-----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, KxqJP0pP5X9vR2yDz98y47DSG4B8AymYiY10dZpQC2EFLD/WBAVlrgn9Ln2LoFTS toiUTTwsnFz6L+FYj0RVxw== 0000950152-98-008829.txt : 19981116 0000950152-98-008829.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950152-98-008829 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 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: 98746099 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-16311 CHARTER ONE FINANCIAL, INC. ------------------------------------------------------ (exact name of registrant as specified in its charter) DELAWARE 34-1567092 -------- ---------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 1215 SUPERIOR AVENUE, CLEVELAND, OHIO 44114 ------------------------------------- ----- (Address of principal executive offices) (Zip Code) (216) 566-5300 -------------- (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months ( or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of the registrant's sole class of common stock as of October 31, 1998 was 134,723,123. ================================================================================ 2 TABLE OF CONTENTS
ITEM NUMBER PAGE ------ ------ PART I - FINANCIAL INFORMATION 1. Financial Statements Consolidated Statements of Financial Condition -- September 30, 1998 and December 31, 1997 ........................... 1 Consolidated Statements of Income -- Three and nine months ended September 30, 1998 and 1997 ............ 2 Consolidated Statement of Changes in Shareholders' Equity -- Nine months ended September 30, 1998 ............................... 3 Consolidated Statements of Cash Flows -- Nine months ended September 30, 1998 and 1997 ...................... 4 Notes to Consolidated Financial Statements ........................... 5 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................. 6 3. Quantitative and Qualitative Disclosure About Market Risk ................ 24 PART II - OTHER INFORMATION 5. Other Information ........................................................ 24 6. Exhibits and Reports on Form 8-K ......................................... 24 Signatures .......................................................................... 25
i 3 PART I - FINANCIAL CONDITION ITEM 1. FINANCIAL STATEMENTS CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)
SEPTEMBER 30, 1998 DECEMBER 31, 1997 -------------------- ------------------- (AS RESTATED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS Cash and deposits with banks ............................................ $ 200,595 214,716 Federal funds sold and other ............................................ 15,235 25,000 ------------ ------------ Total cash and cash equivalents .................................... 215,830 239,716 Investment securities available for sale, at fair value ................. 82,581 582,589 Mortgage-backed securities: Available for sale, at fair value ..................................... 2,124,905 1,070,233 Held to maturity (fair value of $3,103,099 and $4,273,605) ............ 3,039,126 4,215,249 Loans and leases, net ................................................... 13,378,290 12,360,134 Loans held for sale ..................................................... 155,088 341,671 Federal Home Loan Bank stock ............................................ 285,375 366,647 Premises and equipment .................................................. 160,103 158,500 Accrued interest receivable ............................................. 99,621 110,181 Real estate owned ....................................................... 13,540 13,726 Loan servicing assets ................................................... 92,026 81,836 Goodwill ................................................................ 84,937 90,471 Other assets ............................................................ 110,217 129,312 ------------ ------------ Total assets ....................................................... $ 19,841,639 19,760,265 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Checking accounts ..................................................... $ 1,432,980 1,181,528 Money market accounts ................................................. 1,781,174 1,799,709 Savings accounts ...................................................... 1,095,546 1,155,093 Certificates of deposit ............................................... 6,539,713 6,082,870 ------------ ------------ Total deposits ..................................................... 10,849,413 10,219,200 Federal Home Loan Bank advances ......................................... 5,187,809 5,370,503 Reverse repurchase agreements ........................................... 1,695,062 2,096,524 Other borrowings ........................................................ 242,823 229,798 Advance payments by borrowers for taxes and insurance ................... 50,811 138,379 Accrued interest payable ................................................ 62,314 53,094 Accrued expenses and other liabilities .................................. 249,974 275,878 ------------ ------------ Total liabilities .................................................. 18,338,206 18,383,376 ------------ ------------ Shareholders' equity: Preferred stock - $.01 par value per share; 20,000,000 shares authorized and unissued ............................................. - - Common stock - $.01 par value per share; 180,000,000 shares authorized; 132,541,371 and 129,915,210 shares issued(1) ............ 1,325 1,299 Additional paid-in capital ............................................ 774,901 706,155 Retained earnings ..................................................... 680,932 700,616 Less zero and 2,217,536 shares of common stock held in treasury at cost(1) ................................................. - (45,441) Borrowings of employee investment and stock ownership plan ............ (1,734) (2,349) Accumulated other comprehensive income ................................ 48,009 16,609 ------------ ------------ Total shareholders' equity ..................................... 1,503,433 1,376,889 ------------ ------------ Total liabilities and shareholders' equity ..................... $ 19,841,639 19,760,265 ============ ============ - ------------------------- (1) Restated to reflect the 2-for-1 stock split issued on May 20, 1998.
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, -------------------------------- ------------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- (AS RESTATED) (AS RESTATED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INTEREST INCOME: Loans and leases ....................... $ 268,083 232,901 787,971 660,656 Mortgage-backed securities: Available for sale ................... 32,475 18,739 75,337 56,307 Held to maturity ..................... 55,366 82,570 188,866 262,600 Investment securities available for sale 796 5,729 11,448 16,143 Other interest-earning assets .......... 7,483 7,091 24,519 19,101 ------------ ------------ ------------ ------------ Total interest income ............... 364,203 347,030 1,088,141 1,014,807 ------------ ------------ ------------ ------------ INTEREST EXPENSE: Deposits ............................... 115,963 113,547 341,402 335,502 Federal Home Loan Bank advances ........ 74,184 58,516 219,929 159,492 Other borrowings ....................... 31,814 44,286 100,421 129,046 ------------ ------------ ------------ ------------ Total interest expense .............. 221,961 216,349 661,752 624,040 ------------ ------------ ------------ ------------ Net interest income ................. 142,242 130,681 426,389 390,767 Provision for loan and lease losses ...... 5,780 16,342 15,935 25,967 ------------ ------------ ------------ ------------ Net interest income after provision for loan and lease losses ......... 136,462 114,339 410,454 364,800 ------------ ------------ ------------ ------------ OTHER INCOME: Mortgage banking ....................... 14,165 13,651 44,591 44,821 Retail banking ......................... 23,906 17,824 66,089 47,946 Leasing operations ..................... 1,464 1,908 7,114 5,442 Net gains .............................. 5,661 1,982 14,035 2,599 Other .................................. 640 199 1,916 309 ------------ ------------ ------------ ------------ Total other income .................. 45,836 35,564 133,745 101,117 ------------ ------------ ------------ ------------ ADMINISTRATIVE EXPENSES: Compensation and employee benefits ..... 39,120 40,671 117,290 123,766 Net occupancy and equipment ............ 12,679 13,184 37,935 38,648 Federal deposit insurance premiums ..... 1,197 1,345 3,730 4,041 Amortization of goodwill ............... 1,791 1,362 5,373 4,086 Other administrative expenses .......... 24,210 20,879 78,525 61,905 ------------ ------------ ------------ ------------ Total administrative expenses ....... 78,997 77,441 242,853 232,446 ------------ ------------ ------------ ------------ Income before income taxes ............... 103,301 72,462 301,346 233,471 Income taxes ............................. 34,555 18,889 100,706 73,027 ------------ ------------ ------------ ------------ Net income .......................... $ 68,746 53,573 200,640 160,444 ============ ============ ============ ============ Basic earnings per share ................. $ .52 .41 1.50 1.22 ============ ============ ============ ============ Diluted earnings per share ............... $ .51 .39 1.46 1.19 ============ ============ ============ ============ Average common shares(1) ................. 132,966,320 132,084,519 133,926,283 131,677,035 ============ ============ ============ ============ Average common and common equivalent shares outstanding--assuming dilution(1) 135,898,290 135,929,373 137,666,906 135,330,425 ============ ============ ============ ============ Cash dividends declared per share(1) ..... $ .13 .11 .39 .33 ============ ============ ============ ============ - ---------------------------------- (1) Restated to reflect the 2-for-1 stock split issued May 20, 1998 and the 5% stock dividend issued September 30, 1998.
