-----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, AASKzy+766L9vdaBcB4xDXV1QLH5PNvNeX55SokDH4PguHiF4enxPAa1DO/GeYOl MOGVH+GP3NN0zpnO0RiuKw== 0000950152-97-008097.txt : 19971117 0000950152-97-008097.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950152-97-008097 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD 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: SEC FILE NUMBER: 000-16311 FILM NUMBER: 97721038 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 September 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 October 31, 1997 was 63,767,886. ================================================================================ 2 TABLE OF CONTENTS
ITEM NUMBER PAGE - --------- ----- PART I - FINANCIAL INFORMATION 1. Financial Statements Consolidated Statements of Financial Condition -- September 30, 1997 and December 31, 1996.................................................... 1 Consolidated Statements of Income -- Three and nine months ended September 30, 1997 and 1996..................................... 2 Consolidated Statement of Changes in Shareholders' Equity -- Nine months ended September 30, 1997........................................................ 3 Consolidated Statements of Cash Flows -- Nine months ended September 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............................................................................... 27 6. Exhibits and Reports on Form 8-K................................................................ 27 Signatures............................................................................................... 28
i 3 PART I - FINANCIAL CONDITION ITEM 1. FINANCIAL STATEMENTS CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)
SEPTEMBER 30, 1997 DECEMBER 31, 1996 ------------------ ----------------- (AS RESTATED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS Cash and deposits with banks .................................. $ 117,104 152,301 Federal funds sold and other .................................. 72,235 118,003 ------------ ------------ Total cash and cash equivalents .......................... 189,339 270,304 Investment securities available for sale, at fair value ....... 389,693 243,632 Mortgage-backed securities: Available for sale, at fair value ........................... 1,077,974 1,070,705 Held to maturity (fair value of $3,151,150 and $3,652,547) .. 3,100,872 3,633,369 Loans and leases, net ......................................... 9,786,005 8,100,342 Federal Home Loan Bank stock .................................. 271,743 215,815 Premises and equipment ........................................ 126,699 114,145 Accrued interest receivable ................................... 81,488 77,193 Equipment on operating leases ................................. 14,451 22,599 Real estate owned ............................................. 6,399 7,337 Goodwill ...................................................... 87,466 64,496 Other assets .................................................. 64,864 73,904 ------------ ------------ Total assets ............................................. $ 15,196,993 13,893,841 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Checking accounts ........................................... $ 892,270 859,438 Money market accounts ....................................... 1,375,053 1,344,973 Savings accounts ............................................ 817,517 868,361 Certificates of deposit ..................................... 4,855,956 4,768,425 ------------ ------------ Total deposits ........................................... 7,940,796 7,841,197 Federal Home Loan Bank advances ............................... 3,882,648 3,194,333 Reverse repurchase agreements ................................. 1,841,670 1,549,778 Other borrowings .............................................. 215,478 211,180 Advance payments by borrowers for taxes and insurance ......... 43,098 39,346 Accrued interest payable ...................................... 54,357 35,298 Accrued expenses and other liabilities ........................ 147,016 100,985 ------------ ------------ Total liabilities ........................................ 14,125,063 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; 48,422,248 and 47,472,486 shares issued ....... 484 475 Additional paid-in capital .................................. 377,543 321,991 Retained earnings ........................................... 731,940 637,356 Less 1,219,399 and 1,029,763 shares of common stock held in treasury at cost .......................................... (49,934) (39,615) Net unrealized gain on securities, net of tax expense of $6,406 and $812 ........................................ 11,897 1,517 ------------ ------------ Total shareholders' equity ........................... 1,071,930 921,724 ------------ ------------ Total liabilities and shareholders' equity ........... $ 15,196,993 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- (AS RESTATED) (AS RESTATED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INTEREST INCOME: Loans and leases ................................. $ 181,847 151,510 517,805 443,845 Mortgage-backed securities: Available for sale ............................. 18,621 20,047 55,357 59,956 Held to maturity ............................... 57,681 70,677 182,822 211,993 Investment securities available for sale ......... 5,713 5,325 16,061 16,375 Other interest-earning assets .................... 6,273 6,768 16,767 16,886 ------------ ------------ ------------ ------------ Total interest income ......................... 270,135 254,327 788,812 749,055 ------------ ------------ ------------ ------------ INTEREST EXPENSE: Deposits ......................................... 87,037 85,332 258,005 241,129 Federal Home Loan Bank advances .................. 56,070 46,741 151,125 137,858 Other borrowings ................................. 30,192 25,075 87,353 81,980 ------------ ------------ ------------ ------------ Total interest expense ........................ 173,299 157,148 496,483 460,967 ------------ ------------ ------------ ------------ Net interest income ........................... 96,836 97,179 292,329 288,088 Provision for loan and lease losses ................ 260 1,001 740 3,001 ------------ ------------ ------------ ------------ Net interest income after provision for loan and lease losses ................... 96,576 96,178 291,589 285,087 ------------ ------------ ------------ ------------ OTHER INCOME: Loan servicing fees .............................. 3,228 3,463 8,594 8,485 Service fees and other charges ................... 14,138 9,761 37,445 24,955 Leasing operations ............................... 1,907 1,697 5,440 5,204 Net gains (losses): Loans .......................................... 355 1,459 794 1,770 Mortgage-backed securities ..................... 2,403 (1,476) 2,403 (1,758) Investment securities .......................... -- 1 -- (2,024) Other gains .................................... (375) (55) (396) 403 Other ............................................ 198 125 642 344 ------------ ------------ ------------ ------------ Total other income ............................ 21,854 14,975 54,922 37,379 ------------ ------------ ------------ ------------ ADMINISTRATIVE EXPENSES: Compensation and employee benefits ............... 23,384 23,784 70,803 68,434 Net occupancy and equipment ...................... 7,624 6,831 22,406 19,615 Federal deposit insurance premiums ............... 1,256 4,488 3,807 12,571 Amortization of goodwill ......................... 1,113 1,121 3,340 1,500 Other administrative expenses .................... 13,649 11,661 40,695 36,412 ------------ ------------ ------------ ------------ Administrative expenses before federal deposit insurance special assessment ................. 47,026 47,885 141,051 138,532 Federal deposit insurance special assessment ..... -- 56,258 -- 56,258 ------------ ------------ ------------ ------------ Total administrative expenses ................. 47,026 104,143 141,051 194,790 ------------ ------------ ------------ ------------ Income before federal income taxes ................. 71,404 7,010 205,460 127,676 Federal income taxes ............................... 23,595 1,979 67,834 42,825 ------------ ------------ ------------ ------------ Net income .................................... $ 47,809 5,031 137,626 84,851 ============ ============ ============ ============ Primary earnings per common and common equivalent share(1) .............................. $ .95 .10 2.75 1.68 ============ ============ ============ ============ Average common and common equivalent shares outstanding(1) ............................ 50,318,725 50,305,526 50,067,444 50,462,517 ============ ============ ============ ============ Cash dividends declared per share(1) ............... $ .24 .21 .70 .60 ============ ============ ============ ============
