-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JNruczEfqTiDxpkUpvR9LRk1YJPiaYx1XVJqXStonKAZZpHptX2yA9toGt66XSZU 94PGBM0Z0UCNQowDwv8PRg== 0000950152-97-005756.txt : 19970812 0000950152-97-005756.hdr.sgml : 19970812 ACCESSION NUMBER: 0000950152-97-005756 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970811 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHARTER ONE FINANCIAL INC CENTRAL INDEX KEY: 0000819692 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 341567092 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16311 FILM NUMBER: 97655350 BUSINESS ADDRESS: STREET 1: 1215 SUPERIOR AVE CITY: CLEVELAND STATE: OH ZIP: 44114 BUSINESS PHONE: 2165665300 MAIL ADDRESS: STREET 1: 1215 SUPERIOR AVENUE STREET 2: 1215 SUPERIOR AVENUE CITY: CLEVELAND STATE: OH ZIP: 44114 10-Q 1 CHARTER ONE FINANCIAL, INC. 10-Q 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-16311 CHARTER ONE FINANCIAL, INC. --------------------------- (exact name of registrant as specified in its charter) DELAWARE 34-1567092 -------- ---------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 1215 SUPERIOR AVENUE, CLEVELAND, OHIO 44114 - ------------------------------------- ----- (Address of principal executive offices) (Zip Code) (216) 566-5300 -------------- (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months ( or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of the registrant's sole class of common stock as of August 4, 1997 was 46,221,061. ================================================================================ 2 TABLE OF CONTENTS ITEM NUMBER PAGE - --------- ----- PART I - FINANCIAL INFORMATION 1. Financial Statements Consolidated Statements of Financial Condition -- June 30, 1997 and December 31, 1996......................... 1 Consolidated Statements of Income -- Three and six months ended June 30, 1997 and 1996........... 2 Consolidated Statement of Changes in Shareholders' Equity -- Six months ended June 30, 1997.............................. 3 Consolidated Statements of Cash Flows -- Six months ended June 30, 1997 and 1996..................... 4 Notes to Consolidated Financial Statements.................... 5 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 7 PART II - OTHER INFORMATION 5. Other Information............................................... 26 6. Exhibits and Reports on Form 8-K................................ 26 Signatures............................................................... 27 i 3 PART I - FINANCIAL CONDITION ITEM 1. FINANCIAL STATEMENTS CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)
JUNE 30, 1997 DECEMBER 31, 1996 --------------- ------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS Cash and deposits with banks.......................................... $ 120,378 152,301 Federal funds sold and other.......................................... 85,000 118,003 ------------ ------------ Total cash and cash equivalents.................................. 205,378 270,304 Investment securities available for sale, at fair value............... 359,880 243,632 Mortgage-backed securities: Available for sale, at fair value................................... 1,071,230 1,070,705 Held to maturity (fair value of $3,381,893 and $3,652,547).......... 3,341,684 3,633,369 Loans and leases, net................................................. 9,015,824 8,100,342 Federal Home Loan Bank stock.......................................... 235,686 215,815 Premises and equipment................................................ 120,749 114,145 Accrued interest receivable........................................... 83,207 77,193 Equipment on operating leases......................................... 16,954 22,599 Real estate owned..................................................... 5,196 7,337 Goodwill.............................................................. 62,163 64,496 Other assets.......................................................... 42,127 73,904 ------------ ------------ Total assets..................................................... $ 14,560,078 13,893,841 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Checking accounts................................................... $ 899,042 859,438 Money market accounts............................................... 1,344,987 1,344,973 Savings accounts.................................................... 827,404 868,361 Certificates of deposit............................................. 4,706,142 4,768,425 ------------ ------------ Total deposits................................................... 7,777,575 7,841,197 Federal Home Loan Bank advances....................................... 3,648,416 3,194,333 Reverse repurchase agreements......................................... 1,698,990 1,549,778 Other borrowings...................................................... 212,761 211,180 Advance payments by borrowers for taxes and insurance................. 51,944 39,346 Accrued interest payable.............................................. 41,870 35,298 Accrued expenses and other liabilities................................ 154,911 100,985 ------------ ------------ Total liabilities................................................ 13,586,467 12,972,117 ------------ ------------ Shareholders' equity: Preferred stock - $.01 par value per share; 20,000,000 shares authorized and unissued........................................... - - Common stock - $.01 par value per share; 180,000,000 shares authorized; 47,472,486 shares issued.............................. 475 475 Additional paid-in capital.......................................... 321,991 321,991 Retained earnings................................................... 698,011 637,356 Less 1,286,520 and 1,029,763 shares of common stock held in treasury at cost.................................................. (52,726) (39,615) Net unrealized gain on securities, net of tax expense of $3,158 and $812................................................ 5,860 1,517 ------------ ------------ Total shareholders' equity................................... 973,611 921,724 ------------ ------------ Total liabilities and shareholders' equity................... $ 14,560,078 13,893,841 ============ ============
See Notes to Consolidated Financial Statements 1 4 CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, -------------------------- -------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INTEREST INCOME: Loans and leases..................................... $ 171,976 150,144 335,958 292,335 Mortgage-backed securities: Available for sale................................. 18,556 19,352 36,737 39,909 Held to maturity................................... 61,299 72,266 125,140 141,316 Investment securities available for sale............. 5,629 5,278 10,348 11,050 Other interest-earning assets........................ 5,424 4,640 10,494 10,118 ------------ ------------ ----------- ------------ Total interest income............................. 262,884 251,680 518,677 494,728 ------------ ------------ ----------- ------------ INTEREST EXPENSE: Deposits............................................. 85,924 76,269 170,968 155,797 Federal Home Loan Bank advances...................... 50,129 45,990 95,055 91,117 Other borrowings..................................... 28,864 30,514 57,161 56,905 ------------ ------------ ----------- ------------ Total interest expense............................ 164,917 152,773 323,184 303,819 ------------ ------------ ----------- ------------ Net interest income............................... 97,967 98,907 195,493 190,909 Provision for loan and lease losses.................... 260 1,000 480 2,000 ------------ ------------ ----------- ------------ Net interest income after provision for loan and lease losses....................... 97,707 97,907 195,013 188,909 ------------ ------------ ----------- ------------ OTHER INCOME: Loan servicing fees.................................. 2,792 2,763 5,366 5,022 Service fees and other charges....................... 12,987 8,235 23,307 15,194 Leasing operations................................... 1,445 1,719 3,533 3,507 Net gains (losses): Loans.............................................. 316 121 439 311 Mortgage-backed securities......................... - (339) - (282) Investment securities.............................. - (2,025) - (2,025) Other gains........................................ 15 128 (21) 458 Other................................................ 332 (37) 444 219 ------------ ------------ ----------- ------------ Total other income................................ 17,887 10,565 33,068 22,404 ------------ ------------ ----------- ------------ ADMINISTRATIVE EXPENSES: Compensation and employee benefits................... 23,359 22,613 47,419 44,650 Net occupancy and equipment.......................... 7,449 6,380 14,782 12,784 Federal deposit insurance premiums................... 1,292 4,094 2,551 8,083 Amortization of goodwill............................. 1,114 190 2,227 379 Other administrative expenses........................ 14,114 12,787 27,046 24,751 ------------ ------------ ----------- ------------ Total administrative expenses..................... 47,328 46,064 94,025 90,647 ------------ ------------ ----------- ------------ Income before federal income taxes..................... 68,266 62,408 134,056 120,666 Federal income taxes................................... 22,535 21,038 44,239 40,846 ------------ ------------ ----------- ------------ Net income........................................ $ 45,731 41,370 89,817 79,820 ============ ============ =========== ============ Primary earnings per common and common equivalent share(1)............................................. $ .96 .86 1.89 1.65 ============ ============ =========== ============ Average common and common equivalent shares outstanding(1)................................ 47,501,523 48,343,411 47,563,623 48,302,064 ============ ============ =========== ============ Cash dividends declared per share(1)................... $ .25 .21 .48 .40 ============ ============ =========== ============ - --------------------------- (1) Restated to reflect the 5% stock dividend issued September 30, 1996.
