-----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, O3+93zctA7ksFLBBxvHeCWkI06w8VXbuHIYqiNRWHrZ2NnbIjQeaA0YMeLO7R7Y9 0QhKe9IqY82BvqRk2ev5pw== 0000950152-99-006826.txt : 19990816 0000950152-99-006826.hdr.sgml : 19990816 ACCESSION NUMBER: 0000950152-99-006826 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHARTER ONE FINANCIAL INC CENTRAL INDEX KEY: 0000819692 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 341567092 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16311 FILM NUMBER: 99688288 BUSINESS ADDRESS: STREET 1: 1215 SUPERIOR AVE CITY: CLEVELAND STATE: OH ZIP: 44114 BUSINESS PHONE: 2165665300 MAIL ADDRESS: STREET 1: 1215 SUPERIOR AVENUE STREET 2: 1215 SUPERIOR AVENUE CITY: CLEVELAND STATE: OH ZIP: 44114 10-Q 1 CHARTER ONE FINANCIAL, INC. 10-Q 1 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 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 July 31, 1999 was 165,194,971. - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Item Number Page - ------ PART I - FINANCIAL INFORMATION 1. Financial Statements Consolidated Statements of Financial Condition -- June 30, 1999 and December 31, 1998........................................................ 1 Consolidated Statements of Income -- Three and six months ended June 30, 1999 and 1998.......................................... 2 Consolidated Statement of Changes in Shareholders' Equity -- Six months ended June 30, 1999............................................................. 3 Consolidated Statements of Cash Flows -- Six months ended June 30, 1999 and 1998.................................................... 4 Notes to Consolidated Financial Statements................................................... 5 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................................... 7 3. Quantitative and Qualitative Disclosure About Market Risk........................................ 28 PART II - OTHER INFORMATION 5. Other Information................................................................................ 28 6. Exhibits and Reports on Form 8-K................................................................. 28 Signatures.................................................................................................. 29
i 3 PART I - FINANCIAL CONDITION ITEM 1. FINANCIAL STATEMENTS CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)
JUNE 30, 1999 DECEMBER 31, 1998 --------------- ----------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS Cash and deposits with banks ............................................ $ 220,686 $ 334,054 Federal funds sold and other ............................................ 446 65,453 ------------ ------------ Total cash and cash equivalents .................................... 221,132 399,507 Investment securities: Available for sale, at fair value ..................................... 174,897 253,317 Held to maturity (fair value of $21,474 and $42,554) .................. 21,425 42,256 Mortgage-backed securities: Available for sale, at fair value ..................................... 3,155,462 2,299,204 Held to maturity (fair value of $2,053,007 and $2,716,740) ............ 2,026,597 2,668,980 Loans and leases, net ................................................... 17,553,669 17,502,729 Loans held for sale ..................................................... 76,570 175,107 Federal Home Loan Bank stock ............................................ 367,514 319,993 Premises and equipment .................................................. 237,815 218,788 Accrued interest receivable ............................................. 118,088 117,493 Real estate and other collateral owned .................................. 19,357 18,094 Loan servicing assets ................................................... 101,011 90,838 Goodwill ................................................................ 152,021 158,709 Other assets ............................................................ 727,046 202,240 ------------ ------------ Total assets ....................................................... $ 24,952,604 $ 24,467,255 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Checking accounts: Interest-bearing ................................................... $ 1,411,890 $ 1,204,221 Noninterest-bearing ................................................ 948,947 1,015,650 Money market accounts ................................................. 2,909,903 2,505,846 Savings accounts ...................................................... 1,503,989 1,828,087 Certificates of deposit ............................................... 8,312,876 8,611,260 ------------ ------------ Total deposits ..................................................... 15,087,605 15,165,064 Federal Home Loan Bank advances ......................................... 7,256,870 6,186,118 Reverse repurchase agreements ........................................... 128,541 685,024 Other borrowings ........................................................ 130,933 130,336 Advance payments by borrowers for taxes and insurance ................... 59,237 60,383 Accrued interest payable ................................................ 39,726 45,584 Accrued expenses and other liabilities .................................. 294,277 319,634 ------------ ------------ Total liabilities .................................................. 22,997,189 22,592,143 ------------ ------------ Shareholders' equity: Preferred stock - $.01 par value per share; 20,000,000 shares authorized and unissued ............................................. - - Common stock - $.01 par value per share; 360,000,000 shares authorized; 166,428,418 and 165,399,180 shares issued ............... 1,664 1,654 Additional paid-in capital ............................................ 1,138,426 1,130,398 Retained earnings ..................................................... 835,493 704,661 Less 1,165,000 and zero shares of common stock held in treasury, at cost (32,038) - Borrowings of employee investment and stock ownership plan ............ (4,223) (5,288) Accumulated other comprehensive income ................................ 16,093 43,687 ------------ ------------ Total shareholders' equity ..................................... 1,955,415 1,875,112 ------------ ------------ Total liabilities and shareholders' equity ..................... $ 24,952,604 $ 24,467,255 ============ ============
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, -------------------------------- -------------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INTEREST INCOME: Loans and leases ....................... $ 336,342 $ 328,476 $ 678,475 $ 647,951 Mortgage-backed securities: Available for sale ................... 45,965 29,464 80,257 57,694 Held to maturity ..................... 36,349 63,280 78,217 134,396 Investment securities: Available for sale ................... 2,806 6,857 6,051 18,314 Held to maturity ..................... 409 1,112 1,076 2,235 Other interest-earning assets .......... 6,243 11,064 13,459 21,586 ------------ ------------ ------------ ------------ Total interest income ............... 428,114 440,253 857,535 882,176 ------------ ------------ ------------ ------------ INTEREST EXPENSE: Deposits ............................... 144,965 154,006 291,744 304,645 FHLB advances .......................... 84,378 71,903 162,253 146,208 Other borrowings ....................... 7,145 33,221 17,708 69,119 ------------ ------------ ------------ ------------ Total interest expense .............. 236,488 259,130 471,705 519,972 ------------ ------------ ------------ ------------ Net interest income ................. 191,626 181,123 385,830 362,204 Provision for loan and lease losses ...... 7,843 7,155 14,614 13,768 ------------ ------------ ------------ ------------ Net interest income after provision for loan and lease losses ......... 183,783 173,968 371,216 348,436 ------------ ------------ ------------ ------------ OTHER INCOME: Retail banking ......................... 38,710 28,848 70,931 51,762 Mortgage banking ....................... 11,317 16,115 22,573 31,550 Leasing operations ..................... 1,657 3,441 3,705 5,651 Net gains .............................. 4,668 4,348 9,832 8,612 Other .................................. 7,768 1,781 10,633 3,289 ------------ ------------ ------------ ------------ Total other income .................. 64,120 54,533 117,674 100,864 ------------ ------------ ------------ ------------ ADMINISTRATIVE EXPENSES: Compensation and employee benefits ..... 52,803 51,089 105,690 101,546 Net occupancy and equipment ............ 16,848 17,348 34,494 34,356 Federal deposit insurance premiums ..... 1,553 1,528 3,144 3,245 Merger expenses ........................ 3,519 - 5,719 - Amortization of goodwill ............... 3,300 3,369 6,663 6,732 Other administrative expenses .......... 33,682 37,281 65,826 74,594 ------------ ------------ ------------ ------------ Total administrative expenses ....... 111,705 110,615 221,536 220,473 ------------ ------------ ------------ ------------ Income before income taxes ............... 136,198 117,886 267,354 228,827 Income taxes ............................. 43,697 38,527 86,718 75,415 ------------ ------------ ------------ ------------ Net income .......................... $ 92,501 $ 79,359 $ 180,636 $ 153,412 ============ ============ ============ ============ Basic earnings per share ................. $ .56 $ .48 $ 1.09 $ .93 ============ ============ ============ ============ Diluted earnings per share ............... $ .54 $ .46 $ 1.06 $ .89 ============ ============ ============ ============ Average common shares outstanding(1) ..... 166,238,400 165,978,203 166,009,365 165,771,076 ============ ============ ============ ============ Average common and common equivalent shares outstanding(1) .................. 170,231,663 172,423,363 170,126,959 171,916,458 ============ ============ ============ ============ Cash dividends declared per share(1) ..... $ .16 $ .13 $ .30 $ .26 ============ ============ ============ ============
- -------------- (1) Restated to reflect the 5% stock dividend issued September 30, 1998. See Notes to Consolidated Financial Statements 2 5 CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited)
BORROWINGS OF EMPLOYEE ACCUMULATED INVESTMENT TOTAL ADDITIONAL OTHER AND STOCK SHARE- COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE OWNERSHIP HOLDERS' STOCK CAPITAL EARNINGS STOCK INCOME PLAN EQUITY -------- ------------- --------- -------- ------------- ---------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Balance, January 1, 1999 $ 1,654 $ 1,130,398 $ 704,661 $ - $ 43,687 $(5,288) $1,875,112 Comprehensive income: Net unrealized holding loss on securities................ - - - - (27,594) - (27,594) Net income.................... - - 180,636 - - - 180,636 ------- ------------ --------- --------- -------- ------- ---------- Comprehensive income............ - - 180,636 - (27,594) - 153,042 Treasury stock purchased 1,165,000 shares.............. - - - (32,038) - - (32,038) EISOP loan payment.............. - - - - - 1,065 1,065 Issuance of common shares for stock option plans, 1,029,238 shares.............. 10 8,028 - - - - 8,038 Dividends paid ($.30 per share)........................ - - (49,804) - - - (49,804) ------- ------------ --------- --------- -------- ------- ---------- Balance, June 30, 1999.......... $ 1,664 $ 1,138,426 $ 835,493 $ (32,038) $ 16,093 $(4,223) $1,955,415 ======= ============ ========= ========= ======== ======= ==========