- --------------------------- (1) Restated to reflect the 5% stock dividend issued October 31, 1997. 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) (AS RESTATED) 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) Common stock issued in connection with acquisition, 949,762 shares ............. 9 55,552 55,561 Treasury stock reissued in connection with stock options exercised, 345,364 . (9,281) 13,680 4,399 shares Dividends paid ($.70 per share)(1) .............. (33,761) (33,761) Change in net unrealized gain on securities, net of tax expense .................... 10,380 10,380 Net income ................... 137,626 137,626 --------- --------- --------- --------- --------- --------- Balance, September 30, 1997 .... $ 484 377,543 731,940 (49,934) 11,897 1,071,930 ========= ========= ========= ========= ========= =========
- ------------- (1) Restated to reflect the 5% stock dividend issued October 31, 1997. See Notes to Consolidated Financial Statements 3 6 CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1997 1996 ----------- ----------- (AS RESTATED) (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income ........................................................... $ 137,626 84,851 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses ................................ 740 3,001 Net gains (losses) ................................................. (2,801) 1,609 Accretion of discounts, amortization of premiums, amortization of goodwill and depreciation, net .................... 21,202 4,952 Origination of real estate loans held for sale ..................... (28,863) (52,887) Proceeds from sale of loans held for sale .......................... 29,657 54,657 Other .............................................................. 62,548 69,527 ----------- ----------- Net cash provided by operating activities ........................ 220,109 165,710 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Net principal disbursed on loans and leases .......................... (1,389,073) (1,529,263) Proceeds from principal repayments and maturities of: Mortgage-backed securities held to maturity ........................ 454,469 586,711 Mortgage-backed securities available for sale ...................... 6,817 20,176 Investment securities available for sale ........................... 10,340 158,149 Sales of mortgage-backed securities available for sale ............... 4,452 832,401 Sales of mortgage-backed securities held to maturity ................. 75,551 -- Sales of investment securities available for sale .................... 175,101 240,520 Purchases of: Mortgage-backed securities held to maturity ........................ -- (569,577) Investment securities available for sale ........................... (300,400) (326,252) Federal Home Loan Bank stock ....................................... (45,709) (15,842) Equipment on operating lease ....................................... (4,383) (7,256) Net cash and cash equivalents received in connection with acquisitions 4,829 731,170 Other ................................................................ (23,874) (9,276) ----------- ----------- Net cash (used in) provided by investing activities ................... (1,031,880) 111,661 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings ..................... 141,824 (741,954) Proceeds from long-term borrowings ................................... 2,922,133 2,491,105 Repayments of long-term borrowings ................................... (2,116,513) (2,268,376) Decrease in deposits ................................................. (164,917) (59,565) Increase (decrease) in advance payments by borrowers for taxes and insurance ........................................................... 1,640 (8,989) Payment of dividends on common stock ................................. (33,761) (29,737) Purchase of treasury stock, net of options exercised ................. (19,600) (28,940) Common shares issued ................................................. -- 1,392 ----------- ----------- Net cash provided by (used in) financing activities .................... 730,806 (645,064) ----------- ----------- Net decrease in cash and cash equivalents .............................. (80,965) (367,693) Cash and cash equivalents, beginning of the period ..................... 270,304 658,371 ----------- ----------- Cash and cash equivalents, end of the period ........................... $ 189,339 290,678 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest on deposits and borrowings .................... $ 477,854 483,587 Cash paid for income taxes ........................................... 41,000 34,000 SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES: Transfers from loans to real estate owned ............................ 3,018 1,902 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. Subsequent to the issuance of the Company's 1996 consolidated financial statements, the Company's management determined that approximately $1.1 billion of the mortgage-backed security portfolio previously reported as held to maturity should have been classified as available for sale during 1996 and the related fair value adjustment recorded in 1996 aggregating $40.5 million, net of tax, should have been recorded in 1995. As a result, the Company's 1996 and 1995 consolidated financial statements have been restated from the amounts previously reported to reflect the reclassification. The restatement did not affect net income. 2. On September 19, 1997, Charter One Bank acquired Haverfield Corporation, the holding company of Home Bank, F.S.B.. Home Bank, headquartered in Cleveland, Ohio, was a federally chartered savings and loan with 10 branch offices throughout the Cleveland area. The merger was accounted for as a purchase under generally accepted accounting principles, whereby assets acquired and liabilities assumed were recorded at their estimated fair value as of the acquisition date. The acquisition was completed by exchanging shares of Charter One's common stock valued at $55.6 million for all of the outstanding shares of Haverfield. Charter One acquired $363.3 million in assets, primarily loans and investment securities, and $307.7 million in liabilities, primarily deposits. Charter One recorded $26.5 million of goodwill which will be amortized over a period of 15 years. Results of operations for Haverfield Corporation have been included in Charter One's consolidated statements of income since the acquisition date. 3. On October 3, 1997, Charter One completed a strategic alliance with RCSB Financial, Inc. ("RCSB"), which was accounted for as a pooling of interests. Headquartered in Rochester, New York, RCSB Financial, Inc. was the holding company of Rochester Community Savings Bank, a $4 billion savings bank with primary business lines in retail banking, mortgage banking and automobile lending. The merger was effected through the issuance of .91 shares of Company common stock for each share of RCSB Financial, Inc. common stock resulting in the issuance of 14,179,385 shares as adjusted for the 5% stock dividend issued October 31, 1997. Because the transaction was completed after the close of the quarter, RCSB operations did not affect the Company's third quarter results. Proforma restated financial data reflecting the pooling is presented below:
AT OR FOR THE NINE MONTHS ENDED 09/30/97 -------- Shareholders equity $ 1,395,240 Total assets 19,303,713 Net income 160,444 Earnings per share 2.49
For the 30 days subsequent to the merger date, the combined operations of the Company and RCSB produced interest income of $120.5 million, other income of $13.1 million and net income of $9.7 million, inclusive of transaction related charges recorded to date. 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 5 8 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. 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 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(2)..................... 48,754,178 49,164,227 48,640,372 49,390,821 Add common stock equivalents for shares issuable under Stock Option Plan(1)(2)....... 1,512,144 1,090,707 1,375,191 1,020,755 ----------- ------------ ----------- ----------- Weighted average number of shares outstanding adjusted for common stock equivalent................................... 50,266,322 50,254,934 50,015,563 50,411,576 =========== ============ =========== =========== Net income.................................... $ 47,809 5,031 137,626 84,851 Basic earnings per share...................... .98 .10 2.83 1.72 Diluted earnings per share.................... .95 .10 2.75 1.68
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. (2) Restated to reflect the 5% stock dividend issued October 31, 1997. 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. 6 9 8. Certain items in the consolidated financial statements for 1996 have been reclassified to conform to the 1997 presentation. 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. Following the October 3 acquisition of RCSB Financial, Inc. as discussed below, the bank has 221 branch locations: 102 branches in Ohio operating under the name Charter One Bank, 81 in Michigan under the name First Federal of Michigan ("First Federal"), and 38 in Western New York under the name Rochester Community Savings Bank. RESULTS OF OPERATIONS PERFORMANCE OVERVIEW The Company reported net income of $47.8 million, or $.95 per share, for the three months ended September 30, 1997. For the three months ended September 30, 1996, the Company reported net income of $5.0 million, or $.10 per share. The primary reason for this $42.8 million increase in net income was due to the special assessment resulting from an act of Congress relating to the Savings Association Insurance Fund ("SAIF") recapitalization. The Bank incurred an after-tax charge of $37.1 million on September 30, 1996 as its share of the effort to recapitalize the SAIF to the required level of 1.25% of deposits. Exclusive of this SAIF assessment, earnings increased $5.6 million for the quarter from $42.2 million in the third quarter of 1996. The $5.6 million, or 13.4%, increase was primarily due to increases in service fees and other charges and gains on sale. Net income for the nine months ended September 30, 1997 was $137.6 million, or $2.75 per share, as compared to $84.9 million, or $1.68 per share, for the 1996 period. This $52.8 million increase in net income was also primarily attributable to the $37.1 million special SAIF assessment in the 1996 period as discussed above. The remaining $15.7 million, or 12.8%, increase in net income was primarily due to increases in service fees and other charges, gains on sale and net interest income as well as lower loan loss provisions. 7 10 QUARTERLY EARNINGS SUMMARY (Figure 1)