See Notes to Consolidated Financial Statements 2 5 CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited)
BORROWINGS OF EMPLOYEE ACCUMULATED INVESTMENT TOTAL ADDITIONAL OTHER AND STOCK SHARE- COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE OWNERSHIP HOLDERS' STOCK CAPITAL EARNINGS STOCK INCOME PLAN EQUITY ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Balance, January 1, 1998 .... $ 1,299 706,155 700,616 (45,441) 16,609 (2,349) 1,376,889 Comprehensive income: Net unrealized holding gain on securities .............. - - - - 65,192 - 65,192 Reclassification adjustment for (gains) losses included in net income .............. - - - - (12,884) (12,884) Income tax expense related to items of other comprehensive income ..................... - - - - 20,908 - 20,908 Net income .................. - - 200,640 - - - 200,640 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Comprehensive income .......... - - 200,640 - 31,400 - 232,040 EISOP loan repayment .......... - - - - - 615 615 Treasury stock purchased 1,980,000 shares(1) ......... - - - (59,235) - - (59,235) Treasury stock reissued in connection with stock options exercised, 502,531 shares(1) - - (5,439) 10,413 - - 4,974 Dividends paid ($.39 per share)(1) ................... - - (51,763) - - - (51,763) Stock dividend paid ........... 26 68,746 (163,122) 94,263 - - (87) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance, September 30, 1998 ... $ 1,325 774,901 680,932 - 48,009 (1,734) 1,503,433 ========== ========== ========== ========== ========== ========== ========== - ---------------------- (1) Restated to reflect the 2-for-1 stock split issued on May 20, 1998 and the 5% stock dividend issued September 30, 1998.
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, ------------------------------- 1998 1997 ---- ---- (AS RESTATED) (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income ....................................................... $ 200,640 160,444 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses ............................ 15,935 25,967 Net gains ...................................................... (7,107) (3,963) Accretion of discounts, amortization of premiums, amortization of goodwill and depreciation, net ................ 11,873 40,770 Origination of real estate loans held for sale ................. (1,453,503) (1,214,562) Proceeds from sale of loans held for sale ...................... 1,446,576 1,245,710 Other .......................................................... 2,903 67,219 ------------ ------------ Net cash provided by operating activities .................... 217,317 321,585 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Net principal disbursed on loans and leases ...................... (2,617,781) (1,743,582) Proceeds from principal repayments and maturities of: Mortgage-backed securities held to maturity .................... 1,175,713 670,701 Mortgage-backed securities available for sale .................. 93,099 8,060 Investment securities available for sale ....................... 559,912 10,540 Sales of mortgage-backed securities available for sale ........... 705,642 40,438 Sales of mortgage-backed securities held to maturity ............. - 75,551 Sales of investment securities available for sale ................ 272 175,183 Redemption of Federal Home Loan Bank stock ....................... 95,942 - Sales of loan servicing rights ................................... 13,937 35,708 Purchases of: Mortgage-backed securities held to maturity .................... (713) (469) Mortgage-backed securities available for sale .................. - (24,685) Investment securities available for sale ....................... - (300,400) Investment securities held to maturity ......................... (57,895) (26) Federal Home Loan Bank stock ................................... - (50,286) Loan servicing rights, including those originated .............. (34,725) (17,494) Other ............................................................ (41,968) (23,150) ------------ ------------ Net cash used in investing activities .......................... (108,565) (1,143,911) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings ................. (1,445,002) 242,376 Proceeds from long-term borrowings ............................... 2,423,650 3,008,809 Repayments of long-term borrowings ............................... (1,548,074) (2,399,493) Increase (decrease) in deposits .................................. 630,467 (61,959) Increase (decrease) in advance payments by borrowers for taxes and insurance ....................................................... (87,568) 10,931 Payment of dividends on common stock ............................. (51,850) (40,396) Purchase of treasury stock, net of options exercised ............. (59,235) (36,406) Reissuance of treasury stock ..................................... 4,974 - ------------ ------------ Net cash provided by (used in) financing activities ................ (132,638) 723,862 ------------ ------------ Net decrease in cash and cash equivalents .......................... (23,886) (98,464) Cash and cash equivalents, beginning of the period ................. 239,716 334,596 Adjustment to convert RCSB to a calendar year end .................. - 28,163 ------------ ------------ Cash and cash equivalents, end of the period ....................... $ 215,830 264,295 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest on deposits and borrowings ................ $ 777,414 606,907 Cash paid for income taxes ....................................... 45,000 47,338 SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES: Transfers from loans to real estate owned ........................ 3,332 9,244 Loans exchanged for mortgage-backed securities ................... 1,816,088 - 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") Annual Report on Form 10-K. The interim financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. Such adjustments are of a normal recurring nature. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year. 2. On June 15, 1998, the Company announced a definitive agreement under which ALBANK Financial Corporation ("ALBANK") would be merged into a wholly owned subsidiary of Charter One. ALBANK, the holding company of ALBANK, F.S.B., a federally chartered savings bank, and ALBANK Commercial, a state-chartered commercial bank, is headquartered in Albany, New York, has $4.1 billion in assets ($3.5 billion in deposits), and operates 88 branches in upstate New York and 21 in Massachusetts and Vermont. Terms of the agreement call for a tax-free exchange of common shares at a fixed exchange ratio of 2.268 shares (as adjusted for the 5% stock dividend issued September 30, 1998) of Charter One common stock for each of ALBANK's common shares. The merger, which will be accounted for as a pooling of interests, is expected to close on November 30, 1998. The transaction has been approved by the boards of directors of both companies, the Federal Reserve Board, the Office of Thrift Supervision, the New York Superintendent of Banking, and is subject to approval by each Company's shareholders. 3. On October 16, 1998, Charter One completed its previously announced acquisition of CS Financial, Inc. ("CS Financial"), a $400 million institution headquartered in Cleveland, Ohio. As a result of the merger, which was accounted for as a pooling of interests, Charter One issued an additional 2,131,500 shares of its common stock. The transaction added eight branches to the Ohio network, four of which have been consolidated, resulting in a net increase of four branches. Charter One has already converted CS Financial's data processing operation, essentially completing all consolidation activity associated with this merger. 4. 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 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 common stock resulting in the issuance of 29,776,709 shares (as adjusted for the 5% stock dividends issued October 31, 1997 and September 30, 1998 and the 2-for-1 stock split effected on May 20, 1998.) 5. In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the reporting of financial information about reportable operating segments in annual and interim financial statements. This statement required that financial information be reported on the basis that it is reported internally for evaluating segment performance and deciding how to allocate resources to segments. This statement may result in additional financial statement disclosures upon adoption; however, the Company does not expect to make material changes to its current segment reporting. SFAS No. 131 will become effective December 31, 1998. 6. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for financial statements for years beginning after June 15, 1999. Management has not completed the process of evaluating this statement and therefore has not determined the impact that adopting this statement will have on the financial position and results of operations. 5 8 7. In October 1998, the FASB issued SFAS No. 134 "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This Statement amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," and conforms the subsequent accounting for securities retained after the securitization of mortgage loans by a mortgage banking enterprise with the subsequent accounting for securities retained after the securitization of other types of assets by a non-mortgage banking enterprise. It is effective for the first fiscal quarter beginning after December 15, 1998. Management has not completed the process of evaluating this Statement and has therefore not determined the impact that adopting this statement will have on the financial position and results of operations. 