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, ------------------------- 1999 1998 ---- ---- (AS RESTATED) (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income .......................................................... $ 180,636 $ 153,412 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses ............................... 14,614 13,768 Net gains ......................................................... (7,011) (3,631) Accretion of discounts, amortization of premiums, amortization of goodwill and depreciation, net ................... 27,553 10,226 Origination of real estate loans held for sale .................... (971,060) (890,269) Proceeds from sale of loans held for sale ......................... 968,359 885,276 Other ............................................................. (68,176) (68,088) ----------- ----------- Net cash provided by operating activities ....................... 144,915 100,694 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Net principal disbursed on loans and leases ......................... (1,819,002) (1,850,754) Proceeds from principal repayments and maturities of: Mortgage-backed securities held to maturity ....................... 664,032 814,857 Investment securities held to maturity ............................ - 25,896 Mortgage-backed securities available for sale ..................... 291,236 41,382 Investment securities available for sale .......................... 101,511 741,646 Proceeds from sale of: Mortgage-backed securities available for sale ..................... 673,311 418,198 Investment securities available for sale .......................... 64,176 - Federal Home Loan Bank stock ...................................... 1,809 2,188 Loan servicing rights ............................................. - 13,937 Purchases of: Investment securities available for sale .......................... (90,749) (138,179) Investment securities held to maturity ............................ - (24,958) Loans ............................................................. (11,513) (85,040) Federal Home Loan Bank stock ...................................... (37,902) (4,456) Loan servicing assets, including those originated ................. (16,892) (16,149) Bank owned life insurance ......................................... (480,500) - Other ............................................................. (26,687) 5,278 ----------- ----------- Net cash used in investing activities ............................. (687,170) (56,154) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings .................... 233,337 (1,609,644) Proceeds from long-term borrowings .................................. 500,711 2,041,301 Repayments of long-term borrowings .................................. (217,958) (1,052,155) Increase (decrease) in deposits ..................................... (77,260) 679,636 Decrease in advance payments by borrowers for taxes and insurance .......................................................... (1,146) (72,541) Payment of dividends on common stock ................................ (49,804) (38,558) Proceeds from issuance of common stock, net of options excercised ... 8,038 - Purchase of treasury stock .......................................... (32,038) (11,608) ----------- ----------- Net cash provided by (used in) financing activities ................... 363,880 (63,569) ----------- ----------- Net decrease in cash and cash equivalents ............................. (178,375) (19,029) Cash and cash equivalents, beginning of the period .................... 399,507 412,105 ----------- ----------- Cash and cash equivalents, end of the period .......................... $ 221,132 $ 393,076 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest on deposits and borrowings ................... $ 477,064 $ 513,489 Cash paid for income taxes .......................................... 8,000 44,455 SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES: Transfers from loans to real estate owned ........................... 2,586 6,309 Loans exchanged for mortgage-backed securities ...................... 1,866,045 1,347,422
See Notes to Consolidated Financial Statements 4 7 CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Charter One Financial, Inc. ("the Company" or "Charter One") Annual Report on Form 10-K. The interim financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. Such adjustments are of a normal recurring nature. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year. 2. On May 17, 1999, the boards of directors of Charter One and St. Paul Bancorp, Inc. ("St.Paul"), the holding company of St. Paul Federal Bank, For Savings entered into a definitive agreement to enter into a strategic alliance through a stock-for-stock exchange. St. Paul Federal Bank For Savings, headquartered in Chicago, Illinois, has an asset base of $6.0 billion ($3.8 billion in deposits) and operates 60 branch offices in the metropolitan Chicago area. Terms of the agreement call for a tax-free exchange of common shares at a fixed exchange ratio of .99225 shares of Charter One common stock for each of St. Paul's common shares. Based on the current number of diluted St. Paul shares, it is expected that approximately 38.7 million shares of Charter One common stock will be added in conjunction with the merger, 37.7 million new shares to be issued and approximately one million additional shares related to exercisable stock options. This results in an initial transaction value of approximately $1.2 billion and a pro forma market capitalization of the combined company of $6.2 billion. The merger, which would be accounted for as a pooling of interests, is expected to close in the fourth quarter of 1999. The transaction has already been approved by the boards of directors of both companies and is subject to approval by the Office of Thrift Supervision, the Federal Reserve Board, the Illinois Commissioner of Banks and Real Estate and each company's shareholders. 3. On May 4, 1999, the Company announced a definitive agreement with Chittenden ("Chittenden") Corporation to purchase 14 Vermont National Bank offices along with approximately $400 million in deposits and $120 million in commercial real estate and business loans. The deposits will be assumed for a deposit premium of approximately 10.5% and will result in approximately $42 million in tax deductible goodwill. The purchase is related to the branch divestiture required by federal regulators relative to Chittenden's pending merger with Vermont Financial Services Corp., the parent company of Vermont National Bank and United Bank in Massachusetts. The transaction is expected to close during the fourth quarter of 1999. 4. On November 30, 1998, the Company completed the merger with ALBANK Financial Corporation ("ALBANK"). ALBANK, the holding company of ALBANK, F.S.B., a federally chartered savings bank, and ALBANK Commercial, a state-chartered commercial bank, was headquartered in Albany, New York, had $4.1 billion in assets ($3.5 billion in deposits), and operated 88 branches in upstate New York and 21 in Massachusetts and Vermont. Terms of the agreement called for a tax-free exchange of common shares at a fixed exchange ratio of 2.268 shares (as adjusted for the 5% stock dividend issued September 30, 1998) of Charter One common stock for each of ALBANK's common shares, resulting in the issuance of 30,479,758 shares of Charter One common stock. 5. On October 16, 1998, Charter One completed its acquisition of CS Financial, Inc. ("CS Financial"), a $393.9 million privately-owned thrift holding company headquartered in Cleveland, Ohio. As a result of the merger, which was accounted for as a pooling of interests, Charter One issued an additional 2,131,500 shares of its common stock. The transaction added eight branches to the Ohio network, four of which have been consolidated, resulting in a net increase of four branches. 6. On January 1, 1999, the Company adopted SFAS No. 134 "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This statement amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," and conforms the subsequent accounting for securities retained after the securitization of mortgage loans by a mortgage banking enterprise with the subsequent accounting for securities retained after the securitization of other types of assets by a non-mortgage banking enterprise. The adoption of this statement did not have a material effect on the Company's financial position and results of operations. 5 8 7. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The FASB has delayed the effective date of SFAS No. 133 for one year, to fiscal years beginning after June 15, 2000. The delay, published as SFAS No. 137, applies to quarterly and annual financial statements. Early application is still permitted. Management has not completed the process of evaluating SFAS No. 133 and therefore has not determined the impact that adopting this statement will have on the financial position and results of operations. 8. Certain items in the consolidated financial statements for 1998 have been reclassified to conform to the 1999 presentation. 6 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HOLDING COMPANY BUSINESS GENERAL Headquartered in Cleveland, Ohio, Charter One is now a bank holding company, having converted from a unitary savings institution holding company on November 30, 1998. The conversion was undertaken in conjunction with our November 30, 1998 acquisition of ALBANK, which included the acquisition of ALBANK Commercial, a New York chartered commercial bank. ALBANK Commercial was merged into Charter One Bank on May 31, 1999 and New ALBANK Commercial was formed on the same date. New ALBANK Commercial is a New York chartered commercial bank. Charter One is a Delaware corporation and owns all of the outstanding capital stock of Charter Michigan Bancorp, Inc. and New ALBANK Commercial. Charter Michigan Bancorp, Inc. owns all of the outstanding capital stock of Charter One Bank, F.S.B., a federally chartered thrift. The primary business of the company is operating these financial institutions. Their operations are jointly referred to in the following discussion as the bank. The bank's primary business is providing consumer and business banking services to certain major markets in Ohio, Michigan and New York and in some markets of Massachusetts and Vermont. At the end of the second quarter of 1999, the Bank and its subsidiaries were doing business through 340 full-service banking branches and 39 loan production offices. FORWARD-LOOKING STATEMENTS When used in this Form 10-Q and in future filings by Charter One with the Securities and Exchange Commission (the "SEC"), in Charter One's press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected, including but not limited to: (i) changes in economic conditions in our market area; (ii) changes in policies by regulatory agencies; (iii) fluctuations in interest rates; (iv) demand for loans in our market areas; (v) competition; (vi) the possibility that expected cost savings from the proposed acquisition of St. Paul and the Chittenden branch acquisition cannot be fully realized within the expected time frame; (vii) the possibility that costs or difficulties relating to the integration of St. Paul and Chittenden will be greater than expected; (viii) the possibility that revenues following the St. Paul merger and Chittenden branch acquisition will be lower than expected; (ix) the possibility that expected cost savings from the acquisition of ALBANK cannot be fully realized within the expected time frame; (x) the possibility that costs or difficulties relating to the integration of our business and ALBANK will be greater than expected; (xi) the possibility that revenues following the ALBANK Merger will be lower than expected; and (xii) the possibility that year 2000 compliance failures could result in additional expense to Charter One and significant disruption of its business and there can be no assurance that any contingency plans will completely mitigate the effects of any such failure. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We also wish to advise readers that the factors listed above could affect Charter One's financial performance and could cause Charter One's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. We do not undertake--and specifically declines any obligation--to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. RESULTS OF OPERATIONS PERFORMANCE OVERVIEW Charter One reported net income of $92.5 million, or $0.54 per diluted share, for the three months ended June 30, 1999. This was a $13.1 million, or 16.6%, increase over the results of the second quarter of 1998 when net income was $79.4 million, or $0.46 per diluted share. This increase was primarily attributable to increases in net interest income, retail banking income and income from bank owned life insurance ("BOLI"). The Company's net income 7 10 for the second quarter of 1999 resulted in a return on average equity of 18.47% and a return on average assets of 1.49%. The comparable returns for the second quarter of 1998 were 16.97% and 1.31%, respectively. For the six months ended June 30, 1999, Charter One reported net income of $180.6 million, or $1.06 per diluted share. This was a $27.2 million, or 17.7%, increase over the results for the same period in 1998. This increase, just as in the second quarter results, was primarily attributable to increases in net interest income, retail banking income and income from BOLI. This net income resulted in a return on average equity of 18.40% and a return on average assets of 1.47%. The comparable returns for the six months ended June 30, 1998 were 16.68% and 1.26%, respectively. SELECTED OPERATING RATIOS (Figure 1)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------------- --------------------------- 1999 1998 1999 1998 ------------- ------------- ------------ ----------- ANNUALIZED RETURNS Return on average assets ....................... 1.49% 1.31% 1.47% 1.26% Return on average equity ....................... 18.47 16.97 18.40 16.68 Average equity to average assets ............... 8.07 7.71 7.98 7.58 ANNUALIZED OPERATING RATIOS Net interest income to administrative expenses . 1.72x 1.64x 1.74x 1.64x Administrative expenses to average assets ...... 1.80% 1.82% 1.80% 1.82% Efficiency ratio ............................... 43.18 46.37 43.53 47.03
NET INTEREST INCOME Net interest income is the principal source of our earnings. Net interest income is affected by a number of factors including the level, pricing and maturity of interest-earning assets and interest-bearing liabilities, as well as market interest rate fluctuations and asset quality. Figure 2 sets forth information concerning Charter One's interest-earning assets, interest-bearing liabilities, net interest income, interest rate spreads and net yield on average interest earning assets during the periods indicated (including fees which are considered adjustments to yields). Average balance calculations are based on daily balances. 8 11 AVERAGE BALANCES, INTEREST RATES AND YIELDS/COSTS (Figure 2)
THREE MONTHS ENDED JUNE 30, ------------------------------------------------------------------------------- 1999 1998 -------------------------------------- -------------------------------------- AVG. AVG. AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST COST BALANCE INTEREST COST ------- -------- ---- ------- -------- ---- (DOLLARS IN THOUSANDS) Interest-earning assets: Loans and leases(1) .................... $ 17,836,472 $ 336,342 7.55% $ 16,690,216 $ 328,476 7.88% Mortgage-backed securities: Available for sale ................... 2,739,571 45,965 6.71 1,675,332 29,464 7.03 Held to maturity ..................... 2,109,020 36,349 6.89 3,561,269 63,280 7.11 Investment securities: Available for sale ................... 162,841 2,806 6.89 467,757 6,857 5.86 Held to maturity ..................... 26,001 409 6.30 67,868 1,112 6.55 Other interest-earning assets(2) ............................. 364,254 6,243 6.78 656,361 11,064 6.67 ------------ --------- ------------ --------- Total interest-earning assets ....... 23,238,159 428,114 7.37 23,118,803 440,253 7.62 --------- --------- Allowance for loan and lease losses .... (141,521) (141,942) Noninterest-earning assets(3) .......... 1,730,263 1,291,070 ------------ ------------ Total assets ...................... $ 24,826,901 $ 24,267,931 ============ ============ Interest bearing liabilities(4): Deposits: Checking accounts .................... $ 2,320,342 5,259 0.91 $ 1,915,135 3,796 0.79 Savings accounts ..................... 1,638,021 7,829 1.92 1,929,152 11,393 2.37 Money market accounts ................ 2,779,672 23,394 3.38 2,172,717 18,051 3.33 Certificates of deposit .............. 8,412,337 108,483 5.17 8,600,735 120,766 5.63 ------------ --------- ------------ --------- Total deposits ..................... 15,150,372 144,965 3.84 14,617,739 154,006 4.23 ------------ --------- ------------ --------- FHLB advances .......................... 6,782,626 84,378 4.99 5,121,660 71,903 5.62 Other borrowings ....................... 436,814 7,145 6.50 2,095,899 33,221 6.28 ------------ --------- ------------ --------- Total borrowings .................... 7,219,440 91,523 5.08 7,217,559 105,124 5.82 ------------ --------- ------------ --------- Total interest-bearing liabilities ........................ 22,369,812 236,488 4.24 21,835,298 259,130 4.75 --------- --------- Non interest-bearing liabilities ....... 453,969 511,535 ------------ ----------- Total liabilities ................... 22,823,781 22,346,833 Corporation-obligated mandatorily redeemable capital securities of subsidiary trust ..................... - 50,000 Shareholders' equity ..................... 2,003,120 1,871,098 ------------ ----------- Total liabilities and shareholders' equity ............... $ 24,826,901 $ 24,267,931 ============ ============ Net interest income ...................... $ 191,626 $ 181,123 ========= ========= Interest rate spread ..................... 3.13 2.87 Net yield on average interest- earning assets(5) ....................... 3.30 3.13 Average interest-earning assets to average interest-bearing liabilities ............................. 103.88% 105.88%
- -------------- (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, ------------------------------------------------------------------------------- 1999 1998 -------------------------------------- -------------------------------------- AVG. AVG. AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST COST BALANCE INTEREST COST ------- -------- ---- ------- -------- ---- (DOLLARS IN THOUSANDS) Interest-earning assets: Loans and leases(1) .................... $ 17,928,418 $ 678,475 7.58% $ 16,398,540 $ 647,951 7.91% Mortgage-backed securities: Available for sale ................... 2,397,057 80,257 6.70 1,647,759 57,694 7.00 Held to maturity ..................... 2,261,036 78,217 6.92 3,782,615 134,396 7.11 Investment securities: Available for sale ................... 178,536 6,051 6.78 572,562 18,314 6.40 Held to maturity ..................... 34,027 1,076 6.32 66,477 2,235 6.72 Other interest-earning assets(2) ............................. 413,957 13,459 6.47 634,922 21,586 6.76 ------------ --------- ----------- --------- Total interest-earning assets ....... 23,213,031 857,535 7.40 23,102,875 882,176 7.64 --------- --------- Allowance for loan and lease losses .... (142,145) (141,992) Noninterest-earning assets(3) .......... 1,528,725 1,307,314 ------------ ------------ Total assets ...................... $ 24,599,611 $ 24,268,197 ============ ============ Interest bearing liabilities(4): Deposits: Checking accounts .................... $ 2,208,692 8,973 0.82 $ 1,787,789 7,557 0.85 Savings accounts ..................... 1,706,533 16,386 1.94 1,937,363 22,964 2.39 Money market accounts ................ 2,668,819 44,678 3.38 2,163,578 35,769 3.33 Certificates of deposit .............. 8,502,684 221,707 5.26 8,523,788 238,355 5.64 ------------ --------- ----------- --------- Total deposits ..................... 15,086,728 291,744 3.90 14,412,518 304,645 4.26 ------------ --------- ----------- --------- FHLB advances .......................... 6,555,189 162,253 4.99 5,196,437 146,208 5.67 Other borrowings ....................... 564,961 17,708 6.25 2,190,787 69,119 6.28 ------------ --------- ----------- --------- Total borrowings .................... 7,120,150 179,961 5.09 7,387,224 215,327 5.85 ------------ --------- ----------- --------- Total interest-bearing liabilities ........................ 22,206,878 471,705 4.28 21,799,742 519,972 4.80 --------- --------- Non interest-bearing liabilities ....... 429,798 579,380 ------------ ----------- Total liabilities ................... 22,636,676 22,379,122 Corporation-obligated mandatorily redeemable capital securities of subsidiary trust ..................... - 50,000 Shareholders' equity ..................... 1,962,935 1,839,075 ------------ ----------- Total liabilities and shareholders' equity ............... $ 24,599,611 $ 24,268,197 ============ ============ Net interest income ...................... $ 385,830 $ 362,204 ========= ========= Interest rate spread ..................... 3.12 2.84 Net yield on average interest- earning assets(5) ....................... 3.32 3.14 Average interest-earning assets to average interest-bearing liabilities ............................. 104.53% 105.98%
