-----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, L3W37tjnCY15NPkC42pqTBx1yBJyrp+O57U4s7+j4s8h3aclnn88IonXLgrU70zp kUKxWBrOLeOaZYmUv3a19g== 0000950152-96-004150.txt : 19960816 0000950152-96-004150.hdr.sgml : 19960816 ACCESSION NUMBER: 0000950152-96-004150 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHARTER ONE FINANCIAL INC CENTRAL INDEX KEY: 0000819692 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 341567092 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16311 FILM NUMBER: 96612919 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 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-16311 CHARTER ONE FINANCIAL, INC. --------------------------- (exact name of registrant as specified in its charter) DELAWARE 34-1567092 -------- ---------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 1215 SUPERIOR AVENUE, CLEVELAND, OHIO 44114 ------------------------------------- ----- (Address of principal executive offices) (Zip Code) (216) 566-5300 -------------- (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of the registrant's sole class of common stock as of August 6, 1996 was 44,773,041. ================================================================================ 2 TABLE OF CONTENTS
ITEM NUMBER PAGE - ------ ---- PART I - FINANCIAL INFORMATION 1. Financial Statements Consolidated Statements of Financial Condition -- June 30, 1996 and December 31, 1995 ............................. 1 Consolidated Statements of Income -- Three and six months ended June 30, 1996 and 1995 ............... 2 Consolidated Statement of Changes in Shareholders' Equity -- Six months ended June 30, 1996 .................................. 3 Consolidated Statements of Cash Flows -- Six months ended June 30, 1996 and 1995 ......................... 4 Notes to Consolidated Financial Statements ....................... 5 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................................... 7 PART II - OTHER INFORMATION 5. Other Information .................................................. 26 6. Exhibits and Reports on Form 8-K ................................... 26 Signatures .................................................................. 27
i 3 PART I - FINANCIAL CONDITION ITEM 1. FINANCIAL STATEMENTS CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)
JUNE 30, 1996 DECEMBER 31, 1995 ------------- ----------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS Cash and deposits with banks ............................................. $ 163,429 163,123 Federal funds sold and other ............................................. 84,869 495,248 ----------- ---------- Total cash and cash equivalents .................................... 248,298 658,371 Investment securities available for sale, at fair value .................. 340,653 407,427 Mortgage-backed securities: Available for sale, at fair value ...................................... 532,300 1,435,589 Held to maturity (fair value of $5,075,684 and $3,961,326) ............. 5,087,788 3,879,160 Loans held for sale ...................................................... -- 4,340 Loans and leases, net .................................................... 7,201,810 6,674,260 FHLB stock ............................................................... 197,242 178,136 Premises and equipment ................................................... 106,677 96,581 Accrued interest receivable .............................................. 80,107 73,683 Equipment on operating leases ............................................ 27,077 32,755 Real estate owned ........................................................ 9,885 11,991 Goodwill ................................................................. 67,058 10,602 Other assets ............................................................. 52,951 115,964 ----------- ---------- Total assets ..................................................... $13,951,846 13,578,859 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Checking accounts ...................................................... $ 878,755 733,962 Money market accounts .................................................. 1,131,047 829,087 Savings accounts ....................................................... 939,059 1,007,178 Certificates of deposit ................................................ 4,868,265 4,442,264 ----------- ----------- Total deposits ..................................................... 7,817,126 7,012,491 FHLB advances ............................................................ 3,267,103 3,163,144 Reverse repurchase agreements ............................................ 1,521,078 2,089,520 Other borrowings ......................................................... 210,780 209,020 Advance payments by borrowers for taxes and insurance .................... 65,786 47,738 Accrued interest payable ................................................. 39,993 56,955 Accrued expenses and other liabilities ................................... 95,502 155,593 ----------- ---------- Total liabilities ................................................ 13,017,368 12,734,461 ----------- ---------- 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; 45,218,049 and 45,119,014 shares issued ................... 452 451 Additional paid-in capital ............................................. 237,219 235,889 Retained earnings ...................................................... 695,762 642,197 Less 208,285 and 101,488 shares of common stock held in treasury at cost (7,351) (3,061) Net unrealized gain (loss) on securities, net of tax (expense) benefit of $(4,521) and $15,978 ....................................... 8,396 (31,078) ----------- ---------- Total shareholders' equity ....................................... 934,478 844,398 ----------- ---------- Total liabilities and shareholders' equity ....................... $13,951,846 13,578,859 =========== ==========
See Notes to Consolidated Financial Statements 1 4 CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INTEREST INCOME: Loans and leases ............................. $ 150,144 137,616 292,335 274,041 Mortgage-backed securities: Available for sale ......................... 1,015 82,802 8,812 167,475 Held to maturity ........................... 90,603 33,313 172,413 65,319 Investment securities available for sale ..... 5,278 15,561 11,050 27,460 Other interest-earning assets ................ 4,640 6,243 10,118 14,612 ---------- ---------- ---------- ---------- Total interest income .................... 251,680 275,535 494,728 548,907 ---------- ---------- ---------- ---------- INTEREST EXPENSE: Deposits ..................................... 76,269 91,544 155,797 175,662 FHLB advances ................................ 45,990 44,263 91,117 88,046 Other borrowings ............................. 30,514 62,832 56,905 131,050 ---------- ---------- ---------- ---------- Total interest expense ................... 152,773 198,639 303,819 394,758 ---------- ---------- ---------- ---------- Net interest income ...................... 98,907 76,896 190,909 154,149 Provision for loan and lease losses ............ 1,000 258 2,000 516 ---------- ---------- ---------- ---------- Net interest income after provision for loan and lease losses ............... 97,907 76,638 188,909 153,633 ---------- ---------- ---------- ---------- OTHER INCOME: Loan servicing fees .......................... 2,763 2,089 5,022 4,590 Service fees and other charges ............... 8,235 6,370 15,194 12,301 Leasing operations ........................... 1,719 1,645 3,507 3,357 Net gains (losses): Loans ...................................... 121 548 311 758 Mortgage-backed securities ................. (339) 23 (282) 23 Investment securities ...................... (2,025) 2,074 (2,025) 3,387 Other gains ................................ 128 377 458 949 Other ........................................ (37) 192 219 573 ---------- ---------- ---------- ---------- Total other income ....................... 10,565 13,318 22,404 25,938 ---------- ---------- ---------- ---------- ADMINISTRATIVE EXPENSES: Compensation and employee benefits ........... 22,613 21,223 44,650 44,166 Net occupancy and equipment .................. 6,380 5,950 12,784 12,229 Federal deposit insurance premiums ........... 4,094 4,211 8,083 8,422 State taxes .................................. 1,852 1,511 3,966 3,106 Amortization of goodwill ..................... 190 188 379 384 Other administrative expenses ................ 10,935 9,736 20,785 19,723 ---------- ---------- ---------- ---------- Total administrative expenses ............ 46,064 42,819 90,647 88,030 ---------- ---------- ---------- ---------- Income before federal income taxes ............. 62,408 47,137 120,666 91,541 Federal income taxes ........................... 21,038 16,092 40,846 31,186 ---------- ---------- ---------- ---------- Net income ............................... $ 41,370 31,045 79,820 60,355 ========== ========== ========== ========== Earnings per common and common equivalent share $ .90 .68 1.74 1.32 ========== ========== ========== ========== Average common and common equivalent shares outstanding ............................ 46,041,344 45,935,095 46,001,965 45,849,796 ========== ========== ========== ========== Dividends declared per share ................... $ .23 .19 .43 .36 ========== ========== ========== ==========
See Notes to Consolidated Financial Statements 2 5 CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited)
TOTAL ADDITIONAL NET UNREALIZED SHARE- COMMON PAID-IN RETAINED TREASURY GAIN (LOSS) HOLDERS' STOCK CAPITAL EARNINGS STOCK ON SECURITIES EQUITY ----- ---------- -------- -------- -------------- ------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Balance, January 1, 1996 ....... $451 235,889 642,197 (3,061) (31,078) 844,398 Purchase of 433,900 shares of treasury stock ........... (14,269) (14,269) Treasury stock reissued in connection with stock options exercised, 319,063 shares ... (6,776) 9,736 2,960 Treasury stock reissued in connection with compensation plans, 8,040 shares ......... (99) 243 144 Common stock issued in connection with stock options exercised, 99,035 shares .... 1 1,330 1,331 Dividends paid ($.43 per share) .................. (19,380) (19,380) Change in net unrealized gain (loss) on securities, net of tax (expense) benefit ....... 39,474 39,474 Net income ................... 79,820 79,820 --- ------- ------- ------ ----- ------- Balance, June 30, 1996 ......... $452 237,219 695,762 (7,351) 8,396 934,478 === ======= ======= ====== ===== =======
See Notes to Consolidated Financial Statements 3 6 CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
SIX MONTHS ENDED JUNE 30, ------------------------- 1996 1995 ---- ---- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income ................................................................. $ 79,820 60,355 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for loan and lease losses ...................................... 2,000 516 Net (gains) losses ....................................................... 1,538 (5,117) Accretion of discounts, amortization of premiums, amortization of goodwill and depreciation, net .......................... 7,305 10,136 Origination of real estate loans held for sale ........................... (17,467) (36,680) Proceeds from sale of loans held for sale ................................ 17,778 40,741 Change in deferred federal income taxes .................................. 3,120 39,564 Other .................................................................... 27,756 (5,757) ---------- ---------- Net cash provided by operating activities .............................. 121,850 103,758 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Net principal (disbursed) repaid on loans and leases ....................... (1,023,020) 1,704 Proceeds from principal repayments and maturities of: Mortgage-backed securities held to maturity .............................. 423,325 293,617 Mortgage-backed securities available for sale ............................ 10,061 17,043 Investment securities available for sale ................................. 123,238 8,749 Sales of mortgage-backed securities available for sale ..................... 323,662 59,924 Sales of investment securities available for sale .......................... 77,975 204,502 Purchases of: Mortgage-backed securities held to maturity .............................. (569,577) (63,670) Mortgage-backed securities available for sale ............................ -- (1,715) Investment securities available for sale ................................. (141,525) (784,039) Loans .................................................................... -- (22,516) Federal Home Loan Bank stock ............................................. (15,819) (1,499) Equipment on operating lease ............................................. (4,570) (17,281) Net cash and cash equivalents received in connection with branch acquisition 731,170 (9,969) Other ...................................................................... (3,758) 7,111 ---------- ---------- Net cash used in investing activities .................................... (68,838) (308,039) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings ........................... (741,954) 391,587 Proceeds from long-term borrowings ......................................... 2,161,133 1,540,470 Repayments of long-term borrowings ......................................... (1,879,735) (1,995,842) Increase in, net of acquisitions: Deposits ................................................................. 8,638 193,198 Advance payments by borrowers for taxes and insurance .................... 18,048 34,575 Payment of dividends on common stock ....................................... (19,380) (13,713) Purchase of treasury stock, net of options exercised ....................... (11,166) (4,698) Common shares issued ....................................................... 1,331 -- ---------- ---------- Net cash provided by (used in) financing activities .......................... (463,085) 145,577 ---------- ---------- Net decrease in cash and cash equivalents .................................... (410,073) (58,704) Cash and cash equivalents, beginning of the period ........................... 658,371 341,935 ---------- ---------- Cash and cash equivalents, end of the period ................................. $ 248,298 283,231 ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest on deposits and borrowings .......... $ 326,291 349,645 Refund received for income taxes ........................................... -- 13,419 Cash paid for income taxes ................................................. 29,000 -- SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES: Securities transferred from available for sale to held to maturity ......... 1,064,722 -- Transfers from loans to real estate owned .................................. 1,192 2,624 Loans exchanged for mortgage-backed securities ............................. 510,435 28,250
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") 1995 Annual Report to Shareholders. 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 28, 1996 the Company completed the acquisition of First Nationwide Bank's 21 branch offices in the Detroit Metropolitan area. Four First Nationwide offices directly overlapped existing branch offices and therefore were consolidated into the existing branch facilities. The deposits of the branches totaled $796.7 million and were assumed for a cost of $57.0 million. Such cost has been reflected as goodwill in the accompanying financial statements. 3. On July 24, 1996 the Company's Board of Directors approved a 5% stock dividend which will be distributed September 30, 1996, to shareholders of record on September 13, 1996. It is the Board's intention, subject to ongoing review of the Company's operating results and prospects, to maintain the quarterly cash dividend at no less than $.23 per share subsequent to the distribution of the stock dividend. If maintained at that level, this would represent an increase of 5% in the cash dividend paid to common shareholders. Par value will remain at $.01 per share. Pro forma earnings per share, giving retroactive effect to the stock dividend, are presented below.