See Notes to Consolidated Financial Statements 2 5 CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited)
TOTAL ADDITIONAL NET UNREALIZED SHARE- COMMON PAID-IN RETAINED TREASURY GAIN HOLDERS' STOCK CAPITAL EARNINGS STOCK ON SECURITIES EQUITY --------- --------- --------- -------- ------------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Balance, January 1, 1997........ $ 475 321,991 637,356 (39,615) 1,517 921,724 Purchase of 535,000 shares of treasury stock........... - - - (23,999) - (23,999) Treasury stock reissued in connection with stock options exercised, 278,243 shares...................... - - (6,955) 10,888 - 3,933 Dividends paid ($.48 per share).................. - - (22,207) - - (22,207) Change in net unrealized gain on securities, net of tax expense..................... - - - - 4,343 4,343 Net income.................... - - 89,817 - - 89,817 ---- --------- --------- -------- ------ --------- Balance, June 30, 1997.......... $ 475 321,991 698,011 (52,726) 5,860 973,611 ==== ========= ========= ======== ====== =========
See Notes to Consolidated Financial Statements 3 6 CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
SIX MONTHS ENDED JUNE 30, ---------------------------- 1997 1996 ---- ---- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income......................................................................... $ 89,817 79,820 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses.............................................. 480 2,000 Net gains (losses)............................................................... (418) 1,538 Accretion of discounts, amortization of premiums, amortization of goodwill and depreciation, net.................................. 14,471 7,305 Origination of real estate loans held for sale................................... (17,777) (17,467) Proceeds from sale of loans held for sale........................................ 18,216 17,778 Other............................................................................ 80,630 30,876 ---------- ----------- Net cash provided by operating activities...................................... 185,419 121,850 ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Net principal disbursed on loans and leases........................................ (913,864) (1,023,020) Proceeds from principal repayments and maturities of: Mortgage-backed securities held to maturity...................................... 291,992 423,325 Mortgage-backed securities available for sale.................................... 3,642 10,061 Investment securities available for sale......................................... 10,166 123,238 Sales of mortgage-backed securities available for sale............................. - 323,662 Sales of investment securities available for sale.................................. - 77,975 Purchases of: Mortgage-backed securities held to maturity...................................... - (569,577) Investment securities available for sale......................................... (126,000) (141,525) Federal Home Loan Bank stock..................................................... (15,391) (15,819) Equipment on operating lease..................................................... (3,201) (4,570) Net cash and cash equivalents received in connection with branch acquisition....... - 731,170 Other.............................................................................. (9,576) (3,758) ---------- ----------- Net cash used in investing activities............................................ (762,232) (68,838) ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings................................... 249,144 (741,954) Proceeds from long-term borrowings................................................. 1,059,845 2,161,133 Repayments of long-term borrowings................................................. (704,143) (1,879,735) Increase (decrease) in deposits.................................................... (63,284) 8,638 Increase in advance payments by borrowers for taxes and insurance......................................................................... 12,598 18,048 Payment of dividends on common stock............................................... (22,207) (19,380) Purchase of treasury stock, net of options exercised............................... (20,066) (11,166) Common shares issued............................................................... - 1,331 ---------- ----------- Net cash provided by (used in) financing activities.................................. 511,887 (463,085) ---------- ----------- Net decrease in cash and cash equivalents............................................ (64,926) (410,073) Cash and cash equivalents, beginning of the period................................... 270,304 658,371 ---------- ----------- Cash and cash equivalents, end of the period......................................... $ 205,378 248,298 ========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest on deposits and borrowings.................................. $ 316,950 326,291 Cash paid for income taxes......................................................... 25,000 29,000 SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES: Transfers from loans to real estate owned.......................................... 1,130 1,192 Loans exchanged for mortgage-backed securities..................................... - 510,435
See Notes to Consolidated Financial Statements 4 7 CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Charter One Financial, Inc. ("the Company" or "Charter One") Notice of 1997 Annual Meeting, Proxy Statement and Annual Financial Report. The interim financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. Such adjustments are of a normal recurring nature. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year. 2. In April 1997, the boards of directors of Charter One Financial, Inc. and Haverfield Corporation, the holding company of Home Bank, F.S.B. entered into a definitive agreement to merge in a stock-for-stock exchange. Home Bank, headquartered in Cleveland, Ohio, is a federally chartered savings and loan with $346 million in assets ($271 million in deposits) and 10 branch offices throughout the Cleveland area. Terms of the agreement call for the tax-free exchange of $27.00 in Charter One common stock for each of Haverfield's common shares or a total consideration of approximately $53.7 million. The price will stay fixed at $27.00 per Haverfield share if Charter One's average stock price remains between $41.09 and $55.60 per share during a 20-day pricing period ending five business days before closing the transaction. The merger, which would be accounted for as a purchase, is expected to close near the end of the third quarter of 1997. Already approved by the boards of directors of both companies, the transaction requires the approvals of the Office of Thrift Supervision and Haverfield shareholders. 3. In May 1997, the boards of directors of Charter One Financial, Inc. and RCSB Financial, Inc., the holding company of Rochester Community Savings Bank, entered into a definitive agreement to enter into a strategic alliance through a stock-for-stock exchange. Rochester Community Savings Bank, headquartered in Rochester, New York, is a state-chartered savings bank with $4 billion in assets ($2.4 billion in deposits) and 38 branch offices in Rochester and Buffalo. Terms of the agreement call for a tax-free exchange of shares at a fixed exchange ratio of .91 shares in Charter One common stock for each of RCSB's common shares. Based on current RCSB shares, it is expected that approximately 13.6 million new shares of Charter One stock will be issued in conjunction with the merger, bringing the initial value of the transaction to $635 million and the pro forma market capitalization of the combined company to $2.9 billion. The merger, which would be accounted for as a purchase, is expected to close in the fourth quarter of 1997. Already approved by the boards of directors of both companies, the transaction requires the approvals of the Office of Thrift Supervision and each company's shareholders. In addition, RCSB has granted Charter One an option to purchase shares equal to 19.9% of RCSB's outstanding common stock under certain conditions. 4. On January 1, 1997 the Company adopted SFAS No. 125. SFAS No. 125 amends portions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," amends and extends to all servicing assets and liabilities the accounting standards for mortgage servicing rights now in SFAS No. 65, and supersedes SFAS No. 122. SFAS No. 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. Those standards are based upon consistent application of a financial components approach that focuses on control. The statement also defines accounting treatment for servicing assets and other retained interests in the assets that are transferred. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. The adoption of this statement has not had a material effect on the Company's financial condition or results of operations. The FASB has recently issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125," that defers the effective date of certain provisions of SFAS No. 125 related to secured borrowings and collateral, repurchase agreements, dollar rolls, securities lending, and similar transactions until after December 31, 1997. Management has not completed the process of evaluating this statement and therefore has not determined the impact, if any, that adopting this statement will have on the financial position and results of operations. 5 8 5. In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock. This statement simplifies the standards for computing earnings per share previously found in Accounting Principles Board Opinion No. 15, "Earnings Per Share," and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures. This Statement is effective for financial statements for both interim and annual periods ending after December 15, 1997. The following presentation illustrates pro forma basic and diluted earnings per share based on the provisions of SFAS No. 128:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- -------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Weighted average number of common shares outstanding used in basic earnings per share calculation.......................... 46,215,423 47,349,145 46,269,971 47,314,545 Add common stock equivalents for shares issuable under Stock Option Plan(1)............ 1,236,955 946,475 1,244,491 938,838 ----------- ------------ ----------- ----------- Weighted average number of shares outstanding adjusted for common stock equivalent..................................... 47,452,378 48,295,620 47,514,462 48,253,383 =========== ============ =========== =========== Net income...................................... $ 45,731 41,370 89,817 79,820 Basic earnings per share........................ .99 .87 1.94 1.69 Diluted earnings per share...................... .96 .86 1.89 1.65 Disclosure of earnings per share calculated in accordance with Accounting Principles Board Opinion No. 15, "Earnings Per Share" is contained in Exhibit 11. --------------------------- (1) Additional shares issuable were derived under the "treasury stock method" using the average market price during the period.
6. In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure." This statement establishes standards for disclosing information about an entity's capital structure. It supersedes specific disclosure requirements of APB Opinions No. 10, "Omnibus Opinion-1966," and No. 15, "Earnings Per Share," and FASB Statement No. 47, "Disclosure of Long-Term Obligations," and consolidates them in this statement for ease of retrieval and for greater visibility to nonpublic entities. This statement is effective for financial statements for periods ending after December 15, 1997. It contains no changes in disclosure requirements for entities that were previously subject to the requirements of Opinions 10 and 15 and Statement 47 and, therefore, is not expected to have a significant impact on the financial condition or results of operations of the Company. 7. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, losses) in a full set of general-purpose financial statements. This statement is effective for fiscal years beginning after December 15, 1997. 8. Certain items in the consolidated financial statements for 1996 have been reclassified to conform to the 1997 presentation. 6 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HOLDING COMPANY BUSINESS GENERAL Charter One Financial, Inc. ("Charter One" or the "Company") is a unitary savings and loan holding company incorporated in Delaware and is the parent company of Charter Michigan Bancorp, Inc. which owns all of the outstanding capital stock of Charter One Bank, F.S.B. ("Charter One Bank" or the "Bank"), a federally chartered stock savings bank headquartered in Cleveland, Ohio. The bank has 175 branch locations: 95 branches in Ohio operating under the name Charter One Bank and 80 branches in Michigan under the name First Federal of Michigan ("First Federal"). RESULTS OF OPERATIONS PERFORMANCE OVERVIEW The Company reported net income of $45.7 million, or $0.96 per share, for the three months ended June 30, 1997. This was a $4.4 million, or 10.5% increase over the net income for the second quarter of 1997 which was $41.4 million, or $0.86 per share. The primary reason for this improvement was due to a $4.8 million, or 57.7%, increase in service fees and other charges. In addition, the Company experienced increases in gains on sale and lower deposit insurance premium expense which was partially offset by increases in administrative expenses. Net income for the six months ended June 30, 1997 was $89.8 million, or $1.89 per share, as compared to $79.8 million, or $1.65 per share, for the 1996 period. This $10.0 million, or 12.5%, increase in net income was primarily attributable to increases in recurring fee income, net interest income and lower deposit insurance premiums which were partially offset by increases in administrative expenses. QUARTERLY EARNINGS SUMMARY (Figure 1)
