 95,034
GNMA 2,364 2,608
Collateralized mortgage obligations:
Government agency issues:
FHLMC 298,368 232,906
FNMA 230,457 304,018
GNMA 6,673 7,349
Private issues 518,444 527,991
Total mortgage-backed securities available for sale 3,701,980 4,193,134
Held to Maturity
Participation certificates:
Government agency issues:
FNMA 490,918 549,866
FHLMC 175,516 196,704
GNMA 93,346 101,468
Private issues 146,747 162,485
Collateralized mortgage obligations:
Government agency issues:
FNMA 215,207 221,934
FHLMC 76,348 82,838
Private issues 512,456 591,951
Total mortgage-backed securities held to maturity 1,710,538 1,907,246
Total $ 5,412,518 $ 6,100,380
Weighted average rate 7.25 % 7.04 %

14

Table of Contents

Asset Quality

Analysis of the Allowance for Loan and Lease Losses (Figure 9)

                                         
Three Months Ended Six Months Ended
6/30/00 6/30/99 6/30/00 6/30/99
(Dollars in thousands)
Allowance for loan and lease losses
Balance, beginning of period $ 185,267 $ 181,584 $ 186,400 $ 184,989
Provision for loan and lease losses 11,509 7,843 20,107 14,613
Loans and leases charged off:
Mortgage (1,399 ) (2,648 ) (3,285 ) (3,724 )
Automobile (6,786 ) (6,183 ) (13,881 ) (14,309 )
Retail consumer (4,664 ) (445 ) (7,387 ) (1,982 )
Leases — — — (900 )
Corporate banking (313 ) (86 ) (436 ) (534 )
Total charge-offs (13,162 ) (9,362 ) (24,989 ) (21,449 )
Recoveries:
Mortgage 315 508 564 762
Automobile 1,515 1,681 3,100 3,054
Retail consumer 564 77 764 266
Leases — — — —
Corporate banking 186 18 248 114
Total recoveries 2,580 2,284 4,676 4,196
Net loan and lease charge-offs (10,582 ) (7,078 ) (20,313 ) (17,253 )
Balance, end of period $ 186,194 $ 182,349 $ 186,194 $ 182,349
Net charge-offs to average loans and leases (annualized) .18 % .13 % .17 % .15 %

Figure 10 sets forth information concerning nonperforming assets and additional information on the allowance for loan and lease losses. At June 30, 2000, we had no outstanding commitments to lend additional funds to borrowers whose loans were on nonaccrual or restructured status.

15

Table of Contents

Nonperforming Assets (Figure 10)

                         
6/30/00 12/31/99
(Dollars in thousands)
Nonperforming loans and leases:
Nonaccrual loans and leases:
Real estate mortgage loans:
One-to-four family(1) $ 68,671 $ 75,682
Multifamily and commercial 6,614 3,369
Construction and land 5,074 1,095
Total real estate mortgage loans 80,359 80,146
Retail consumer 49,712 39,638
Automobile 268 482
Corporate banking 7,836 6,037
Leases — —
Total nonaccrual loans and leases 138,175 126,303
Accruing loans and leases delinquent more than 90 days:
Real estate mortgage loans — —
Retail consumer(1) 1,908 2,562
Automobile 4,275 4,973
Corporate banking 7,286 2,463
Leases 2,475 —
Total accruing loans and leases delinquent more than 90 days 15,944 9,998
Restructured real estate mortgage loans 671 1,009
Total nonperforming loans and leases 154,790 137,310
Real estate acquired through foreclosure and other 23,065 24,453
Total nonperforming assets 177,855 161,763
Less government guaranteed loans 20,293 18,841
Nonperforming assets net of government guaranteed loans $ 157,562 $ 142,922
Ratio of:
Nonperforming loans and leases to total loans and leases .66 % .62 %
Nonperforming assets to total assets .55 .51
Allowance for loan and lease losses to:
Nonperforming loans and leases 120.29 135.75
Total loans and leases before allowance .79 .83
Ratio of (excluding government guaranteed nonperforming loans):
Nonperforming loans and leases to total loans and leases .57 .53
Nonperforming assets to total assets .49 .45
Allowance for loan and lease losses to:
Nonperforming loans and leases 138.44 157.34
Total loans and leases before allowances .79 % .83 %

(1)   Includes government guaranteed loans.