THREE MONTHS ENDED --------------------------------------------------- 9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Net interest income..................................... $ 96,836 97,967 97,526 95,304 97,179 Provision for loan and lease losses..................... (260) (260) (220) (1,000) (1,001) Other income, excluding gains and losses...................................... 19,471 17,556 15,094 16,257 15,046 Administrative expenses, excluding the SAIF assessment................................... (47,026) (47,328) (46,697) (49,234) (47,885) ------- ------- ------- ------- ------- Pretax core earnings................................ 69,021 67,935 65,703 61,327 63,339 Gains and losses, net................................... 2,383 331 87 3,502 (71) Federal deposit insurance special assessment............................................ - - - - (56,258) ------- ------- ------- ------- ------- Income before federal income taxes.................. 71,404 68,266 65,790 64,829 7,010 Federal income taxes.................................... 23,595 22,535 21,704 21,958 1,979 ------- ------- ------- ------- ------- Net income............................................ $ 47,809 45,731 44,086 42,871 5,031 ======= ======= ======= ======= ======= Primary earnings per common and common equivalent share(1)................................... $ .95 .91 .89 .86 .10 ======= ======= ======= ======= =======
- --------------------------- (1) Restated to reflect the 5% stock dividend issued October 31, 1997. The increase in earnings in the third quarter of 1997 contributed to an 18.97% annualized return on average equity and a 1.30% annualized return on average assets. This compares to third quarter 1996 annualized returns of 18.08% and 1.23% (excluding the SAIF special assessment), respectively. These annualized returns and other selected ratios are set forth in Figure 2. SELECTED OPERATING RATIOS (Figure 2)
THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ------------------ 9/30/97 9/30/96 9/30/97 9/30/96 ------- ------- ------- ------- Annualized returns (excluding the SAIF special assessment): Return on average assets......................................... 1.30% 1.23% 1.28% 1.21% Return on average equity......................................... 18.97 18.08 18.68 17.73 Average equity to average assets................................. 6.87 6.78 6.86 6.84 Annualized operating ratios (excluding the SAIF special assessment): Net interest income to administrative expenses................... 205.92 202.94 207.25 207.96 Administrative expenses to average assets........................ 1.28 1.39 1.31 1.38 Efficiency ratio................................................. 39.48 41.67 39.98 41.90
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 SEPTEMBER 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)................ $ 9,315,773 $ 181,847 7.80% $ 7,500,770 $ 151,510 8.08% Mortgage-backed securities: Available for sale............... 1,068,980 18,621 6.97 1,172,413 20,047 6.84 Held to maturity................. 3,195,160 57,681 7.22 3,914,858 70,677 7.22 Investment securities available for sale................ 334,178 5,713 6.84 310,464 5,325 6.86 Other interest-earning assets(2)......................... 355,039 6,273 6.91 418,950 6,768 6.46 ----------- --------- ----------- --------- Total interest-earning assets... 14,269,130 270,135 7.56 13,317,455 254,327 7.64 --------- --------- Allowance for loan losses.......... (66,341) (65,564) Noninterest-earning assets(3)...... 482,055 505,961 ----------- ----------- Total assets.................. $ 14,684,844 $ 13,757,852 =========== =========== Interest bearing liabilities(4): Deposits: Checking accounts................ $ 883,063 2,557 1.15 $ 823,181 2,519 1.22 Savings accounts................. 815,781 4,577 2.23 916,086 5,568 2.43 Money market accounts............ 1,336,731 11,639 3.45 1,187,879 9,954 3.35 Certificates of deposit.......... 4,697,220 68,264 5.77 4,817,004 67,291 5.59 ----------- --------- ----------- --------- Total deposits................. 7,732,795 87,037 4.47 7,744,150 85,332 4.41 ----------- --------- ----------- --------- FHLB advances...................... 3,822,452 56,070 5.80 3,227,064 46,741 5.79 Other borrowings................... 1,920,412 30,192 6.18 1,680,699 25,075 5.97 ----------- --------- ----------- --------- Total borrowings................ 5,742,864 86,262 5.92 4,907,763 71,816 5.85 ----------- --------- ----------- --------- Total interest-bearing liabilities.................... 13,475,659 173,299 5.09 12,651,913 157,148 4.97 --------- --------- Non interest-bearing liabilities... 200,923 173,050 ----------- ----------- Total liabilities............... 13,676,582 12,824,963 Shareholders' equity................. 1,008,262 932,889 ----------- ----------- Total liabilities and shareholders' equity........... $ 14,684,844 $ 13,757,852 =========== =========== Net interest income.................. $ 96,836 $ 97,179 ========= ========= Interest rate spread................. 2.47 2.67 Net yield on average interest- earning assets(5)................... 2.71 2.92 Average interest-earning assets to average interest-bearing liabilities......................... 105.89% 105.26%
- --------------------------- (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
NINE MONTHS ENDED SEPTEMBER 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)................ $ 8,816,291 $ 517,805 7.83% $ 7,266,055 $ 443,845 8.14% Mortgage-backed securities: Available for sale............... 1,076,906 55,357 6.85 1,153,801 59,956 6.93 Held to maturity................. 3,376,363 182,822 7.22 3,924,940 211,993 7.20 Investment securities available for sale................ 309,501 16,061 6.92 329,624 16,375 6.62 Other interest-earning assets(2)......................... 323,378 16,767 6.84 345,763 16,886 6.51 ----------- --------- ----------- --------- Total interest-earning assets... 13,902,439 788,812 7.57 13,020,183 749,055 7.67 --------- --------- Allowance for loan losses.......... (66,028) (65,708) Noninterest-earning assets(3)...... 474,652 454,085 ----------- ----------- Total assets.................. $ 14,311,063 $ 13,408,560 =========== =========== Interest bearing liabilities(4): Deposits: Checking accounts................ $ 877,113 7,398 1.13 $ 755,557 7,202 1.27 Savings accounts................. 834,969 14,077 2.25 925,729 16,778 2.42 Money market accounts............ 1,350,344 35,054 3.47 1,003,378 24,274 3.23 Certificates of deposit.......... 4,710,603 201,476 5.72 4,549,431 192,875 5.65 ----------- --------- ----------- --------- Total deposits................. 7,773,029 258,005 4.44 7,234,095 241,129 4.44 ----------- --------- ----------- --------- FHLB advances...................... 3,471,307 151,125 5.79 3,238,286 137,858 5.68 Other borrowings................... 1,902,972 87,353 6.07 1,847,788 81,980 5.92 ----------- --------- ----------- --------- Total borrowings................ 5,374,279 238,478 5.89 5,086,074 219,838 5.76 ----------- --------- ----------- --------- Total interest-bearing liabilities.................... 13,147,308 496,483 5.03 12,320,169 460,967 4.99 --------- --------- Non interest-bearing liabilities... 181,340 170,996 ----------- ----------- Total liabilities............... 13,328,648 12,491,165 Shareholders' equity................. 982,415 917,395 ----------- ----------- Total liabilities and shareholders' equity........... $ 14,311,063 $ 13,408,560 =========== =========== Net interest income.................. $ 292,329 $ 288,088 ========= ========= Interest rate spread................. 2.54 2.68 Net yield on average interest- earning assets(5)................... 2.80 2.95 Average interest-earning assets to average interest-bearing liabilities......................... 105.74% 105.68%