8. Certain items in the consolidated financial statements for 1997 have been reclassified to conform to the 1998 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 Delaware corporation organized as a unitary savings and loan holding company and owns all of the outstanding capital stock of Charter Michigan Bancorp, Inc., a Michigan corporation organized as a unitary savings and loan holding company, which in turn owns all of the outstanding capital stock of Charter One Bank, F.S.B. (the "Bank"). The business of the Bank and, therefore, the primary business of the Company is providing consumer and business banking services to certain major markets in Ohio, Michigan, and, since October 1997, New York. At the end of the third quarter of 1998 the Bank and its subsidiaries were doing business through 232 full-service banking branches and 37 loan production offices. Recently, in conjunction with the planned merger of ALBANK, Charter One and Charter Michigan Bancorp have filed applications with the Federal Reserve Board to become Bank Holding Companies. Currently, ALBANK owns a commercial bank and Charter One and Charter Michigan Bancorp will own this bank when the merger is completed. FORWARD-LOOKING STATEMENTS When used in this Form 10-Q and in future filings by the Company with the Securities and Exchange Commission (the "SEC"), in the Company's press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected, including but not limited to: (i) changes in economic conditions in the Company's market area; (ii) changes in policies by regulatory agencies; (iii) fluctuations in interest rates; (iv) demand for loans in the Company's market area; (v) competition; (vi) the possibility that expected cost savings from the proposed acquisition (the "Merger") of ALBANK cannot be fully realized within the expected time frame; (vii) the possibility that costs or difficulties relating to the integration of the businesses of the Company and ALBANK will be greater than expected; (viii) the possibility that revenues following the Merger will be lower than expected; and (ix) the possibility that year 2000 compliance failures could result in additional expense to the Company and significant disruption of its business and there can be no assurance that any contingency plans will completely mitigate the effects of any such failure. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake--and specifically declines any obligation--to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. 6 9 RESULTS OF OPERATIONS PERFORMANCE OVERVIEW The Company reported net income of $68.7 million, or $0.51 per diluted share, for the three months ended September 30, 1998. This was a $15.2 million, or 28.3%, increase over the net income for the third quarter of 1997 which was $53.6 million, or $0.39 per diluted share. The increased income was attributable to increases in net interest income, retail banking income and increases in net gains on sales of assets, along with a lower loan loss provision in the 1998 period. These favorable increases were partially offset by increases in administrative expenses and federal income taxes. For the third quarter of 1998, the Company's reported net income resulted in a 18.4% return on average equity and a 1.4% return on average assets. For the 1997 period, those ratios were 16.1% and 1.1%, respectively. Net income for the first nine months of 1998 was $200.6 million, or $1.46 per diluted share, as compared to $160.4 million, or $1.19 per diluted share for the 1997 period. The increase of $40.2 million, or 25.1%, in net income was primarily due to increases in net interest income, recurring fee income and gains from sales of assets. These increases were partially offset by an increase in administrative expenses and federal income taxes. For the nine months ended September 30, 1998, the Company's reported net income resulted in a 18.4% return on average equity and a 1.4% return on average assets. For the 1997 period, those ratios were 16.5% and 1.2%, respectively. SELECTED OPERATING RATIOS (Figure 1)
THREE MONTHS ENDED NINE MONTHS ENDED ------------------- ----------------- 9/30/98 9/30/97 9/30/98 9/30/97 ------- ------- ------- ------- Annualized returns: Return on average assets ............................ 1.38% 1.14% 1.35% 1.17% Return on average equity ............................ 18.42 16.12 18.35 16.49 Average equity to average assets .................... 7.50 7.09 7.35 7.07 Annualized operating ratios: Net interest income to administrative expenses ...... 1.80x 1.69x 1.76x 1.68x Administrative expenses to average assets ........... 1.59% 1.65% 1.63% 1.69% Efficiency ratio .................................... 42.32 46.32 43.49 46.67
NET INTEREST INCOME Net interest income is the principal source of earnings for the Company. It is affected by a number of factors including the level, pricing and maturity of interest-earning assets and interest-bearing liabilities, as well as interest rate fluctuations and asset quality. Figure 2 sets forth information concerning Charter One's interest-earning assets, interest-bearing liabilities, net interest income, interest rate spreads and net yield on average interest-earning assets during the periods indicated (including fees which are considered adjustments to yields). Average balance calculations are based on daily balances. 7 10 AVERAGE BALANCES, INTEREST RATES AND YIELDS/COSTS (Figure 2)
THREE MONTHS ENDED SEPTEMBER 30, --------------------------------------------------------------------------- 1998 1997 ----------------------------------- --------------------------------------- AVG. AVG. AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST COST BALANCE INTEREST COST ------------ ---------- -------- ------------ --------- --------- (DOLLARS IN THOUSANDS) Interest-earning assets: Loans and leases(1) ............... $ 13,722,067 $ 268,083 7.80% $ 11,630,350 $ 232,901 8.00% Mortgage-backed securities: Available for sale .............. 1,804,582 32,475 7.20 1,076,132 18,739 6.97 Held to maturity ................ 3,159,165 55,366 7.01 4,684,528 82,570 7.05 Investment securities available for sale ............... 49,486 796 6.44 336,475 5,729 6.81 Other interest-earning assets(2) ........................ 405,457 7,483 7.22 403,343 7,091 6.88 ------------ ---------- ------------ --------- Total interest-earning assets .. 19,140,757 364,203 7.60 18,130,828 347,030 7.65 ---------- --------- Allowance for loan losses ......... (111,164) (93,557) Noninterest-earning assets(3) ..... 876,790 718,581 ------------ ------------ Total assets ................. $ 19,906,383 $ 18,755,852 ============ ============ Interest bearing liabilities(4): Deposits: Checking accounts ............... $ 1,499,465 2,893 .77 $ 1,106,611 3,249 1.16 Savings accounts ................ 1,115,405 6,087 2.17 1,314,789 7,795 2.35 Money market accounts ........... 1,771,218 14,511 3.25 1,629,502 14,348 3.49 Certificates of deposit ......... 6,486,179 92,472 5.66 6,069,176 88,155 5.76 ------------ ---------- ------------ --------- Total deposits ................ 10,872,267 115,963 4.23 10,120,078 113,547 4.45 ------------ ---------- ------------ --------- FHLB advances ..................... 5,240,515 74,184 5.61 3,985,902 58,516 5.80 Other borrowings .................. 1,950,974 31,814 6.41 2,923,309 44,286 5.94 ------------ ---------- ------------ --------- Total borrowings ............... 7,191,489 105,998 5.83 6,909,211 102,802 5.86 ------------ ---------- ------------ --------- Total interest-bearing liabilities ................... 18,063,756 221,961 4.87 17,029,289 216,349 5.02 ---------- --------- Non interest-bearing liabilities .. 349,950 396,967 ------------ ------------ Total liabilities .............. 18,413,706 17,426,256 Shareholders' equity ................ 1,492,677 1,329,596 ------------ ------------ Total liabilities and shareholders' equity .......... $ 19,906,383 $ 18,755,852 ============ ============ Net interest income ................. $ 142,242 $ 130,681 ========== ========= Interest rate spread ................ 2.73 2.63 Net yield on average interest- earning assets(5) .................. 2.97 2.88 Average interest-earning assets to average interest-bearing liabilities ........................ 105.96% 106.47% - ---------------------------------- (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.
8 11