At June 30, 2000, there were $72.1 million of loans and leases 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 repayment terms and that may result in disclosure of such loans and leases in the future.

16

Table of Contents

SOURCES OF FUNDS

General

Deposits have historically been the most important source of our funds for use in lending and for general business purposes. We also derive funds from FHLB advances, reverse repurchase agreements and other borrowings, principal repayments on loans and mortgage-backed securities, funds provided by operations and proceeds from the sale of loans and loan participations.

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 11)

                                     
6/30/00 12/31/99
Weighted Weighted
Average Average
Amount Rate Amount Rate
(Dollars in thousands)
Checking accounts:
Interest-bearing $ 2,357,297 2.45 % $ 2,066,453 2.05 %
Noninterest-bearing 1,381,803 — 1,263,290 —
Savings accounts 1,553,565 1.54 2,065,127 1.61
Money market accounts 3,921,289 3.85 3,170,435 3.41
Certificates of deposit 9,355,003 5.57 10,508,670 5.31
Total deposits, net $ 18,568,957 4.06 $ 19,073,975 3.89
Including the annualized effect of applicable interest rate risk management instruments 3.99 % 3.79 %

Investment securities and mortgage-backed securities with a book value of $506.2 million at June 30, 2000 and $544.4 million at December 31, 1999, were pledged to secure public deposits and for other purposes required or permitted by law.

Borrowings

At June 30, 2000, borrowings primarily consisted of FHLB advances. These positions were secured by our investment in the stock of the FHLB, as well as $11.3 billion in certain real estate loans and $2.9 billion in mortgage-backed securities.

Federal Home Loan Bank Advances (Figure 12)

                                   
6/30/00 12/31/99
Weighted Weighted
Average Average
Amount Rate Amount Rate
(Dollars in thousands)
Short-term $ 5,905,248 6.21 % $ 4,115,000 5.43 %
Long-term:
Fixed-rate advances 3,836,909 5.18 4,512,941 5.10
Variable-rate advances 409,604 6.55 598,209 6.21
   Total advances, net $ 10,151,761 5.83 % $ 9,226,150 5.32 %

17

Table of Contents

Interest Rate Risk Management

We utilize various types of interest rate contracts in managing our interest rate risk profile. We 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. We utilize 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.

Interest Rate Swaps (Figure 13)

 
                                                     
6/30/00 12/31/99
Notional Receiving Paying Notional Receiving Paying
Principal Interest Interest Principal Interest Interest
Amount Rate Rate Amount Rate Rate
(Dollars in thousands)
Fixed Payment and Variable
Receipt Maturing in:
2002 $ 25,000 6.22 %(1) 6.44 % $ 25,000 5.58 %(1) 6.44 %
Variable Payment and Fixed
Receipt Maturing in:
2000 $ 40,000 5.55 % 6.65 % 40,000 5.55 % 6.16 %
2001 420,000 6.38 6.56 420,000 6.38 6.14
2002 310,000 7.57 6.67 — — —
2003 120,000 6.14 6.64 120,000 6.14 6.14
2004 580,000 7.01 6.51 580,000 7.01 6.15
2005 395,000 7.93 6.62 25,000 7.00 5.87
2006 40,000 7.00 6.52 40,000 7.00 6.37
2009 65,000 7.32 6.59 65,000 7.32 6.16
   Total $ 1,970,000 7.08 % 6.58 %(1) $ 1,290,000 6.69 % 6.15 %(1)

(1) Rates are based upon LIBOR.

Interest rate risk management instruments reduced interest expense as follows:

Net Benefit of Interest Rate Risk Management (Figure 14)

                                     
Three Months Ended Six Months Ended
6/30/00 6/30/99 6/30/00 6/30/99
(Dollars in thousands)
Interest expense (income):
Deposits $ (2,691 ) $ (2,188 ) $ (5,672 ) $ (4,307 )
FHLB advances — — — 86
Reverse repurchase agreements — (114 ) — (236 )
Other borrowings — 87 — 169
Total net benefit $ (2,691 ) $ (2,215 ) $ (5,672 ) $ (4,288 )

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 flows and loan and mortgage-backed securities 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. We generally manage the pricing of deposits to maintain a steady deposit balance, but from time to time may decide not to pay rates on deposits as high as our competition and, when necessary, to supplement deposits with longer term and/or lower cost alternative sources of funds such as

18

Table of Contents

FHLB advances and reverse repurchase agreements. Management also considers our interest-sensitivity profile when deciding on alternative sources of funds. At June 30, 2000, our one-year gap was a negative 13.33% of total assets. See Item 3 “Quantitative and Qualitative Disclosure About Market Risk” regarding further information on our interest rate risk profile.