THREE MONTHS ENDED ------------------------------------------------------- 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96 ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Net interest income..................................... $ 97,967 97,526 95,304 97,179 98,907 Provision for loan and lease losses..................... (260) (220) (1,000) (1,001) (1,000) Other income, excluding gains and losses...................................... 17,556 15,094 16,257 15,046 12,680 Administrative expenses, excluding the SAIF assessment................................... (47,328) (46,697) (49,234) (47,885) (46,064) ------- ------- ------- ------- ------- Pretax core earnings................................ 67,935 65,703 61,327 63,339 64,523 Gains and losses, net................................... 331 87 3,502 (71) (2,115) Federal deposit insurance special assessment............................................ - - - (56,258) - ------- ------- ------- ------- ------- Income before federal income taxes.................. 68,266 65,790 64,829 7,010 62,408 Federal income taxes.................................... 22,535 21,704 21,958 1,979 21,038 ------- ------- ------- ------- ------- Net income............................................ $ 45,731 44,086 42,871 5,031 41,370 ======= ======= ======= ======= ======= Primary earnings per common and common equivalent share...................................... $ .96 .93 .90 .11 .86 ======= ======= ======= ======= =======
The increase in earnings in the second quarter of 1997 contributed to an 18.85% annualized return on average equity and a 1.28% annualized return on average assets. This compares to second quarter 1996 annualized returns of 17.80% and 1.22%, respectively. These annualized returns and other selected ratios are set forth in Figure 2. 7 10 SELECTED OPERATING RATIOS (Figure 2)
THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ------------------ 6/30/97 6/30/96 6/30/97 6/30/96 ------- ------- ------- ------- Annualized returns: Return on average assets......................................... 1.28% 1.22% 1.27% 1.21% Return on average equity......................................... 18.85 17.80 18.61 17.55 Average equity to average assets................................. 6.79 6.88 6.84 6.87 Annualized operating ratios: Net interest income to administrative expenses................... 207.00 214.72 207.92 210.61 Administrative expenses to average assets........................ 1.32 1.36 1.33 1.37 Efficiency ratio................................................. 40.00 41.11 40.24 42.01
NET INTEREST INCOME Net interest income is the principal source of earnings for the Company. It is affected by a number of factors including the level, pricing and maturity of interest-earning assets and interest-bearing liabilities, as well as interest rate fluctuations and asset quality. Figure 3 sets forth information concerning Charter One's interest-earning assets, interest-bearing liabilities, net interest income, interest rate spreads and net yield on average interest-earning assets during the periods indicated (including fees which are considered adjustments to yields). Average balance calculations are based on daily balances. 8 11 AVERAGE BALANCES, INTEREST RATES AND YIELDS/COSTS (Figure 3)
THREE MONTHS ENDED JUNE 30, -------------------------------------------------------------------------- 1997 1996 ---------------------------------- -------------------------------------- AVG. AVG. AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST COST BALANCE INTEREST COST ----------- --------- ------- ----------- --------- -------- (DOLLARS IN THOUSANDS) Interest-earning assets: Loans and leases(1)................ $ 8,792,803 $ 171,976 7.83% $ 7,403,685 $ 150,144 8.11% Mortgage-backed securities: Available for sale............... 1,079,308 18,556 6.88 1,126,842 19,352 6.87 Held to maturity................. 3,397,791 61,299 7.22 4,010,236 72,266 7.21 Investment securities available for sale................ 321,973 5,629 6.99 329,382 5,278 6.41 Other interest-earning assets(2)......................... 312,053 5,424 6.88 283,354 4,640 6.55 ----------- --------- ----------- --------- Total interest-earning assets... 13,903,928 262,884 7.56 13,153,499 251,680 7.65 --------- --------- Allowance for loan losses.......... (65,841) (65,576) Noninterest-earning assets(3)...... 451,453 436,940 ----------- ----------- Total assets.................. $ 14,289,540 $ 13,524,863 =========== =========== Interest bearing liabilities(4): Deposits: Checking accounts................ $ 890,782 2,460 1.11 $ 746,249 2,381 1.28 Savings accounts................. 836,019 4,695 2.25 881,037 5,358 2.43 Money market accounts............ 1,360,903 11,600 3.42 968,655 7,451 3.08 Certificates of deposit.......... 4,686,807 67,169 5.75 4,391,378 61,079 5.56 ----------- --------- ----------- --------- Total deposits................. 7,774,511 85,924 4.43 6,987,319 76,269 4.37 ----------- --------- ----------- --------- FHLB advances...................... 3,452,866 50,129 5.80 3,301,927 45,990 5.57 Other borrowings................... 1,883,821 28,864 6.07 2,135,279 30,514 5.72 ----------- --------- ----------- --------- Total borrowings................ 5,336,687 78,993 5.90 5,437,206 76,504 5.63 ----------- --------- ----------- --------- Total interest-bearing liabilities.................... 13,111,198 164,917 5.03 12,424,525 152,773 4.92 --------- --------- Non interest-bearing liabilities... 208,005 170,463 ----------- ----------- Total liabilities............... 13,319,203 12,594,988 Shareholders' equity................. 970,337 929,875 ----------- ----------- Total liabilities and shareholders' equity........... $ 14,289,540 $ 13,524,863 =========== =========== Net interest income.................. $ 97,967 $ 98,907 ========= ========= Interest rate spread................. 2.53 2.73 Net yield on average interest- earning assets(5)................... 2.82 3.01 Average interest-earning assets to average interest-bearing liabilities......................... 106.05% 105.87% - --------------------------- (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 12
SIX MONTHS ENDED JUNE 30, -------------------------------------------------------------------------- 1997 1996 ---------------------------------- -------------------------------------- AVG. AVG. AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST COST BALANCE INTEREST COST ----------- --------- ------- ----------- --------- -------- (DOLLARS IN THOUSANDS) Interest-earning assets: Loans and leases(1)................ $ 8,562,410 $ 335,958 7.86% $ 7,147,407 $ 292,335 8.18% Mortgage-backed securities: Available for sale............... 1,080,936 36,737 6.80 1,144,080 39,909 6.98 Held to maturity................. 3,468,466 125,140 7.22 3,930,349 141,316 7.19 Investment securities available for sale................ 296,958 10,348 6.97 339,309 11,050 6.51 Other interest-earning assets(2)......................... 307,285 10,494 6.79 308,768 10,118 6.55 ----------- --------- ----------- --------- Total interest-earning assets... 13,716,055 518,677 7.57 12,869,913 494,728 7.69 --------- --------- Allowance for loan losses.......... (65,869) (65,781) Noninterest-earning assets(3)...... 470,889 427,864 ----------- ----------- Total assets.................. $ 14,121,075 $ 13,231,996 =========== =========== Interest bearing liabilities(4): Deposits: Checking accounts................ $ 874,088 4,841 1.12 $ 721,374 4,683 1.30 Savings accounts................. 844,723 9,500 2.27 930,603 11,210 2.41 Money market accounts............ 1,357,263 23,415 3.48 910,113 14,320 3.15 Certificates of deposit.......... 4,717,405 133,212 5.69 4,414,175 125,584 5.69 ----------- --------- ----------- --------- Total deposits................. 7,793,479 170,968 4.42 6,976,265 155,797 4.47 ----------- --------- ----------- --------- FHLB advances...................... 3,292,825 95,055 5.79 3,243,958 91,117 5.62 Other borrowings................... 1,894,106 57,161 6.01 1,932,251 56,905 5.89 ----------- --------- ----------- --------- Total borrowings................ 5,186,931 152,216 5.87 5,176,209 148,022 5.72 ----------- --------- ----------- --------- Total interest-bearing liabilities.................... 12,980,410 323,184 5.00 12,152,474 303,819 5.00 --------- --------- Non interest-bearing liabilities... 175,411 169,959 ----------- ----------- Total liabilities............... 13,155,821 12,322,433 Shareholders' equity................. 965,254 909,563 ----------- ----------- Total liabilities and shareholders' equity........... $ 14,121,075 $ 13,231,996 =========== =========== Net interest income.................. $ 195,493 $ 190,909 ========= ========= Interest rate spread................. 2.57 2.69 Net yield on average interest- earning assets(5)................... 2.85 2.97 Average interest-earning assets to average interest-bearing liabilities......................... 105.67% 105.90% - --------------------------- (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 13 Figure 4 sets forth the changes in Charter One's interest income and interest expense resulting from changes in interest rates and the volume of interest-earning assets and interest-bearing liabilities. Changes not solely attributable to volume or rate have been allocated in proportion to the changes due to volume and rate. RATE/VOLUME ANALYSIS (Figure 4)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------------ ----------------------------------- 1997 V. 1996 1997 V. 1996 ------------------------------------ ----------------------------------- INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO -------------------------- -------------------------- RATE VOLUME TOTAL RATE VOLUME TOTAL ---- ------ ----- ---- ------ ----- (DOLLARS IN THOUSANDS) Interest income: Loans and leases.................. $ (5,228) 27,060 21,832 (11,413) 55,036 43,623 Mortgage-backed securities: Available for sale.............. 21 (817) (796) (1,008) (2,164) (3,172) Held to maturity................ 82 (11,049) (10,967) 490 (16,666) (16,176) Investment securities available for sale............... 466 (115) 351 898 (1,600) (702) Other interest-earning assets........................... 295 489 784 424 (48) 376 -------- -------- ------- -------- -------- -------- Total......................... (4,364) 15,568 11,204 (10,609) 34,558 23,949 -------- -------- ------- -------- -------- -------- Interest expense: Checking accounts................. (180) 259 79 (369) 527 158 Savings accounts.................. (399) (264) (663) (719) (991) (1,710) Money market accounts............. 877 3,272 4,149 1,503 7,592 9,095 Certificates of deposit........... 1,898 4,192 6,090 (936) 8,564 7,628 Federal Home Loan Bank advances ................... 1,543 2,596 4,139 2,546 1,392 3,938 Other borrowings.................. 2,032 (3,682) (1,650) 1,371 (1,115) 256 -------- -------- ------- -------- -------- -------- Total......................... 5,771 6,373 12,144 3,396 15,969 19,365 -------- -------- ------- -------- -------- -------- Change in net interest income............................. $ (10,135) 9,195 (940) (14,005) 18,589 4,584 ======== ======== ======= ======== ======== ========