(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 3 sets forth the changes in Charter One's interest income and interest expense resulting from changes in interest rates and the volume of interest-earning assets and interest-bearing liabilities. Changes not solely attributable to volume or rate have been allocated in proportion to the changes due to volume and rate. RATE/VOLUME ANALYSIS (Figure 3)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, -------------------------------------- -------------------------------------- 1999 V. 1998 1999 V. 1998 -------------------------------------- -------------------------------------- INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO -------------------------- -------------------------- RATE VOLUME TOTAL RATE VOLUME TOTAL ---- ------ ----- ---- ------ ----- (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) Interest income: Loans and leases ....................... $ (16,622) $ 24,488 $ 7,866 $ (32,422) $ 62,946 $ 30,524 Mortgage-backed securities: Available for sale ................... (1,413) 17,914 16,501 (2,626) 25,189 22,563 Held to maturity ..................... (1,848) (25,083) (26,931) (3,454) (52,725) (56,179) Investment securities: Available for sale ................... 1,037 (5,088) (4,051) 1,031 (13,294) (12,263) Held to maturity ..................... (42) (661) (703) (126) (1,033) (1,159) Other interest-earning assets ........... 182 (5,003) (4,821) (906) (7,221) (8,127) --------- -------- ------- --------- -------- -------- Total .............................. (18,706) 6,567 (12,139) (38,503) 13,862 (24,641) --------- -------- ------- --------- -------- -------- Interest expense: Checking accounts ...................... 591 872 1,463 (304) 1,720 1,416 Savings accounts ....................... (1,990) (1,574) (3,564) (4,042) (2,536) (6,578) Money market accounts .................. 238 5,105 5,343 456 8,453 8,909 Certificates of deposit ................ (9,683) (2,600) (12,283) (16,059) (589) (16,648) FHLB advances .......................... (8,825) 21,300 12,475 (18,931) 34,976 16,045 Other borrowings ....................... (2,730) (23,346) (26,076) (5,366) (46,045) (51,411) --------- -------- ------- --------- -------- -------- Total .............................. (22,399) (243) (22,642) (44,246) (4,021) (48,267) --------- -------- ------- --------- -------- -------- Change in net interest income ............ $ 3,693 $ 6,810 $ 10,503 $ 5,743 $ 17,883 $ 23,626 ========= ======== ======= ========= ======== ========
Net interest income for the second quarter of 1999 was $191.6 million, a $10.5 million, or 5.8%, increase as compared to $181.1 million for the second quarter of 1998. The interest rate spread increased by 26 basis points to 3.13% and the net-yield on interest-earning assets increased by 17 basis points to 3.30% for the second quarter of 1999. The primary reason for these improvements related to the cost of funds which decreased by 51 basis points to 4.24% for the three months ended June 30, 1999. The lower cost of funds had the effect of reducing interest expense and therefore increasing net interest income by $22.6 million. The lower cost of funds is attributable to both a shift in the mix of interest-bearing liabilities and lower market interest rates. As shown in Figure 4, Charter One was able to shift balances from higher costing borrowings to lower cost retail deposits since June 30, 1998. This shift was achieved by growing the retail deposit balances since June 30, 1998 while holding the balance of borrowings steady. In addition, market interest rates were lower in the second quarter of 1999 as compared to the same period in 1998. This contributed to a lower cost of deposits in the 1999 period. The improvement in net interest income resulting from the lower cost of funds was partially offset by lower interest income. Interest income for the second quarter of 1999 was $428.1 million as compared to $440.3 million for the second quarter of 1998. This $12.1 million, or 2.8%, decline was primarily attributable to lower market interest rates. The yield on interest-earning assets declined to 7.37% for the second quarter of 1999 as compared to 7.62% for the same period in 1998. The lower yield had the effect of reducing interest income by $18.7 million. Growth in the average balance of interest-earning assets lessened the effect of the lower yield. The average balance of interest-earning assets increased by $119.4 million which had the effect of increasing interest income by $6.6 million. The increase in the average balance of interest-earning assets was primarily in the loan portfolio as we continued our emphasis on growing the balances of consumer and commercial loans. The average balance of the loan and lease portfolio was $1.1 billion higher for the first three months of 1999 as compared to the same period in 1998. This growth was partially funded by repayments from the mortgage-backed security, investments and other interest-earning assets portfolio. 11 14 AVERAGE BALANCE PORTFOLIO MIX (Figure 4)
THREE MONTHS ENDED JUNE 30, ----------------------------------------------------------------------- 1999 1998 --------------------------------- --------------------------------- YIELD/ % OF YIELD/ % OF BALANCE COST TOTAL BALANCE COST TOTAL ------------- -------- -------- ------------- ------- -------- (DOLLARS IN THOUSANDS) Interest-earning assets: Loans and leases............................. $ 17,836,472 7.55% 76.8% $ 16,690,216 7.88% 72.2% Other interest-earning assets................ 5,401,687 6.79 23.2 6,428,587 6.95 27.8 ------------- ---- ---- ------------- ---- ---- Total..................................... $ 23,238,159 7.37% 100.0% $ 23,118,803 7.62% 100.0% ============= ==== ===== ============= ==== ===== Interest-bearing liabilities: Deposits..................................... $ 15,150,372 3.84% 67.7% $ 14,617,739 4.23% 66.9% Borrowings................................... 7,219,440 5.08 32.3 7,217,559 5.82 33.1 ------------- ---- ---- ------------- ---- ---- Total..................................... $ 22,369,812 4.24% 100.0% $ 21,835,298 4.75% 100.0% ============= ==== ===== ============= ==== =====
SIX MONTHS ENDED JUNE 30, ----------------------------------------------------------------------- 1999 1998 --------------------------------- --------------------------------- YIELD/ % OF YIELD/ % OF BALANCE COST TOTAL BALANCE COST TOTAL ------------- -------- -------- ------------- ------- -------- (DOLLARS IN THOUSANDS) Interest-earning assets: Loans and leases............................. $ 17,928,418 7.58% 77.2% $ 16,398,540 7.91% 71.0% Other interest-earning assets................ 5,284,613 6.78 22.8 6,704,335 6.99 29.0 ------------- ---- ---- ------------- ---- ---- Total..................................... $ 23,213,031 7.40% 100.0% $ 23,102,875 7.64% 100.0% ============= ==== ===== ============= ==== ===== Interest-bearing liabilities: Deposits..................................... $ 15,086,728 3.90% 67.9% $ 14,412,518 4.26% 66.1% Borrowings................................... 7,120,150 5.09 32.1 7,387,224 5.85 33.9 ------------- ---- ---- ------------- ---- ---- Total..................................... $ 22,206,878 4.28% 100.0% $ 21,799,742 4.80% 100.0% ============= ==== ===== ============= ==== =====
Net interest income for the six months ended June 30, 1999 was $385.8 million, a $23.6 million, or 6.5%, increase as compared to the $362.2 million for the same period in 1998. The interest rate spread increased by 28 basis points to 3.12% for the first half of 1999 as compared to 2.84% for the same period in 1998. The net-yield on interest-earning assets increased by 18 basis points to 3.32% for the first six months of 1999 as compared to 3.14% for the same period in 1998. These improvements were primarily attributable to the decrease in the cost of interest-bearing liabilities. The average cost of interest-bearing liabilities was 52 basis points lower for the first half of 1999 as compared to the first six months of 1998. This had the effect of reducing interest expense and therefore increasing net interest income by $44.2 million. The lower cost of funds is attributable to both a shift in the mix of interest-bearing liabilities and lower market interest rates. As shown in Figure 4, Charter One was able to shift balances from higher costing borrowings to lower cost retail deposits since June 30, 1998. This shift was achieved by growing the retail deposit balances since June 30, 1998 while there was a decrease in the average balance of borrowed funds. The improvement in net interest income resulting from the lower cost of funds was partially offset by lower interest income. Interest income for the first half of 1999 was $857.5 million as compared to $882.2 million for the same period in 1998. This $24.6 million, or 2.8%, decline was primarily attributable to lower market interest rates. The yield on interest-earning assets declined to 7.40% for the first six months of 1999 as compared to 7.64% for the same period in 1998. The lower yield had the effect of reducing interest income by $38.5 million. Growth in the average balance of interest-earning assets lessened the effect of the lower yield. The average balance of interest-earning assets increased by $110.2 million which had the effect of increasing interest income by $13.9 million. The increase in the average balance of interest-earning assets was primarily in the loan portfolio as we continued our emphasis on growing the balances of consumer and commercial loans. The average balance of the loan and lease portfolio was $1.5 billion higher for the first six months of 1999 as compared to the same period in 1998. This growth was partially funded by repayments from the mortgage-backed security, investments and other interest-earning assets portfolio. Figure 5 sets forth Charter One's yields and costs at period end for the dates indicated. 12 15 YIELDS AND COSTS AT END OF PERIOD (Figure 5)
June 30, 1999 December 31, 1998 ------------- ----------------- YIELDS AND COSTS AT END OF PERIOD Weighted average yield: Real estate loans .............................. 7.33% 7.45% Automobile loans ............................... 8.55 8.70 Retail consumer loans .......................... 7.80 8.11 Leases (1) ..................................... 6.02 6.22 Corporate banking loans ........................ 8.63 8.40 Total loans and leases ....................... 7.57 7.69 Mortgage-backed securities ..................... 6.77 6.88 Investment securities .......................... 6.77 6.30 Other interest-earning assets .................. 6.95 6.38 Total interest-earning assets .............. 7.38 7.48 Weighted average cost (2): Checking ....................................... 1.02 .67 Money market ................................... 3.29 3.36 Savings ........................................ 1.91 2.15 Certificates of deposit ........................ 5.07 5.46 Total deposits ............................... 3.78 4.02 FHLB advances .................................. 5.01 5.01 Other borrowings ............................... 7.29 6.15 Total interest-bearing liabilities ........ 4.22 4.37 Interest rate spread ............................. 3.16 3.11 Net yield on interest-earning assets ............. 3.32 3.34