- --------------------------- (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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 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.................. $ (5,435) 35,772 30,337 (17,017) 90,977 73,960 Mortgage-backed securities: Available for sale.............. 385 (1,811) (1,426) (640) (3,959) (4,599) Held to maturity................ (4) (12,992) (12,996) 534 (29,705) (29,171) Investment securities available for sale............... (18) 406 388 852 (1,166) (314) Other interest-earning assets........................... 745 (1,240) (495) 1,952 (2,071) (119) ------- -------- -------- ------- ------- -------- Total......................... (4,327) 20,135 15,808 (14,319) 54,076 39,757 ------- -------- -------- ------- ------- -------- Interest expense: Checking accounts................. (105) 143 38 (499) 695 196 Savings accounts.................. (407) (584) (991) (1,125) (1,576) (2,701) Money market accounts............. 398 1,287 1,685 1,884 8,896 10,780 Certificates of deposit........... 2,571 (1,598) 973 1,724 6,877 8,601 Federal Home Loan Bank advances ................... 449 8,880 9,329 2,667 10,600 13,267 Other borrowings.................. 1,663 3,454 5,117 3,005 2,368 5,373 ------- -------- -------- ------- ------- -------- Total......................... 4,569 11,582 16,151 7,656 27,860 35,516 ------- -------- -------- ------- ------- -------- Change in net interest income............................. $ (8,896) 8,553 (343) (21,975) 26,216 4,241 ======= ======== ======== ======= ======= ========
Net interest income for the third quarter of 1997 was $96.8 million, a decrease of $343,000 as compared to the third quarter of 1996. The primary reason for this decrease was due to a narrowing of interest rate spreads attributable, in part, to competitive pressures and the flattening of the yield curve. The yield on interest-earning assets decreased to 7.56% for the three months ended September 30, 1997 as compared to 7.64% for the third quarter of 1996. The primary reason for this decline was due to 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 12 basis points higher in the third quarter of 1997 as compared to the same period in 1996 primarily due to borrowed funds. 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 third quarter of 1997 to decline by 20 basis points to 2.47%. The net yield on interest-earning assets declined by 21 basis points to 2.71% during the third quarter of 1997 as compared to the third quarter of 1996. This decline in the interest rate spread caused net interest income to decrease by $8.9 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 $8.6 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 $20.1 million. Due to high volumes of loan and lease originations since September 30, 1996, the average balance of loans and leases was $1.8 billion higher during the third quarter of 1997 as compared to 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 third quarter of 1997 was $951.7 million higher than in the third 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 borrowed funds, increased $823.7 million. For the nine months ended September 30, 1997, net interest income was $292.3 million, an increase of $4.2 million, or 1.5%, over the comparable period in 1996. This increase was primarily attributable to increased volumes of interest-earning assets and interest-bearing liabilities. Increases in the average balance of loans and 11 14 leases caused the average balance of interest-earning assets to increase by $882.3 million. The average balance of interest-bearing liabilities increased by $827.1 for the first nine 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 when the Bank purchased 21 branch offices with $796.7 million in deposits in the Detroit Metropolitan area. The increases in the balances of interest-earning assets and interest-bearing liabilities caused net interest income to increase by $26.2 million. This was partially offset by a declining interest rate spread. The interest rate spread was 2.54% for the first nine months of 1997 as compared to 2.68% for the first nine months of 1996. This caused net interest income to decline by $22.0 million for the nine months 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 10 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)
SEPTEMBER 30, 1997 DECEMBER 31, 1996 ------------------ ------------------ (DOLLARS IN THOUSANDS) Weighted average yield: Loans and leases...................................................... 7.84% 7.96% Mortgage-backed securities............................................ 7.18 7.22 Investment securities................................................. 6.79 6.89 Other interest-earning assets......................................... 7.35 7.21 Total interest-earning assets......................................... 7.61 7.66 Weighted average cost(1): Deposits.............................................................. 4.48 4.48 Federal Home Loan Bank advances....................................... 5.83 5.81 Other borrowings...................................................... 6.27 6.15 Total interest-bearing liabilities.................................... 5.12 5.04 Interest rate spread.................................................... 2.49 2.62 Net yield on interest-earning assets.................................... 2.79 2.87 Interest-earning assets................................................. $14,744,989 $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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------ 1997 1996 1997 1996 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Loan servicing fees........................................... $ 3,228 3,463 8,594 8,485 Service fees and other charges: Retail deposit account service charges and fees............. 11,509 8,044 29,143 20,012 Fees on insurance, annuity, and mutual fund sales........... 2,232 1,379 6,927 3,726 Other branch service fees................................... 352 331 1,222 1,180 Miscellaneous............................................... 45 7 153 37 -------- -------- -------- ------- Total..................................................... 14,138 9,761 37,445 24,955 Leasing operations............................................ 1,907 1,697 5,440 5,204 Net gains: Real estate................................................. 136 73 215 402 Mortgage-backed securities.................................. 2,403 (1,476) 2,403 (1,758) Investment securities....................................... - 1 - (2,024) Loans....................................................... 355 1,459 794 1,770 Other....................................................... (511) (128) (611) 1 -------- -------- -------- ------- Total..................................................... 2,383 (71) 2,801 (1,609) Other......................................................... 198 125 642 344 -------- -------- -------- ------- Total.................................................... $ 21,854 14,975 54,922 37,379 ======== ======== ======== =======
OTHER INCOME Other income was $21.9 million for the third quarter of 1997 as compared to $15.0 million for the same period in 1996. This $6.9 million, or 45.9%, increase was primarily due to increases in recurring fee income as illustrated in figure 6 above and due to gains on mortgage-backed security sales in 1997. 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 services charges, primarily checking account service charges, increased $3.5 million primarily due to a new fee for checking accounts with sustained overdraft balances. 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; plus, moving into the Michigan market with these products in early 1996 has resulted in higher fee income during the current quarter as compared to the third quarter of 1996. The sale of mortgage-backed securities from the Company's available for sale portfolio in the third quarter of 1997 which resulted in a net gain of $2.4 million was executed primarily to eliminate small pool securities in the portfolio. Other income was $54.9 million for the nine months ended September 30, 1997 as compared to $37.4 million for the same period in 1996. This $17.5 million, or 46.9%, increase was also primarily attributable to increases in recurring fee income as illustrated in figure 6 above and due to gains on mortgage-backed security sales in 1997. In addition to the discussion above relating to increases in retail deposit fees and insurance, annuity and mutual funds sales, the Bank acquired over 55,000 additional checking accounts in the acquisition of 21 branches from First Nationwide Bank on June 28, 1996. The sale of mortgage-backed securities from the Company's available for sale portfolio in 1997 which resulted in a net gain of $2.4 million was executed primarily to eliminate small pool securities in the portfolio 13 16 ADMINISTRATIVE EXPENSES (EXCLUDING SAIF SPECIAL ASSESSMENT)(Figure 7)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------- 1997 1996 1997 1996 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Compensation and employee benefits............................ $ 23,384 23,784 70,803 68,434 Net occupancy and equipment................................... 7,624 6,831 22,406 19,615 Federal deposit insurance premiums............................ 1,256 4,488 3,807 12,571 Amortization of goodwill...................................... 1,113 1,121 3,340 1,500 Other administrative expenses................................. 13,649 11,661 40,695 36,412 ------- ------- -------- -------- Administrative expenses before federal deposit insurance special assessment............................... $ 47,026 47,885 141,051 138,532 ======= ======= ======== ======== Number of full-time equivalent employees at end of period............................................ 2,702 2,555 2,702 2,555 Net interest income to administrative expenses................ 205.92% 202.94% 207.25% 207.96% Administrative expenses to average assets (annualized)........ 1.28 1.39 1.31 1.38 Efficiency ratio.............................................. 39.48 41.67 39.98 41.90