3 MONTHS ENDED JUNE 30, 6 MONTHS ENDED JUNE 30, ----------------------- ----------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Primary and fully diluted earnings per common and common equivalent share ................... $.86 .64 1.65 1.25
Financial information contained elsewhere in this Form 10Q has not been adjusted to reflect the impact of the stock dividend. 4. On January 1, 1996, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." This Statement requires that long-lived assets and certain identified intangibles held and used by an entity, along with goodwill related to those assets, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss must be recognized if the estimate of the future cash flows (undiscounted and without interest charges) resulting from the use of the asset and its eventual disposition is less than the carrying amount of the asset. The adoption of this Statement has not had a material effect on the Company's financial condition or results of operations. 5. On January 1, 1996, the Company also adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights." SFAS No. 122 amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," to require that a company recognize, as a separate asset, rights to service mortgage loans for others, regardless of how those servicing rights are acquired. A company that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells or securitizes those loans with the servicing rights retained should allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based upon their relative values, if it is practicable to estimate those fair values. This Statement also requires that a company periodically assess its capitalized mortgage servicing rights for impairment based upon the fair value of those rights. The adoption of this Statement has not had a material effect on the Company's financial condition or results of operations. 6. Effective January 1, 1996, Charter One adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which prescribes financial accounting and reporting standards for stock-based employee compensation plans. The Statement defines a fair value based method of accounting for employee stock options or similar equity instruments and encourages all entities to adopt that method of accounting for all employee stock compensation plans. However, the Statement also allows an entity to continue to measure compensation cost for these plans using an intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25"). Entities electing to retain the accounting treatment under APB No. 25 must make pro forma footnote disclosures of net income and earnings per share as if the fair value based method of accounting defined in this Statement has been applied. Management has elected to 5 8 continue using the APB No. 25 accounting method and include pro forma disclosures when presenting complete financial statement footnotes in the future. 7. On October 31, 1995, Charter One completed a merger of equals with FirstFed Michigan Corporation ("FirstFed") which was accounted for as a pooling of interests and, accordingly, the financial statements for the Company for all periods prior to the merger have been restated to include the results of FirstFed. FirstFed was the holding company for First Federal of Michigan ("First Federal"), a $7.7 billion savings and loan headquartered in Detroit, Michigan. The merger was effected through the issuance of 1.2 shares of Company common stock for each share of FirstFed common stock resulting in the issuance of 22,506,201 shares. 8. Certain items in the consolidated financial statements for 1995 have been reclassified to conform to the 1996 presentation. 6 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HOLDING COMPANY BUSINESS GENERAL Charter One Financial, Inc. ("Charter One" or the "Company") is a unitary savings and loan holding company incorporated in Delaware and is the parent company of Charter One Bank, F.S.B. ("Charter One Bank" or the "Bank"), a federally chartered stock savings bank headquartered in Cleveland, Ohio. The bank has 172 branch locations: 94 branches in Ohio operating under the name Charter One Bank and 78 branches in Michigan under the name First Federal of Michigan ("First Federal"). The two-state branch franchise was created through a merger of equals transaction in October 1995 when FirstFed Michigan Corporation was combined with Charter One ("the Merger"). RESULTS OF OPERATIONS PERFORMANCE OVERVIEW Net income for the three months ended June 30, 1996 was $41.4 million, or $.90 per share, up 33.3% from $31.0 million, or $.68 per share, for the second quarter of 1995. The increase in net income was attributable to increases in net interest income and services fees and other charges which were partially offset by losses on the sale of investment securities and increased administrative expenses. Net income for the six months ended June 30, 1996 was $79.8 million, or $1.74 per share, compared to $60.4 million, or $1.32 per share, in the same period of 1995. The 32.3% increase in net income was also attributable to increases in net interest income and service fees and other charges which were partially offset by losses on the sales of investment securities and increased administrative expenses. Net income for both the current quarter and the year-to-date periods increased over the comparable 1995 periods as a result of overall improvement in categories described by industry practice as core earnings. Core earnings are recurring in nature. Thus, core earnings would exclude nonrecurring items such as gains and losses on sales of assets and merger related expenses. As Figure 1 illustrates, the Company's favorable trend in core earnings continued as pretax core earnings for the second quarter of 1996 increased by 11.9% over the first quarter of 1996. QUARTERLY EARNINGS SUMMARY (Figure 1)
THREE MONTHS ENDED ------------------------------------------------------- 6/30/96 3/31/96 12/31/95 9/30/95 6/30/95 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Net interest income .................. $ 98,907 92,002 85,798 77,869 76,896 Provision for loan and lease losses .. (1,000) (1,000) (258) (258) (258) Other income, excluding gains and losses .................... 12,680 11,262 12,283 11,363 10,296 Administrative expenses, excluding merger-related costs ................ (46,064) (44,583) (46,426) (43,759) (42,819) --------- --------- --------- --------- --------- Pretax core earnings ............... 64,523 57,681 51,397 45,215 44,115 Gains and losses, net ................ (2,115) 577 (100,683) 3,263 3,022 Merger-related costs ................. -- -- (37,528) -- -- --------- --------- --------- --------- --------- Income before federal income taxes 62,408 58,258 (86,814) 48,478 47,137 Federal income taxes ................. 21,038 19,808 (28,384) 16,371 16,092 --------- --------- --------- --------- --------- Net income ......................... $ 41,370 38,450 (58,430) 32,107 31,045 ========= ========= ========= ========= ========= Earnings per common and common equivalent share .................... $ .90 .84 (1.30) .70 .68 ========= ========= ========= ========= =========
7 10 The increase in net income in the second quarter of 1996 contributed to a 17.80% annualized return on average equity and a 1.22% annualized return on average assets. This compares to second quarter 1995 annualized returns of 14.20% and .84%, respectively. These annualized returns and other selected ratios are set forth in Figure 2. SELECTED OPERATING RATIOS (Figure 2)
THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ------------------- 6/30/96 6/30/95 6/30/96 6/30/95 ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Annualized returns: Return on average assets ..................... 1.22% .84% 1.21% .81% Return on average equity ..................... 17.80 14.20 17.55 14.09 Average equity to average assets ............. 6.88 5.88 6.87 5.75 Annualized operating ratios: Net interest income to administrative expenses 214.72 179.58 210.61 175.11 Administrative expenses to average assets .... 1.36 1.15 1.37 1.18 Efficiency ratio ............................. 41.11 48.89 42.01 50.09
8 11 NET INTEREST INCOME Net interest income is the principal source of earnings for the Company. It is affected by a number of factors including the level, pricing and maturity of interest-earning assets and interest-bearing liabilities, as well as interest rate fluctuations and asset quality. Figure 3 sets forth information concerning Charter One's interest-earning assets, interest-bearing liabilities, net interest income, interest rate spreads and net yield on average interest-earning assets during the periods indicated (including fees which are considered adjustments to yields). Average balance calculations are based on daily balances. AVERAGE BALANCES, INTEREST RATES AND YIELDS/COSTS (Figure 3)
THREE MONTHS ENDED JUNE 30, --------------------------------------------------------------------------------- 1996 1995 --------------------------------------- --------------------------------------- AVG. AVG. AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST COST BALANCE INTEREST COST ---------- ---------- ------- ---------- ---------- ------- (DOLLARS IN THOUSANDS) Interest-earning assets: Loans and leases(1) ............. $ 7,338,109 $ 150,144 8.18% $ 6,629,563 $ 137,616 8.30% Mortgage-backed securities: Available for sale ............ 56,662 1,015 7.17 381,528 6,399 6.71 Held to maturity .............. 5,080,416 90,603 7.13 6,085,478 109,716 7.21 Investment securities available for sale ............. 329,382 5,278 6.41 929,710 15,561 6.69 Other interest-earning assets(2) ...................... 283,354 4,640 6.55 379,051 6,243 6.59 ---------- ---------- ---------- ---------- Total interest-earning assets 13,087,923 251,680 7.69 14,405,330 275,535 7.65 ---------- ---------- Noninterest-earning assets(3) ... 436,940 462,645 ---------- ---------- Total assets .............. $13,524,863 $14,867,975 ========== ========== Interest-bearing liabilities(4) Deposits: Checking accounts ............. $ 746,249 2,381 1.28 $ 668,822 2,473 1.48 Savings accounts .............. 881,037 5,358 2.43 1,069,337 6,471 2.42 Money market accounts ......... 968,655 7,451 3.08 850,747 6,775 3.19 Certificates of deposit ....... 4,391,378 61,079 5.56 4,880,767 75,825 6.21 ---------- ---------- ---------- ---------- Total deposits .............. 6,987,319 76,269 4.37 7,469,673 91,544 4.90 ---------- ---------- ---------- ---------- FHLB advances ................... 3,301,927 45,990 5.57 2,846,942 44,263 6.22 Other borrowings ................ 2,135,279 30,514 5.72 3,434,746 62,832 7.32 ---------- ---------- ---------- ---------- Total borrowings ............ 5,437,206 76,504 5.63 6,281,688 107,095 6.82 ---------- ---------- ---------- ---------- Total interest-bearing liabilities ................ 12,424,525 152,773 4.92 13,751,361 198,639 5.78 ---------- ---------- Non interest-bearing liabilities 170,463 242,261 ---------- ---------- Total liabilities ......... 12,594,988 13,993,622 Shareholders' equity .............. 929,875 874,353 ---------- ---------- Total liabilities and shareholders' equity ..... $13,524,863 $14,867,975 ========== ========== Net interest income ............... $ 98,907 $ 76,896 ========== ========== Interest rate spread .............. 2.77 1.87 Net yield on average interest- earning assets(5) ................ 3.02 2.14 Average interest-earning assets to average interest-bearing liabilities ...................... 105.34% 104.76% - ----------------------- (1) Average balances include nonaccrual loans and interest income includes loan fee amortization. (2) Includes FHLB stock, federal funds sold, interest-bearing deposits with banks and other. (3) Includes mark-to-market adjustments on securities available for sale. (4) The costs of liabilities include the annualized effect of interest rate risk management instruments. (5) Annualized net interest income divided by the average balance of interest-earning assets.