We are required by regulation to maintain specific minimum levels of liquid investments. Regulations currently in effect require us to maintain average liquid assets at least equal to 4.0% of the sum of the 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. Charter One Bank’s average regulatory liquidity ratio for the second quarter of 2000 was 4.90%.

We anticipate that we will have sufficient funds available to meet our commitments. At June 30, 2000, we had outstanding commitments to originate loans and leases of $1.7 billion, unfunded consumer lines of credit totaling $2.6 billion and unfunded corporate banking lines of credit totaling $141.3 million. We do not expect all of these lines to be used by the borrowers. Outstanding letters of credit totaled $75.6 million as of June 30, 2000. Certificates of deposit scheduled to mature in one year or less at June 30, 2000 totaled $7.8 billion. We believe that a significant portion of the amounts maturing will remain with us because they are retail deposits. We believe we have significant borrowing capacity with the FHLB and investment banking firms to meet any need for additional borrowings and sources of funds.

Capital and Dividends

On October 20, 1999, our Board of Directors authorized a buyback to repurchase up to 3.3 million shares of Charter One common stock in a program of open market or privately negotiated purchases. As of March 31, 2000, we had purchased all of the shares authorized under this buyback for a total cost of $68.6 million. The repurchased shares are reserved in treasury for later reissue in connection with employee benefit plans.

On April 26, 2000, our Board of Directors authorized a new buyback to repurchase up to 7.5 million shares of Charter One common stock in a program of open market purchases or privately negotiated transactions. The repurchased shares will be reserved in treasury for later reissue in connection with future stock dividends as well as employee benefit plans. As of June 30, 2000, we had purchased all of the shares authorized under this buyback for a total cost of $170.7 million.

On July 18, 2000, the Board of Directors of Charter One authorized management to repurchase up to 10% of the Company’s outstanding common stock in a buyback program. The repurchased shares will be reserved in treasury for later reissue in connection with future stock dividends as well as employee benefit plans. As of August 4, 2000, we had purchased 2,854,400 shares authorized under this buyback for a total cost of $62.5 million.

As a financial holding company, Charter One is subject to regulation by the Federal Reserve Board (“FRB”) under the Bank Holding Company Act of 1956 as amended, and the regulations of the FRB, including various capital requirements. Charter One 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 (“OTS”), 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 Charter One 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 the institution to meet specific capital adequacy guidelines and the regulatory framework for prompt corrective action that involve quantitative measures of an institution’s 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,

19

Table of Contents

and other factors.

The actual regulatory capital ratios calculated for Charter One, Charter One 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 15)

                                                   
6/30/00
To Be “Well Capitalized”
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Charter One:
Total capital to risk-weighted assets $ 2,392,320 10.23 % $ 1,870,205 >8.00 % $ 2,337,756       >10.00 %
Tier 1 capital to risk-weighted assets 2,203,264 9.42 935,103 >4.00 1,402,654         >6.00
Tier 1 capital to average assets 2,203,264 7.10 1,240,594 >4.00 1,550,742         >5.00
Charter One Commercial:
Total capital to risk-weighted assets 42,614 46.96 7,259 >8.00 9,074 >10.00
Tier I capital to risk-weighted assets 42,614 46.96 3,630 >4.00 5,445 >6.00
Tier I capital to average assets 42,614 12.67 13,449 >4.00 16,812 >5.00
Charter One Bank, F.S.B.:
Total capital to risk-weighted assets 2,317,316 10.38 1,785,514 >8.00 2,231,893 >10.00
Tier I capital to risk-weighted assets 1,814,089 8.13 N/A N/A 1,339,136 >6.00
Core capital to adjusted tangible assets 1,832,567 5.72 1,281,917 >4.00 1,602,396 >5.00
Tangible capital to tangible assets 1,831,897 5.72 480,709 >1.50 N/A N/A
                                                   