ADMINISTRATIVE EXPENSES Administrative expenses were $47.0 million during the third quarter of 1997. This is an $859,000, or 1.8%, decrease as compared to the third quarter of 1996 which had $47.9 million in administrative expenses before the federal deposit insurance special assessment. Other administrative expenses and net occupancy and equipment expenses increased primarily due to expanded branch and subsidiary operations in 1997. Those increases were offset by a reduction of $3.2 million in the federal deposit insurance premium expense and reduced compensation and employee benefits. 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. That special assessment for recapitalization was incurred by the Bank in the third quarter of 1996 resulting in an expense of $56.3 million. Administrative expenses were $141.1 million for the nine months ended September 30, 1997. This is a $2.5 million, or 1.8%, increase as compared to the same period in 1996 which had $138.5 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. 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 their subsidiary operations relating to insurance, annuity and mutual fund sales during 1996 which fully impacted the 1997 period. 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 1.28% for the third quarter of 1997 and 1.31% for the first nine months of 1997. This compares favorably to the 1996 percentages of 1.39% and 1.38% for the third quarter and for the first nine months of 1996, respectively. Also, the Company's efficiency ratio of 39.48% for the third quarter of 1997 and 39.98% for the first nine months of 1997 compared favorably to the 41.67% and the 41.90% efficiency ratio during the third quarter and first nine 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 $23.6 million for the three months ending September 30, 1997. This was $21.6 million higher than the federal income tax expense during the same period of 1996. This increase was primarily due to an increase in pretax income. The effective tax rates were 33.0% for the 1997 period and 28.2% for the 1996 period. Federal income tax expense was $67.8 million for the nine months ended September 30, 1997 an increase of $25.0 million as compared to the federal income tax expense of $42.8 million for the nine months ended September 30, 14 17 1996. This increase was also primarily attributable to an increase in pretax income. The effective tax rates were 33.0% for the 1997 period and 33.5% for the 1996 period. FINANCIAL CONDITION Figure 8 sets forth information concerning the composition of the Company's assets, liabilities and shareholders' equity at September 30, 1997 and December 31, 1996. FINANCIAL CONDITION (Figure 8)
SEPTEMBER 30, 1997 DECEMBER 31, 1996 ----------------------- --------------------- PERCENT PERCENT OF OF AMOUNT TOTAL AMOUNT TOTAL ----------- ------ ----------- ------ (DOLLARS IN THOUSANDS) Assets: Cash and cash equivalents..................... $ 189,339 1.2% $ 270,304 1.9% Investment securities......................... 389,693 2.6 243,632 1.8 Mortgage-backed securities.................... 4,178,846 27.5 4,704,074 33.9 Loans and leases, net......................... 9,786,005 64.4 8,100,342 58.3 Other assets.................................. 653,110 4.3 575,489 4.1 ----------- ------ ----------- ------ Total...................................... $ 15,196,993 100.0% $ 13,893,841 100.0% =========== ====== =========== ====== Liabilities: Deposits...................................... $ 7,940,796 52.3% $ 7,841,197 56.4% Borrowings.................................... 5,939,796 39.1 4,955,291 35.7 Other liabilities............................. 244,471 1.6 175,629 1.3 Shareholders' equity.......................... 1,071,930 7.0 921,724 6.6 ----------- ------ ----------- ------ Total...................................... $ 15,196,993 100.0% $ 13,893,841 100.0% =========== ====== =========== ======
OVERVIEW At September 30, 1997, total assets were $15.2 billion which was $1.3 billion 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 $1.7 billion to $9.8 billion at September 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. 15 18 LOANS AND LEASES COMPOSITION OF LOANS AND LEASES (Figure 9)
SEPTEMBER 30, 1997 DECEMBER 31, 1996 --------------------- -------------------- PERCENT PERCENT OF OF AMOUNT TOTAL AMOUNT TOTAL ---------- ------ ---------- ----- (DOLLARS IN THOUSANDS) Real estate: One-to-four family..................................... $ 7,158,534 73.2% $ 6,072,927 75.0% Multifamily............................................ 278,450 2.8 290,195 3.6 Commercial............................................. 353,383 3.7 348,787 4.4 Construction........................................... 373,395 3.9 302,405 3.7 ---------- ------ ---------- ----- Total real estate................................... 8,163,762 83.6 7,014,314 86.7 Consumer................................................. 1,300,174 13.2 929,204 11.4 Leases................................................... 358,983 3.7 251,133 3.1 Business................................................. 160,207 1.6 100,302 1.2 ---------- ------ ---------- ----- Total loans and leases................................ 9,983,126 102.1 8,294,953 102.4 Less net items........................................... 197,121 2.1 194,611 2.4 ---------- ------ ---------- ----- Loans and leases, net............................... $ 9,786,005 100.0% $ 8,100,342 100.0% ========== ====== ========== =====
LOAN AND LEASE ACTIVITY (Figure 10)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ------------------------ 1997 1996 1997 1996 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Originations: Real estate: Permanent: One-to-four family................................. $ 560,050 620,123 1,548,580 1,946,722 Multifamily........................................ 1,570 5,295 18,859 25,367 Commercial......................................... 15,816 9,993 53,907 56,107 ---------- ----------- ----------- ---------- Total permanent.................................. 577,436 635,411 1,621,346 2,028,196 ---------- ----------- ----------- ---------- Construction: One-to-four family................................. 106,601 70,397 282,688 242,800 Multifamily........................................ 5,350 5,760 7,714 5,910 Commercial......................................... 5,630 8,600 15,225 15,800 ---------- ----------- ----------- ---------- Total construction............................... 117,581 84,757 305,627 264,510 ---------- ----------- ----------- ---------- Total real estate loans originated............. 695,017 720,168 1,926,973 2,292,706 ---------- ----------- ----------- ---------- Consumer line of credit draws........................ 80,894 59,985 221,092 142,844 Consumer............................................. 137,175 91,402 386,411 351,324 Business line of credit draws........................ 30,097 17,337 73,931 53,736 Business............................................. 25,339 8,737 58,690 32,047 Leases(1)............................................ 67,838 60,189 159,029 129,664 ---------- ----------- ----------- ---------- Total loans and leases originated.............. 1,036,360 957,818 2,826,126 3,002,321 ---------- ----------- ----------- ---------- Loans purchased.......................................... 295,318 - 295,318 - Sales and principal reductions: Loans sold............................................. 11,086 35,420 28,863 52,887 Loans exchanged for MBS................................ - - - 510,435 Principal reductions................................... 559,249 398,001 1,404,408 1,372,983 ---------- ----------- ----------- ---------- Total sales and principal reductions............. 570,335 433,421 1,433,271 1,936,305 ---------- ----------- ----------- ---------- Increase before net items...................... $ 761,343 524,397 1,688,173 1,066,016 ========== =========== =========== ==========
- --------------------------- (1) Not included herein are $1.2 and $2.7 million in operating leases originated during the three months ended September 30, 1997 and 1996, respectively and $4.4 million and $7.3 million for the nine months ended September 30, 1997 and 1996. 16 19 INVESTMENT SECURITIES The entire investment securities portfolio was classified as available for sale at both September 30, 1997 and December 31, 1996. Figure 11 summarizes the fair values of the portfolio at those dates. INVESTMENT SECURITIES PORTFOLIO (Figure 11)
SEPTEMBER 30, 1997 DECEMBER 31, 1996 ------------------ ------------------ (DOLLARS IN THOUSANDS) U.S. Treasury and agency securities.................................... $ 382,166 238,135 Corporate notes and commercial paper................................... - 4,107 Other.................................................................. 7,527 1,390 -------- --------- Total................................................................ $ 389,693 243,632 ======== ========= Weighted average rate................................................ 6.79% 6.89% ======== =========