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------------------------------- 1998 1997 ------------------------------------ --------------------------------------- AVG. AVG. AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST COST BALANCE INTEREST COST ------------ ----------- -------- ------------ ----------- -------- (DOLLARS IN THOUSANDS) Interest-earning assets: Loans and leases(1) ............... $ 13,385,735 $ 787,971 7.85% $ 10,998,946 $ 660,656 8.01% Mortgage-backed securities: Available for sale .............. 1,409,938 75,337 7.12 1,093,972 56,307 6.86 Held to maturity ................ 3,556,983 188,866 7.08 4,935,813 262,600 7.09 Investment securities available for sale ............... 220,088 11,448 6.94 311,946 16,143 6.90 Other interest-earning assets(2) ........................ 458,625 24,519 7.05 370,779 19,101 6.79 ------------ ----------- ------------ ----------- Total interest-earning assets .. 19,031,369 1,088,141 7.62 17,711,456 1,014,807 7.64 ----------- ----------- Allowance for loan losses ......... (112,007) (93,100) Noninterest-earning assets(3) ..... 908,777 724,600 ------------ ------------ Total assets ................. $ 19,828,139 $ 18,342,956 ============ ============ Interest bearing liabilities(4): Deposits: Checking accounts ............... $ 1,382,466 8,788 .85 $ 1,095,782 9,405 1.15 Savings accounts ................ 1,131,601 18,498 2.19 1,333,792 23,606 2.37 Money market accounts ........... 1,777,180 43,370 3.26 1,639,902 42,950 3.50 Certificates of deposit ......... 6,361,964 270,746 5.69 6,060,907 259,541 5.73 ------------ ----------- ------------ ----------- Total deposits ................ 10,653,211 341,402 4.28 10,130,383 335,502 4.43 ------------ ----------- ------------ ----------- FHLB advances ..................... 5,200,188 219,929 5.65 3,655,711 159,492 5.81 Other borrowings .................. 2,085,449 100,421 6.36 2,890,107 129,046 5.90 ------------ ----------- ------------ ----------- Total borrowings ............... 7,285,637 320,350 5.85 6,545,818 288,538 5.85 ------------ ----------- ------------ ----------- Total interest-bearing liabilities ................... 17,938,848 661,752 4.92 16,676,201 624,040 4.99 ----------- ----------- Non interest-bearing liabilities .. 431,441 369,541 ------------ ------------ Total liabilities .............. 18,370,289 17,045,742 Shareholders' equity ................ 1,457,850 1,297,214 ------------ ------------ Total liabilities and shareholders' equity .......... $ 19,828,139 $ 18,342,956 ============ ============ Net interest income ................. $ 426,389 $ 390,767 =========== =========== Interest rate spread ................ 2.70 2.65 Net yield on average interest- earning assets(5) .................. 2.99 2.94 Average interest-earning assets to average interest-bearing liabilities ........................ 106.09% 106.21% - -------------------------------- (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 Figure 3 sets forth the changes in Charter One's interest income and interest expense resulting from changes in interest rates and the volume of interest-earning assets and interest-bearing liabilities. Changes not solely attributable to volume or rate have been allocated in proportion to the changes due to volume and rate. RATE/VOLUME ANALYSIS (Figure 3)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------ ------------------------------------ 1998 V. 1997 1998 V. 1997 ------------------------------------ ------------------------------------ INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO ------------------------------------ ------------------------------------ RATE VOLUME TOTAL RATE VOLUME TOTAL ---- ------ ----- ---- ------ ----- (DOLLARS IN THOUSANDS) Interest income: Loans and leases.................. $ (7,378) 42,560 35,182 (18,210) 145,525 127,315 Mortgage-backed securities: Available for sale.............. 647 13,089 13,736 2,219 16,811 19,030 Held to maturity................ (468) (26,736) (27,204) (521) (73,213) (73,734) Investment securities available for sale............... (301) (4,632) (4,933) 83 (4,778) (4,695) Other interest-earning assets........................... 355 37 392 746 4,672 5,418 ------- -------- -------- -------- -------- --------- Total......................... (7,145) 24,318 17,173 (15,683) 89,017 73,334 ------- -------- -------- -------- -------- --------- Interest expense: Checking accounts................. (1,309) 953 (356) (2,757) 2,140 (617) Savings accounts.................. (588) (1,120) (1,708) (1,712) (3,396) (5,108) Money market accounts............. (1,037) 1,200 163 (3,040) 3,460 420 Certificates of deposit........... (1,652) 5,969 4,317 (1,616) 12,821 11,205 Federal Home Loan Bank advances ................... (2,217) 17,885 15,668 (5,366) 65,803 60,437 Other borrowings.................. 1,709 (14,181) (12,472) 5,932 (34,557) (28,625) ------- -------- -------- -------- -------- --------- Total......................... (5,094) 10,706 5,612 (8,559) 46,271 37,712 ------- -------- -------- -------- -------- --------- Change in net interest income............................. $ (2,051) 13,612 11,561 (7,124) 42,746 35,622 ======= ======== ======== ======== ======== =========
Net interest income for the third quarter of 1998 was $142.2 million as compared to $130.7 million for the third quarter of 1997. This $11.6 million, or 8.8%, increase was primarily attributable to the growth in interest-earning assets, mainly loans and leases, since September 30, 1997. Due to the high volumes of loan and lease originations since September 30, 1997, the average balance of loans and leases was $2.1 billion higher during the third quarter of 1998 as compared to the same period in 1997. This increase in the balance of loans and leases caused interest income to increase by $42.6 million. Overall, average interest-earning assets in the third quarter of 1998 were $1.0 billion higher than in the same period of 1997. The decrease in the remaining components of interest-earning assets, primarily mortgage-backed securities, helped fund the loan and lease growth. Mortgage-backed security balances were $796.9 million lower in the third quarter of 1998 which caused interest income to decrease by $13.6 million, partially offsetting the increase in interest income created by the loan and lease growth. The yield on interest-earning assets was 7.60% during the third quarter of 1998 as compared to 7.65% for the third quarter of 1997. This five basis point decrease caused interest income to decrease by $7.1 million. The average balance of interest-bearing liabilities was $1.0 billion higher in the third quarter of 1998 as compared to the same period in 1997. This caused interest expense to increase by $10.7 million. Overall the higher balances in interest-earning assets and interest-bearing liabilities resulted in an increase of $13.6 million in net interest income. The growth was funded primarily by retail deposit growth which generally carries a lower cost of funds than borrowed money. This contributed to the cost of interest-bearing liabilities decreasing by 15 basis points to 4.87% for the three months ended September 30, 1998. This caused interest expense to decrease by $5.1 million. In general, the lower interest rates were primarily attributable to lower market interest rates. Overall, the interest rate spread was 2.73% for the third quarter of 1998 as compared to 2.63% for the third quarter of 1997. The net yield on interest-earning assets was 2.97% for the third quarter of 1998 as compared to 2.88% for the third quarter of 1997. Net interest income for the first nine months of 1998 was $426.4 million, an increase of $35.6 million, or 9.1%, over the same period in 1997. This increase was primarily attributable to an increase in the balance of interest- 10 13 earning assets. The average balance of interest-earning assets for the nine months ended September 30, 1998 was $1.3 billion higher than for the same period in 1997. This increase was primarily due to growth in the loan and lease portfolio. The average balance of loans and leases was $2.4 billion higher in the 1998 period as compared to 1997 which caused interest income to increase by $145.5 million. This increase was partially offset by declining balances of mortgage-backed securities. The average balance of mortgage-backed securities decreased by $1.1 billion for the first nine months of 1998 as compared to the same period in 1997. The declining balances of mortgage-backed securities caused interest income to decrease by $56.4 million as repayments and sales of mortgage-backed securities was used to fund loan and lease growth. The remaining growth of interest-earning assets was primarily funded by an increase in interest-bearing liabilities. The average balance of interest-bearing liabilities was $1.3 billion higher for the first nine months of 1998 as compared to the same period of 1997. This caused interest expense to increase by $46.3 million. The growth in interest-earning assets was funded by interest-bearing liabilities and was accomplished at favorable margins as the interest rate spread was 2.70% for the first nine months of 1998 as compared to 2.65% for the same period in 1997. The net yield on interest-earning assets was 2.99% for the first nine months of 1998 as compared to 2.94% for the first nine months of 1997. Figure 4 sets forth the Company's yields and costs at period end for the dates indicated. YIELDS AND COSTS AT END OF PERIOD (Figure 4)
SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------------------ ----------------- YIELDS AND COSTS AT END OF PERIOD Weighted average yield: Real estate loans ................................... 7.52% 7.72% Automobile loans .................................... 8.81 8.92 Retail consumer loans ............................... 7.98 8.40 Leases(1) ........................................... 6.45 8.04 Corporate banking loans ............................. 9.15 8.86 Total loans and leases ............................ 7.76 8.00 Mortgage-backed securities .......................... 7.02 7.20 Investment securities ............................... 8.02 6.67 Other interest-earning assets ....................... 7.14 7.29 Total interest-earning assets ................... 7.55 7.73 Weighted average cost (2): Checking ............................................ .68 1.02 Savings ............................................. 2.16 2.33 Money market ........................................ 3.14 3.31 Certificates of deposit ............................. 5.65 5.73 Total deposits .................................... 4.23 4.37 FHLB advances ....................................... 5.62 5.83 Other borrowings .................................... 6.45 6.38 Total interest-bearing liabilities ............. 4.87 5.07 Interest rate spread .................................. 2.68 2.66 Net yield on interest-earning assets .................. 2.97% 2.96% - ------------------------- (1) 1998 yield excludes impact of related tax benefits. (2) The costs of liabilities include the annualized effect of interest rate risk management instruments.