Net interest income for the second quarter of 1997 was $98.0 million, a decrease of $940,000 or 1.0%, as compared to the second quarter of 1996. The primary reason for this decrease was due to a narrowing of interest rate spreads. The yield on interest-earning assets decreased to 7.56% for the three months ended June 30, 1997 as compared to 7.65% for the second quarter of 1996, primarily due to the decline in the yield on loans. New loan volumes were at lower rates than the average yield on the loan portfolio due to lower market interest rates and increases in variable rate loan production. The cost of the interest-bearing liabilities was 11 basis points higher in the second quarter of 1997 as compared to the same period in 1996. The increased cost of interest-bearing liabilities coupled with the decline in the yield on interest-earning assets caused the interest rate spread for the second quarter of 1997 to decline by 20 basis points to 2.53%. The net yield on interest-earning assets declined by nineteen basis points to 2.82% during the second quarter of 1997 as compared to the second quarter of 1996. This decline caused net interest income to decrease by $10.1 million. This decrease was almost entirely offset by higher balances of interest-earning assets and interest-bearing liabilities. The volume increase caused net interest income to increase by $9.2 million. While the yield on interest-earning assets was declining, growth in interest-earning assets, mainly loans and leases, caused interest income to increase by $15.6 million. Due to high volumes of loan and lease originations in the second half of 1996 and the first half of 1997, the average balance of loans and leases was $1.4 billion higher during the second quarter of 1997 than in the same period in 1996. This increase in the average balance of loans was the primary reason the average balance of interest-earning assets in the second quarter of 1997 was $750.4 million higher than in the second quarter of 1996. The decrease in the remaining components of interest-earning assets helped fund the loan and lease growth. The primary funding for the remaining growth in the loan and lease portfolio came from increases in interest-bearing liabilities. The average balance of interest-bearing liabilities, primarily savings deposits, increased $787.2 million, as a result of the First Nationwide branch and deposit acquisition. On June 28, 1996 the Bank acquired 21 branch offices and $796.7 million in deposits in the Detroit Metropolitan area from First Nationwide Bank. For the six months ended June 30, 1997, net interest income was $195.5 million, an increase of $4.6 million, or 2.4%, over the comparable period in 1996. This increase was primarily attributable to increased volumes of 11 14 interest-earning assets and interest-bearing liabilities. Increases in the average balance of loans and leases caused the average balance of interest-earning assets to increase by $846.1 million. The average balance of interest-bearing liabilities increased by $827.9 for the first six months of 1997 as compared to the same period in 1996. This increase was primarily due to increases in the average balance of deposits as a result of the First Nationwide branch and deposit acquisition at June 28, 1996. The increases in the balances of interest-earning assets and interest-bearing liabilities caused net interest income to increase by $18.6 million. This was partially offset by a declining interest rate spread. The interest rate spread was 2.57% for the first six months of 1997 as compared to 2.69% for the first six months of 1996. This caused net interest income to decline by $14.0 million for the first half of 1997 as compared to the same period in 1996. The decline in the interest rate spread was primarily due to the yield on interest-earning assets decreasing by 12 basis points to 7.57%. This decrease was primarily attributable to new loan volumes coming in at rates lower than the average portfolio yield due to lower market interest rates and increased variable-rate loan production. Figure 5 sets forth the Company's yields and costs at period end for the dates indicated. YIELDS AND COSTS AT END OF PERIOD (Figure 5)
JUNE 30, 1997 DECEMBER 31, 1996 --------------- ------------------ (DOLLARS IN THOUSANDS) Weighted average yield: Loans and leases...................................................... 7.84% 7.96% Mortgage-backed securities............................................ 7.22 7.22 Investment securities................................................. 7.00 6.89 Other interest-earning assets......................................... 7.23 7.21 Total interest-earning assets......................................... 7.61 7.66 Weighted average cost(1): Deposits.............................................................. 4.44 4.48 Federal Home Loan Bank advances....................................... 5.87 5.81 Other borrowings...................................................... 6.19 6.15 Total interest-bearing liabilities.................................... 5.08 5.04 Interest rate spread.................................................... 2.53 2.62 Net yield on interest-earning assets.................................... 2.84 2.87 Interest-earning assets................................................. $14,180,673 $13,458,265 - --------------------------- (1) The costs of liabilities include the annualized effect of interest rate risk management instruments.
12 15 OTHER INCOME (Figure 6)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, -------------------------- ------------------------ 1997 1996 1997 1996 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Loan servicing fees........................................ $ 2,792 2,763 5,366 5,022 Service fees and other charges: Retail deposit account service charges and fees.......... 9,840 6,077 17,634 11,653 Fees on insurance, annuity, and mutual fund sales........ 2,561 1,431 4,695 2,167 Other branch service fees................................ 558 624 869 1,164 Miscellaneous............................................ 28 103 109 210 ------- ------- ------- ------- Total.................................................. 12,987 8,235 23,307 15,194 Leasing operations......................................... 1,445 1,719 3,533 3,507 Net gains: Real estate.............................................. 138 47 78 329 Mortgage-backed securities............................... - (339) - (282) Investment securities.................................... - (2,025) - (2,025) Loans.................................................... 316 121 439 311 Other.................................................... (123) 81 (99) 129 ------- ------- ------- ------- Total.................................................. 331 (2,115) 418 (1,538) Other...................................................... 332 (37) 444 219 ------- ------- ------- ------- Total................................................. $ 17,887 10,565 33,068 22,404 ======= ======= ======= =======
OTHER INCOME Other income was $17.9 million for the second quarter of 1997 as compared to $10.6 million for the same period in 1996. This $7.3 million, or 69.3% increase was primarily due to increases in recurring fee income as illustrated in Figure 6 above and due to losses on investment security sales in 1996. Increases in retail deposit account service charges and fees on insurance, annuity and mutual fund sales were the primary reasons that service fees and other charges increased. Retail deposit account service charges, primarily checking account service charges, increased $3.7 million primarily due to increases in the number of checking accounts as a result of the First Nationwide acquisition on June 28, 1996. The Bank acquired over 55,000 additional checking accounts in this acquisition. Fees on insurance, annuity and mutual fund sales increased as a result of expanded operations. The Bank has subsidiaries that increased the scope of their business to include mutual fund sales late in 1995. Those expanded operations together with introducing these products into the Michigan market in early 1996 has resulted in higher fee income during the current quarter as compared to the second quarter of 1996. The sale of investments in the Company's available for sale portfolio in the second quarter of 1996 which resulted in a net loss of $2.0 million was executed to reduce interest rate risk and purchase higher yielding investments. Other income was $33.1 million for the six months ended June 30, 1997 as compared to $22.4 million for the same period in 1996. This $10.7 million, or 47.6%, increase was also primarily attributable to increases in recurring fee income as illustrated in Figure 6 above and due to losses on investment security sales in 1996. The reasons for these changes are the same as those discussed in the previous paragraph relative to the quarter to quarter comparisons. 13 16 ADMINISTRATIVE EXPENSES (Figure 7)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, -------------------------- ------------------------ 1997 1996 1997 1996 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Compensation and employee benefits............................ $ 23,359 22,613 47,419 44,650 Net occupancy and equipment................................... 7,449 6,380 14,782 12,784 Federal deposit insurance premiums............................ 1,292 4,094 2,551 8,083 Amortization of goodwill...................................... 1,114 190 2,227 379 Other administrative expenses................................. 14,114 12,787 27,046 24,751 -------- -------- -------- ------- Administrative expenses..................................... $ 47,328 46,064 94,025 90,647 ======== ======== ======== ======= Number of full-time equivalent employees at end of period............................................ 2,626 2,499 2,626 2,499 Net interest income to administrative expenses................ 207.00% 214.72% 207.92% 210.61% Administrative expenses to average assets (annualized)........ 1.32% 1.36% 1.33% 1.37% Efficiency ratio.............................................. 40.00% 41.11% 40.24% 42.01%
ADMINISTRATIVE EXPENSES Administrative expenses were $47.3 million during the second quarter of 1997. This is a $1.3 million, or 2.7%, increase as compared to the second quarter of 1996 which had $46.1 million in administrative expenses. These increases were primarily due to the expansion of the Bank's branch network in 1996 and expanded subsidiary operations. On June 28, 1996 the Bank acquired 21 offices with $796.7 million in deposits from First Nationwide Bank. Four of these offices were closed as a result of overlapping market areas. Also, the Bank expanded subsidiary operations relating to insurance, annuity and mutual fund sales during 1996. The increases were partially offset by a reduction of $2.8 million in the federal deposit insurance premium expense. This reduction was due to the Federal Deposit Insurance Corporation reducing the premium rate to 6.5 basis points per $100 in deposits as a result of the Savings Association Insurance Fund recapitalization in 1996. Administrative expenses were $94.0 million for the six months ended June 30, 1997. This is a $3.4 million, or 3.7%, increase as compared to the same period in 1996 which had $90.6 million in administrative expenses. These increases were also primarily due to the expansion of the Bank's branch network in 1996 and expanded subsidiary operations partially offset by lower federal deposit insurance premiums. The reasons for these changes are the same as those discussed in the previous paragraph relative to the quarter to quarter comparisons. While the dollar level of expenses increased, those increases were consistent with the expanded operations of the Bank and its subsidiaries. The ratio of administrative expenses to average assets was 1.32% for the second quarter of 1997 and 1.33% for the first six months of 1997. This compares favorably to the 1996 percentages of 1.36% and 1.37% for the second quarter and for the first six months of 1996, respectively. Also, the Company's efficiency ratio of 40.00% for the second quarter of 1997 and 40.24% for the first six months of 1997 compared favorably to the 41.11% and the 42.01% efficiency ratio during the second quarter and first six months of 1996, respectively. Since efficiency ratios are a calculation of administrative expenses (excluding the amortization of goodwill) divided by net interest income plus recurring fee income, the lower the ratio the better for the Company. FEDERAL INCOME TAXES Federal income tax expense was $22.5 million for the three months ending June 30, 1997. This was $1.5 million, or 7.1%, higher than the federal income tax expense during the same period of 1996. This increase was primarily due to a $5.9 million, or 9.4%, increase in pretax income. The effective tax rates were 33.0% for the 1997 period and 33.7% for the 1996 period. Federal income tax expense was $44.2 million for the six months ended June 30, 1997 an increase of $3.4 million, or 8.3%, as compared to the federal income tax expense of $40.8 million for the six months ended June 30, 1996. This increase was also primarily attributable to a $13.4 million, or 11.1% increase in pretax income. The effective tax rates were 33.0% for the 1997 period and 33.9% for the 1996 period. 14 17 FINANCIAL CONDITION Figure 8 sets forth information concerning the composition of the Company's assets, liabilities and shareholders' equity at June 30, 1997 and December 31, 1996. FINANCIAL CONDITION (Figure 8)