- ------------ (1) Excludes impact of related tax benefit. (2) The costs of liabilities include the annualized effect of interest rate risk management instruments. OTHER INCOME Other income for the three months ended June 30, 1999 was $64.1 million as compared to $54.5 million for the second quarter of 1998. This $9.6 million, or 17.6%, increase was primarily attributable to increased retail banking income which increased $9.9 million, or 34.2% and an increase in other income of $6.0 million. Retail banking income increased primarily due to increases in checking account fee income and increases in commissions on the sale of annuities and mutual funds. Checking account fee income increased as a result of increases in the number of checking accounts and the effort to increase the revenues per account. Commission income increased as a result of increasing sales of tax deferred annuity and mutual fund products. The increase in other income was attributable to the BOLI program. On March 9, 1999, the Company increased the BOLI portfolio by $480.0 million bringing the total investment in BOLI to $535.1 million. This asset is classified with Other Assets on the balance sheet and the income from BOLI is the primary reason for the $6.0 million increase in other income. These increases in retail banking and other income were partially offset by a $4.8 million, or 29.8%, decrease in mortgage banking income. There was a gain on sale of servicing in the 1998 period that contributed $2.8 million of mortgage banking income. There was no similar transaction in 1999. Other income for the six months ended June 30, 1999 was $117.7 million as compared to $100.9 million for the same period in 1998. This $16.8 million, or 16.7%, increase was primarily attributable to increased retail banking income which increased $19.2 million, or 37.0% and an increase in other income of $7.3 million. These increases were partially offset by a decrease of $9.0 million, or 28.5%, in mortgage banking income. 13 16 ADMINISTRATIVE EXPENSES Administrative expenses were $111.7 million for the three months ended June 30, 1999, an increase of $1.1 million, or 1.0%, as compared to the second quarter of 1998. The second quarter of 1999 also included $3.5 million of merger-related expenses as we continue the process of combining back-office operations associated with the ALBANK merger that was effective November 30, 1998. This consolidation process is expected to be completed by the end of the third quarter of 1999 and we expect to incur a total of $7.0 to $10.0 million of merger-related expenses associated with this consolidation in 1999. Our administrative expenses, excluding the merger-related expenses, resulted in a ratio of 1.74% of expenses to average assets for the three months ended June 30, 1999 as compared to 1.82% for the comparable period in 1998. Administrative expenses were $221.5 million for the six months ended June 30, 1999, an increase of $1.1 million, or 0.5%, as compared to the same period in 1998. The 1999 period also included $5.7 million of merger related expenses as we continue the process of combining back-office operations associated with the ALBANK merger that was effective November 30, 1998. Our administrative expenses, excluding the merger-related expenses, resulted in a ratio of 1.75% of expenses to average assets for the six months ended June 30, 1999 as compared to 1.82% for the comparable period in 1998. FEDERAL INCOME TAXES Federal income tax expense for the three months ended June 30, 1999 was $43.7 million as compared to $38.5 million for the same period in 1998. The primary reason for this 13.4% increase in the provision for federal income tax expense was a 15.5% increase in pre-tax book income. The effective tax rates were 32.1% and 32.7% for the 1999 and 1998 periods, respectively. Federal income tax expense for the six months ended June 30, 1999 was $86.7 million as compared to $75.4 million for the same period in 1998. The primary reason for this 15.0% increase in the provision for federal income tax expense was a 16.8% increase in pre-tax book income. The effective tax rates were 32.4% and 33.0% for the 1999 and 1998 periods, respectively. FINANCIAL CONDITION OVERVIEW At June 30, 1999, total assets were $25.0 billion relatively flat as compared to total assets of $24.5 billion at December 31, 1998. However, our mix of assets has changed during the quarter. See "Net Interest Income" discussion above. 14 17 LOANS AND LEASES COMPOSITION OF LOANS AND LEASES(Figure 6)
JUNE 30, 1999 DECEMBER 31, 1998 ------------------------------- ---------------------------- AMOUNT % OF TOTAL AMOUNT % OF TOTAL -------------- ---------- ------------ ---------- (DOLLARS IN THOUSANDS) LOAN AND LEASE PORTFOLIO, NET One-to-four family: Permanent: Fixed rate ...................................... $ 6,229,718 35.34% $ 6,909,161 39.08% Adjustable rate ................................. 2,923,294 16.58 3,360,705 19.01 Construction ....................................... 265,263 1.50 294,893 1.67 ----------- ------ ----------- ------ 9,418,275 53.42 10,564,759 59.76 Commercial real estate: Multifamily ......................................... 235,086 1.33 242,776 1.38 Other ............................................... 509,125 2.89 475,753 2.69 ----------- ------ ----------- ------ 744,211 4.22 718,529 4.07 Consumer: Retail .............................................. 3,808,118 21.60 3,129,312 17.70 Automobile .......................................... 2,284,816 12.96 2,020,157 11.43 ----------- ------ ----------- ------ 6,092,934 34.56 5,149,469 29.13 Business: Leasing ............................................. 803,147 4.56 730,415 4.13 Corporate banking ................................... 571,672 3.24 514,664 2.91 ----------- ------ ----------- ------ 1,374,819 7.80 1,245,079 7.04 ----------- ------ ----------- ------ $17,630,239 100.00% $17,677,836 100.00% =========== ====== =========== ====== Portfolio of loans serviced for others .................. $ 9,319,353 $ 9,308,294 =========== ===========
15 18 LOAN AND LEASE ACTIVITY (Figure 7)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------- ------------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) ORIGINATIONS: Real Estate: Permanent: One-to-four family ................................. $ 1,203,737 $ 1,641,305 $ 2,464,954 $ 3,092,852 Multifamily ........................................ 2,687 11,899 17,504 17,188 Commercial ......................................... 44,233 27,598 88,771 42,664 ----------- ----------- ----------- ----------- Total permanent loans ........................... 1,250,657 1,680,802 2,571,229 3,152,704 ----------- ----------- ----------- ----------- Construction: One-to-four family ................................. 158,226 118,613 262,635 210,416 Multifamily ........................................ 28,648 2,831 41,950 7,270 Commercial ......................................... 36,739 7,480 47,065 9,681 ----------- ----------- ----------- ----------- Total construction loans ........................ 223,613 128,924 351,650 227,367 ----------- ----------- ----------- ----------- Total real estate loans originated ....... 1,474,270 1,809,726 2,922,879 3,380,071 ----------- ----------- ----------- ----------- Retail consumer .......................................... 637,139 680,555 1,235,885 1,070,124 Automobile ............................................... 390,812 334,998 736,705 615,975 Leases ................................................... 82,253 137,537 132,520 217,448 Corporate banking ........................................ 160,034 46,365 284,048 92,877 ----------- ----------- ----------- ----------- Total loans and leases originated ............... 2,744,508 3,009,181 5,312,037 5,376,495 ----------- ----------- ----------- ----------- Loans purchased .......................................... 2,501 16,487 11,513 16,897 Sales and principal reductions: Loans sold ............................................. 447,905 486,507 971,060 890,274 Loans exchanged for MBS ................................ 717,672 705,427 1,866,045 1,347,422 Principal reductions ................................... 1,118,487 1,300,651 2,445,957 2,574,032 ----------- ----------- ----------- ----------- Total sales and principal reductions ............ 2,284,064 2,492,585 5,283,062 4,811,728 ----------- ----------- ----------- ----------- Increase before net items ................... $ 462,945 $ 533,083 $ 40,488 $ 581,664 =========== =========== =========== ===========
INVESTMENT SECURITIES Figure 8 summarizes our investment portfolio at June 30, 1999 and December 31, 1998. The amounts reflected represent the fair values of securities available for sale and the amortized cost of securities held to maturity. INVESTMENT SECURITIES PORTFOLIO (Figure 8)
JUNE 30, 1999 DECEMBER 31, 1998 ------------- ----------------- (DOLLARS IN THOUSANDS) Available for Sale: U.S. Treasury and agency securities .................................... $ 47,391 $ 48,999 Corporate notes and commercial paper ................................... 71,213 135,520 Other .................................................................. 56,293 68,798 -------- -------- Total investment securities available for sale ..................... 174,897 253,317 -------- -------- Held to maturity: U.S. Treasury and agency securities .................................... 15,450 35,932 Other .................................................................. 5,975 6,324 -------- -------- Total investment securities held to maturity ....................... 21,425 42,256 -------- -------- Total ......................................................... $196,322 $295,573 ======== ======== Weighted average rate .................................................. 6.77% 6.30% ======== ========
16 19 MORTGAGE-BACKED SECURITIES Figure 9 summarizes our mortgage-backed securities portfolios at June 30, 1999 and December 31, 1998. 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 9)
JUNE 30, 1999 DECEMBER 31, 1998 ----------------- -------------------- (DOLLARS IN THOUSANDS) AVAILABLE FOR SALE Participation certificates: Government agency issues: FNMA ........................................................... $ 2,038,255 $ 1,053,324 FHLMC .......................................................... 80,054 140,273 GNMA ........................................................... 3,003 3,327 Collateralized mortgage obligations: Government agency issues: FHLMC .......................................................... 307,395 337,658 FNMA ........................................................... 238,725 255,238 GNMA ........................................................... 8,270 9,374 Private issues ................................................... 479,760 500,010 ----------- ----------- Total mortgage-backed securities available for sale ............ 3,155,462 2,299,204 ----------- ----------- HELD TO MATURITY Participation certificates: Government agency issues: FNMA ........................................................... 616,977 741,828 FHLMC .......................................................... 229,081 285,131 GNMA ........................................................... 114,321 132,066 Private issues ................................................... 186,146 219,256 Collateralized mortgage obligations: Government agency issues: FNMA ........................................................... 227,056 261,528 FHLMC .......................................................... 94,257 126,279 Private issues ................................................... 558,759 902,892 ----------- ----------- Total mortgage-backed securities held to maturity ............ 2,026,597 2,668,980 ----------- ----------- Total ..................................................... $ 5,182,059 $ 4,968,184 =========== ===========