OTHER INCOME Other income was $45.8 million for the third quarter of 1998 as compared to $35.6 million for the same period in 1997. This $10.3 million, or 28.9%, increase was primarily due to increases in retail banking fee income and gains from asset sales. Retail banking income increased $6.1 million primarily due to checking account service charges. An increase in the number of checking accounts was the primary reason checking account fee income increased. Charter One's product mix and sales culture resulted in a net increase of over 56,000 checking accounts since December 31, 1997. Gains on the sale of assets, primarily Bank-originated mortgage loans that were securitized into mortgage-backed securities, increased by $3.7 million over the third quarter of 1997. These sales were executed to assist the Bank in managing its interest rate risk as the assets sold primarily consisted of long-term, fixed-rate mortgage-backed securities classified as available for sale. 11 14 Other income for the nine months ended September 30, 1998 was $133.7 million, a $32.6 million, or 32.3%, increase compared to other income during the first nine months of 1997. This increase was primarily attributable to increases in retail banking fee income and gains from asset sales. Retail banking income was $66.1 million for the nine months ended September 30, 1998 which was a 37.8% increase over the $47.9 million of retail banking income for the first nine months of 1997. As explained in the quarterly comparisons above, the growth in the number of checking accounts was the primary reason checking related fee income increased which was the driving factor for the increase in the retail banking income statement line item. Asset sales resulted in net gains of $14.0 million for the nine months ended September 30, 1998 which was an increase of $11.4 million over the same period in 1997. The 1998 asset sales were primarily for interest rate risk management purposes as the assets sold primarily consisted of long-term, fixed-rate mortgage-backed securities classified as available for sale. The assets sold had primarily been mortgage loans previously originated by the Bank and then securitized with the Federal National Mortgage Association prior to the sale. ADMINISTRATIVE EXPENSES Administrative expenses were $79.0 million during the third quarter of 1998. This is a $1.6 million, or 2.0%, increase as compared to the third quarter of 1997 which had $77.4 million in administrative expenses. While the dollar level of expenses increased, those increases were consistent with the expanded operations of the Bank and its subsidiaries. The ratio of administrative expenses to average assets was 1.59% for the 1998 period and 1.65% during the third quarter of 1997. Also, the Company's efficiency ratio of 42.32% for the third quarter of 1998 compared favorably to the 46.32% efficiency ratio during the third quarter of 1997. Administrative expenses were $242.9 million for the nine months ended September 30, 1998 as compared to $232.4 million for the comparable period in 1997. While the 1998 administrative 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 1.63% for the 1998 period and 1.69% during the first nine months of 1997. Also, the Company's efficiency ratio of 43.49% for the first nine months of 1998 compared favorably to the 46.67% efficiency ratio during the same period of 1997. FEDERAL INCOME TAXES Federal income tax expense was $34.6 million for the three months ended September 30, 1998. This was $15.7 million, or 82.9%, higher than the federal income tax expense during the three months ended September 30, 1997. This increase was primarily due to a 42.6% increase in pre-tax income and a lower effective tax rate in the 1997 period. The effective tax rates were 33.5% for the 1998 period and 26.1% for the 1997 period. The 1997 period was favorably impacted by tax planning strategies implemented by the former Rochester Community Savings Bank in the third quarter of 1997. Federal income tax expense was $100.7 million for the nine months ended September 30, 1998. This was $27.7 million, or 37.9%, higher than the federal income tax expense during the nine months ended September 30, 1997. This increase was primarily due to a 29.1% increase in pre-tax income and a lower effective tax rate in the 1997 period. The effective tax rates were 33.4% for the 1998 period and 31.3% for the 1997 period. FINANCIAL CONDITION OVERVIEW At September 30, 1998, total assets were $19.8 billion which was $81.4 million higher than at December 31, 1997. This increase was primarily the result of increases in the balances of loans and leases. The loan and lease portfolio grew by $831.6 million to $13.5 billion at September 30, 1998, funded by reductions of cash and cash equivalents and mortgage-backed securities along with increased deposit balances. 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 6. ASSET/LIABILITY STRATEGY AND CAPITAL DEPLOYMENT During the past twelve months, Charter One has consistently followed the strategy of optimizing its balance sheet by replacing single-family loans and investment securities with energized assets (non-single-family lending product). Additionally, given the persistent flatness of the yield curve, Charter One has substantially increased its 12 15 sale of excess fixed-rate mortgage loan production. As a result of these strategies, Charter One's equity to asset ratio was 7.6% at September 30, 1998 well in excess of its internal target of 6.5% The Company's capital position together with the current interest rate environment has provided it with significant opportunities to reprice and/or extend a portion of its liabilities. Accordingly, early in the fourth quarter, the Company replaced (through maturity and extinguishment) approximately $3.5 billion in borrowings, bearing a weighted average cost of 5.86%, with longer term borrowings that have a weighted average maturity of approximately 30 months. This activity, which will result in an after-tax extraordinary loss in the fourth quarter of 1998 of approximately $17 million, will reduce the cost of the $3.5 billion borrowing position by approximately 100 basis points. On a similar front, on October 13, 1998, Charter One announced that it had tendered for all or a portion of its secured zero coupon bonds due February 2005. These bonds were issued in 1985 by First Federal of Michigan prior to its merger with Charter One. The issue had an accreted balance of $198 million, an original face value of $407 million, and an annual yield to maturity of 11.93%. As of October 27, 1998, bonds had been tendered with an original face of approximately $235 million, resulting in an after-tax extraordinary loss to be recognized in the fourth quarter of approximately $39 million. The tender offer expired on October 27, 1998 although Charter One may still repurchase a portion of the bonds remaining on a privately negotiated basis. Going forward, the above actions, together with the contractual maturity within one year of $5.2 billion in retail certificates of deposit (with a 5.67% cost of funds), will tend to mitigate potential margin compression caused by the downward pressure on asset yields in the current interest rate environment. LOANS AND LEASES COMPOSITION OF LOANS AND LEASES(Figure 5)
SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------------------------ ------------------------ % OF % OF AMOUNT TOTAL AMOUNT TOTAL ------------ -------- ------------- -------- (DOLLARS IN THOUSANDS) LOAN AND LEASE PORTFOLIO, NET One-to-four family: Permanent: Fixed rate ........................................ $ 5,220,855 38.58% $ 5,281,533 41.59% Adjustable rate ................................... 2,402,851 17.75 2,880,513 22.68 Construction ........................................ 200,160 1.48 196,647 1.55 ------------ -------- ------------- -------- 7,823,866 57.81 8,358,693 65.82 Commercial real estate: Multifamily ......................................... 199,149 1.47 265,360 2.09 Other ............................................... 352,318 2.61 325,646 2.56 ------------ -------- ------------- -------- 551,467 4.08 591,006 4.65 Consumer: Retail .............................................. 2,473,559 18.28 1,606,128 12.64 Automobile .......................................... 1,877,685 13.87 1,542,230 12.14 ------------ -------- ------------- -------- 4,351,244 32.15 3,148,358 24.78 Business: Leasing ............................................. 622,486 4.60 437,227 3.44 Corporate banking ................................... 184,315 1.36 166,521 1.31 ------------ -------- ------------- -------- 806,801 5.96 603,748 4.75 ------------ -------- ------------- -------- $ 13,533,378 100.00% $ 12,701,805 100.00% ============ ======== ============= ======== Portfolio of loans serviced for others .................. $ 9,905,436 $ 9,084,871 ============ =============
13 16 LOAN AND LEASE ACTIVITY (Figure 6)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ------------------------ 1998 1997 1998 1997 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Originations: Real estate: Permanent: One-to-four family................................. $ 1,266,592 1,039,460 4,117,455 2,804,554 Multifamily........................................ 4,706 1,570 20,820 18,859 Commercial......................................... 44,893 15,816 77,198 53,907 ---------- ----------- ----------- ---------- Total permanent.................................. 1,316,191 1,056,846 4,215,473 2,877,320 ---------- ----------- ----------- ---------- Construction: One-to-four family................................. 113,061 106,601 316,205 282,688 Multifamily........................................ 11,942 5,350 16,833 7,714 Commercial......................................... 15,433 5,630 24,191 15,225 ---------- ----------- ----------- ---------- Total construction............................... 140,436 117,581 357,229 305,627 ---------- ----------- ----------- ---------- Total real estate loans originated............. 1,456,627 1,174,427 4,572,702 3,182,947 ---------- ----------- ----------- ---------- Retail consumer...................................... 433,410 237,266 1,480,930 665,471 Automobile........................................... 294,190 270,625 893,386 821,203 Leases............................................... 62,539 67,838 279,987 132,621 Corporate banking.................................... 63,743 55,436 156,620 159,029 ---------- ----------- ----------- ---------- Total loans and leases originated.............. 2,310,509 1,805,592 7,383,625 4,961,271 ---------- ----------- ----------- ---------- Loans purchased.......................................... 2,708 295,318 18,857 295,318 Sales and principal reductions: Loans sold............................................. 564,819 471,637 1,453,503 1,290,939 Loans exchanged for MBS................................ 468,666 - 1,816,088 - Principal reductions................................... 1,073,016 765,120 3,367,334 1,980,300 ---------- ----------- ----------- ---------- Total sales and principal reductions............. 2,106,501 1,236,757 6,636,925 3,271,239 ---------- ----------- ----------- ---------- Increase before net items...................... $ 206,716 864,153 765,557 1,985,350 ========== =========== =========== ==========
INVESTMENT SECURITIES The entire investment securities portfolio was classified as available for sale at both September 30, 1998 and December 31, 1997. Figure 7 summarizes the fair values of the portfolio at those dates. INVESTMENT SECURITIES PORTFOLIO (Figure 7)
SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------------------ ------------------ (DOLLARS IN THOUSANDS) U.S. Treasury and agency securities.................................... $ 16,601 571,363 Corporate notes and securities......................................... 65,128 10,188 Other.................................................................. 852 1,038 -------- --------- Total................................................................ $ 82,581 582,589 ======== ========= Weighted average rate................................................ 8.02% 6.67% ======== =========