JUNE 30, 1997 DECEMBER 31, 1996 ---------------------- --------------------- PERCENT PERCENT OF OF AMOUNT TOTAL AMOUNT TOTAL ----------- ------ ----------- ------ (DOLLARS IN THOUSANDS) Assets: Cash and cash equivalents..................... $ 205,378 1.4% $ 270,304 1.9% Investment securities......................... 359,880 2.5 243,632 1.8 Mortgage-backed securities.................... 4,412,914 30.3 4,704,074 33.9 Loans and leases, net......................... 9,015,824 61.9 8,100,342 58.3 Other assets.................................. 566,082 3.9 575,489 4.1 ----------- ------ ----------- ------ Total...................................... $ 14,560,078 100.0% $ 13,893,841 100.0% =========== ====== =========== ====== Liabilities: Deposits...................................... $ 7,777,575 53.4% $ 7,841,197 56.4% Borrowings.................................... 5,560,167 38.2 4,955,291 35.7 Other liabilities............................. 248,725 1.7 175,629 1.3 Shareholders' equity.......................... 973,611 6.7 921,724 6.6 ----------- ------ ----------- ------ Total...................................... $ 14,560,078 100.0% $ 13,893,841 100.0% =========== ====== =========== ======
OVERVIEW At June 30, 1997, total assets were $14.6 billion which was $660.1 million higher than at December 31, 1996. This increase was primarily the result of increases in the balances of loans and leases. The loan and lease portfolio grew by $915.5 million to $9.0 billion at June 30, 1997, funded by reductions of cash and cash equivalents and mortgage-backed securities along with increased borrowing levels. The Company's loan and lease portfolio is growing due to the Bank's ability to originate new loans and leases at levels that exceed repayments as illustrated in Figure 10. LOANS AND LEASES COMPOSITION OF LOANS AND LEASES(Figure 9)
JUNE 30, 1997 DECEMBER 31, 1996 --------------------- -------------------- PERCENT PERCENT OF OF AMOUNT TOTAL AMOUNT TOTAL ---------- ------ ---------- ----- (DOLLARS IN THOUSANDS) Real estate: One-to-four family..................................... $ 6,672,944 74.0% $ 6,072,927 75.0% Multifamily............................................ 286,060 3.2 290,195 3.6 Commercial............................................. 347,417 4.0 348,787 4.4 Construction........................................... 345,081 3.8 302,405 3.7 ---------- ------ ---------- ----- Total real estate................................... 7,651,502 85.0 7,014,314 86.7 Consumer................................................. 1,128,756 12.4 929,204 11.4 Leases................................................... 310,337 3.4 251,133 3.1 Business................................................. 131,189 1.5 100,302 1.2 ---------- ------ ---------- ----- Total loans and leases................................ 9,221,784 102.3 8,294,953 102.4 Less net items........................................... 205,960 2.3 194,611 2.4 ---------- ------ ---------- ----- Loans and leases, net............................... $ 9,015,824 100.0% $ 8,100,342 100.0% ========== ====== ========== =====
15 18 LOAN AND LEASE ACTIVITY (Figure 10)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- -------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Originations: Real estate: Permanent: One-to-four family................................. $ 570,192 784,231 988,530 1,326,599 Multifamily........................................ 12,720 4,570 17,289 20,072 Commercial......................................... 23,511 37,940 38,091 46,114 ---------- ----------- ----------- ---------- Total permanent.................................. 606,423 826,741 1,043,910 1,392,785 ---------- ----------- ----------- ---------- Construction: One-to-four family................................. 117,474 125,082 176,087 172,403 Multifamily........................................ 964 150 2,364 150 Commercial......................................... 4,300 6,200 9,595 7,200 ---------- ----------- ----------- ---------- Total construction............................... 122,738 131,432 188,046 179,753 ---------- ----------- ----------- ---------- Total real estate loans originated............. 729,161 958,173 1,231,956 1,572,538 ---------- ----------- ----------- ---------- Consumer line of credit draws........................ 79,588 43,276 140,198 82,859 Consumer............................................. 157,668 158,831 249,236 259,922 Business line of credit draws........................ 28,058 18,202 43,834 36,399 Business............................................. 17,690 16,706 33,351 23,310 Leases(1)............................................ 120,131 37,229 187,731 69,475 ---------- ----------- ----------- ---------- Total loans and leases originated.............. 1,132,296 1,232,417 1,886,306 2,044,503 ---------- ----------- ----------- ---------- Sales and principal reductions: Loans sold............................................. 10,994 3,299 17,777 17,467 Loans exchanged for MBS................................ - 510,435 - 510,435 Principal reductions................................... 542,164 540,718 941,699 974,982 ---------- ----------- ----------- ---------- Total sales and principal reductions............. 553,158 1,054,452 959,476 1,502,884 ---------- ----------- ----------- ---------- Increase before net items...................... $ 579,138 177,965 926,830 541,619 ========== =========== =========== ========== - --------------------------- (1) Not included herein are $1.5 and $2.1 million in operating leases originated during the three months ended June 30, 1997 and 1996, respectively and $3.2 million and $4.1 million for the six months ended June 30, 1997 and 1996.
16 19 INVESTMENT SECURITIES The entire investment securities portfolio was classified as available for sale at both June 30, 1997 and December 31, 1996. Figure 11 summarizes the fair values of the portfolio at those dates. INVESTMENT SECURITIES PORTFOLIO (Figure 11)
JUNE 30, 1997 DECEMBER 31, 1996 ---------------- ------------------ (DOLLARS IN THOUSANDS) U.S. Treasury and agency securities.................................... $ 352,869 238,135 Corporate notes and commercial paper................................... 5,868 4,107 Other.................................................................. 1,143 1,390 -------- --------- Total................................................................ $ 359,880 243,632 ======== ========= Weighted average rate................................................ 7.00% 6.89% ======== =========
MORTGAGE-BACKED SECURITIES Figure 12 summarizes the mortgage-backed securities ("MBS") portfolios at June 30, 1997 and December 31, 1996. The amounts reflected represent the fair values of securities available for sale and the amortized cost of securities held to maturity. MORTGAGE-BACKED SECURITIES (Figure 12)
JUNE 30, 1997 DECEMBER 31, 1996 --------------- ----------------- (DOLLARS IN THOUSANDS) AVAILABLE FOR SALE Participation certificates: Government agency issues: FHLMC.................................................................... $ 11,941 13,335 Collateralized mortgage obligations: Government agency issues: FHLMC.................................................................... 351,195 350,158 FNMA..................................................................... 264,982 264,682 Private issues............................................................. 443,112 442,530 ---------- ---------- Total mortgage-backed securities available for sale...................... 1,071,230 1,070,705 ---------- ---------- HELD TO MATURITY Participation certificates: Government agency issues: FNMA..................................................................... 1,141,586 1,246,398 FHLMC.................................................................... 561,435 636,228 GNMA..................................................................... 173,552 188,057 Private issues............................................................. 371,903 407,564 Collateralized mortgage obligations: Government agency issues: FNMA..................................................................... 161,687 162,646 FHLMC.................................................................... 81,848 82,433 Private issues............................................................. 849,673 910,043 ---------- ---------- Total mortgage-backed securities held to maturity...................... 3,341,684 3,633,369 ---------- ---------- Total............................................................... $ 4,412,914 4,704,074 ========== ==========
17 20 MORTGAGE-BACKED SECURITIES BY PAYMENT TYPE (Figure 13)
JUNE 30, 1997 DECEMBER 31, 1996 ------------------------ ------------------------- BOOK AVERAGE BOOK AVERAGE VALUE RATE VALUE RATE --------- ------- ----------- -------- (DOLLARS IN THOUSANDS) AVAILABLE FOR SALE Adjustable rate: Collateralized mortgage obligations.............. $1,058,695 7.05% $ 1,056,087 6.94% --------- ----------- Total adjustable rate.......................... 1,058,695 7.05 1,056,087 6.94 --------- ----------- Fixed rate: Participation certificates....................... 11,941 6.03 13,335 6.03 Collateralized mortgage obligations.............. 594 5.09 1,283 5.09 --------- ----------- Total fixed rate............................... 12,535 5.98 14,618 5.94 --------- ----------- Total available for sale..................... 1,071,230 7.03 1,070,705 6.93 --------- ----------- HELD TO MATURITY Adjustable rate: Participation certificates....................... 918,221 7.13 1,019,324 7.16 Collateralized mortgage obligations.............. 286,758 7.40 301,866 7.23 --------- ----------- Total adjustable rate.......................... 1,204,979 7.19 1,321,190 7.18 --------- ----------- Fixed rate: Participation certificates....................... 1,330,255 7.45 1,458,923 7.51 Collateralized mortgage obligations.............. 806,450 7.12 853,256 7.15 --------- ----------- Total fixed rate............................... 2,136,705 7.33 2,312,179 7.38 --------- ----------- Total held to maturity....................... 3,341,684 7.28 3,633,369 7.31 --------- ----------- Total mortgage-backed securities........... $4,412,914 7.22% $ 4,704,074 7.22% ========= ===========
18 21 ASSET QUALITY ANALYSIS OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES (Figure 14)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, -------------------------- ----------------------- 1997 1996 1997 1996 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Balance, beginning of period................................ $ 65,833 65,218 65,922 64,436 Provision for loan and lease losses......................... 260 1,000 480 2,000 Loans and leases charged off: Mortgage.................................................. (117) (946) (343) (980) Consumer.................................................. (116) (102) (255) (417) Leases.................................................... - - - - Business.................................................. (3) - (42) (1) -------- ------- ------- ------- Total charge-offs....................................... (236) (1,048) (640) (1,398) -------- ------- ------- ------- Recoveries: Mortgage.................................................. 62 48 131 92 Consumer.................................................. 11 50 37 138 Leases.................................................... - - - - Business.................................................. 5 - 5 - -------- ------- ------- ------- Total recoveries....................................... 78 98 173 230 -------- ------- ------- ------- Net loan and lease charge-offs....................... (158) (950) (467) (1,168) -------- ------- ------- ------- Balance, end of period...................................... $ 65,935 65,268 65,935 65,268 ======== ======= ======= ======= Net charge-offs to average loans and leases (annualized) .01% .05% .01% .03%
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES (Figure 15)