17 20 MORTGAGE-BACKED SECURITIES BY PAYMENT TYPE (Figure 10)
JUNE 30, 1999 DECEMBER 31, 1998 ----------------------------- ---------------------------- BOOK AVERAGE BOOK AVERAGE VALUE RATE VALUE RATE -------------- ------------ -------------- ------------ (DOLLARS IN THOUSANDS) AVAILABLE FOR SALE Adjustable rate: Participation certificates ....................... $ 81,063 6.74% $ 104,582 6.77% Collateralized mortgage obligations .............. 968,303 6.31 1,005,868 6.69 ---------- ---------- Total adjustable rate .......................... 1,049,366 6.35 1,110,450 6.70 ---------- ---------- Fixed rate: Participation certificates ....................... 2,040,249 6.86 1,092,342 6.87 Collateralized mortgage obligations .............. 65,847 6.36 96,412 6.36 ---------- ---------- Total fixed rate ............................... 2,106,096 6.85 1,188,754 6.83 ---------- ---------- Total available for sale ..................... 3,155,462 6.68 2,299,204 6.76 ---------- ---------- HELD TO MATURITY Adjustable rate: Participation certificates ....................... 459,745 6.64 547,989 6.92 Collateralized mortgage obligations .............. 243,593 6.86 278,841 7.30 ---------- ---------- Total adjustable rate .......................... 703,338 6.72 826,830 7.05 ---------- ---------- Fixed rate: Participation certificates ....................... 685,974 7.29 830,292 7.30 Collateralized mortgage obligations .............. 637,285 6.65 1,011,858 6.65 ---------- ---------- Total fixed rate ............................... 1,323,259 6.98 1,842,150 6.94 ---------- ---------- Total held to maturity ....................... 2,026,597 6.89 2,668,980 6.98 ---------- ---------- Total mortgage-backed securities............ $5,182,059 6.77% $4,968,184 6.88% ========== ==========
ASSET QUALITY ANALYSIS OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES (Figure 11)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 --------- --------- --------- --------- (DOLLARS IN THOUSANDS) ALLOWANCE FOR LOAN AND LEASE LOSSES Balance, beginning of period ........................... $ 141,281 $ 142,635 $ 144,566 $ 142,985 Provision for loan and lease losses .................... 7,843 7,155 14,614 13,768 Loans and leases charged off: Mortgage ............................................ (2,208) (1,470) (3,230) (2,809) Automobile .......................................... (6,141) (6,791) (14,251) (12,920) Retail consumer ..................................... (386) (1,079) (1,905) (2,003) Leases .............................................. -- -- (900) -- Corporate banking ................................... -- (211) (264) (270) --------- --------- --------- --------- Total charge-offs ................................ (8,735) (9,551) (20,550) (18,002) --------- --------- --------- --------- Recoveries: Mortgage ............................................ 505 186 627 320 Automobile .......................................... 1,670 1,137 3,040 2,212 Retail consumer ..................................... 72 265 243 461 Leases .............................................. -- -- -- -- Corporate banking ................................... 17 31 113 114 --------- --------- --------- --------- Total recoveries ................................. 2,264 1,619 4,023 3,107 --------- --------- --------- --------- Net loan and lease charge-offs .............. (6,471) (7,932) (16,527) (14,895) --------- --------- --------- --------- Balance, end of period ................................. $ 142,653 $ 141,858 $ 142,653 $ 141,858 ========= ========= ========= ========= Net charge-offs to average loans and leases (annualized) ......................................... .15% .19% .18% .18%
18 21 Figure 12 sets forth information concerning nonperforming assets and the allowance for loan and lease losses. At June 30, 1999, we had no outstanding commitments to lend additional funds to borrowers whose loans were on nonaccrual or restructured status. NONPERFORMING ASSETS (Figure 12)
JUNE 30, 1999 DECEMBER 31, 1998 ------------- ----------------- (DOLLARS IN THOUSANDS) NONPERFORMING LOANS AND LEASES: Nonaccrual loans and leases: Real estate mortgage loans: One-to-four family(1) ................................ $ 66,547 $ 73,175 Multifamily and commercial ........................... 2,253 3,958 Construction and land ................................ 278 1,178 -------- -------- Total real estate mortgage loans ................... 69,078 78,311 Retail consumer ........................................ 27,406 21,032 Automobile ............................................. 355 327 Leases ................................................. -- -- Corporate banking ...................................... 4,989 8,810 -------- -------- Total nonaccrual loans and leases .................. 101,828 108,480 -------- -------- Accruing loans and leases delinquent more than 90 days: Real estate mortgage loans ............................. -- -- Retail consumer ........................................ 298 3,878 Automobile ............................................. 3,266 5,873 Leases ................................................. 341 -- Corporate banking ...................................... 872 904 -------- -------- Total accruing loans and leases more than 90 days .. 4,777 10,655 -------- -------- Restructured real estate mortgage loans .................. 682 3,936 -------- -------- Total nonperforming loans and leases ............... 107,287 123,071 Real estate acquired through foreclosure and other ....... 19,127 17,803 -------- -------- Total nonperforming assets ......................... 126,414 140,874 Less government guaranteed loans ................... 19,966 22,429 -------- -------- Nonperforming assets net of guaranteed loans ....... $106,448 $118,445 ======== ======== Ratio of: Nonperforming loans and leases to total loans and leases .61% .70% Nonperforming assets to total assets ................... .51 .58 Allowance for loan and lease losses to: Nonperforming loans and leases ....................... 132.96 117.47 Total loans and leases before allowance .............. .80 .81 Ratio of (excluding guaranteed nonperforming loans): Nonperforming loans and leases to total loans and leases .50% .57% Nonperforming assets to total assets ................... .43 .48 Allowance for loan and lease losses to: Nonperforming loans and leases ....................... 163.37 143.64 Total loans and leases before allowance .............. .80 .81
- --------------- (1) Includes $20.0 million and $22.4 million of government guaranteed loans at June 30, 1999 and December 31, 1998, respectively. At June 30, 1999, there were $44 million of loans not reflected in the table above, where known information about possible credit problems of borrowers caused management to have doubts as to the ability of the borrower to comply with present loan repayment terms and that may result in disclosure of such loans in the future. The largest of these potential loans is a $5.7 million loan to a trucking and warehousing company where the borrower is experiencing operating losses but the loans is current. 19 22 SOURCES OF FUNDS GENERAL Deposits have historically been the most important source of the our funds for use in lending and for general business purposes. We also derive 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, 1999 and December 31, 1998, 67% and 68% of interest-bearing liabilities were in the form of deposits and 33% and 32% were in the form of borrowings. DEPOSITS Deposit inflows and outflows are significantly influenced by general interest rates, market conditions and competitive factors. We reprice our deposits primarily based on competitive conditions. In order to decrease the volatility of our deposits, we impose stringent early withdrawal penalties on our certificates of deposit. Consumer and commercial deposits are attracted principally from within our primary market areas through the offering of a broad range of deposit instruments. COMPOSITION OF DEPOSITS (Figure 13)
JUNE 30, 1999 DECEMBER 31, 1998 ----------------------------------- ----------------------------------- WEIGHTED PERCENT WEIGHTED PERCENT AVERAGE OF AVERAGE OF AMOUNT RATE TOTAL AMOUNT RATE TOTAL ------ ---- ----- ------ ---- ----- (DOLLARS IN THOUSANDS) Checking accounts: Interest-bearing ....................... $ 1,411,890 1.71% 9.36% $ 1,204,221 1.22% 7.94% Noninterest-bearing .................... 948,947 - 6.29 1,015,650 - 6.70 Money market accounts .................... 2,909,903 3.29 19.29 2,505,846 3.37 16.52 Savings accounts ......................... 1,503,989 1.91 9.97 1,828,087 2.15 12.06 Certificates of deposit .................. 8,311,993 5.25 55.09 8,610,177 5.62 56.78 ----------- -------- ---------- -------- Total deposits ...................... 15,086,722 3.88 100.00% 15,163,981 4.10 100.00% ======== ======== Plus unamortized premium on deposits purchased ................... 883 1,083 ----------- ----------- Total deposits, net ................. $15,087,605 $15,165,064 =========== =========== Including the annualized effect of applicable interest rate risk management instruments .................. 3.78% 4.02% ==== ====
BORROWINGS At June 30, 1999, borrowings primarily consisted of FHLB advances and reverse repurchase agreements. These positions were secured by our investment in the stock of the FHLB, as well as $8.5 billion in real estate loans and $2.4 billion in mortgage-backed securities. 20 23 FEDERAL HOME LOAN ADVANCES (Figure 14)
JUNE 30, 1999 DECEMBER 31, 1998 ---------------------------- ---------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE ------------- ----------- -------------- ------------ (DOLLARS IN THOUSANDS) Short-term ................................................ $ 1,485,000 5.38% $ 803,000 5.10% Long-term: Fixed-rate advances ..................................... 5,408,140 5.04 5,109,388 4.99 Variable-rate advances .................................. 363,730 4.87 273,730 5.35 ------------- -------------- Total advances, net ................................... $ 7,256,870 5.10 $ 6,186,118 5.02 ============= ============== Including the annualized effect of applicable interest rate risk management instruments ........................ 5.01% 5.01%
Figure 15 presents a summary of outstanding reverse repurchase agreements. We enter into short-term reverse repurchase agreements for terms up to one year, as well as longer term fixed- and variable-rate agreements. REVERSE REPURCHASE AGREEMENTS (Figure 15)
JUNE 30, 1999 DECEMBER 31, 1998 ---------------------------- -------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE ------------- ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Short-term ................................................. $ 28,541 4.37% $ 39,962 4.57% Long-term: Fixed-rate ............................................... 100,000 5.96 275,062 5.99 Variable-rate ............................................ - - 370,000 5.30 ------------- ------------ Weighted average cost including amortization of fees ................................................. $128,541 5.61 $685,024 5.53 ============= ============ Including the annualized effect of applicable interest rate risk management instruments ......................... 5.67% 5.50%