MORTGAGE-BACKED SECURITIES Figure 8 summarizes the mortgage-backed securities portfolios at September 30, 1998 and December 31, 1997. The amounts reflected represent the fair values of securities available for sale and the amortized cost of securities held to maturity. 14 17 MORTGAGE-BACKED SECURITIES (Figure 8)
SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------------------ ----------------- (DOLLARS IN THOUSANDS) AVAILABLE FOR SALE Participation certificates: Government agency issues: FNMA ......................................................... $1,086,467 - FHLMC ........................................................ 1,496 1,897 GNMA ......................................................... 76 102 Private issues ................................................. 190 - Collateralized mortgage obligations: Government agency issues: FHLMC ........................................................ 341,614 360,732 FNMA ......................................................... 259,636 264,694 Private issues ................................................. 435,426 442,808 ---------- --------- Total mortgage-backed securities available for sale .......... 2,124,905 1,070,233 ---------- --------- HELD TO MATURITY Participation certificates: Government agency issues: FNMA ......................................................... 809,666 1,013,757 FHLMC ........................................................ 319,828 439,816 GNMA ......................................................... 128,334 160,678 Private issues ................................................. 246,184 316,046 Collateralized mortgage obligations: Government agency issues: FNMA ......................................................... 288,532 359,664 FHLMC ........................................................ 138,139 176,074 Private issues ................................................. 1,108,443 1,749,214 ---------- --------- Total mortgage-backed securities held to maturity .......... 3,039,126 4,215,249 ---------- --------- Total ................................................... $5,164,031 5,285,482 ========== =========
MORTGAGE-BACKED SECURITIES BY PAYMENT TYPE (Figure 9)
SEPTEMBER 30, 1998 DECEMBER 31, 1997 --------------------- --------------------- BOOK AVERAGE BOOK AVERAGE VALUE RATE VALUE RATE --------- ------- ---------- -------- (DOLLARS IN THOUSANDS) AVAILABLE FOR SALE Adjustable rate: Participation certificates ........... $ 190 7.73% $ - -% Collateralized mortgage obligations .. 1,034,080 6.98 1,062,903 7.31 ---------- ---------- Total adjustable rate .............. 1,034,270 6.98 1,062,903 7.31 ---------- ---------- Fixed rate: Participation certificates ........... 1,088,039 6.90 1,999 8.02 Collateralized mortgage obligations .. 2,596 6.36 5,331 6.36 ---------- ---------- Total fixed rate ................... 1,090,635 6.90 7,330 6.81 ---------- ---------- Total available for sale ......... 2,124,905 6.94 1,070,233 7.30 ---------- ---------- HELD TO MATURITY Adjustable rate: Participation certificates ........... 621,445 7.05 792,765 7.18 Collateralized mortgage obligations .. 283,880 7.44 326,864 7.76 ---------- ---------- Total adjustable rate .............. 905,325 7.17 1,119,629 7.35 ---------- ---------- Fixed rate: Participation certificates ........... 897,799 7.30 1,137,532 7.34 Collateralized mortgage obligations .. 1,236,002 6.83 1,958,088 6.99 ---------- ---------- Total fixed rate ................... 2,133,801 7.03 3,095,620 7.12 ---------- ---------- Total held to maturity ........... 3,039,126 7.07 4,215,249 7.18 ---------- ---------- Total mortgage-backed securities $5,164,031 7.02% $5,285,482 7.20% ========== ==========
15 18 ASSET QUALITY ANALYSIS OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES (Figure 10)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 1998 1997 1998 1997 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Balance, beginning of period.................................... $ 112,142 92,924 113,868 94,112 Provision for loan and lease losses............................. 5,780 16,342 15,935 25,967 Adjustment to convert RCSB to a calendar year end............... - - - 650 Loans and leases charged off: Mortgage...................................................... (1,224) (3,075) (2,833) (6,917) Automobile.................................................... (5,894) (4,495) (18,662) (13,216) Retail consumer............................................... (222) (866) (453) (2,319) Leases........................................................ - - - - Corporate banking............................................. (71) - (71) (42) -------- -------- -------- -------- Total charge-offs........................................... (7,411) (8,436) (22,019) (22,494) -------- -------- -------- -------- Recoveries: Mortgage...................................................... 367 3,115 642 3,560 Automobile.................................................... 1,435 1,038 3,624 2,876 Retail consumer............................................... 102 239 339 546 Leases........................................................ - - - - Corporate banking............................................. 1 1 27 6 -------- -------- -------- -------- Total recoveries........................................... 1,905 4,393 4,632 6,988 -------- -------- -------- -------- Net loan and lease charge-offs........................... (5,506) (4,043) (17,387) (15,506) -------- -------- -------- -------- Balance, end of period.......................................... $ 112,416 105,223 112,416 105,223 ======== ======== ======== ======== Net charge-offs to average loans and leases (annualized) .16% .14% .17% .19%
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES (Figure 11)
SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------------------ ----------------- (DOLLARS IN THOUSANDS) Mortgage.................................................................... $ 57,583 59,794 Automobile.................................................................. 38,480 39,455 Retail consumer............................................................. 9,238 8,255 Leases...................................................................... 2,572 1,777 Corporate banking........................................................... 4,543 4,587 -------- --------- Total..................................................................... $ 112,416 113,868 ======== ========= Percent of loans and leases to ending loans and leases: Mortgage.................................................................. 61.9% 70.0% Automobile................................................................ 13.9 12.2 Retail consumer........................................................... 18.3 12.8 Leases.................................................................... 4.6 3.6 Corporate banking......................................................... 1.3 1.4 -------- --------- Total................................................................... 100.0% 100.0% ======== =========
Management believes that the allowance for loan and lease losses has been established in accordance with generally accepted accounting principles based on the best information available. However, future adjustments to reserves may be necessary and net income could be significantly affected if circumstances and/or economic conditions differ substantially from the assumptions used in making the initial determinations. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan and lease losses. Such agencies may require the recognition of additions to the allowance based on their judgments of information available to them at the time of their examination. The provision for loan and lease losses was $10.6 million lower for the third quarter of 1998 as compared to the same period in 1997. The primary reason for this change was due to deterioration in consumer credit in auto finance and auto 16 19 repossession trends in the second half of 1997. Due to the loss trends, management shifted the mix of the indirect auto financing business to a higher concentration of prime credits. Figure 12 sets forth information concerning nonperforming assets and the allowance for loan and lease losses. At September 30, 1998, the Bank had no outstanding commitments to lend additional funds to borrowers whose loans were on nonaccrual or restructured status. NONPERFORMING ASSETS (Figure 12)
SEPTEMBER 30, 1998 DECEMBER 31, 1997 ----------------- ---------------- (DOLLARS IN THOUSANDS) Nonperforming loans and leases: Nonaccrual loans and leases: Mortgage loans: One-to-four family(1).............................................. $ 48,794 32,154 Multifamily and commercial......................................... 2,874 3,794 Construction and land.............................................. 1,280 1,943 ------- ------- Total mortgage loans............................................. 52,948 37,891 Retail consumer...................................................... - - Automobile........................................................... - - Corporate banking.................................................... 4,357 716 Lease financings..................................................... - - ------- ------- Total nonaccrual loans and leases................................ 57,305 38,607 ------- ------- Accruing loans and leases delinquent more than 90 days: Mortgage loans: One-to-four family................................................. - 8,356 Multifamily and commercial......................................... - - Construction and land.............................................. - - ------- ------- Total mortgage loans............................................. - 8,356 Retail consumer...................................................... 16,138 4,671 Automobile........................................................... 4,234 3,547 Corporate banking.................................................... 84 290 Lease financings..................................................... - - ------- ------- Total accruing 90-day delinquent loans and leases................ 20,456 16,864 ------- ------- Restructured real estate loans......................................... 6,258 6,722 ------- ------- Total nonperforming loans and leases............................. 84,019 62,193 Real estate acquired through foreclosure and other..................... 13,249 13,414 ------- ------- Total nonperforming assets....................................... 97,268 75,607 ------- ------- Less government guaranteed loans................................. 18,601 - ------- ------- Nonperforming assets net of guaranteed loans..................... $ 78,667 75,607 ======= ======= Ratio of: Nonperforming loans and leases to total loans and leases............. .62% .49% Nonperforming assets to total assets................................. .49 .38 Allowance for loan and lease losses to: Nonperforming loans and leases..................................... 133.80 183.09 Total loans and leases before allowance............................ .82 .89 Ratio of (excluding guaranteed nonperforming loans): Nonperforming loans and leases to total loans and leases............. .48% .49% Nonperforming assets to total assets................................. .40 .38 Allowance for loan and lease losses to: Nonperforming loans and leases..................................... 171.84 183.09 Total loans and leases before allowance............................ .82 .89 - --------------------------- (1) Includes $18.6 million of government guaranteed loans at September 30, 1998.