JUNE 30, 1997 DECEMBER 31, 1996 ------------- ----------------- (DOLLARS IN THOUSANDS) Mortgage......................................................................... $ 52,921 53,133 Consumer......................................................................... 6,626 6,765 Leases........................................................................... 1,377 977 Business......................................................................... 5,011 5,047 ------- -------- Total.......................................................................... $ 65,935 65,922 ======= ======== Percent of loans and leases to ending loans and leases: Mortgage....................................................................... 82.6% 84.3% Consumer....................................................................... 12.6 11.4 Leases......................................................................... 3.4 3.1 Business....................................................................... 1.4 1.2 ------- -------- Total........................................................................ 100.0% 100.0% ======= ========
The allowance for loan and lease losses as a percentage of ending loans and leases (before the allowance) was .73% at June 30, 1997, down slightly from .81% at December 31, 1996. Credit quality remained high, with nonperforming assets at only .27% of total assets at June 30, 1997. Net charge-offs totaled $158,000 and $467,000 for the three and six months ended June 30, 1997, respectively. Net charge-offs for the comparable periods of 1996 were $950,000 and $1,168,000. Management believes that the allowance for loan and lease losses has been established in accordance with generally accepted accounting principles based on the best information available. However, future adjustments to reserves may be necessary and net income could be significantly affected if circumstances and/or economic conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the Ohio or Michigan real estate markets could result in an increased level of nonperforming assets and charge-offs, significant provisions for loan and lease losses and significant reductions in income. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan and lease losses. Such agencies may require the recognition of additions to the allowance based on their judgments of information available to them at the time of their examination. 19 22 Figure 16 sets forth information concerning nonperforming assets and the allowance for loan lease losses. At June 30, 1997, the Bank had no outstanding commitments to lend additional funds to borrowers whose loans were on nonaccrual or restructured status. NONPERFORMING ASSETS (Figure 16)
JUNE 30, 1997 DECEMBER 31, 1996 ------------ ----------------- (DOLLARS IN THOUSANDS) Nonperforming loans and leases: Nonaccrual loans and leases: Mortgage loans: One-to-four family................................................... $ 11,024 10,264 Multifamily and commercial........................................... 5,216 2,372 Construction and land................................................ 1,397 827 ------- ------- Total mortgage loans............................................... 17,637 13,463 Consumer............................................................... - - Business............................................................... 656 95 Lease financings....................................................... - - ------- ------- Total nonaccrual loans and leases.................................. 18,293 13,558 ------- ------- Accruing loans and leases delinquent more than 90 days: Mortgage loans: One-to-four family................................................... 5,495 5,961 Multifamily and commercial........................................... - - Construction and land................................................ - - ------- ------- Total mortgage loans............................................... 5,495 5,961 Consumer............................................................... 2,630 544 Business............................................................... 297 58 Lease financings....................................................... - - ------- ------- Total accruing 90-day delinquent loans and leases.................. 8,422 6,563 ------- ------- Restructured real estate loans........................................... 8,411 15,294 ------- ------- Total nonperforming loans and leases............................... 35,126 35,415 Real estate acquired through foreclosure and other....................... 4,884 7,030 ------- ------- Total nonperforming assets......................................... $ 40,010 42,445 ======= ======= Ratio of: Nonperforming loans and leases to total loans and leases............... .39% .44% Nonperforming assets to total assets................................... .27 .31 Allowance for loan and lease losses to: Nonperforming loans and leases....................................... 187.71 186.14 Total loans and leases before allowance.............................. .73 .81
Nonperforming assets at June 30, 1997 totaled $40.0 million, down from $42.4 million from December 31, 1996. The ratio of nonperforming loans to total loans was .39% at June 30, 1997 as compared to .44% at December 31, 1996. At June 30, 1997, there were $41.3 million of loans not reflected in the table above, where known information about possible credit problems of borrowers caused management to have doubts as to the ability of the borrower to comply with present loan repayment terms and that may result in disclosure of such loans in the future. The largest of these potential problem loans is a $15.5 million loan on apartment buildings where the borrower is experiencing cash flow deficiencies but the loan is current. 20 23 SOURCES OF FUNDS GENERAL Deposits have historically been the most important source of the Bank's funds for use in lending and for general business purposes. The Bank also derives funds from Federal Home Loan Bank ("FHLB") advances, reverse repurchase agreements and other borrowings, principal repayments on loans and mortgage-backed securities, funds provided by operations and proceeds from the sale of loans and loan participations. At June 30, 1997 and December 31, 1996, 58% and 61% of interest-bearing liabilities were in the form of deposits and 42% and 39% were in borrowings. DEPOSITS Deposit inflows and outflows are significantly influenced by general interest rates, market conditions and competitive factors. The Bank reprices its deposits primarily based on competitive conditions. In order to decrease the volatility of its deposits, the Bank imposes stringent early withdrawal penalties on its certificates of deposit. Consumer and commercial deposits are attracted principally within the Bank's primary market areas through the offering of a broad range of deposit instruments. COMPOSITION OF DEPOSITS (Figure 17)
JUNE 30, 1997 DECEMBER 31, 1996 --------------------------------- -------------------------------- WEIGHTED PERCENT WEIGHTED PERCENT AVERAGE OF AVERAGE OF AMOUNT RATE TOTAL AMOUNT RATE TOTAL ------ --------- -------- ------ -------- ------- (DOLLARS IN THOUSANDS) Checking accounts: Interest-bearing........................ $ 575,658 1.76% 7.4% $ 558,753 1.86% 7.1% Noninterest-bearing..................... 323,384 - 4.2 300,685 - 3.8 Savings accounts.......................... 827,404 2.24 10.6 868,361 2.42 11.1 Money market accounts..................... 1,344,987 3.35 17.3 1,344,973 3.52 17.2 Certificates of deposit................... 4,704,425 5.93 60.5 4,766,369 5.85 60.8 ----------- ------ ---------- ------ Deposits.............................. 7,775,858 4.54 100.0% 7,839,141 4.56 100.0% ====== ====== Plus unamortized premium on deposits purchased.................... 1,717 2,056 ----------- ---------- Deposits, net........................ $ 7,777,575 $ 7,841,197 =========== ========== Weighted average cost including the annualized effect of applicable swaps, floors, and amortization of deferred gains on terminated swaps......................... 4.44% 4.48% ===== =====
BORROWINGS At June 30, 1997, borrowings primarily consisted of FHLB advances and reverse repurchase agreements. These positions were secured by Charter One's investment in the stock of the FHLB, as well as $5.2 billion in real estate loans and $2.4 billion in mortgage-backed securities. 21 24 FEDERAL HOME LOAN BANK ADVANCES (Figure 18)
JUNE 30, 1997 DECEMBER 31, 1996 ----------------------- ------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE ------ --------- ------ ---------- (DOLLARS IN THOUSANDS) Fixed-rate advances........................................ $ 2,527,916 5.91% $ 1,791,332 5.99% Variable-rate advances..................................... 1,120,500 5.79 1,403,000 5.56 ---------- ---------- Advances................................................. 3,648,416 5.87 3,194,332 5.80 Unamortized premium........................................ - 1 ---------- ---------- Total advances, net...................................... $ 3,648,416 $ 3,194,333 ========== ========== Weighted average cost including the annualized effect of applicable caps and amortization of deferred gains on terminated swaps....................... 5.87% 5.81% ===== ====
The variable-rate advances reprice based upon three-month LIBOR at three-month intervals, and included $175 million which are callable, at par, by the FHLB. The fixed-rate advances include $200 million and $225 million maturing in 2001 and 2002, respectively, which are convertible, at the counterparty's option, to a variable rate of three-month LIBOR, beginning in February 1999 and March 1999, respectively, and quarterly thereafter. Figure 19 presents a summary of outstanding reverse repurchase agreements. The Bank enters into short-term reverse repurchase agreements for terms up to one year, as well as longer term fixed- and variable-rate agreements. REVERSE REPURCHASE AGREEMENTS (Figure 19)
JUNE 30, 1997 DECEMBER 31, 1996 ----------------------- ------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE ------ --------- ------ ---------- (DOLLARS IN THOUSANDS) Short term............................................... $ 249,144 5.78% $ - - Long term: Fixed rate............................................. 1,249,846 5.62 1,374,784 5.58% Variable rate.......................................... 200,000 5.89 174,994 5.93 ---------- ---------- Weighted average cost including amortization of fees................................... $ 1,698,990 5.68 $ 1,549,778 5.62 ========== ========== Weighted average cost including the annualized effect of amortization of deferred gains on terminated swaps.................................... 5.66% 5.59% ===== ====
The long-term fixed-rate agreements include $370 million convertible, at the counterparty's option, to a variable rate based on three-month LIBOR. The agreements are convertible as follows: $120 million beginning in August 1997 and $250 million beginning in October 1997. INTEREST RATE RISK MANAGEMENT The company utilizes various types of interest rate contracts in managing its interest rate risk on certain of its deposits. The Company has utilized fixed payment swaps to convert certain of its floating-rate or short-term, fixed-rate liabilities into longer term, fixed-rate instruments. Under these agreements, the Company has agreed to pay interest to the counterparty on a notional principal amount at a fixed rate defined in the agreement, and receive interest at a floating rate indexed to LIBOR. The amounts of interest exchanged are calculated on the basis of notional principal amounts. The Company also utilizes fixed receipt swaps to convert certain of its longer term callable certificates of deposit into short-term variable instruments. Under these agreements the Company has agreed to receive interest from the counterparty on a notional amount at a fixed rate defined in the agreement, and to pay interest at a floating rate indexed to LIBOR. 22 25 INTEREST RATE SWAPS (Figure 20)
JUNE 30, 1997 DECEMBER 31, 1996 ------------------------------------ ------------------------------------ NOTIONAL RECEIVING PAYING NOTIONAL RECEIVING PAYING PRINCIPAL INTEREST INTEREST PRINCIPAL INTEREST INTEREST AMOUNT RATE RATE AMOUNT RATE RATE -------- --------- ----------- -------- --------- ----------- (DOLLARS IN THOUSANDS) Fixed payment and variable receipt maturing in 1999.......... $ 100,000 5.63%(1) 10.09% $ 100,000 5.77%(1) 10.09% ======== ======== Variable payment and fixed receipt: Maturing in: 1998.......................... $ 55,000 6.06% 5.81% $ 115,000 6.40% 5.53% 1999.......................... 90,000 6.62 5.82 - - - 2000.......................... 40,000 6.89 5.80 110,000 7.06 5.54 2001.......................... 235,000 7.27 5.82 140,000 7.28 5.53 -------- -------- Total....................... $ 420,000 6.94% 5.82%(1) $ 365,000 6.93% 5.53%(1) ======== ======== - --------------------------- (1) Rates are based upon LIBOR.