9 12
SIX MONTHS ENDED JUNE 30, -------------------------------------------------------------------------------- 1996 1995 -------------------------------------- ------------------------------------- AVG. AVG. AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST COST BALANCE INTEREST COST ------- -------- ---- ------- -------- ---- (DOLLARS IN THOUSANDS) Interest-earning assets: Loans and leases(1) ............. $ 7,081,626 $ 292,335 8.26% $ 6,624,499 $ 274,041 8.27% Mortgage-backed securities: Available for sale ............ 250,277 8,812 7.04 391,356 13,143 6.72 Held to maturity .............. 4,824,152 172,413 7.15 6,135,956 219,651 7.16 Investment securities available for sale ............. 339,309 11,050 6.51 818,354 27,460 6.71 Other interest-earning assets(2) ...................... 308,768 10,118 6.55 456,542 14,612 6.40 ---------- ------- ---------- ------- Total interest-earning assets 12,804,132 494,728 7.73 14,426,707 548,907 7.61 ------- ------- Noninterest-earning assets(3) ... 427,864 471,258 ---------- ---------- Total assets .............. $13,231,996 $14,897,965 ========== ========== Interest-bearing liabilities(4) Deposits: Checking accounts ............. $ 721,374 4,683 1.30 $ 658,862 4,896 1.49 Savings accounts .............. 930,603 11,210 2.41 1,088,784 13,112 2.41 Money market accounts ......... 910,113 14,320 3.15 870,640 13,782 3.17 Certificates of deposit ....... 4,414,175 125,584 5.69 4,763,102 143,872 6.04 ---------- ------- ---------- ------- Total deposits .............. 6,976,265 155,797 4.47 7,381,388 175,662 4.76 ---------- ------- ---------- ------- FHLB advances ................... 3,243,958 91,117 5.62 2,851,237 88,046 6.18 Other borrowings ................ 1,932,251 56,905 5.89 3,582,992 131,050 7.32 ---------- ------- ---------- ------- Total borrowings ............ 5,176,209 148,022 5.72 6,434,229 219,096 6.81 ---------- ------- ---------- ------- Total interest-bearing liabilities ................ 12,152,474 303,819 5.00 13,815,617 394,758 5.71 ------- ------- Non interest-bearing liabilities 169,959 225,552 ---------- ---------- Total liabilities ......... 12,322,433 14,041,169 Shareholders' equity .............. 909,563 856,796 ---------- ---------- Total liabilities and shareholders' equity ..... $13,231,996 $14,897,965 =========== =========== Net interest income ............... $ 190,909 $ 154,149 ========== ========= Interest rate spread .............. 2.73 1.90 Net yield on average interest- earning assets(5) ................ 2.98 2.14 Average interest-earning assets to average interest-bearing liabilities ...................... 105.36% 104.42% - --------------- (1) Average balances include nonaccrual loans and interest income includes loan fee amortization. (2) Includes FHLB stock, federal funds sold, interest-bearing deposits with banks and other. (3) Includes mark-to-market adjustments on securities available for sale. (4) The costs of liabilities include the annualized effect of interest rate risk management instruments. (5) Annualized net interest income divided by the average balance of interest-earning assets.
10 13 Figure 4 sets forth the changes in Charter One's interest income and interest expense resulting from changes in interest rates and the volume of interest-earning assets and interest-bearing liabilities. Changes not solely attributable to volume or rate have been allocated in proportion to the changes due to volume and rate. RATE/VOLUME ANALYSIS (Figure 4)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- --------------------------- 1996 V. 1995 1996 V. 1995 --------------------------- --------------------------- INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO --------------------------- --------------------------- RATE VOLUME TOTAL RATE VOLUME TOTAL ---- ------ ----- ---- ------ ----- (DOLLARS IN THOUSANDS) Interest income: Loans and leases ...... $ (1,994) 14,522 12,528 (578) 18,872 18,294 Mortgage-backed securities: Available for sale .. 408 (5,792) (5,384) 609 (4,940) (4,331) Held to maturity .... (1,177) (17,936) (19,113) (354) (46,884) (47,238) Investment securities available for sale ... (637) (9,646) (10,283) (786) (15,624) (16,410) Other interest-earning assets ............... (36) (1,567) (1,603) 340 (4,834) (4,494) -------- ------- ------- ----- ------- -------- Total ............. (3,436) (20,419) (23,855) (769) (53,410) (54,179) -------- ------- ------- ----- ------- -------- Interest expense: Checking accounts ..... (360) 268 (92) (653) 440 (213) Savings accounts ...... 32 (1,145) (1,113) 3 (1,905) (1,902) Money market accounts . (237) 913 676 (83) 621 538 Certificates of deposit (7,532) (7,214) (14,746) (8,090) (10,198) (18,288) FHLB advances ......... (4,901) 6,628 1,727 (8,394) 11,465 3,071 Other borrowings ...... (11,842) (20,476) (32,318) (22,035) (52,110) (74,145) -------- ------- ------- ----- ------- -------- Total ............. (24,840) (21,026) (45,866) (39,252) (51,687) (90,939) -------- ------- ------- ----- ------- -------- Change in net interest income ................. $ 21,404 607 22,011 38,483 (1,723) 36,760 ======== ======= ======= ====== ======= ========
Net interest income for the second quarter of 1996 was $98.9 million, a $22.0 million, or 28.6%, increase over net interest income for the second quarter of 1995. Net interest income increased primarily due to a lower cost of interest-bearing liabilities. The cost of interest-bearing liabilities was 4.92% in the 1996 period and 5.78% during the 1995 period. This 86 basis points decrease in the cost of interest-bearing liabilities lowered interest expense by $24.8 million. This improvement was primarily a result of the financial restructuring undertaken in the fourth quarter of 1995 in conjunction with the Merger. That financial restructuring included the termination of $750 million in interest rate exchange agreements ("swaps") and $800 million in interest rate cap agreements ("caps"). These off-balance sheet interest rate risk management tools were being used to hedge interest-bearing liabilities which were eliminated in the financial restructuring. At the time they were terminated, they were having an adverse effect on net interest income. Terminating these positions reduced the cost of interest-bearing liabilities in 1996. The interest rate spread was 2.77% for the three months ended June 30, 1996, compared to 1.87% for the second quarter of 1995. Also, the net yield on interest-earning assets improved to 3.02% for the 1996 period from 2.14% during the 1995 period. Net interest income for the six months ended June 30, 1996 was $190.9 million, a $36.8 million, or 23.8%, increase over the same period in 1995. This improvement was also primarily attributable to a decrease in the cost of interest-bearing liabilities. The cost of interest-bearing liabilities was 5.00% for the six months ended June 30, 1996. This was 71 basis points less than the cost for the same period in 1995. The lower cost of interest-bearing liabilities caused interest expense to decrease by $39.3 million. This lower cost was also a result of the financial restructuring undertaken in the fourth quarter of 1995 in conjunction with the Merger as discussed in the previous paragraph. The reduction in the cost of interest-bearing liabilities was the primary reason the interest rate spread improved to 2.73% for the first six months of 1996 from 1.90% for the comparable period of 1995. Likewise, the net yield on interest-earning assets improved to 2.98% for the six months ended June 30, 1996 from 2.14% in the 1995 period. 11 14 Figure 5 sets forth the Company's yields and costs at period end for the dates indicated. YIELDS AND COSTS AT END OF PERIOD (Figure 5)
JUNE 30, 1996 DECEMBER 31, 1995 ------------- ----------------- (DOLLARS IN THOUSANDS) Weighted average yield: Loans and leases ................... 8.12% 8.26% Mortgage-backed securities ......... 7.23 7.27 Investment securities .............. 6.31 6.76 Other interest-earning assets ...... 6.74 5.86 Total interest-earning assets ...... 7.68 7.71 Weighted average cost(1): Deposits ........................... 4.39 4.61 FHLB advances ...................... 5.65 5.90 Other borrowings ................... 6.00 6.08 Total interest-bearing liabilities.. 4.93 5.19 Interest rate spread ................. 2.75 2.52 Net yield on interest-earning assets.. 3.00 2.78 Interest-earning assets .............. $13,504,554 13,059,533 - --------------------------- (1) The costs of liabilities include the annualized effect of interest rate risk management instruments.