MORTGAGE-BACKED SECURITIES Figure 12 summarizes the mortgage-backed securities ("MBS") portfolios at September 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)
SEPTEMBER 30, 1997 DECEMBER 31, 1996 ------------------ ----------------- (DOLLARS IN THOUSANDS) AVAILABLE FOR SALE Participation certificates: Government agency issues: GNMA.................................................................. $ 110 - FHLMC................................................................. 13,281 13,335 Collateralized mortgage obligations: Government agency issues: FHLMC................................................................. 352,786 350,158 FNMA.................................................................. 264,720 264,682 Private issues.......................................................... 447,077 442,530 ---------- ---------- Total mortgage-backed securities available for sale................... 1,077,974 1,070,705 ---------- ---------- HELD TO MATURITY Participation certificates: Government agency issues: FNMA.................................................................. 1,069,820 1,246,398 FHLMC................................................................. 472,416 636,228 GNMA.................................................................. 164,521 188,057 Private issues.......................................................... 341,104 407,564 Collateralized mortgage obligations: Government agency issues: FNMA.................................................................. 159,974 162,646 FHLMC................................................................. 80,953 82,433 Private issues.......................................................... 812,084 910,043 ---------- ---------- Total mortgage-backed securities held to maturity................... 3,100,872 3,633,369 ---------- ---------- Total............................................................ $ 4,178,846 4,704,074 ========== ==========
17 20 MORTGAGE-BACKED SECURITIES BY PAYMENT TYPE (Figure 13)
SEPTEMBER 30, 1997 DECEMBER 31, 1996 ------------------------ ------------------------- BOOK AVERAGE BOOK AVERAGE VALUE RATE VALUE RATE --------- ------- ----------- -------- (DOLLARS IN THOUSANDS) AVAILABLE FOR SALE Adjustable rate: Collateralized mortgage obligations.............. $1,064,344 7.00% $ 1,056,087 6.94% --------- ----------- Total adjustable rate.......................... 1,064,344 7.00 1,056,087 6.94 --------- ----------- Fixed rate: Participation certificates....................... 13,391 6.30 13,335 6.03 Collateralized mortgage obligations.............. 239 4.75 1,283 5.09 --------- ----------- Total fixed rate............................... 13,630 6.27 14,618 5.94 --------- ----------- Total available for sale..................... 1,077,974 6.99 1,070,705 6.93 --------- ----------- HELD TO MATURITY Adjustable rate: Participation certificates....................... 863,289 7.16 1,019,324 7.16 Collateralized mortgage obligations.............. 282,601 7.39 301,866 7.23 --------- ----------- Total adjustable rate.......................... 1,145,890 7.21 1,321,190 7.18 --------- ----------- Fixed rate: Participation certificates....................... 1,184,572 7.34 1,458,923 7.51 Collateralized mortgage obligations.............. 770,410 7.12 853,256 7.15 --------- ----------- Total fixed rate............................... 1,954,982 7.25 2,312,179 7.38 --------- ----------- Total held to maturity....................... 3,100,872 7.24 3,633,369 7.31 --------- ----------- Total mortgage-backed securities........... $4,178,846 7.18% $ 4,704,074 7.22% ========= ===========
18 21 ASSET QUALITY ANALYSIS OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES (Figure 14)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------ 1997 1996 1997 1996 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Balance, beginning of period................................ $ 65,935 65,268 65,922 64,436 Provision for loan and lease losses......................... 260 1,001 740 3,001 Acquired through acquisition................................ 2,963 - 2,963 - Loans and leases charged off: Mortgage.................................................. (2,351) (504) (2,692) (1,484) Consumer.................................................. (161) (114) (417) (531) Leases.................................................... - - - - Business.................................................. - (2) (42) (3) -------- ------- ------- -------- Total charge-offs....................................... (2,512) (620) (3,151) (2,018) -------- ------- ------- -------- Recoveries: Mortgage.................................................. 37 10 167 102 Consumer.................................................. 30 52 67 190 Leases.................................................... - - - - Business.................................................. 1 - 6 - -------- ------- ------- -------- Total recoveries....................................... 68 62 240 292 -------- ------- ------- -------- Net loan and lease charge-offs....................... (2,444) (558) (2,911) (1,726) -------- ------- ------- -------- Balance, end of period...................................... $ 66,714 65,711 66,714 65,711 ======== ======= ======= ======== Net charge-offs to average loans and leases (annualized) .10% .03% .04% .03%
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES (Figure 15)
SEPTEMBER 30, 1997 DECEMBER 31, 1996 ----------------- ----------------- (DOLLARS IN THOUSANDS) Mortgage.................................................................... $ 53,661 53,133 Consumer.................................................................... 6,464 6,765 Leases...................................................................... 1,577 977 Business.................................................................... 5,012 5,047 ------- ------- Total..................................................................... $ 66,714 65,922 ======= ======= Percent of loans and leases to ending loans and leases: Mortgage.................................................................. 81.4% 84.3% Consumer.................................................................. 13.3 11.4 Leases.................................................................... 3.7 3.1 Business.................................................................. 1.6 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 .68% at September 30, 1997, down from .81% at December 31, 1996. Credit quality remained high, with nonperforming assets at only .27% of total assets at September 30, 1997. Net charge-offs totaled $2.4 million and $2.9 million for the three and nine months ended September 30, 1997, respectively. Net charge-offs included $2.2 million related to two previously classified commercial real estate loans. Net charge-offs for the comparable periods of 1996 were $558,000 and $1.7 million. Management believes that the allowance for loan and lease losses has been established in accordance with generally accepted accounting principles based on the best information available. However, future adjustments to reserves may be necessary and net income could be significantly affected if circumstances and/or economic conditions differ substantially from the assumptions used in making the initial determinations. 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 19 22 loan and lease losses. Such agencies may require the recognition of additions to the allowance based on their judgments of information available to them at the time of their examination. Figure 16 sets forth information concerning nonperforming assets and the allowance for loan lease losses. At September 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)
SEPTEMBER 30, 1997 DECEMBER 31, 1996 ----------------- ----------------- (DOLLARS IN THOUSANDS) Nonperforming loans and leases: Nonaccrual loans and leases: Mortgage loans: One-to-four family................................................. $ 12,650 10,264 Multifamily and commercial......................................... 1,011 2,372 Construction and land.............................................. 2,185 827 ------- ------- Total mortgage loans............................................. 15,846 13,463 Consumer............................................................. - - Business............................................................. - 95 Lease financings..................................................... - - ------- ------- Total nonaccrual loans and leases................................ 15,846 13,558 ------- ------- Accruing loans and leases delinquent more than 90 days: Mortgage loans: One-to-four family................................................. 6,502 5,961 Multifamily and commercial......................................... - - Construction and land.............................................. - - ------- ------- Total mortgage loans............................................. 6,502 5,961 Consumer............................................................. 3,333 544 Business............................................................. 1,584 58 Lease financings..................................................... - - ------- ------- Total accruing 90-day delinquent loans and leases................ 11,419 6,563 ------- ------- Restructured real estate loans......................................... 8,390 15,294 ------- ------- Total nonperforming loans and leases............................. 35,655 35,415 Real estate acquired through foreclosure and other..................... 6,087 7,030 ------- ------- Total nonperforming assets....................................... $ 41,742 42,445 ======= ======= Ratio of: Nonperforming loans and leases to total loans and leases............. .36% .44% Nonperforming assets to total assets................................. .27 .31 Allowance for loan and lease losses to: Nonperforming loans and leases..................................... 187.11 186.14 Total loans and leases before allowance............................ .68 .81