The Company also utilizes swaps to hedge a special class of certificates of deposit. These swaps provide for the receipt of variable interest based upon the S&P 500 Index, and the payment of either fixed or variable interest. At June 30, 1997, the notional principal amount outstanding was $34.9 million with a weighted average receipt rate of 25.83% and payment rate of 5.77%. At December 31, 1996, the outstanding principal was $32.2 million with receipt and payment rates of 19.58% and 5.59%, respectively. In 1995, the Company entered into $300 million of four-year interest rate floor agreements maturing in March 1999, which provide for receipt of interest when six-month LIBOR falls below 6.00%. The Company receives the difference between 6.00% and LIBOR at the time of repricing, calculated on the $300 million notional amount. At June 30, 1997, interest received based on a 5.67% weighted average LIBOR rate was partially offset by a .07% per annum fee cost. Fees paid at inception of the agreements are being amortized over the terms of the agreements. Unamortized fees totaled $354,000 at June 30, 1997. In the past, the Company entered into caps with primary dealers to limit its exposure to rising rates on certain of its variable-rate and short-term, fixed-rate liabilities. The agreements provided for receipt of interest when three-month LIBOR exceeded an agreed upon base rate. The Company received a rate of interest equal to the excess of three-month LIBOR at the time of repricing over the 6.00% base rate, calculated on a notional principal amount. At December 31, 1996, the notional principal amount outstanding was $650 million. As of June 30, 1997, all interest rate caps had fully matured. The cost (benefit) of interest rate exchange, cap, floor and collar positions, including amortization of gains and losses on terminated positions, was included in interest expense as follows: 23 26 COST OF INTEREST RATE RISK MANAGEMENT (Figure 21)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, -------------------------- ------------------------ 1997 1996 1997 1996 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Interest expense (income): Deposits................................................. $(4,397) (2,353) (8,197) (3,269) FHLB advances............................................ (71) 420 185 919 Reverse repurchase agreements............................ (60) (537) (368) (1,173) ------ ------- ------- ------- Total.................................................. $(4,528) (2,470) (8,380) (3,523) ====== ======= ======= =======
LIQUIDITY Deposits have historically been the most important source of the Bank's funds for use in lending and for general business purposes. The Bank also derives funds from FHLB advances, reverse repurchase agreements and other borrowings, principal repayments on loans and mortgage-backed securities, funds provided by operations and proceeds from the sale of loans and securities. While scheduled loan, security and interest-bearing deposit amortization and maturities are relatively predictable sources of funds, deposit flows and loan and security prepayments are greatly influenced by economic conditions, the general level of interest rates and competition. The Bank utilizes particular sources of funds based on comparative costs and availability. The Bank generally manages the pricing of its deposits to maintain a steady deposit balance, but has from time to time decided not to pay rates on deposits as high as its competition and, when necessary, to supplement deposits with longer term and/or less expensive alternative sources of funds such as advances and reverse repurchase agreements. The Bank is required by regulation to maintain specific minimum levels of liquid investments. Regulations currently in effect require the Bank to maintain liquid assets at least equal to 5.0% of the sum of its average daily balance of net withdrawable accounts and borrowed funds due in one year or less. This regulatory requirement may be changed from time to time to reflect current economic conditions. The Bank's average regulatory liquidity ratio for the quarter ended June 30, 1997 was 5.29%. Liquidity management is both a daily and long-term responsibility of management. The Bank adjusts its investments in cash and cash equivalents based upon management's assessment of (i) expected loan and lease demand, (ii) projected security maturities, (iii) expected deposit flows, (iv) yields available on short-term investments, and (v) the objectives of its asset/liability management program. Excess liquidity is generally invested in federal funds sold, U.S. Treasury and agency securities and commercial paper. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB and collateral eligible for reverse repurchase agreements. Because the Bank has a stable retail deposit base, management believes that significant borrowings will not be necessary to maintain its current liquidity position. The Bank anticipates that it will have sufficient funds available during the next 12 months to meet current and future loan commitments. At June 30, 1997, the Bank and its subsidiaries had outstanding commitments to originate loans and leases of $696.8 million, unfunded lines of consumer credit totaling $507.9 million (a significant portion of which normally remains undrawn) and unfunded lines of commercial (business loans) credit totaling $20.8 million. Outstanding letters of credit totaled $15.1 million as of June 30, 1997. Certificates of deposit scheduled to mature in one year or less at June 30, 1997 totaled $2.2 billion. Management believes that a significant portion of the amounts maturing during the next 12 months will remain with the Bank because they are retail deposits. At June 30, 1997, the Bank had $1.9 billion of advances from the FHLB and $249 million of reverse repurchase agreements which mature during the next 12 months. Management will review the need for advances and reverse repurchase agreements when they mature and believes the Bank has significant additional borrowing capacity with the FHLB and investment banking firms to meet any need for replacement borrowings. 24 27 CAPITAL AND DIVIDENDS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. The regulations require the Bank to meet specific capital adequacy guidelines and the regulatory framework for prompt corrective action that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total risk-based, Tier 1 risk-based, Tier 1 leverage and tangible capital as set forth in the tables below. REGULATORY CAPITAL (Figure 22)
AS OF JUNE 30, 1997 ------------------------------------------------------------------- TO BE WELL CAPITALIZED FOR CAPITAL UNDER PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS -------------------- -------------------- ----------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- (DOLLARS IN THOUSANDS) Total capital (to risk-weighted assets).......... $ 845,746 10.59% $ 638,932 8.0% $ 798,665 10.0% Tier 1 capital (to risk-weighted assets)......... 784,132 9.82 N/A N/A 479,199 6.0 Tier 1 capital (to adjusted tangible assets)..... 784,132 5.36 438,918 3.0 731,530 5.0 Tangible capital (to adjusted tangible assets)... 784,132 5.36 219,459 1.5 N/A N/A AS OF DECEMBER 31, 1996 ------------------------------------------------------------------- TO BE WELL CAPITALIZED FOR CAPITAL UNDER PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS -------------------- -------------------- ----------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- (DOLLARS IN THOUSANDS) Total capital (to risk-weighted assets).......... $ 741,904 10.62% $559,080 8.0% $698,850 10.0% Tier 1 capital (to risk-weighted assets)......... 679,967 9.73 N/A N/A 419,310 6.0 Tier 1 capital (to adjusted tangible assets)..... 679,967 5.00 407,700 3.0 679,500 5.0 Tangible capital (to adjusted tangible assets)... 679,967 5.00 203,850 1.5 N/A N/A
As of December 31, 1996, the most recent notification from the Office of Thrift Supervision categorized the Bank as well capitalized under the regulatory framework for Prompt Corrective Action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table above. There are no conditions or events since that notification that have changed the Bank's category. Management believes, as of June 30, 1997, that the Bank meets all capital requirements to which it is subject. Events beyond management's control, such as fluctuations in interest rates or a downturn in the economy in areas in which the Bank's loans and securities are concentrated, could adversely affect future earnings and, consequently, the Bank's ability to meet its future capital requirements. 25 28 QUARTERLY STOCK PRICES AND DIVIDENDS (Figure 23)
2ND QUARTER 1ST QUARTER 4TH QUARTER 3RD QUARTER 2ND QUARTER 1997 1997 1996 1996 1996 ----------- ------------ ------------ ----------- ----------- Market price of common stock(1): High......................................... $ 54.00 50.13 44.75 40.56 36.19 Low.......................................... 42.25 41.13 38.13 32.03 29.34 Close........................................ 53.88 43.88 42.00 40.00 33.22 Dividends declared and paid.................... .25 .23 .23 .22 .21 (1) Restated to reflect the 5% stock dividend issued September 30, 1996.