OTHER INCOME (Figure 6)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Loan servicing fees ............................. $ 2,763 2,089 5,022 4,590 Service fees and other charges: Retail deposit account service charges and fees 6,077 5,297 11,653 10,302 Fees on insurance and annuity sales ........... 1,431 585 2,167 1,100 Other branch service fees ..................... 624 407 1,164 769 Miscellaneous ................................. 103 81 210 130 ------ ------ ------ ------ Total ....................................... 8,235 6,370 15,194 12,301 ------ ------ ------ ------ Leasing operations .............................. 1,719 1,645 3,507 3,357 Net gains (losses): Real estate ................................... 47 134 329 385 Mortgage-backed securities .................... (339) 23 (282) 23 Investment securities ......................... (2,025) 2,074 (2,025) 3,387 Loans ......................................... 121 548 311 758 Other ......................................... 81 243 129 564 ------ ------ ------ ------ Total ....................................... (2,115) 3,022 (1,538) 5,117 Other ........................................... (37) 192 219 573 ------ ------ ------ ------ Total ..................................... $10,565 13,318 22,404 25,938 ====== ====== ====== ======
OTHER INCOME Other income (as seen in Figure 6 above) for the three months ended June 30, 1996 was $10.6 million compared to $13.3 million for the second quarter of 1995. This $2.8 million decrease was primarily due to losses on the sales of investment securities from the Company's available-for-sale portfolio in the second quarter of 1996 which were partially offset by increases in recurring fee income. The loss on the sale of investment securities was $2.0 million in the second quarter of 1996. The sales in the 1996 period were executed to reduce interest rate risk and purchase higher yielding investments. In the second quarter of 1995, the Company reported a net gain of $2.1 million on sales of investment securities. When 12 15 comparing the two second quarter periods, the net effect of investment securities sales activity reduced other income by $4.1 million. That decrease was partially offset by a $2.6 million increase in recurring fee income: $1.9 million in service fees and other charges, $674,000 in loan servicing fees and $74,000 in leasing operations. The increase in fee income was primarily attributable to fees from checking accounts, fees on servicing loans for others, brokerage commissions earned by a subsidiary of the Bank, and penalties on payoffs of commercial real estate loans. Checking account fees increased as a result of an increase in the number of accounts open at June 30, 1996, compared to June 30, 1995. The reasons for the increase included introducing the programs in Michigan during the quarter, with no comparable activity in 1995, and the continuing sales effort in Ohio. Loan servicing fees increased due to the higher balance of loans serviced for others resulting from $330 million of mortgage loans that were sold, with servicing retained, as part of the fourth quarter 1995 financial restructuring. Brokerage commissions were higher in 1996 because brokerage services were only introduced in 1995 and have been expanded in 1996. The prepayment penalty related to an early payoff on a $12.5 million commercial real estate loan in 1996. Other income for the six months ended June 30, 1996 was $22.4 million as compared to $25.9 million for the 1995 period. This $3.5 million decrease was also primarily due to losses on the sales of investment securities described in the preceding paragraph that were partially offset by increases in recurring fee income. In the comparable 1995 period, a gain of $3.4 million was recorded on sales of investment securities. As a result, investment securities activity accounted for a $5.4 million decrease in other income from the first half of 1995 to the first half of 1996. This decrease was partially offset by increases of $2.9 million in service fees and other charges, $432,000 in loan servicing fees and $150,000 in leasing operations. The primary reasons for these increases were the same as explained in the previous paragraph concerning the quarter-to-quarter comparisons. ADMINISTRATIVE EXPENSES (Figure 7)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Compensation and employee benefits ................... $ 22,613 21,223 44,650 44,166 Net occupancy and equipment .......................... 6,380 5,950 12,784 12,229 Federal deposit insurance premiums ................... 4,094 4,211 8,083 8,422 State taxes .......................................... 1,852 1,511 3,966 3,106 Amortization of goodwill ............................. 190 188 379 384 Other administrative expenses ........................ 10,935 9,736 20,785 19,723 -------- ------ ------ ------ Total .............................................. $ 46,064 42,819 90,647 88,030 ======== ====== ====== ====== Number of full-time equivalent employees at end of period .................................... 2,499 2,442 2,499 2,442 Net interest income to administrative expenses ....... 214.72% 179.58% 210.61% 175.11% Administrative expenses to average assets (annualized) 1.36% 1.15% 1.37% 1.18% Efficiency ratio ..................................... 41.11% 48.89% 42.01% 50.09%
ADMINISTRATIVE EXPENSES As shown in Figure 7, administrative expenses for the second quarter of 1996 were $46.1 million, compared to $42.8 million in the second quarter of 1995. This increase of $3.2 million was primarily attributable to increased lending activities and merger-related conversion expenses. Overall, administrative expenses remained at favorable levels as illustrated by the 41.1% efficiency ratio for the second quarter of 1996, compared to 48.9% for the same period in 1995. Compensation and employee benefits expenses increased by $1.4 million due to increased lending support functions, and the introduction of Charter One's retail products into the Michigan market. The other administrative expenses increased as a result of operational conversion expenses related to telephone lines, office supplies and stationery, ATM fees and business travel expenses. Other administrative expenses for the six months ended June 30, 1996 were $90.6 million, compared to $88.0 million in the 1995 period. This $2.6 million increase was also primarily attributable to increased lending activities and mergerrelated conversion expenses together with an increase in state tax expense. ATM fees, office supplies and stationery expenses were the primary reasons other administrative expenses were $1.1 million higher in the 1996 period. State taxes were $860,000 higher in 1996 than the first six months of 1995 due to higher assessment bases. The state of Ohio tax is based upon net worth and the Michigan tax is based upon gross revenues. Both of these assessment bases were higher when calculating 13 16 the 1996 tax expense. Despite the increase in administrative expenses, the Company's efficiency ratio for the six months ended June 30, 1996 improved to 42.0% from 50.1% for the first six months of 1995. This efficiency ratio is among the best in the financial services industry. FEDERAL INCOME TAXES The provision for federal income taxes for the first half and second quarter of 1996 increased by $9.7 million and $4.9 million, respectively, over the 1995 periods due to higher pre-tax income for the 1996 periods. The effective tax rates were comparable at 33.9% and 33.7% for the first half and second quarter of 1996 and 34.1% for the first half and second quarter of 1995. FINANCIAL CONDITION Figure 8 sets forth information concerning the composition of the Company's assets, liabilities and shareholders' equity at June 30, 1996 and December 31, 1995. FINANCIAL CONDITION (Figure 8)
JUNE 30, 1996 DECEMBER 31, 1995 ------------------ ------------------ PERCENT PERCENT OF OF AMOUNT TOTAL AMOUNT TOTAL ---------- ----- ---------- ----- (DOLLARS IN THOUSANDS) Assets: Cash and cash equivalents ......... $ 248,298 1.8% $ 658,371 4.9% Investment securities ............. 340,653 2.4 407,427 3.0 Mortgage-backed securities ........ 5,620,088 40.3 5,314,749 39.1 Loans and leases, net ............. 7,201,810 51.6 6,678,600 49.2 Other assets ...................... 540,997 3.9 519,712 3.8 ----------- ----- ----------- ----- Total ........................... $13,951,846 100.0% $13,578,859 100.0% =========== ===== =========== ===== Liabilities and shareholders' equity: Deposits .......................... $ 7,817,126 56.0% $ 7,012,491 51.7% Borrowings ........................ 4,998,961 35.8 5,461,684 40.2 Other liabilities ................. 201,281 1.5 260,286 1.9 Shareholders' equity .............. 934,478 6.7 844,398 6.2 ----------- ----- ----------- ----- Total ........................... $13,951,846 100.0% $13,578,859 100.0% =========== ===== =========== =====
OVERVIEW At June 30, 1996, total assets were $14.0 billion which was $373.0 million, or 2.7%, higher than at December 31, 1995. This growth was primarily in the loan and lease portfolio as that portfolio grew by $527.6 million, or 7.9%, during the first six months of 1996. The growth in the loan and lease portfolio was primarily due to record levels of loan originations (see Figure 10). Mortgage-backed securities stood at $5.6 billion at June 30, 1996 which was $305.3 million, or 5.7%, higher than at December 31, 1995. This growth was primarily due to a $510.4 million exchange of loans for Federal National Mortgage Association ("FNMA") participation certificates in June. Those FNMA participation certificates were committed to be sold as of June 30, 1996 with settlement in July. A loss on sale of $289,000 was recorded in June 1996 on this transaction. Total deposits were $7.8 billion at June 30, 1996 which was $804.6 million, or 11.5%, higher than at December 31, 1995. The primary reason for this deposit growth was the acquisition of First Nationwide Bank's 21 branch offices in the Detroit Metropolitan Area as of the close of business on June 28, 1996. The deposits acquired in this acquisition totaled $796.7 million. Four First Nationwide offices directly overlapped existing Michigan branch offices so they were consolidated into existing branch facilities. Borrowings declined by $462.7 million, or 8.5%, as a portion of the deposits obtained in the First Nationwide acquisition were used to pay down higher cost borrowings. 14 17 LOANS AND LEASES COMPOSITION OF LOANS AND LEASES (Figure 9)
JUNE 30, 1996 DECEMBER 31, 1995 ---------------------- ---------------------- PERCENT PERCENT OF OF AMOUNT TOTAL AMOUNT TOTAL --------- ----- --------- ----- (DOLLARS IN THOUSANDS) Real estate: One-to-four family ...... $5,351,072 74.3% $5,140,857 77.0% Multifamily ............. 323,107 4.5 359,056 5.4 Commercial .............. 397,188 5.5 368,372 5.5 Construction ............ 230,253 3.2 182,863 2.7 ---------- ----- ---------- ----- Total real estate ..... 6,301,620 87.5 6,051,148 90.6 Consumer .................. 809,962 11.3 594,609 8.9 Leases .................... 183,160 2.5 131,352 2.0 Business .................. 89,733 1.2 65,747 1.0 ---------- ----- ---------- ----- Total loans and leases 7,384,475 102.5 6,842,856 102.5 Less net items ............ 182,665 2.5 168,596 2.5 ---------- ----- --------- ----- Loans and leases, net $7,201,810 100.0% $6,674,260 100.0% ========== ===== ========== =====