INTEREST RATE RISK MANAGEMENT We utilize various types of interest rate contracts in managing our interest rate risk on certain of our deposits. We have utilized fixed payment swaps to convert certain of our floating-rate or short-term, fixed-rate liabilities into longer term, fixed-rate instruments. Under these agreements, we have agreed to pay interest to the counterparty on a notional principal amount at a fixed rate defined in the agreement, and receive interest at a floating rate indexed to LIBOR. The amounts of interest exchanged are calculated on the basis of notional principal amounts. We also utilize fixed receipt swaps to convert certain of our longer term callable certificates of deposit into short-term variable instruments. Under these agreements we have agreed to receive interest from the counterparty on a notional amount at a fixed rate defined in the agreement, and to pay interest at a floating rate indexed to LIBOR. 21 24 INTEREST RATE SWAPS (Figure 16)
JUNE 30, 1999 DECEMBER 31, 1998 --------------------------------- --------------------------------- NOTIONAL RECEIVING PAYING NOTIONAL RECEIVING PAYING PRINCIPAL INTEREST INTEREST PRINCIPAL INTEREST INTEREST AMOUNT RATE RATE AMOUNT RATE RATE --------------------------------- --------------------------------- (DOLLARS IN THOUSANDS) Variable payment and fixed receipt: Maturing in: 2000 ........................... $ 40,000 5.55% 5.14% $120,000 5.80% 5.31% 2001 ........................... 120,000 5.70 5.08 - - - 2003 ........................... 120,000 6.14 5.06 230,000 6.32 5.30 2004 ........................... 190,000 6.27 5.04 - - - -------- ------ ---- -------- ---- ---- Total ........................ $470,000 6.03% 5.06% (1) $350,000 6.14% 5.30% (1) ======== ====== ==== ======== ==== ====
- ----------------------- (1) Rates are based upon LIBOR. The cost (benefit) of interest rate risk management instruments included in interest expense was as follows: COST OF INTEREST RATE RISK MANAGEMENT (Figure 17)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------- ------------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Interest expense (income): Deposits ......................................... $ (2,188) $ (2,246) $ (4,307) $ (4,353) FHLB advances .................................... - (71) (63) (142) Reverse repurchase agreements .................... (114) (120) (236) (109) -------- -------- -------- -------- Total .......................................... $ (2,302) $ (2,437) $ (4,606) $ (4,604) ======== ======== ======== ========
LIQUIDITY Our principal sources of funds are deposits, advances from the FHLB of Cincinnati, reverse repurchase agreements, repayments and maturities of loans and securities, proceeds from the sale of loans and securities, and funds provided by operations. While scheduled loan, security and interest-bearing deposit amortization and maturity are relatively predictable sources of funds, deposit flow and loan and mortgage-backed security repayments are greatly influenced by economic conditions, the general level of interest rates and competition. We utilize particular sources of funds based on comparative costs and availability and may supplement deposits with longer term and/or less expensive alternative sources of funds such as FHLB advances and reverse repurchase agreements. Management also considers our interest-sensitivity profile when deciding on alternative sources of funds. At June 30, 1999, our one-year gap was a negative 4.43% of total assets. We are required by regulation to maintain specific minimum levels of liquid investments at the bank level. Regulations currently in effect require us to maintain average liquid assets at least equal to 4.0% of the sum of the bank's 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. Our average regulatory liquidity ratio for the second quarter of 1999 was 15.75%. Management anticipates that we will have sufficient funds available to meet current and future loan commitments. At June 30, 1999, we had outstanding commitments to originate loans and leases of $1.1 billion, unfunded lines of consumer credit totaling $1.8 billion (a significant portion of which normally remains undrawn) and unfunded lines of commercial (business loans) credit totaling $163.1 million. Outstanding letters of credit totaled $51.1 million as of June 30, 1999. Certificates of deposit scheduled to mature in one year or less at June 30, 1999 totaled $6.6 billion. Management believes that a significant portion of the 22 25 amounts maturing will remain with us because they are retail deposits. At June 30, 1999, we had $1.5 billion of advances from the FHLB system and $128.5 million in reverse repurchase agreements which mature in one year. Management intends to replace the majority of these borrowings when they mature with new borrowings and believes it has significant additional borrowing capacity with the FHLB and investment banking firms to meet any need for additional borrowings. CAPITAL AND DIVIDENDS Following its November 1998 acquisition of ALBANK, Charter One became a bank holding company, converting from a unitary savings and loan holding company. As a bank holding company, Charter One is now subject to regulation by the FRB under the Bank Holding Company Act of 1956, and the regulations of the FRB, including various capital requirements. New ALBANK Commercial and Charter One Bank, F.S.B. are subject to various regulatory capital requirements administered by the Federal Deposit Insurance Corporation and the Office of Thrift Supervision, respectively. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by each regulator that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines must be met that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Quantitative measures established by regulation to ensure capital adequacy require Charter One and New ALBANK Commercial to individually maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Charter One Bank, F.S.B. is required to maintain minimum amounts and ratios (also set forth in the table below) of total and Tier 1 capital to risk-weighted assets, of core capital to adjusted tangible assets, and of tangible capital to tangible assets. Each regulator of Charter One requires an institution to meet specific capital adequacy guidelines and the regulatory framework for prompt corrective action that involve quantitative measures of an institutions assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The institution's capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The actual regulatory capital ratios calculated for Charter One, New ALBANK Commercial and Charter One Bank, F.S.B., along with the capital amounts and ratios for capital adequacy purposes and the amounts required to be categorized as well capitalized under the regulatory framework for prompt corrective action are as follows: REGULATORY CAPITAL (Figure 18)
AS OF JUNE 30, 1999 ------------------------------------------------------------------------------------ TO BE "WELL CAPITALIZED" FOR CAPITAL UNDER PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ---------------- --------------------- --------------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- (DOLLARS IN THOUSANDS) CHARTER ONE: Total capital to risk-weighted assets ......$1,932,999 10.79% 1,433,233 greater than 1,791,541 greater than or equal to 8.00% or equal to 10.00% Tier 1 capital to risk-weighted assets ..... 1,784,273 9.96 716,616 greater than 1,074,924 greater than or equal to 4.00 or equal to 6.00 Tier 1 capital to average assets ........... 1,784,273 7.23 986,874 greater than 1,233,593 greater than or equal to 4.00 or equal to 5.00 NEW ALBANK COMMERCIAL: Total capital to risk-weighted assets ...... 40,145 44.95 7,144 greater than 8,930 greater than or equal to 8.00 or equal to 10.00 Tier 1 capital to risk-weighted assets ..... 40,145 44.95 3,572 greater than 5,358 greater than or equal to 4.00 or equal to 6.00 Tier 1 capital to average assets ........... 40,145 14.71 10,918 greater than 13,648 greater than or equal to 4.00 or equal to 5.00 CHARTER ONE BANK, F.S.B.: Total capital to risk-weighted assets ...... 1,790,786 10.10 1,417,997 greater than 1,772,496 greater than or equal to 8.00 or equal to 10.00 Tier 1 capital to risk-weighted assets ..... 1,462,853 8.25 N/A N/A 1,063,498 greater than or equal to 6.00 Core capital to adjusted tangible assets.... 1,471,318 5.89 749,605 greater than 1,249,342 greater than or equal to 3.00 or equal to 5.00 Tangible capital to tangible assets......... 1,471,318 5.89 374,803 greater than N/A N/A or equal to 1.50
23 26
AS OF DECEMBER 31, 1998 ---------------------------------------------------------------------------------- TO BE "WELL CAPITALIZED" FOR CAPITAL UNDER PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ---------------- --------------------- --------------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- (DOLLARS IN THOUSANDS) CHARTER ONE: Total capital to risk-weighted assets ......$1,812,053 10.86% $1,335,073 greater than $1,668,841 greater than or equal to 8.00% or equal to 10.00% Tier 1 capital to risk-weighted assets ..... 1,659,578 9.94 667,537 greater than 1,001,305 greater than or equal to 4.00 or equal to 6.00 Tier 1 capital to average assets ........... 1,659,578 6.86 967,071 greater than 1,208,838 greater than or equal to 4.00 or equal to 5.00 ALBANK COMMERCIAL(1): Total capital to risk-weighted assets ...... 40,720 14.55 22,392 greater than 27,990 greater than or equal to 8.00 or equal to 10.00 Tier 1 capital to risk-weighted assets ..... 39,037 13.95 11,196 greater than 16,794 greater than or equal to 4.00 or equal to 6.00 Tier 1 capital to average assets ........... 39,037 5.92 26,375 greater than 32,969 greater than or equal to 4.00 or equal to 5.00 CHARTER ONE BANK, F.S.B.: Total capital to risk-weighted assets ...... 1,575,652 10.10 1,259,984 greater than 1,574,980 greater than or equal to 8.00 or equal to 10.00 Tier 1 capital to risk-weighted assets ..... 1,246,542 7.91 N/A N/A 944,988 greater than or equal to 6.00 Core capital to adjusted tangible assets.... 1,246,542 5.19 720,077 greater than 1,200,128 greater than or equal to 3.00 or equal to 5.00 Tangible capital to tangible assets......... 1,246,542 5.19 360,038 greater than N/A N/A or equal to 1.50