On May 15, 1996, the Board of Directors of the Company authorized management to repurchase 5% of the Company's outstanding common stock in a buyback program. As of that date, the Company had 47,354,637 common shares outstanding (adjusted for subsequent stock dividend). As a result of the pending merger with RCSB the Company has rescinded its stock repurchase program. The Company had 865,458 shares remaining unpurchased. On July 24, 1996, the Board of Directors of Charter One Financial, Inc. approved a 5% stock dividend which was distributed September 30, 1996, to shareholders of record on September 13, 1996. 26 29 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS In connection with the Annual Meeting of Shareholders of the Company held on April 24, 1997 there were three proposals submitted to a vote of security holders. The first proposal concerned the election of nominees of the Board of Directors as directors. The Board of Directors as previously reported to the Commission was re-elected in its entirety. Proposal two was to approve the Charter One Financial, Inc. 1997 Stock Option and Incentive Plan. The vote was tabulated as follows: For 35,056,238 Against 2,122,072 Abstain 331,499 Broker Non-Vote 4,139,319 ------------ Total 41,649,128 ============ The third proposal was to ratify the appointment by the Board of Directors of the firm of Deloitte and Touche LLP as independent auditors of the Corporation for the fiscal year ending December 31, 1997. The vote was tabulated as follows: For 41,206,401 Against 218,205 Abstain 224,522 ------------ Total 41,649,128 ============ ITEM 5. OTHER INFORMATION DIVIDEND On July 16, 1997, the Directors of Charter One Financial, Inc. declared a quarterly cash dividend of 25 cents per common share. The dividend will be payable on August 20, 1997 to shareholders of record as of August 6, 1997. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 11 - Computation of Per Share Earnings Exhibit 27 - Financial Data Schedule Exhibit 99 - Selected Monthly Financial Highlights (b) Reports on Form 8-K On April 24, 1997 the Company filed an 8-K disclosing that the boards of directors of Charter One Financial, Inc. and Haverfield Corporation, the holding company of Home Bank, F.S.B. entered into a definitive agreement to merge in a stock-for-stock exchange. Home Bank, headquartered in Cleveland, Ohio, is a federally chartered savings and loan with $342 million in assets ($273 million in deposits) and 10 branch offices throughout the Cleveland area. Terms of the agreement call for the tax-free exchange of $27.00 in Charter One common stock for each of Haverfield's common shares or a total consideration of approximately $53.7 million. The price will stay fixed at $27.00 per Haverfield share if Charter One's average stock price remains between $41.09 and $55.60 per share during a 20-day pricing period ending five business days before closing the transaction. The merger, which would be accounted for as a pooling of interests, is expected to close near the end of the third quarter of 1997. Already approved by the 27 30 boards of directors of both companies, the transaction requires the approvals of the Office of Thrift Supervision and Haverfield shareholders. On May 21, 1997, the Company filed an 8-K disclosing that the boards of directors of Charter One Financial, Inc. and RCSB Financial, Inc., the holding company of Rochester Community Savings Bank, entered into a definitive agreement to enter into a strategic alliance through a stock-for-stock exchange. Rochester Community Savings Bank, headquartered in Rochester, New York, is a state-chartered savings bank with $4 billion in assets ($2.4 billion in deposits) and 36 branch offices in Rochester and Buffalo. Terms of the agreement call for a tax-free exchange of shares at a fixed exchange ratio of .91 shares in Charter One common stock for each of RCSB's common shares. Based on current RCSB shares, it is expected that approximately 13.6 million new shares of Charter One stock will be issued in conjunction with the merger, bringing the initial value of the transaction to $635 million and the pro forma market capitalization of the combined company to $2.9 billion. The merger, which would be accounted for as a pooling of interests, is expected to close in the fourth quarter of 1997. Already approved by the boards of directors of both companies, the transaction requires the approvals of the Office of Thrift Supervision and each company's shareholders. In addition, RCSB has granted Charter One an option to purchase shares equal to 19.9% of RCSB's outstanding common stock under certain conditions. 28 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: /s/ Robert J. Vana --------------------------------------- Robert J. Vana Chief Corporate Counsel and Secretary Date: /s/ Richard W. Neu --------------------------------------- Richard W. Neu Executive Vice President and Chief Financial Officer 29 EX-11 2 EXHIBIT 11 1 EXHIBIT 11 CHARTER ONE FINANCIAL, INC. COMPUTATION OF PER SHARE EARNINGS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- --------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) COMPUTATION OF PRIMARY EARNINGS PER SHARE: Weighted average number of common shares outstanding........................................ 46,215,423 47,349,145 46,269,971 47,314,545 Add common stock equivalents for shares issuable under: Stock Appreciation Rights Plan(1)................. 49,145 47,791 49,161 48,681 Stock Option Plan(1).............................. 1,236,955 946,475 1,244,491 938,838 ------------ ----------- ----------- ------------ Weighted average number of shares outstanding adjusted for common stock equivalents......... 47,501,523 48,343,411 47,563,623 48,302,064 ============ =========== =========== ============ Net income............................................ $ 45,731 41,370 89,817 79,820 Primary earnings per share............................ $ .96 .86 1.89 1.65 COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE: Weighted average number of common shares outstanding........................................ 46,215,351 47,349,145 46,269,935 47,324,013 Add common stock equivalents for shares issuable under: Stock Appreciation Rights Plan(2)................. 49,649 47,889 49,413 50,609 Stock Option Plan(2).............................. 1,483,601 977,417 1,368,813 1,008,282 ------------ ----------- ----------- ------------ Weighted average number of shares outstanding adjusted for common stock equivalents......... 47,748,601 48,374,451 47,688,161 48,382,904 ============ =========== =========== ============ Net income............................................ $ 45,731 41,370 89,817 79,820 Fully diluted earnings per share...................... $ .96 .86 1.88 1.65 - --------------------------- (1) Additional shares issuable were derived under the "treasury stock method" using average market price during the period. (2) Additional shares issuable were derived under the "treasury stock method" using the higher of the average market price during the period or the market price at the end of the period.
EX-27 3 EXHIBIT 27
9 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, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 120,378 0 85,000 0 1,431,110 3,341,684 3,381,893 9,081,759 65,935 14,560,078 7,777,575 249,144 248,725 5,311,023 475 0 0 973,136 14,560,078 335,958 172,225 10,494 519,018 170,968 323,184 195,493 480 0 94,025 134,056 134,056 0 0 89,817 1.89 1.88 2.85 18,293 8,422 8,411 41,300 65,922 640 173 65,935 65,935 0 0
EX-99 4 EXHIBIT 99 1 EXHIBIT 99 CHARTER ONE FINANCIAL, INC. SELECTED MONTHLY FINANCIAL HIGHLIGHTS SELECTED FINANCIAL DATA AT MONTH END
6/30/97 5/31/97 4/30/97 ------- ------- ------- (DOLLARS IN THOUSANDS) Total assets...................................................... $ 14,560,078 14,476,697 14,263,303 Cash & cash equivalents........................................... 205,378 251,455 267,635 Investment securities............................................. 359,880 357,432 282,214 Mortgage-backed securities........................................ 4,412,914 4,467,818 4,519,898 Loans receivable.................................................. 9,015,824 8,835,336 8,644,835 Allowance for loss................................................ 65,935 65,879 65,760 Portfolio of loans serviced for others............................ 1,361,566 1,380,664 1,401,715 Common shares outstanding, net.................................... 46,185,966 46,214,671 46,206,521 Treasury shares................................................... 1,286,520 1,257,815 1,265,965 Deposits: Checking........................................................ $ 899,042 929,805 851,954 Savings......................................................... 827,404 833,296 834,132 MMDA............................................................ 1,344,987 1,363,873 1,355,816 Certificates: 6 month or less............................................... 526,663 548,564 560,633 6 month to 1 year............................................. 1,438,697 1,450,617 1,491,633 Retail jumbos................................................. 231,836 239,571 240,878 Other......................................................... 2,508,946 2,437,309 2,391,254 ----------- ------------ ----------- Total CDS................................................... 4,706,142 4,676,061 4,684,398 ----------- ------------ ----------- Total deposits............................................ $ 7,777,575 7,803,035 7,726,300 =========== ============ =========== Borrowings: Reverse repurchase agreements................................... $ 1,698,990 1,623,928 1,726,398 FHLB advances................................................... 3,648,416 3,600,903 3,401,089 Other........................................................... 212,761 212,236 212,080 ----------- ------------ ----------- Total borrowings.............................................. $ 5,560,167 5,437,067 5,339,567 =========== ============ =========== Weighted average rates: Loans........................................................... 7.84% 7.86% 7.86% MBS............................................................. 7.22 7.22 7.19 Loans and MBS................................................. 7.64 7.64 7.64 Other investments............................................... 7.11 6.95 6.82 Total interest-earning assets................................. 7.61 7.61 7.60 Deposits........................................................ 4.44 4.41 4.40 Borrowings...................................................... 5.98 5.95 5.92 Total interest-bearing liabilities............................ 5.08 5.04 5.04 Interest rate spread.............................................. 2.53% 2.57% 2.56% Net yield on interest-earning assets.............................. 2.84% 2.85% 2.85% Number of employees (FTEs)........................................ 2,626 2,590 2,583
2 Selected Activity for the Month and Quarter
ONE MONTH ENDED 3 MONTHS ---------------------------------------- ENDED 6/30/97 5/31/97 4/30/97 6/30/97 --------- --------- --------- ---------- (DOLLARS IN THOUSANDS) Loan and MBS activity: Originations: Real Estate: Permanent: One-to-four family............................. $ 193,135 193,496 183,561 570,192 Multi-family................................... 1,125 - 11,595 12,720 Commercial..................................... 10,976 3,115 9,420 23,511 --------- --------- --------- ---------- Total permanent.............................. 205,236 196,611 204,576 606,423 --------- --------- --------- ---------- Construction: One-to-four family............................. 33,450 47,051 36,973 117,474 Multi family................................... - 55 909 964 Commercial..................................... 4,300 - - 4,300 --------- --------- --------- ---------- Total construction........................... 37,750 47,106 37,882 122,738 --------- --------- --------- ---------- Total real estate loans originated......... 242,986 243,717 242,458 729,161 --------- --------- --------- ---------- Consumer line of credit draws...................... 28,214 25,958 25,416 79,588 Consumer........................................... 47,865 57,600 52,203 157,668 Business line of credit draws...................... 13,960 6,192 7,906 28,058 Lease financings................................... 85,897 27,738 6,496 120,131 Business........................................... 5,583 8,714 3,393 17,690 --------- --------- --------- ---------- Total originated................................ $ 424,505 369,919 337,872 1,132,296 ========= ========= ========= ========== Loans sold........................................... $ 3,749 3,656 3,589 10,994 Principal reductions................................. $ 229,443 147,991 164,730 542,164 Deposit portfolio activity: Net increase (decrease): Checking......................................... $ (30,763) 77,850 (37,888) 9,199 Savings.......................................... (5,893) (835) (8,931) (15,659) MMDA............................................. (18,886) 8,057 (9,602) (20,431) Certificates: 6 month or less................................ (21,901) (12,069) (12,783) (46,753) 6 month to 1 year.............................. (11,920) (41,016) (36,604) (89,540) Retail jumbos.................................. (7,735) (1,307) 3,392 (5,650) Other.......................................... 71,638 46,055 (10,763) 106,930 --------- --------- --------- ---------- Total CDS.................................... 30,082 (8,337) (56,758) (35,013) --------- --------- --------- ---------- Net increase in deposits............................. $ (25,460) 76,735 (113,179) (61,904) ========= ========= ========= ========== Interest credited to deposits included above......... $ 61,012 10,093 10,875 81,980 Total increase (decrease) as a percentage of beginning deposits................................. (.33)% .99% (1.45)% (.79)%
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