Nonperforming assets at September 30, 1998 totaled $97.3 million, up from $75.6 million from December 31, 1997. The ratio of nonperforming loans to total loans was .62% at September 30, 1998 as compared to .49% at December 31, 1997. Nonperforming loans at September 30, 1998 included $18.6 million of government guaranteed nonperforming loans on which the Bank believes it has minimal exposure. Excluding these loans, the ratio of nonperforming loans to total loans was .48% at September 30, 1998 and the ratio of nonperforming assets to total assets was .40%. There were no such loans included at December 31, 1997. 17 20 At September 30, 1998, there were $35.5 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. 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, 1998 and December 31, 1997, 60% and 61%, respectively, of interest-bearing liabilities were in the form of deposits and 40% and 39%, respectively, 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 from within the Bank's primary market areas through the offering of a broad range of deposit instruments. COMPOSITION OF DEPOSITS (Figure 13)
SEPTEMBER 30, 1998 DECEMBER 31, 1997 --------------------------------- --------------------------------- WEIGHTED PERCENT WEIGHTED PERCENT AVERAGE OF AVERAGE OF AMOUNT RATE TOTAL AMOUNT RATE TOTAL ------------ -------- ------- ------------ -------- ------- (DOLLARS IN THOUSANDS) Checking accounts: Interest-bearing...................... $ 783,916 1.24% 7.23% $ 783,768 1.54% 7.67% Noninterest-bearing................... 649,064 - 5.98 397,760 - 3.89 Savings accounts........................ 1,095,546 2.16 10.10 1,155,093 2.33 11.30 Money market accounts................... 1,781,174 3.14 16.42 1,799,709 3.30 17.61 Certificates of deposit................. 6,538,532 5.83 60.27 6,081,434 5.95 59.53 ------------ ------ ------------ ------ Deposits............................ 10,848,232 4.34 100.00% 10,217,764 4.50 100.00% ====== ====== Plus unamortized premium on deposits purchased.................. 1,181 1,436 ------------ ------------ Deposits, net...................... $ 10,849,413 $ 10,219,200 ============ ============ Including the annualized effect of applicable interest rate risk management instruments................. 4.23% 4.37% ===== =====
BORROWINGS At September 30, 1998, borrowings primarily consisted of FHLB advances and reverse repurchase agreements. These positions were secured by Charter One's investment in the stock of the FHLB, as well as $6.9 billion in real estate loans and $3.3 billion in mortgage-backed securities. 18 21 FEDERAL HOME LOAN BANK ADVANCES (Figure 14)
SEPTEMBER 30, 1998 DECEMBER 31, 1997 ----------------------- ------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE ---------- --------- ---------- --------- (DOLLARS IN THOUSANDS) Short-term................................................. $ 1,590,000 5.78% $ 2,300,000 5.79% Long-term: Fixed-rate advances...................................... 3,134,979 5.57 2,621,760 5.88 Variable-rate advances................................... 462,830 5.56 448,743 5.76 ---------- ---------- Total advances, net.................................... $ 5,187,809 5.63 $ 5,370,503 5.89 ========== ========== Including the annualized effect of applicable interest rate risk management instruments......................... 5.62% 5.83% ===== ====
Figure 15 presents a summary of outstanding reverse repurchase agreements. The Bank enters into short-term reverse repurchase agreements for terms up to one year, as well as longer term fixed- and variable-rate agreements.
REVERSE REPURCHASE AGREEMENTS (Figure 15) SEPTEMBER 30, 1998 DECEMBER 31, 1997 ----------------------- ------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE ---------- --------- ---------- --------- (DOLLARS IN THOUSANDS) Short-term............................................... $ - % $ 210,002 5.84% Long-term: Fixed-rate............................................. 1,125,062 6.04 1,316,522 6.02 Variable-rate.......................................... 570,000 5.69 570,000 5.89 ---------- ---------- Weighted average cost including amortization of fees................................... $ 1,695,062 5.93 $ 2,096,524 5.96 ========== ========== Including the annualized effect of applicable interest rate risk management instruments.............. 5.93% 5.96% ===== ====
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. 19 22 INTEREST RATE SWAPS (Figure 16)
SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------------------------------------ ------------------------------------ NOTIONAL RECEIVING PAYING NOTIONAL RECEIVING PAYING PRINCIPAL INTEREST INTEREST PRINCIPAL INTEREST INTEREST AMOUNT RATE RATE AMOUNT RATE RATE -------- ---------- ----------- -------- ---------- ----------- (DOLLARS IN THOUSANDS) Fixed payment and variable receipt: Maturing in: 1998.............................. $ 25,000 5.69%(1) 5.73% $ 175,000 5.81%(1) 5.96% 1999.............................. 150,000 5.55 5.52 150,000 5.85 5.52 -------- -------- Total........................... 175,000 5.57 5.55 325,000 5.83(1) 5.76 ======== ======== Variable payment and fixed receipt: Maturing in: 1998............................ $ - -% -% $ 25,000 5.70% 5.83% 1999............................ - - - 115,000 6.42 5.83 2000............................ 120,000 6.00 5.64 - - - 2001............................ - - - 15,000 6.39 5.85 2002............................ 50,000 6.80 5.56 250,000 7.08 5.84 2003............................ 180,000 6.42 5.64 - - - -------- -------- Total......................... $ 350,000 6.33% 5.63%(1) $ 405,000 6.78% 5.84%(1) ======== ======== - --------------------------- (1) Rates are based upon LIBOR.
The cost (benefit) of interest rate risk management instruments included in interest expense was as follows: COST OF INTEREST RATE RISK MANAGEMENT (Figure 17)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------- 1998 1997 1998 1997 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Interest expense (income): Deposits................................................. $ (1,462) (4,429) (5,814) (12,626) FHLB advances............................................ (71) (71) (213) 115 Reverse repurchase agreements............................ (110) (298) (219) (362) ------- ------- -------- -------- Total.................................................. $ (1,643) (4,798) (6,246) (12,873) ======= ======= ======== ========
LIQUIDITY The Bank's principal sources of funds are deposits, advances from the FHLB of Cincinnati, reverse repurchase agreements, repayments and maturities of loans and securities, proceeds from the sale of loans and securities, and funds provided by operations. While scheduled loan, security and interest-bearing deposit amortization and maturity are relatively predictable sources of funds, deposit flow and loan and mortgage-backed security repayments are greatly influenced by economic conditions, the general level of interest rates and competition. The Bank utilizes particular sources of funds based on comparative costs and availability and may supplement deposits with longer term and/or less expensive alternative sources of funds such as FHLB advances and reverse repurchase agreements. Management also considers the Bank's interest-sensitivity profile when deciding on alternative sources of funds. At September 30, 1998, the Bank's one-year gap was a positive 2.21% of total assets. The Bank is required by regulation to maintain specific minimum levels of liquid investments. Regulations currently in effect require the Bank to maintain average liquid assets at least equal to 4.0% of the sum of its average daily balance of net withdrawable accounts and borrowed funds due in one year or less. This regulatory requirement may be changed from time to time to reflect current economic conditions. The Bank's average regulatory liquidity ratio for the third quarter of 1998 was 6.22%. Management anticipates that the Bank will have sufficient funds available to meet current and future loan commitments. At September 30, 1998, the Bank and its subsidiaries had outstanding commitments to originate 20 23 loans and leases of $871.2 million, unfunded lines of consumer credit totaling $1.2 billion (a significant portion of which normally remains undrawn) and unfunded lines of commercial (business loans) credit totaling $58.5 million. Outstanding letters of credit totaled $39.5 million as of September 30, 1998. Certificates of deposit scheduled to mature in one year or less at September 30, 1998 totaled $5.2 billion. Management believes that a significant portion of the amounts maturing will remain with the Bank because they are retail deposits. At September 30, 1998, the Bank had $1.6 billion of advances from the FHLB system and $1.5 billion in reverse repurchase agreements which mature in one year. Management intends to replace the majority of these borrowings when they mature with new borrowings and believes it has significant additional borrowing capacity with the FHLB and investment banking firms to meet any need for additional borrowings. CAPITAL AND DIVIDENDS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. The regulations require the Bank to meet specific capital adequacy guidelines and the regulatory framework for prompt corrective action that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total risk-based, Tier 1 risk-based, Tier 1 leverage and tangible capital as set forth in the tables below. REGULATORY CAPITAL (Figure 18)
AS OF SEPTEMBER 30, 1998 ---------------------------------------------------------------------- TO BE WELL CAPITALIZED FOR CAPITAL UNDER PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ----------------------- --------------------- ----------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- (DOLLARS IN THOUSANDS) Total capital (to risk-weighted assets)...... $1,356,971 10.73% $1,012,043 *8.0% $1,265,054 *10.0% Tier 1 capital (to risk-weighted assets)..... 1,247,653 9.86 N/A N/A 759,032 *6.0 Tier 1 capital (to adjusted tangible assets). 1,247,653 6.34 590,043 *3.0 983,405 *5.0 Tangible capital (to adjusted tangible assets) 1,247,653 6.34 295,022 *1.5 N/A N/A
AS OF DECEMBER 31, 1997 --------------------------------------------------------------------- TO BE WELL CAPITALIZED FOR CAPITAL UNDER PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ---------------------- -------------------- ----------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- (DOLLARS IN THOUSANDS) Total capital (to risk-weighted assets)........ $ 1,205,750 10.00% $964,459 *8.0% $1,205,574 *10.0% Tier 1 capital (to risk-weighted assets)....... 1,095,084 9.08 N/A N/A 723,344 *6.0 Tier 1 capital (to adjusted tangible assets)... 1,095,084 5.55 592,272 *3.0 987,120 *5.0 Tangible capital (to adjusted tangible assets). 1,095,084 5.55 296,136 *1.5 N/A N/A
* greater than or equal to 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, 1998, that the Bank meets all capital requirements to which it is subject. Events beyond management's control, such as fluctuations in interest rates or a downturn in the economy in areas in which the Bank's loans and securities are concentrated, could adversely affect future earnings and, consequently, the Bank's ability to meet its future capital requirements. 21 24 QUARTERLY STOCK PRICES AND DIVIDENDS (Figure 19)
3RD QUARTER 2ND QUARTER 1ST QUARTER 4TH QUARTER 3RD QUARTER 1998 1998 1998 1997 1997 ----------- ----------- ----------- ----------- ----------- Market price of common stock(1): High......................................... $ 34.17 34.89 32.44 30.48 27.90 Low.......................................... 21.84 28.57 22.86 25.77 23.36 Close........................................ 24.88 32.09 31.88 30.06 26.82 Dividends declared and paid.................... .13 .13 .12 .12 .11 - --------------------------- (1) Restated to reflect the 2-for-1 stock split issued on May 20, 1998 and the 5% stock dividend issued September 30, 1998.