The loan and lease portfolio has increased $527.6 million, or 7.9%, since December 31, 1995, with growth concentrated in the mortgage and consumer loan portfolio. Real estate mortgage loans grew by $250.5 million, or 4.1%, and the consumer loan portfolio grew by $215.4 million, or 36.2%, in the first six months of 1996 (see Figure 10). One-to-four family loans led the mortgage loan growth and closed-end loans secured by real estate was the primary leader of the consumer loan growth. The expansion into the Michigan market of Charter One's loan product line has been well received as the Michigan Division accounted for approximately 37% of the one-to-four family loan origination volume and 24% of the consumer loan origination volume. The growth in the one-to-four family loan portfolio was achieved despite a $510.4 million exchange of mortgage loans for FNMA participation certificates in June 1996. Loan and lease originations and repayments for the 1996 periods increased over the comparable periods in 1995 due, in part, to increases in loan refinance activity as customers responded to the favorable interest rate environment in 1996. The annualized level of principal repayments as a percent of the average portfolio in the first and second quarters of 1996 was 25% and 29%, respectively. This compared to 18% in both the first and second quarters of 1995. Although refinance activity was higher early in 1996 than it had been in 1995, it appears the level is declining mid-year. At March 31, 1996, 43% of the single-family loan pipeline was attributable to refinance activity while at June 30, 1996, the level had declined to 18%. 15 18 LOAN AND LEASE ACTIVITY (Figure 10)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Originations: Real estate: Permanent: One-to-four family........................ $ 784,231 186,842 1,326,599 290,750 Multifamily............................... 4,570 9,411 20,072 15,803 Commercial................................ 37,940 17,337 46,114 20,654 ---------- -------- --------- -------- Total permanent......................... 826,741 213,590 1,392,785 327,207 ---------- -------- --------- -------- Construction: One-to-four family........................ 125,082 45,516 172,403 75,860 Multifamily............................... 150 1,525 150 3,031 Commercial................................ 6,200 280 7,200 4,872 ---------- -------- --------- -------- Total construction...................... 131,432 47,321 179,753 83,763 ---------- -------- --------- -------- Total real estate loans originated.... 958,173 260,911 1,572,538 410,970 ---------- -------- --------- -------- Consumer line of credit draws................. 43,276 39,076 82,859 68,523 Consumer...................................... 158,831 40,624 259,922 55,596 Business line of credit draws................. 18,202 8,775 36,399 16,647 Business...................................... 16,706 4,597 23,310 7,820 Leases(1)..................................... 37,229 7,753 69,475 29,632 ---------- -------- --------- -------- Total loans and leases originated..... 1,232,417 361,736 2,044,503 589,188 ---------- -------- --------- -------- Purchases: Loans......................................... - - - - Leases(1)..................................... - - - 76,912 ---------- -------- --------- -------- Total purchases......................... - - - 76,912 ---------- -------- --------- -------- Sales and principal reductions: Loans sold.................................... 3,299 28,907 17,467 43,104 Loans exchanged for MBS....................... 510,435 - 510,435 - Principal reductions.......................... 540,718 295,154 974,982 568,081 ---------- -------- --------- -------- Total sales and principal reductions.... 1,054,452 324,061 1,502,884 611,185 ---------- -------- --------- -------- Increase before net items............. $ 177,965 37,675 541,619 54,915 ========== ======== ========= ======== - ----------------------- (1) Not included herein are $2.1 and $4.2 million in operating leases originated during the three months ended June 30, 1996 and 1995, respectively, and $4.1 million and $17.3 million for the six months ended June 30, 1996 and 1995. (2) Not included herein are $29.0 million in operating leases purchased in the acquisition of ICX Corporation which occurred in the first quarter of 1995.
INVESTMENT SECURITIES The entire investment securities portfolio was classified as available for sale at both June 30, 1996 and December 31, 1995. Figure 11 summarizes the fair values of the portfolio at those dates. INVESTMENT SECURITIES PORTFOLIO (Figure 11)
JUNE 30, 1996 DECEMBER 31, 1995 ------------- ----------------- (DOLLARS IN THOUSANDS) U.S. Treasury and agency securities............................................. $ 320,800 377,232 Corporate notes and commercial paper............................................ 17,397 30,033 Other........................................................................... 2,456 162 -------- -------- Total......................................................................... $ 340,653 407,427 ======== ======== Weighted average rate......................................................... 6.31% 6.76% ======== ========
At June 30, 1996, $162.5 million (with a yield of 6.07%) of the above agency securities were committed to be sold with a pretax loss of $2.0 million recorded in the three months ended June 30, 1996. On June 28, 1996, the Company entered into a commitment to purchase $175.0 million of agency securities (with a yield of 7.14%) for settlement on July 16, 1996 was entered into on June 28, 1996. These transactions were executed to reduce interest rate risk and obtain higher yielding investments securities. 16 19 MORTGAGE-BACKED SECURITIES Figure 12 summarizes the mortgage-backed securities ("MBS") portfolios at June 30, 1996 and December 31, 1995. The amounts reflected represent the fair values of securities available for sale and the amortized cost of securities held to maturity. MORTGAGE-BACKED SECURITIES (Figure 12)
JUNE 30, 1996 DECEMBER 31, 1995 ------------- ----------------- (DOLLARS IN THOUSANDS) MBS available for sale: Participation certificates: Government agency issues.................................................. $ 523,243 347,539 Private issues............................................................ 15 116 Collateralized mortgage obligations: Government agency issues.................................................. 1,946 619,104 Private issues............................................................ 7,096 468,830 ---------- ---------- Total MBS available for sale............................................ $ 532,300 1,435,589 ---------- ---------- MBS held to maturity: Participation certificates: Government agency issues.................................................. $ 2,360,834 2,662,782 Private issues............................................................ 434,616 498,631 Collateralized mortgage obligations: Government agency issues.................................................. 865,144 263,721 Private issues............................................................ 1,427,194 454,026 ---------- ---------- Total MBS held to maturity.............................................. $ 5,087,788 3,879,160 ---------- ---------- Total MBS............................................................. $ 5,620,088 5,314,749 ========== ==========
17 20 MORTGAGE-BACKED SECURITIES BY PAYMENT TYPE (Figure 13)
JUNE 30, 1996 DECEMBER 31, 1995 --------------------------- -------------------------- BOOK AVERAGE BOOK AVERAGE VALUE RATE VALUE RATE ----------- ------------ ---------- ------------ (DOLLARS IN THOUSANDS) MBS available for sale: Adjustable rate: Collateralized mortgage obligations......... $ 7,029 7.40% $ 1,085,208 7.23% Fixed rate: Participation certificates.................. 523,258 7.36 347,655 6.23 Collateralized mortgage obligations......... 2,013 5.28 2,726 5.30 ----------- ---------- Total fixed rate.......................... 525,271 7.35 350,381 6.22 ----------- ---------- Total MBS available for sale............ 532,300 7.35 1,435,589 6.98 ----------- ---------- MBS held to maturity: Adjustable rate: Participation certificates.................. 1,111,099 7.18 1,279,124 7.08 Collateralized mortgage obligations......... 1,404,816 6.85 357,816 7.48 ----------- ---------- Total adjustable rate..................... 2,515,915 6.99 1,636,940 7.17 ----------- ---------- Fixed rate: Participation certificates.................. 1,684,351 7.59 1,882,289 7.56 Collateralized mortgage obligations......... 887,522 7.17 359,931 7.32 ----------- ---------- Total fixed rate.......................... 2,571,873 7.44 2,242,220 7.52 ----------- ---------- Total MBS held to maturity.............. 5,087,788 7.22 3,879,160 7.37 ----------- ---------- Total MBS............................. $ 5,620,088 7.23% $ 5,314,749 7.27% =========== ==========
As previously disclosed, on December 31, 1995 management chose to reclassify $1.1 billion of MBS from the held to maturity portfolio to available for sale in accordance with the FASB special report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." It was also disclosed that, after a sufficient period of market value risk, management intended to reclassify these same securities back to the held to maturity portfolio. This reclassification occurred on January 31, 1996, and resulted in a $42.2 million after-tax increase in shareholders' equity. During the first half of 1996, $326.1 million of available for sale securities were sold for total proceeds of $324.0 million, all at the beginning of the year. The loss of $2.2 million was recorded at the trade date in December 1995. Purchases of mortgage-backed securities during the first half of 1996 totaled $567.1 million and were primarily medium-term, fixed-rate collateralized mortgage obligations. At June 30, 1996, the Bank had a commitment to sell $510.4 million of the FNMA fixed-rate participation certificates included above. These participation certificates were made up of seasoned 15- to 30-year fixed-rate mortgage loans originated by the Bank and swapped to FNMA for participation certificates in June 1996. The sale resulted in a $289,000 net loss and recognition of $2.7 million of originated mortgage servicing rights, both of which were recorded in June 1996. Recognition of the servicing rights was in accordance with Statement of Financial Accounting Standards No. 122 "Accounting for Mortgage Servicing Rights" which Charter One adopted as of January 1, 1996. 18 21 ASSET QUALITY ANALYSIS OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES (Figure 14)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------- ------------------------ 1996 1995 1996 1995 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Balance, beginning of period.......................... $ 65,218 64,519 64,436 64,838 Provision for loan and lease losses................... 1,000 258 2,000 516 Other................................................. - - - 176 Loans and leases charged off: Mortgage............................................ (946) (200) (980) (813) Consumer............................................ (102) (360) (417) (732) Leases.............................................. - - - - Business............................................ - - (1) - --------- ------- ------- -------- Total charge-offs................................. (1,048) (560) (1,398) (1,545) --------- ------- ------- -------- Recoveries: Mortgage............................................ 48 129 92 350 Consumer............................................ 50 15 138 26 Leases.............................................. - - - - Business............................................ - 44 - 44 --------- ------- ------- -------- Total recoveries.................................. 98 188 230 420 --------- ------- ------- -------- Net loan and lease charge-offs.................. (950) (372) (1,168) (1,125) --------- ------- ------- -------- Balance, end of period................................ $ 65,268 64,405 65,268 64,405 ========= ======= ======= ======== Net charge-offs to average loans and leases .05% .02% .03% .03%
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES (Figure 15)
JUNE 30, 1996 DECEMBER 31, 1995 ------------ ---------------- (DOLLARS IN THOUSANDS) Mortgage...................................................................... $ 52,386 51,607 Consumer...................................................................... 7,056 7,214 Leases........................................................................ 854 732 Business...................................................................... 4,972 4,883 --------- ---------- Total....................................................................... $ 65,268 64,436 ========= ========== Percent of loans and leases to ending loans and leases: Mortgage.................................................................... 85.1 % 88.3% Consumer.................................................................... 11.2 8.8 Leases...................................................................... 1.2 .9 Business.................................................................... 2.5 2.0 --------- ---------- Total..................................................................... 100.0 % 100.0% ========= ==========