12/31/99
To Be “Well Capitalized”
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Charter One:
Total capital to risk-weighted assets $ 2,404,336 11.16 % $ 1,722,825 >8.00 % $ 2,153,532 >10.00 %
Tier I capital to risk-weighted assets 2,213,534 10.28 861,413 >4.00 1,292,119 >6.00
Tier I capital to average assets 2,213,534 7.05 1,255,645 >4.00 1,569,567 >5.00
Charter One Commercial:
Total capital to risk-weighted assets 41,337 40.92 8,081 >8.00 10,101 >10.00
Tier I capital to risk-weighted assets 41,337 40.92 4,040 >4.00 6,061 >6.00
Tier I capital to average assets 41,337 13.66 12,104 >4.00 15,129 >5.00
Charter One Bank, F.S.B.:
Total capital to risk-weighted assets 2,115,163 10.00 1,691,462 >8.00 2,114,327 >10.00
Tier I capital to risk-weighted assets 1,605,506 7.59 N/A N/A 1,268,596 >6.00
Core capital to adjusted tangible assets 1,619,927 5.10 1,270,858 >4.00 1,588,572 >5.00
Tangible capital to tangible assets 1,618,856 5.10 476,566 >1.50 N/A N/A

As of December 31, 1999, the most recent notification from the OTS categorized Charter One Bank, F.S.B. as “well capitalized” under the regulatory framework for Prompt Corrective Action. As of December 31, 1999, the most recent notification from the FRB categorized Charter One as “well capitalized” under the regulatory framework for Prompt Corrective Action. To be categorized as well capitalized, Charter One and Charter One Bank, F.S.B. 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 Charter One’s or Charter One Bank, F.S.B.’s respective category. Charter One Commercial’s capital ratios exceed the minimum required to be well capitalized. Management does not know of any reasons why Charter One Commercial would not be considered well capitalized; however, as of June 30, 2000, Charter One Commercial had not received a classification from its respective regulator.

20

Table of Contents

Management believes that, as of June 30, 2000, Charter One, Charter One 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 16)

                                           
Three Months Ended
6/30/00 3/31/00 12/31/99 9/30/99 6/30/99
Market price of common stock:
High $ 27.00 $ 21.00 $ 26.44 $ 26.91 $ 30.60
Low 18.13 15.25 17.50 21.08 25.18
Close 23.00 21.00 19.13 23.13 26.49
Dividends declared and paid .18 .16 .16 .16 .15

ITEM 3. Quantitative and Qualitative Disclosure About Market Risk

A comprehensive qualitative and quantitative analysis regarding market risk was disclosed in our December 31, 1999 Form 10-K. The assumptions used in our model have been updated as of June 30, 2000. The table below indicates the estimated impact on net income under the various interest rate scenarios as a percentage of base case earnings projections.

                   
Changes in Estimated Percentage Change
Interest Rates in Future Net Income
(basis points) 12 Months 24 Months
Base Case
+200 Over one year (11.78 )% (15.64 )%
+100 Over one year (5.89 ) (7.61 )
-100 Over one year 5.62 7.11
-200 Over one year 10.22 12.07

Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and management strategies.

PART II – OTHER INFORMATION

ITEM 5. Other Information

Cash Dividend

On July 18, 2000, the Board of Directors of Charter One declared a regular quarterly cash dividend of 18 cents per common share. The dividend is payable August 21, 2000 to shareholders of record as of August 7, 2000.

Stock Dividend

On July 18, 2000, the Board of Directors of Charter One declared a 5% stock dividend which will be distributed September 30, 2000 to shareholders of record on September 14, 2000.

Share Repurchase

On July 18, 2000, the Board of Directors of Charter One authorized management to repurchase up to 10% of the Company’s outstanding common stock in a buyback program. The repurchased shares will be reserved in treasury for later reissue in connection with future stock dividends as well as employee benefit plans.

21

Table of Contents

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 — None

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 9, 2000 /s/ Richard W. Neu
Richard W. Neu
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)

22



© 2022 IncJournal is not affiliated with or endorsed by the U.S. Securities and Exchange Commission