YEAR 2000 STATE OF Y2K READINESS Preparing for the Year 2000 ("Y2K") is the result of the century date change issue caused by computer systems and related technology which are designed to recognize the last 2 digits of a year and may not properly recognize the date change from 12/31/99 to 01/01/00 as January 1, 2000, but as January 1, 1900. The Company is moving forward in the process of remediating those systems and equipment which may be impacted by the century date change. The Company has identified the following components of its Y2K project: AWARENESS PHASE: Activities to identify the scope of the Company's Y2K project has been completed. INVENTORY PHASE: Computer systems and related technology were inventoried and the analysis of potential areas of Y2K risk has been identified and completed. ASSESSMENT PHASE: The Y2K compliance status of computer systems and related technology has been completed. Also, the analysis of risks of major customers, vendors, suppliers of information and electronic data exchange partners has been determined and completed. CONVERSION PHASE: The methodology for the conversion of non-Y2K mission critical compliant systems and equipment has been completed. Non-Y2K compliant systems and equipment will continue to be replaced during the fourth quarter of 1998. IMPLEMENTATION PHASE: Mission critical systems and related technology will be upgraded or replaced, where required, and subsequently fully tested to ensure their Y2K compliance by March 31, 1999. POST IMPLEMENTATION: Follow-up and problem resolution of Y2K solutions will be performed through March 31, 1999. The impact of Year 2000 upon the Company has been assessed in all significant areas of our business, including Y2K readiness of the critical systems such as demand deposits, consumer lending, and branch operations. In addition, the impact posed by major customers, vendors, suppliers of information and electronic data exchange partners has been assessed. In an effort to achieve Y2K readiness, the Company has performed 90% of its Y2K mainframe systems remediation, testing and implementation, with the remainder to be completed by March 31, 1999. Twenty percent of the PC computer systems requiring replacement or upgrade, have been completed, with the remainder to be completed by March 31, 1999. In addition, efforts are underway to ensure that ATMs and non-information technology systems, such as branch offices and other Company facilities are prepared for Year 2000. Thus far, one quarter of the Company's non-Y2K compliant ATM units and facilities equipment, such as telephone switches and security monitoring systems have been upgraded or replaced with Y2K compliant equipment. Testing and, if required, replacement of ATM units and facilities equipment will be completed by March 31, 1999. 22 25 In summary, the Company has successfully completed 60% of the required Y2K testing. It is anticipated that 80% of the required Y2K testing will be completed by December 31, 1998 with the balance being completed by March 31, 1999. For most operations, the anticipated acquisition of ALBANK will result in the current Company operating procedures being implemented in all ALBANK locations. As a result, there are no additional Year 2000 issues requiring consideration in these areas. Where there are enhancements or changes to be made to Company processes, full Y2K testing will be performed prior to their implementation. COSTS TO ADDRESS Y2K ISSUES The Company has estimated the out-of-pocket Year 2000 initiative to cost approximately $4 million. This will provide for the replacement or upgrade of PC hardware, software and the use of consultants. The cost of internal resources for the Year 2000 initiative has not been estimated. Other Y2K related costs are being accounted for as operating expenditures as they represent an improvement in Company operations. RISKS OF Y2K ISSUES Corporate wide efforts have been taken to identify and assess the risk and adequacy of those systems and equipment for Y2K readiness. In addition, efforts continue to be made toward Y2K compliance of all systems and equipment that have been deemed critical to continued operations. The risk of major customers impacting the Company was determined to be not material as the Company has a widely diversified portfolio of major customers. The Y2K risks presented by vendors and suppliers of information have been assessed and, where applicable, corrective actions taken. These actions ranged from replacement to reducing the risk to an acceptable level. Finally, electronic data exchange partners, identified as being critical to continued operations, are scheduled for testing in the fourth quarter of 1998 and the first quarter of 1999. As a result of the aforementioned, it is our opinion that any of the most reasonably likely worst case Year 2000 scenario would not have a material effect on the company. CONTINGENCY PLAN In the event the onset of Year 2000 causes business operations or customer service to not properly function or prevents them from completely functioning, the Company has, and is, prepared to implement contingency plans. These contingency plans provide the ability to implement supplemental computer systems, equipment or manual procedures to reduce the potential impact of a Y2K problem upon business operations or customer service. If on December 31, 1998, there are any business functions using mission critical computer applications which have not been Y2K certified by the vendor, the business functions will begin the implementation of their Y2K contingency plan. If on March 31, 1999, there are any business functions using mission critical computer applications, which have not been Y2K certified by the Company, the business functions will begin the implementation of their Y2K contingency plan. In preparation of January 1, 2000, branch offices and corporate departments at the Company will finalize preparations for potential failures of computer systems and equipment at branch locations, ATM units and corporate offices. Methods of preparation include setting up alternative systems, manual procedures or outsourcing activities to provide alternative means for servicing customers and processing data. To ensure Y2K preparedness of branches and corporate departments, training will be performed during the fourth quarter of 1999. This training will furnish Company employees with transition procedures to alternative methods of continuing servicing customers and maintaining business activity as needed. 23 26 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK A comprehensive qualitative and quantitative analysis regarding market risk was disclosed in the Company's December 31, 1997 Form 10-K. No material changes in the assumptions used or results obtained from the model have occurred. PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION DIVIDEND On October 21, 1998, the Directors of Charter One Financial, Inc. declared a quarterly cash dividend of 14 cents per common share. The dividend will be payable on November 20, 1998 to shareholders of record as of November 6, 1998. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 11 - Computation of Per Share Earnings Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K On July 22, 1998, the Company filed a report on Form 8-K to incorporate prior filings into the Registration Statement on Form S-4 filed in connection with the CS Financial acquisition. On August 18, 1998, the Company filed a report on Form 8-K to incorporate prior filings into Amendment Number 1 to the Registration Statement on Form S-4 filed in connection with the CS Financial acquisition. 24 27 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: November 12, 1998 /s/ Robert J. Vana ------------------------------------- Robert J. Vana Chief Corporate Counsel and Secretary Date: November 12, 1998 /s/ RICHARD W. NEU ------------------------------------- Richard W. Neu Executive Vice President and Chief Financial Officer 25 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, ---------------------------- --------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC EARNINGS PER SHARE(1): Weighted average number of common shares outstanding................................ 132,966,320 132,084,519 133,926,283 131,677,035 ============= ============= ============ ============ Net income............................................ $ 68,746 53,573 200,640 160,444 ============= ============= ============ ============ Basic earnings per share.............................. $ .52 .41 1.50 1.22 ============= ============= ============ ============ DILUTED EARNINGS PER SHARE(1): Weighted average number of common shares outstanding........................................ 132,966,320 132,084,519 133,926,283 131,677,035 Add common stock equivalents for shares issuable under Stock Option Plan................... 2,931,970 3,844,854 3,740,623 3,653,390 ------------- ------------- ------------ ------------ Weighted average number of common and common equivalent shares outstanding.......... 135,898,290 135,929,373 137,666,906 135,330,425 ============= ============= ============ ============ Net income............................................ $ 68,746 53,573 200,640 160,444 ============= ============= ============ ============ Diluted earnings per share............................ $ .51 .39 1.46 1.19 ============= ============= ============ ============ - --------------------------- (1) Restate to reflect the 2-for-1 stock split issued on May 20, 1998 and the 5% stock dividend issued September 30, 1998.
26 EX-27 3 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE CONSOLIDATED FINANCIAL STATEMENTS OF CHARTER ONE FINANCIAL, INC AND SUBSIDIARIES AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 195,571 5,024 15,235 0 2,207,486 3,039,126 3,103,099 13,645,794 112,416 19,841,639 10,849,413 1,590,000 363,099 5,535,694 0 0 1,325 1,502,108 19,841,639 787,971 275,651 24,519 1,088,141 341,402 661,752 426,389 15,935 12,987 242,853 301,346 301,346 0 0 200,640 1.50 1.46 2.99 57,305 20,456 6,258 35,500 113,868 22,019 4,632 112,416 112,416 0 0
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