The allowance for loan and lease losses as a percentage of ending loans and leases (before the allowance) was .90% at June 30, 1996, down slightly from .96% at December 31, 1995, reflecting second quarter loan growth. Credit quality remained high, with nonperforming assets at only .38% of total assets at June 30, 1996. Net charge-offs totaled $950,000 and $1.2 million (including $874,000 related to one commercial real estate loan) for the three and six months ended June 30, 1996, respectively. Net charge-offs for the comparable periods of 1995 were $372,000 and $1.1 million. Management believes that the allowance for loan and lease losses has been established in accordance with generally accepted accounting principles based on the best information available. However, future adjustments to reserves may be necessary and net income could be significantly affected if circumstances and/or economic conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the Ohio or Michigan real estate markets could result in an increased level of nonperforming assets and charge-offs, significant provisions for loan and lease losses and significant reductions in income. Additionally, various regulatory agencies, as an integral part of their examination process, periodically 19 22 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. Figure 16 sets forth information concerning nonperforming assets and the allowance for loan and lease losses. At June 30, 1996, the Bank had no outstanding commitments to lend additional funds to borrowers whose loans were on nonaccrual or restructured status. NONPERFORMING ASSETS (Figure 16)
JUNE 30, 1996 DECEMBER 31, 1995 ------------- ----------------- (DOLLARS IN THOUSANDS) Nonperforming loans and leases: Nonaccrual loans and leases: Mortgage loans: One-to-four family....................................................... $ 8,891 15,145 Multifamily and commercial............................................... 5,749 3,014 Construction and land.................................................... 1,106 1,463 ------- ------- Total mortgage loans................................................... 15,746 19,622 Consumer................................................................... 320 1,525 Lease financings........................................................... - 27 Business................................................................... 17 - ------- ------- Total nonaccrual loans and leases...................................... 16,083 21,174 ------- ------- Accruing loans and leases delinquent more than 90 days: Mortgage loans: One-to-four family......................................................... 6,014 2,002 Multifamily and commercial................................................. 154 893 Construction and land...................................................... - - ------- ------- Total mortgage loans..................................................... 6,168 2,895 Consumer..................................................................... 487 147 Lease financings............................................................. 123 - Business..................................................................... - - ------- ------- Total accruing 90-day delinquent loans and leases........................ 6,778 3,042 ------- ------- Restructured real estate loans................................................. 20,941 18,835 ------- ------- Total nonperforming loans and leases..................................... 43,802 43,051 Real estate acquired through foreclosure and other............................. 9,372 11,650 ------- ------- Total nonperforming assets............................................... $ 53,174 54,701 ======= ======= Ratio of: Nonperforming loans and leases to total loans and leases..................... .61 % .65% Nonperforming assets to total assets......................................... .38 .40 Allowance for loan and lease losses to: Nonperforming loans and leases............................................. 149.01 149.67 Total loans and leases before allowance.................................... .90 .96
Nonperforming assets at June 30, 1996 totaled $53.2 million, down slightly from December 31, 1995. The ratios of nonperforming loans and leases to total loans and leases declined at June 30, 1996 from December 31, 1995. At June 30, 1996, there were $30.0 million of loans not reflected in the table above, where known information about possible credit problems of borrowers caused management to have doubts as to the ability of the borrower to comply with present loan repayment terms and that may result in disclosure of such loans in the future. Included in the total is a $12.3 million loan on apartment buildings and $7.3 million loan on a hotel property in Illinois. The current cash flow of the hotel property is sufficient to meet current debt service requirements. The apartment building has experienced past cash flow shortfalls, but the loan is current. 20 23 SOURCES OF FUNDS GENERAL Deposits have historically been the most important source of the Bank's funds for use in lending and for general business purposes. The Bank also derives funds from Federal Home Loan Bank ("FHLB") advances, reverse repurchase agreements and other borrowings, principal repayments on loans and mortgage-backed securities, funds provided by operations and proceeds from the sale of loans and loan participations. At June 30, 1996, 61% of interest-bearing liabilities were in the form of deposits and 39% were in borrowings compared with 56% and 44% for deposits and borrowings, respectively, at December 31, 1995. DEPOSITS Deposit inflows and outflows are significantly influenced by general interest rates, market conditions and competitive factors. The Bank reprices its deposits primarily based on competitive conditions. In order to decrease the volatility of its deposits, the Bank imposes stringent early withdrawal penalties on its certificates of deposit. Consumer and commercial deposits are attracted principally within the Bank's primary market areas through the offering of a broad range of deposit instruments. COMPOSITION OF DEPOSITS (Figure 17)
JUNE 30, 1996 DECEMBER 31, 1995 ------------------------------------ ------------------------------------ WEIGHTED PERCENT WEIGHTED PERCENT AVERAGE OF AVERAGE OF AMOUNT RATE TOTAL AMOUNT RATE TOTAL ------ --------- ------- ------ --------- ------- (DOLLARS IN THOUSANDS) Checking accounts: Interest-bearing............. $ 554,768 1.86% 7.1% $ 513,933 1.98% 7.3% Noninterest-bearing.......... 323,987 - 4.1 220,029 - 3.2 Savings accounts............... 939,059 2.42 12.0 1,007,178 2.41 14.4 Money market accounts.......... 1,131,047 3.21 14.5 829,087 3.19 11.8 Certificates of deposit........ 4,865,283 5.78 62.3 4,438,831 5.97 63.3 ---------- ----- ---------- ------ Deposits................... 7,814,144 4.49 100.0 7,009,058 4.65 100.0 ===== ====== Plus unamortized premium on deposits purchased......... 2,982 3,433 ---------- ---------- Deposits, net.............. $ 7,817,126 $ 7,012,491 ========== ========== Weighted average cost including the annualized effect of applicable swaps, floors, and amortization of deferred gains on terminated swaps.............. 4.39% 4.61% ==== =====
Total deposits were $7.8 billion at June 30, 1996 which was $804.6 million, or 11.5%, higher than at December 31, 1995. The primary reason for this deposit growth was the acquisition of First Nationwide Bank's 21 branch offices in the Detroit Metropolitan Area as of the close of business on June 28, 1996. The deposits acquired in this acquisition totaled $796.7 million. Four First Nationwide offices directly overlapped existing Michigan branch offices so they were consolidated into existing branch facilities. The cost of the First Nationwide deposits was 4.30% which contributed to the overall decline in the cost of deposits to 4.39% at June 30, 1996 from 4.61% at December 31, 1995. BORROWINGS At June 30, 1996, borrowings primarily consisted of FHLB advances and reverse repurchase agreements. These positions were secured by Charter One's investment in the stock of the FHLB, as well as $5.3 billion in real estate loans and $2.2 billion in mortgage-backed securities. 21 24 FEDERAL HOME LOAN BANK ADVANCES (Figure 18)
JUNE 30, 1996 DECEMBER 31, 1995 ------------------------- ------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE ---------- --------- ---------- --------- (DOLLARS IN THOUSANDS) Fixed-rate advances.............................. $ 1,505,091 5.78% $ 1,310,122 5.78% Variable-rate advances........................... 1,762,000 5.54 1,853,000 5.87 --------- --------- Advances....................................... 3,267,091 5.65 3,163,122 5.84 Unamortized premium.............................. 12 22 --------- --------- Total advances, net............................ $ 3,267,103 $ 3,163,144 ========= ========= Weighted average cost including the annualized effect of applicable caps and amortization of deffered gains on terminated swaps.............. 5.65% 5.90% ==== ====
The variable-rate advances reprice based upon LIBOR at one- to six-month intervals, and included $145 million with a 6.00% LIBOR cap, and $573 million which are callable, at par, by the FHLB. Charter One has also entered into stand-alone interest rate cap agreements applicable to certain variable-rate and short-term, fixed-rate FHLB advances. Reference is made to "Interest Rate Risk Management" for additional discussion. Figure 19 presents a summary of outstanding reverse repurchase agreements. The Bank enters into short-term reverse repurchase agreements for terms up to one year, as well as longer term fixed- and variable-rate agreements. REVERSE REPURCHASE AGREEMENTS (Figure 19)
JUNE 30, 1996 DECEMBER 31, 1995 ------------------------- ------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE ---------- ------- ---------- ---------- (DOLLARS IN THOUSANDS) Short term........................................... $ 106,079 5.57 $ 848,033 5.86 Long term: Fixed rate......................................... 745,000 5.04 575,000 5.28 Variable rate...................................... 669,999 5.77 666,487 6.01 ----------- ---------- Weighted average cost including amortization of fees................................ $ 1,521,078 5.40% $ 2,089,520 5.80% =========== ========== Weighted average cost including the annualized effect of amortization of deferred gains on terminated swaps................................. 5.31% 5.68% ===== ====
Each long-term, variable-rate reverse repurchase agreement also contains an interest rate cap provision based upon a three-month LIBOR of 6.00%. Long-term, fixed-rate agreements include $75 million maturing in 1996 which are callable, at par, and $200 million maturing in 1998 which are convertible, at the counterparty's option, to a floating rate of three-month LIBOR, beginning June 1997 and quarterly thereafter. INTEREST RATE RISK MANAGEMENT The Company utilizes various types of interest rate contracts in managing its interest rate risk on certain of its deposits and FHLB advances and reverse repurchase agreements. 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 22 25 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. INTEREST RATE SWAPS (Figure 20)
JUNE 30, 1996 DECEMBER 31, 1995 ---------------------------------- ------------------------------------- NOTIONAL RECEIVING PAYING NOTIONAL RECEIVING PAYING PRINCIPAL INTEREST INTEREST PRINCIPAL INTEREST INTEREST AMOUNT RATE RATE AMOUNT RATE RATE -------- --------- ---------- ---------- --------- ----------- (DOLLARS IN THOUSANDS) Fixed payment and variable receipt maturing in 1999....... $ 100,000 5.5%(a) 10.09% $ 100,000 6.02%(a) 10.09% ======== ===== ====== ======== ==== ====== Variable payment and fixed receipt: Maturing in: 1997........................ $ 20,000 6.08% 5.55% $ 45,000 6.30% 5.63% 1998........................ 65,000 6.27 5.52 - - - 2000........................ 110,000 7.08 5.47 110,000 7.08 5.63 2001........................ 70,000 7.13 5.52 - - - -------- ----- ------ -------- ---- ------ Total $ 265,000 6.82% 5.50%(a) $ 155,000 6.86% 5.63%(a) ======== ===== ====== ======== ==== ====== - ----------------------- (a) Rates are based upon LIBOR.