Nonperforming assets at September 30, 1997 totaled $41.7 million, down from $42.4 million from December 31, 1996. The ratio of nonperforming loans to total loans was .36% at September 30, 1997 as compared to .44% at December 31, 1996. At September 30, 1997, there were $29.0 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 $5.2 million loan to a manufacturing company where the borrower is experiencing operating losses 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 September 30, 1997 and December 31, 1996, 57% and 61% of interest-bearing liabilities were in the form of deposits and 43% 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)
SEPTEMBER 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........................ $ 563,070 1.73% 7.1% $ 558,753 1.86% 7.1% Noninterest-bearing..................... 329,200 - 4.1 300,685 - 3.8 Savings accounts.......................... 817,517 2.24 10.3 868,361 2.42 11.1 Money market accounts..................... 1,375,053 3.21 17.3 1,344,973 3.52 17.2 Certificates of deposit................... 4,854,444 5.94 61.2 4,766,369 5.85 60.8 ----------- ------ ---------- ------ Deposits.............................. 7,939,284 4.54 100.0% 7,839,141 4.56 100.0% ====== ====== Plus unamortized premium on deposits purchased.................... 1,512 2,056 ----------- ---------- Deposits, net........................ $ 7,940,796 $ 7,841,197 =========== ========== Weighted average cost including the annualized effect of applicable swaps, floors, and amortization of deferred gains on terminated swaps......................... 4.48% 4.48% ===== =====
BORROWINGS At September 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 $6.1 billion in real estate loans and $3.0 billion in mortgage-backed securities. 21 24 FEDERAL HOME LOAN BANK ADVANCES (Figure 18)
SEPTEMBER 30, 1997 DECEMBER 31, 1996 ----------------------- ------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE ------ --------- ------ ---------- (DOLLARS IN THOUSANDS) Fixed-rate advances........................................ $ 3,080,342 5.86% $ 1,791,332 5.99% Variable-rate advances..................................... 802,296 5.72 1,403,000 5.56 ---------- ---------- Advances................................................. 3,882,638 5.83 3,194,332 5.80 Unamortized premium........................................ 10 1 ---------- ---------- Total advances, net...................................... $ 3,882,648 $ 3,194,333 ========== ========== Weighted average cost including the annualized effect of applicable caps and amortization of deferred gains on terminated swaps....................... 5.83% 5.81% ===== ====
The variable-rate advances reprice based upon three-month LIBOR at three-month intervals, and included $48 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)
SEPTEMBER 30, 1997 DECEMBER 31, 1996 ----------------------- ------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE ------ --------- ------ ---------- (DOLLARS IN THOUSANDS) Short term............................................... $ 141,824 5.80% $ - - Long term: Fixed rate............................................. 1,379,846 5.78 1,374,784 5.58% Variable rate.......................................... 320,000 5.83 174,994 5.93 ---------- ---------- Weighted average cost including amortization of fees................................... $ 1,841,670 5.79 $ 1,549,778 5.62 ========== ========== Weighted average cost including the annualized effect of amortization of deferred gains on terminated swaps.................................... 5.78% 5.59% ===== ====
The long-term fixed-rate agreements include $250 million convertible, at the counterparty's option, to a variable rate based on three-month LIBOR. The agreements are convertible 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)
SEPTEMBER 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 5.93%(1) 10.09% $ 100,000 5.77%(1) 10.09% ======== ======== Variable payment and fixed receipt: Maturing in: 1998.......................... $ 55,000 6.06% 5.74% $ 115,000 6.40% 5.53% 1999.......................... 110,000 6.55 5.75 - - - 2000.......................... 20,000 6.79 5.73 110,000 7.06 5.54 2001.......................... 275,000 7.14 5.53 140,000 7.28 5.53 -------- -------- Total....................... $ 460,000 6.85% 5.62%(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 September 30, 1997, the notional principal amount outstanding was $34.3 million with a weighted average receipt rate of 31.71% and payment rate of 5.75%. 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 September 30, 1997, interest received based on a 5.85% 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 $301,000 at September 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 September 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 1997 1996 1997 1996 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Interest expense (income): Deposits................................................. $ (4,429) (2,491) (12,626) (5,760) FHLB advances............................................ (71) 420 115 1,339 Reverse repurchase agreements............................ (60) (443) (429) (1,616) ------- ------- -------- ------- Total.................................................. $ (4,560) (2,514) (12,940) (6,037) ======= ======= ======== =======
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 September 30, 1997 was 5.59%. 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 September 30, 1997, the Bank and its subsidiaries had outstanding commitments to originate loans and leases of $587.6 million, unfunded lines of consumer credit totaling $609.3 million (a significant portion of which normally remains undrawn) and unfunded lines of commercial (business loans) credit totaling $50.5 million. Outstanding letters of credit totaled $17.1 million as of September 30, 1997. Certificates of deposit scheduled to mature in one year or less at September 30, 1997 totaled $3.6 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 September 30, 1997, the Bank had $1.9 billion of advances from the FHLB and $247 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 SEPTEMBER 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).......... $ 917,895 10.78% $ 680,959 8.0% $ 851,199 10.0% Tier 1 capital (to risk-weighted assets)......... 855,530 10.05 N/A N/A 510,719 6.0 Tier 1 capital (to adjusted tangible assets)..... 855,530 5.64 455,146 3.0 758,577 5.0 Tangible capital (to adjusted tangible assets)... 855,530 5.64 227,573 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 September 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)
3RD QUARTER 2ND QUARTER 1ST QUARTER 4TH QUARTER 3RD QUARTER 1997 1997 1997 1996 1996 ----------- ----------- ----------- ----------- ----------- Market price of common stock(1): High......................................... $ 58.57 51.43 47.74 42.62 38.63 Low.......................................... 49.05 40.24 39.17 36.31 30.50 Close........................................ 56.31 51.31 41.79 40.00 38.10 Dividends declared and paid.................... .24 .24 .22 .22 .21
- --------------------------- (1) Restated to reflect the 5% stock dividend issued October 31, 1997. 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 49,722,369 common shares outstanding (adjusted for subsequent stock dividends). As a result of the pending merger with RCSB the Company has rescinded its stock repurchase program. The Company had 908,731 shares remaining unpurchased. On August 20, 1997, the Board of Directors of Charter One Financial, Inc. approved a 5% stock dividend which was distributed October 31, 1997, to shareholders of record on October 17, 1997. 26 29 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ITEM 5. OTHER INFORMATION MERGER On October 3, 1997, the Company completed a strategic alliance with RCSB Financial, Inc. ("RCSB"). For the 30 days subsequent to the merger date, the combined operations of the Company and RCSB produced interest income of $120.5 million, other income of $13.1 million and net income of $9.7 million, inclusive of transaction related charges recorded to date. DIVIDEND On October 15, 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 November 20, 1997 to shareholders of record as of November 6, 1997. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 11 - Computation of Per Share Earnings Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K A report on Form 8-K was filed on July 29, 1997 relating to the Charter One slide show presentation presented at a July 29, 1997 conference. On August 8, 1997, the Company filed a report on Form 8-K to file a press release announcing the recision of Charter One's Stock Repurchase Program. On August 27, 1997, the Company filed a report on Form 8-K relating to a slide show presentation. 27 30 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: 11/14/97 /s/ Robert J. Vana ---------------------------------------------------- Robert J. Vana Chief Corporate Counsel and Secretary Date: 11/14/97 /s/ Richard W. Neu ---------------------------------------------------- Richard W. Neu Executive Vice President and Chief Financial Officer 28 EX-11 2 EXHIBIT 11 1 EXHIBIT 11