The Company also utilizes swaps to hedge a special class of certificates of deposit. These swaps provide for the receipt of variable interest based upon the S&P 500 Index, and the payment of both fixed and variable interest. At June 30, 1996, the notional principal amount outstanding was $29.9 million with a weighted average receipt rate of 15.72% and payment rate of 5.59%. At December 31, 1995, the outstanding principal was $24.2 million with receipt and payment rates of 14.28% and 5.85%, respectively. In 1995, the Company entered into $300 million of four-year interest rate floor agreements maturing in March 1999, which provide for receipt of interest when six-month LIBOR falls below 6.00%. The Company receives the difference between 6.00% and LIBOR at the time of repricing, calculated on the $300 million notional amount. At June 30, 1996, interest received of 5.30% was partially offset by a .07% per annum fee cost. Fees paid at inception of the agreements are being amortized over the terms of the agreements. Unamortized fees totaled $567,000 at June 30, 1996. The Company has entered into caps with primary dealers to limit its exposure to rising rates on certain of its variable-rate and short-term, fixed-rate liabilities (Figure 21). These stand-alone agreements supplement the cap provisions which have been incorporated into some of the Company's borrowings. The agreements provide for receipt of interest when three-month LIBOR exceeds an agreed upon base rate. The Company receives a rate of interest equal to the excess of three-month LIBOR at the time of repricing over the 6.00% base rate, calculated on a notional principal amount. The agreements reprice quarterly. Fees paid at inception of the agreements are being amortized over the terms of the agreements. Unamortized fees totaled $1.3 million at June 30, 1996. INTEREST RATE CAPS (Figure 21)
JUNE 30, 1996 DECEMBER 31, 1995 ---------------------------------------- ------------------------------------------ PER PER NOTIONAL INTEREST ANNUM NOTIONAL INTEREST ANNUM PRINCIPAL BASE RATE COST OF PRINCIPAL BASE RATE COST OF MATURING IN AMOUNT RATE RECEIVED FEE AMOUNT RATE RECEIVED FEE ------------ ---------- ------ -------- ------- ---------- ------- -------- -------- (DOLLARS IN THOUSANDS) 1996...................... $ - -% -% -% $ 200,000 6.00% -% .21% 1997...................... 650,000 6.00 - .30 650,000 6.00 - .30 -------- ---- ---- --- -------- ---- ----- --- Total................. $ 650,000 6.00% -% .30% $ 850,000 6.00% -% .28% ======== ==== ==== === ======== ==== ===== ===
23 26 The cost of interesrte exchange, cap, floor and collar positions, including amortization of gains and losses on terminated positions, was included in interest expense as follows: COST OF INTEREST RATE RISK MANAGEMENT (Figure 22)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED DECEMBER 31, --------------------------- ----------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Interest expense: Deposits........................... $(2,353) 4,955 (3,269) 10,838 FHLB advances...................... 420 253 919 496 Reverse repurchase agreements...... (537) 9,170 (1,173) 20,668 ------ ----- ----- ------ Total............................ $(2,470) 14,378 (3,523) 32,002 ====== ====== ===== ======
LIQUIDITY The Bank's principal sources of funds are deposits, FHLB advances, reverse repurchase agreements, repayments and maturities on loans and securities, proceeds from the sale of securities and funds provided by operations. While scheduled loan, security and interest-bearing deposit amortization and maturities are relatively predictable sources of funds, deposit flows and loan and security prepayments are greatly influenced by economic conditions, the general level of interest rates and competition. The Bank utilizes particular sources of funds based on comparative costs and availability. The Bank generally manages the pricing of its deposits to maintain a steady deposit balance, but has from time to time decided not to pay rates on deposits as high as its competition and, when necessary, to supplement deposits with longer term and/or less expensive alternative sources of funds such as advances. Management also considers the Bank's interest-sensitivity profile when deciding on alternative sources of funds. At June 30, 1996, the Bank's one-year gap was a negative 5.00%. The Bank is required by regulation to maintain specific minimum levels of liquid investments. Regulations currently in effect require the Bank to maintain liquid assets at least equal to 5.0% of the sum of its average daily balance of net withdrawable accounts and borrowed funds due in one year or less. This regulatory requirement may be changed from time to time to reflect current economic conditions. The Bank's average regulatory liquidity ratio for the quarter ended June 30, 1996 was 5.97%. Liquidity management is both a daily and long-term responsibility of management. The Bank adjusts its investments in cash and cash equivalents based upon management's assessment of (i) expected loan and lease demand, (ii) projected security maturities, (iii) expected deposit flows, (iv) yields available on short-term investments, and (v) the objectives of its asset/liability management program. Excess liquidity is invested generally in federal funds sold, interest-bearing deposits and short-term agency and corporate debt securities. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB and collateral eligible for reverse repurchase agreements. The Bank anticipates that it will have sufficient funds available during the next 12 months to meet current and future loan commitments. At June 30, 1996, the Bank and its subsidiaries had outstanding commitments to originate loans and leases of $546.9 million, unfunded lines of consumer credit totaling $380.0 million (a significant portion of which normally remains undrawn) and unfunded lines of commercial (business loans) credit totaling $83.3 million. Certificates of deposit scheduled to mature in one year or less at June 30, 1996 totaled $3.6 billion. Management believes that a significant portion of the amounts maturing during the next 12 months will remain with the Bank because they are retail deposits. At June 30, 1996, the Bank had $1.1 billion of advances from the FHLB and $250.0 million of reverse repurchase agreements which mature during the next 12 months. Management will review the need for advances and reverse repurchase agreements when they mature and believes the Bank has significant additional borrowing capacity. 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 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 that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory practices. The Bank's capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. 24 27 Quantitative measures established by the regulators to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of tangible, core and total risk-based capital. Prompt Corrective Action regulations require specific supervisory actions as capital levels decrease. To be considered adequately capitalized under the regulatory framework for Prompt Corrective Action, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios as set forth in Figure 23 below. The Bank's actual capital and ratios are also presented in Figure 23. REGULATORY CAPITAL (Figure 23)
JUNE 30, 1996 ------------------------------------------------------ ACTUAL CAPITAL REQUIRED CAPITAL ----------------------- ------------------------ AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- (DOLLARS IN THOUSANDS) Capital adequacy: Tangible capital...................................... $ 794,247 5.80% $ 205,454 1.50% Core capital.......................................... 794,247 5.80 410,908 3.00 Risk-based capital.................................... 849,863 12.78 531,818 8.00 Prompt corrective action: Tier 1 leverage capital............................... 794,247 5.80 547,878 4.00 Tier 1 risk-based capital............................. 794,247 11.95 265,909 4.00 Total risk-based capital.............................. 849,863 12.78 531,818 8.00
DECEMBER 31, 1995 ------------------------------------------------------ ACTUAL CAPITAL REQUIRED CAPITAL ----------------------- ------------------------ AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- (DOLLARS IN THOUSANDS) Capital adequacy: Tangible capital...................................... $ 822,670 6.11% $ 202,027 1.50% Core capital.......................................... 822,670 6.11 404,053 3.00 Risk-based capital.................................... 875,176 14.29 489,835 8.00 Prompt corrective action: Tier 1 leverage capital............................... 822,670 6.11 538,738 4.00 Tier 1 risk-based capital............................. 822,670 13.44 244,917 4.00 Total risk-based capital.............................. 875,176 14.29 489,835 8.00
Management believes that as of June 30, 1996, the Bank meets all capital requirements to which it is subject. Events beyond management's control, such as significant fluctuations in interest rates or a significant 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. QUARTERLY STOCK PRICES AND DIVIDENDS (Figure 24)
2ND QUARTER 1ST QUARTER 4TH QUARTER 3RD QUARTER 2ND QUARTER 1996 1996 1995 1995 1995 ----------- ----------- ----------- ----------- ------------ Market price of common stock: High............................................. $ 38.00 35.25 33.38 30.75 27.00 Low.............................................. 30.81 28.50 28.13 24.38 20.00 Close............................................ 34.88 33.75 30.63 29.50 24.50 Dividends declared and paid........................ .23 .20 .20 .19 .19
During the fourth quarter of 1994, the Board of Directors of the Company authorized management to repurchase up to 1.2 million shares of the Company's common stock. Shares repurchased under this authorization are held in treasury and are available for issuance upon the exercise of stock options or for other corporate purposes. As of June 30, 1996, all of the shares had been repurchased under this authorization. On May 15, 1996, the Board of Directors of the Company authorized management to repurchase 5% of the Company's outstanding common stock in an additional buyback program. As of that date, the Company had 45,099,654 common shares outstanding. 25 28 PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION DIVIDEND On July 24, 1996, the Directors of Charter One Financial, Inc. declared a quarterly cash dividend of 23 cents per common share. The dividend will be payable on August 19, 1996 to shareholders of record as of August 7, 1996. In addition, the Board approved a 5% stock dividend which will be distributed September 30, 1996, to shareholders of record on September 13, 1996. It is the Board's intention, subject to ongoing review of the Company's operating results and prospects, to maintain the quarterly cash dividend at no less than $.23 per share subsequent to the distribution of the stock dividend. If maintained at that level, this would represent an increase of 5% in the cash dividend paid to common shareholders. RECENT DEVELOPMENTS The deposits of savings associations such as Charter One Bank are presently insured by the Savings Association Insurance Fund ("SAIF"), which along with the Bank Insurance Fund ("BIF"), comprise the two insurance funds administered by the Federal Deposit Insurance Corporation ("FDIC"). Financial institutions which are members of the BIF have an insurance premium schedule which ranges from 0% to .27% (with a $2,000 minimum annual assessment) of insured deposits as compared to the current range of .23% to .31% of insured deposits for members of SAIF. Therefore, well-capitalized and healthy BIF members pay a significantly lower premium than comparable SAIF-insured institutions such as Charter One Bank. The disparity is due to the BIF having reached its statutory reserve ratio of 1.25% of insured deposits, while the SAIF is not anticipated to reach that statutory reserve level until 2002, absent a substantial increase in the premium rate or the imposition of special assessments or other significant developments, such as the merger of the SAIF and BIF. As a result of this disparity, management believes SAIF members have been placed at a competitive disadvantage to BIF members with respect to pricing of loans and deposits and the ability to achieve lower operating costs. Various segments of the United States Government have attempted to address the insurance premium disparity through proposed legislation that has ranged from recapitalizing the SAIF through a special assessment to merging the SAIF and BIF and eliminating the thrift charter. Although a special assessment would reduce the Bank's regulatory capital, it would not likely jeopardize its well-capitalized status. Additionally, the reduced premium rate that is expected to result would reduce administrative costs going forward. Finally, management does not believe a SAIF/BIF combination or elimination of the thrift charter (as currently proposed) would have a significant impact on future operations of the Bank. No assurances can be given as to the likelihood that any of the proposed legislation will become law. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit 11 - Computation of Per Share Earnings Exhibit 27 - Financial Data Schedule Exhibit 99 - Selected Monthly Financial Highlights (b) REPORTS ON FORM 8-K The Company filed a report on Form 8-K dated May 15, 1996 disclosing the commencement of an open-market stock repurchase program to purchase up to 5% of the shares of Registrant's outstanding common stock. 26 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHARTER ONE FINANCIAL, INC. Date: August 14, 1996 /s/ Robert J. Vana ------------------ Robert J. Vana Chief Corporate Counsel and Secretary Date: August 14, 1996 /s/ Richard W. Neu ------------------ Richard W. Neu Senior Vice President and Treasurer 27 EX-11 2 EXHIBIT 11 1 EXHIBIT 11 CHARTER ONE FINANCIAL, INC. COMPUTATION OF PER SHARE EARNINGS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------- ------------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) COMPUTATION OF PRIMARY EARNINGS PER SHARE: Weighted average number of common shares outstanding............. 45,094,424 44,948,349 45,061,471 44,935,999 Add common stock equivalents for shares issuable under: Stock Appreciation Rights Plan(1).... 45,515 48,403 46,363 55,688 Stock Option Plan(1)................. 901,405 938,343 894,131 858,109 ----------- ----------- ------------ ----------- Weighted average number of shares outstanding adjusted for common stock equivalents...... 46,041,344 45,935,095 46,001,965 45,849,796 =========== =========== ============ =========== Net income............................. $ 41,370 31,045 79,820 60,355 =========== =========== ============ =========== Primary earnings per share............. $ .90 .68 1.74 1.32 =========== =========== ============ =========== COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE: Weighted average number of common shares outstanding............. 45,094,424 44,948,349 45,070,489 44,935,999 Add common stock equivalents for shares issuable under: Stock Appreciation Rights Plan(2).... 45,609 48,570 48,199 71,128 Stock Option Plan(2)................. 930,873 993,754 960,268 997,403 ----------- ----------- ------------ ----------- Weighted average number of shares outstanding adjusted for common stock equivalents...... 46,070,906 45,990,673 46,078,956 46,004,530 =========== =========== ============ =========== Net income............................. $ 41,370 31,045 79,820 60,355 =========== =========== ============ =========== Fully diluted earnings per share....... $ .90 .67 1.73 1.31 =========== =========== ============ =========== - ----------------------- (1) Additional shares issuable were derived under the "treasury stock method" using average market price during the period. (2) Additional shares issuable were derived under the "treasury stock method" using the higher of the average market price during the period or the market price at the end of the period.
28 EX-27 3 EXHIBIT 27
9 The consolidated financial statements of Charter One. Financial, Inc. and subsidiaries as of and for the six months ended June 30, 1996 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 163,429 0 84,869 0 872,953 5,087,788 5,075,684 7,267,078 65,268 13,951,846 7,817,126 106,079 201,281 4,892,882 452 0 0 934,026 13,951,846 292,335 192,275 10,118 494,728 155,797 303,819 190,909 2,000 (2,307) 90,647 120,666 120,666 0 0 79,820 1.74 1.73 2.98 16,083 6,778 20,941 30,000 64,436 1,398 230 65,268 65,268 0 0
EX-99 4 EXHIBIT 99 1 EXHIBIT 99 CHARTER ONE FINANCIAL, INC. SELECTED MONTHLY FINANCIAL HIGHLIGHTS SELECTED FINANCIAL DATA AT MONTH END
04/30/96 05/31/96 06/30/96 -------- -------- -------- (DOLLARS IN THOUSANDS) Total assets................................................ $ 13,528,222 13,666,754 13,951,846 Investment securities....................................... 322,477 317,233 340,653 Mortgage-backed securities.................................. 5,260,952 5,183,691 5,620,088 Loans receivable............................................ 7,277,889 7,494,110 7,201,810 Deposits.................................................... 6,936,646 6,969,300 7,817,126 Borrowings.................................................. 5,470,117 5,552,732 4,998,961 Portfolio of loans serviced for others...................... 1,143,478 1,119,037 1,602,634 Number of employees (FTEs).................................. 2,250 2,297 2,499 Deposits: Checking.................................................. $ 729,417 761,572 878,755 Savings................................................... 878,209 876,138 939,059 Money market.............................................. 953,677 965,940 1,131,047 Certificates: 6 month or less......................................... 656,869 655,882 673,837 6 month to 1 year....................................... 1,207,978 1,221,901 1,492,729 Jumbo................................................... 298,069 297,140 294,749 Other................................................... 2,212,427 2,190,727 2,406,950 ----------- ------------ ----------- Total CDS............................................. 4,375,343 4,365,650 4,868,265 ----------- ------------ ----------- Total deposits...................................... $ 6,936,646 6,969,300 7,817,126 =========== ============ =========== Borrowings: Reverse repurchase agreements............................. $ 1,955,844 2,080,970 1,521,078 FHLB advances............................................. 3,302,451 3,260,277 3,267,103 Other..................................................... 211,822 211,485 210,780 ----------- ------------ ----------- Total borrowings........................................ $ 5,470,117 5,552,732 4,998,961 =========== ============ =========== Weighted average rates at period end: Loans..................................................... 8.10% 8.08% 8.12% MBS....................................................... 7.18% 7.25% 7.23% Loans and MBS........................................... 7.71% 7.74% 7.73% Other investments......................................... 6.66% 6.68% 6.50% Total interest-earning assets........................... 7.67% 7.70% 7.68% Deposits.................................................. 4.42% 4.40% 4.39% Borrowings................................................ 5.62% 5.67% 5.77% Total interest-bearing liabilities...................... 4.95% 4.96% 4.93% Interest rate spread........................................ 2.72% 2.74% 2.75% Net yield on interest-earning assets........................ 3.01% 3.02% 3.00% Nonperforming assets and allowance for loss: Nonperforming loans and leases............................ $ 25,266* 25,266* 22,861 Restructured loans........................................ 18,794* 18,794* 20,941 REO and other repossessed assets.......................... 11,335 9,460 9,372 ----------- ------------ ----------- Total nonperforming assets.............................. $ 55,395 53,520 53,174 =========== ============ =========== Allowance for loss........................................ $ 64,719 65,865 65,268 * At March 31, 1996
30 2 SELECTED ACTIVITY FOR THE MONTH AND QUARTER
3 MONTHS 6 MONTHS ENDED ENDED 4/30/96 5/31/96 6/30/96 6/30/96 6/30/96 ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Loan and MBS activity: Mortgage loan originations: One-to-four family.... $ 317,375 293,908 298,030 909,313 1,499,002 Multifamily........... 2,198 - 2,522 4,720 20,222 Commercial real estate 24,634 8,067 11,439 44,140 53,314 Consumer loan originations......... 57,523 55,992 45,316 158,831 259,922 -------- -------- --------- ---------- ---------- Total originations.. 401,730 357,967 357,307 1,117,004 1,832,460 Loans sold.............. 457 2,500 342 3,299 17,467 Loans exchanged for MBS................ - - 510,435 510,435 510,435 MBS purchased........... 253,631 - - 253,631 567,104 MBS sold................ - - - - 326,125 Average yield on residential loans originated (excludes impact of fees and costs associated with origination)........... 7.26% 7.37% 7.41% 7.34% 7.30% Deposit portfolio activity: Net increase (decrease): Checking.............. $ (12,842) 32,155 117,183 136,496 144,794 Savings............... (11,399) (2,071) 62,921 49,451 (68,119) Money market.......... (5,179) 12,263 165,107 172,191 301,960 Certificates: 6 month or less..... 10,594 (987) 13,134 22,741 18,301 6 month to 1 year... 16,899 13,923 855,249 886,071 322,726 Jumbo............... (23,847) (929) (2,391) (27,167) (175,325) Other............... (48,377) (21,700) (363,377) (433,454) 260,298 -------- -------- --------- ---------- ---------- Total CDS......... (44,731) (9,693) 502,615 448,191 426,000 -------- -------- --------- ---------- ---------- Net increase (decrease) in deposits............ $ (74,151) 32,654 847,826 806,329 804,635 ======== ======== ========= ========== ========== Interest credited to deposits included above $ 10,595 10,490 51,048 72,133 117,155 Total increase (decrease) as a percentage of beginning deposits..... (1.06)% .47% 12.09% 11.50% 11.47%
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