CHARTER ONE FINANCIAL, INC. COMPUTATION OF PER SHARE EARNINGS THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) COMPUTATION OF PRIMARY EARNINGS PER SHARE(3): Weighted average number of common shares outstanding........................................ 48,754,178 49,164,227 48,640,372 49,390,821 Add common stock equivalents for shares issuable under: Stock Appreciation Rights Plan(1)................. 52,403 50,592 51,881 50,941 Stock Option Plan(1).............................. 1,512,144 1,090,707 1,375,191 1,020,755 ------------ ------------ ----------- ------------ Weighted average number of shares outstanding adjusted for common stock equivalents......... 50,318,725 50,305,526 50,067,444 50,462,517 ============ ============ =========== ============ Net income............................................ $ 47,809 5,031 137,626 84,851 Primary earnings per share............................ $ .95 .10 2.75 1.68 COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE(3): Weighted average number of common shares outstanding........................................ 48,754,178 49,209,902 48,640,347 49,526,796 Add common stock equivalents for shares issuable under: Stock Appreciation Rights Plan(2)................. 52,620 51,306 52,129 52,527 Stock Option Plan(2).............................. 1,608,679 1,313,491 1,494,396 1,143,627 ------------ ------------ ----------- ------------ Weighted average number of shares outstanding adjusted for common stock equivalents......... 50,415,477 50,574,699 50,186,872 50,722,950 ============ ============ =========== ============ Net income............................................ $ 47,809 5,031 137,626 84,851 Fully diluted earnings per share...................... $ .95 .10 2.74 1.67
- --------------------------- (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. (3) Restated to reflect the 5% stock dividend issued October 31, 1997. 29 EX-27 3 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL SATEMENTS OF CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 117,104 0 72,235 0 1,467,667 3,100,872 3,151,150 9,852,719 66,714 15,196,993 7,940,796 141,824 244,471 5,797,972 0 0 484 1,071,446 15,196,993 517,805 254,240 16,767 788,812 258,005 496,483 292,329 740 0 141,051 205,460 205,460 0 0 137,626 2.75 2.74 2.80 15,846 11,419 8,390 29,000 65,922 3,151 240 66,714 66,714 0 0
EX-99 4 EXHIBIT 99 1 EXHIBIT 99 CHARTER ONE FINANCIAL, INC. SELECTED MONTHLY FINANCIAL HIGHLIGHTS
SELECTED FINANCIAL DATA AT MONTH END 9/30/97 8/31/97 7/31/97 (DOLLARS IN THOUSANDS) Total assets...................................................... $ 15,196,993 14,702,406 14,915,224 Cash & cash equivalents........................................... 189,339 201,934 506,976 Investment securities............................................. 389,693 359,236 358,950 Mortgage-backed securities........................................ 4,178,846 4,266,459 4,325,309 Loans receivable.................................................. 9,786,005 9,293,986 9,149,157 Allowance for loss................................................ 66,714 65,979 65,983 Portfolio of loans serviced for others............................ 1,302,580 1,322,681 1,341,686 Common shares outstanding, net.................................... 47,202,849 42,249,711 46,215,136 Treasury shares................................................... 1,219,399 1,222,775 1,257,350 Deposits: Checking........................................................ $ 892,270 918,712 863,705 Savings......................................................... 817,517 807,568 814,353 MMDA............................................................ 1,375,053 1,321,645 1,331,152 Certificates: 6 month or less............................................... 484,299 471,594 496,678 6 month to 1 year............................................. 1,494,085 1,415,007 1,417,232 Retail jumbos................................................. 243,265 236,284 231,733 Other......................................................... 2,634,307 2,538,504 2,534,407 ----------- ------------ ----------- Total CDS................................................... 4,855,956 4,661,389 4,680,050 ----------- ------------ ----------- Total deposits............................................ $ 7,940,796 7,709,314 7,689,260 =========== ============ =========== Borrowings: Reverse repurchase agreements................................... $ 1,841,670 1,690,545 1,690,545 FHLB advances................................................... 3,882,648 3,836,888 4,089,129 Other........................................................... 215,478 214,787 213,443 ----------- ------------ ----------- Total borrowings.............................................. $ 5,939,796 5,742,220 5,993,117 =========== ============ =========== Weighted average rates: Loans........................................................... 7.84% 7.83% 7.84% MBS............................................................. 7.18 7.19 7.20 Loans and MBS................................................. 7.64 7.63 7.63 Other investments............................................... 7.05 7.05 6.63 Total interest-earning assets................................. 7.61 7.60 7.56 Deposits........................................................ 4.48 4.43 4.45 Borrowings...................................................... 5.98 5.97 5.95 Total interest-bearing liabilities............................ 5.12 5.09 5.11 Interest rate spread.............................................. 2.49% 2.51% 2.45% Net yield on interest-earning assets.............................. 2.79% 2.80% 2.75% Number of employees (FTEs)........................................ 2,702 2,609 2,635
31 2 Selected Activity for the Month and Quarter
ONE MONTH ENDED 3 MONTHS --------------------------------------- ENDED 9/30/97 8/31/97 7/31/97 9/30/97 --------- --------- --------- ---------- (DOLLARS IN THOUSANDS) Loan activity: Originations: Real Estate: Permanent: One-to-four family............................. $ 203,611 187,622 168,817 560,050 Multi-family................................... - 125 1,445 1,570 Commercial..................................... 7,741 4,675 3,400 15,816 --------- --------- --------- ---------- Total permanent.............................. 211,352 192,422 173,662 577,436 --------- --------- --------- ---------- Construction: One-to-four family............................. 30,994 37,112 38,495 106,601 Multi family................................... - 4,030 1,320 5,350 Commercial..................................... 5,380 250 - 5,630 --------- --------- --------- ---------- Total construction........................... 36,374 41,392 39,815 117,581 --------- --------- --------- ---------- Total real estate loans originated......... 247,726 233,814 213,477 695,017 --------- --------- --------- ---------- Consumer line of credit draws...................... 26,752 25,266 28,876 80,894 Consumer........................................... 53,569 36,571 47,035 137,175 Business line of credit draws...................... 8,433 11,747 9,917 30,097 Lease financings................................... 33,462 24,512 9,864 67,838 Business........................................... 10,502 9,613 5,224 25,339 --------- --------- --------- ---------- Total originated................................ $ 380,444 341,523 314,393 1,036,360 ========= ========= ========= ========== Loans purchased...................................... $ 295,318 - - 295,318 Loans sold........................................... $ 4,183 3,827 3,076 11,086 Principal reductions................................. $ 191,205 190,017 178,027 559,249 Deposit portfolio activity: Net increase (decrease): Checking......................................... $ (26,442) 55,007 (35,337) (6,772) Savings.......................................... 9,949 (6,785) (13,051) (9,887) MMDA............................................. 53,408 (9,507) (13,835) 30,066 Certificates: 6 month or less................................ 12,705 (25,084) (29,985) (42,364) 6 month to 1 year.............................. 79,078 (2,225) (21,465) 55,388 Retail jumbos.................................. 6,981 4,551 (103) 11,429 Other.......................................... 95,803 4,097 25,461 125,361 --------- --------- --------- ---------- Total CDS.................................... 194,567 (18,661) (26,092) 149,814 --------- --------- --------- ---------- Net increase in deposits............................. $ 231,482 20,054 (88,315) 163,221 ========= ========= ========= ========== Interest credited to deposits included above......... $ 48,911 9,733 10,195 68,839 Total increase (decrease) as a percentage of beginning deposits................................. 3.00% .26% -1.14% 2.12%
32 -----END PRIVACY-ENHANCED MESSAGE-----