- ------------------------ (1) As of May 31, 1999 ALBANK Commercial was merged into Charter One Bank, F.S.B. and New ALBANK Commercial was formed. As of June 8, 1998, the most recent notification from the Office of Thrift Supervision categorized Charter One Bank, F.S.B. as "well capitalized" under the regulatory framework for Prompt Corrective Action. To be categorized as well capitalized, the bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table above. There are no conditions or events since that notification that have changed the bank's category. Charter One's and New ALBANK Commercial's capital ratios exceed the minimum required to be well capitalized. Management does not know of any reasons why Charter One and New ALBANK Commercial would not be considered well capitalized; however, as of June 30, 1999, Charter One and New ALBANK Commercial had not received a classification from their respective regulators. Management believes that, as of June 30, 1999, Charter One, New ALBANK Commercial and Charter One Bank, F.S.B., individually met all capital adequacy requirements to which they were subject. Events beyond management's control, such as fluctuations in interest rates or a downturn in the economy in areas in which the institution's loans and securities are concentrated could adversely affect future earnings and, consequently, the institution's ability to meet its future capital requirements. QUARTERLY STOCK PRICES AND DIVIDENDS (Figure 19)
2nd Qtr 1999 1st Qtr 1999 4th Qtr 1998 3rd Qtr 1998 2nd Qtr 1998 -------------- -------------- -------------- --------------- -------------- Market price of common stock (1): High ...................................... $32.13 $32.06 $30.56 $34.17 $34.89 Low ....................................... 26.44 25.19 17.63 21.84 28.57 Close ..................................... 27.81 28.86 27.75 24.88 32.09 Dividends declared and paid................ 0.16 .14 .14 .13 .13
- ------------------------ (1) Restated to reflect the 2-for-1 stock split issued on May 20, 1998 and the 5% stock dividend issued September 30, 1998. YEAR 2000 STATE OF Y2K READINESS Preparing for the Year 2000 ("Y2K") is the result of the way certain computer systems and related technologies process the century date change. Some systems were designed to read only the last two digits of a year, thus the date change from 12/31/99 to 01/01/00 could be interpreted as January 1, 1900, rather than January 1, 2000. We have made substantial progress in the implementation of our Y2K plan, which includes the remediation, testing and, if required, the implementation of upgrades or replacements of those systems and equipment which may 24 27 be impacted by the century date change. We have identified the following components of our Y2K project: AWARENESS PHASE: Activities to identify the scope of our Y2K project have been completed. INVENTORY PHASE: Computer and related technology were inventoried and the analysis of potential areas of Y2K risk have been identified and completed. ASSESSMENT PHASE: The Y2K compliance status of computer systems and related technology has been completed. Also, the analysis of risks of major customers, vendors, suppliers of information and electronic data exchange partners has been determined and completed, although we continue to monitor this information. CONVERSION PHASE: The methodology for the conversion of non-Y2K mission critical compliant systems and equipment has been completed. IMPLEMENTATION PHASE: Mission critical systems and related technology have been upgraded or replaced and fully tested to ensure their Y2K compliance. As of June 30, 1999 this phase has been completed. POST IMPLEMENTATION: Follow-up and the monitoring of problem resolution of Y2K solutions will be performed through December 31, 1999. This phase also includes the creation, testing and continual monitoring of our Y2K business resumption plan. As of June 30, 1999, we had successfully completed 100% of our Y2K remediation, testing and implementation for mission critical systems. We had Y2K remediated, tested and implemented the majority of applications which were not classified as being mission critical. We will complete, by August 31, 1999, Y2K testing on all non-mission critical systems for which alternative systems/procedures have not been developed. In addition to evaluating the impact of mission critical systems and technology upon Charter One, we have also performed an assessment of the impact posed by major customers, vendors, suppliers of information and electronic data exchange partners. As these assessments resulted in the identification of specific Y2K exposures, specific action plans, to either eliminate or reduce this risk to an acceptable level, were developed. At this time there appears to be no significant Y2K risk associated with these groups, however, we will continue to monitor these groups. As of June 30, 1999, 99% of the computer systems requiring replacement or upgrade have been fixed or replaced. The remaining computer systems will be replaced or upgraded during the third quarter. Efforts have been completed to insure that non-information technology systems are also Y2K compliant. All ATM hardware and software has been certified as Y2K compliant as of March 31, 1999. In addition an extensive review of branch offices and other company facilities has been completed. As of March 31, 1999, all three major telephone switches have been successfully Y2K tested. Security monitoring systems have been certified as Y2K compliant and contingency plans are being developed should they fail. All mission critical equipment (other than personal computer systems) has been replaced. For equipment that cannot be tested by us as Y2K compliant, contingency plans have been developed which will be validated by September 30, 1999. The merger of ALBANK has recently concluded with a data conversion in May 1999. The remaining systems, a student loan processing system and an ATM front end processing system have been Y2K tested and certified compliant. No other Y2K issues remain with ALBANK equipment or facilities. All merger and acquisition projects include Y2K assessment, conversion and implementation tasks to insure that these newly acquired entities are certified under the same standards applied to our existing facilities, equipment and systems. COSTS TO ADDRESS Y2K ISSUES We estimate the out-of-pocket Y2K initiative to cost approximately $4 million. This cost provided for the 25 28 replacement or upgrade of hardware, software and the use of consultants. The cost of internal resources for the Y2K initiative has not been estimated. Other Y2K related costs are being accounted for as operating expenditures as they represent an improvement in our operations. Management believes that there will not be any additional expenses which will have a material impact on the operations, cash flow, or financial condition of future periods. RISKS OF Y2K ISSUES Corporate wide efforts have been taken to identify and assess the risk and adequacy of systems and equipment for Y2K readiness. We have implemented a policy that all new systems or changes, which could be affected by the year 2000 date change, to existing systems will be Y2K certified and tested prior to implementation thus eliminating the risks these changes could create. We have also implemented a freeze date of November 15, 1999, where no additional changes will be implemented to any system software unless approved by Executive Management. The Y2K risk of major customers and their impact on us has been determined to be immaterial. We are continuing to monitor those major customers who, as of June 30, 1999, are not fully Y2K compliant for mission critical systems or processes. We have implemented credit approval procedures for large lending relationships, which take into account the borrower's Y2K risks prior to the loan being approved. The risks presented by vendors and suppliers of information have been assessed and, where applicable, corrective action taken. These actions ranged from replacement to reducing risk to an acceptable level. Testing with electronic data exchange partners, identified as being critical to continued operations, has been 100% completed. We have successfully participated with the Mortgage Bankers Association (MBA) and Alltel as part of a nationwide test for several software applications used for mortgage origination and servicing as well as interfacing to third party investors. We have identified business functions critical to the corporation and a Y2K business resumption plan has been created for each of these functions. The plan has been reviewed by our Internal Audit Department, who has developed a methodology for validating this plan. The validation of the business resumption plan is expected to be completed by September 30, 1999. In addition, Management has scheduled a quarterly review of all business functions to ensure that all critical business functions are accurately identified. As a result of the above it is Management's belief that any of the most reasonably likely worst case Y2K scenarios would not have a material effect on our financial condition and results of operations. We recognize that if certain government regulated third party providers experience significant Y2K failures, the result could create a disruption to our business operations and adversely affect our financial condition and results of operations. We have received written assurances from these providers that they will be Y2K compliant as well as tested many of the electronic interfaces with them and, therefore, it is our opinion these types of disruptions are unlikely to occur. CONTINGENCY PLAN In the event the onset of Y2K causes business operations or customer service to not properly function or prevents them from completely functioning, we have developed and are prepared to implement contingency plans which would either provide alternative means for servicing customers and processing data or specifies the actions to be taken to restore the lost functionality. We are also addressing global facilities issues such as electrical and heating needs through a systematic review of all locations and, where warranted, have developed contracts with alternate source vendors. We have also developed a formal liquidity contingency plan. Increased cash monitoring will begin in the fourth quarter of 1999. To ensure Y2K preparedness of branches and corporate departments, training has been scheduled to be conducted and completed in the fourth quarter of 1999. This training will inform our employees about transition procedures and alternative methods of servicing customers in the event that any portion of the Y2K business resumption plan is required to be implemented. We have also developed work plans for January 1, 2000 that will allow for issues to be identified quickly 26 29 and communicated to both regional and corporate coordination sites. From these sites resources will be dispatched to resolve issues on a priority basis and issue resolutions will be tracked. CUSTOMER AND EMPLOYEE AWARENESS We have recently implemented a new "Y2K Ready" campaign which has included a corporate employee newsletter, outlining all of the material available for customer awareness of Y2K issues. Included in this campaign is a question and answer brochure, "Y2K Ready" buttons and stickers, a Y2K answerline (a toll free number which allows customers to call in and listen to pre-recorded, regularly updated, information regarding various Y2K topics) as well as website information (available through www.charterone.com, www.albank.com and www.ffom.com). Branch and customer contact staff were given samples of all Y2K paper materials and meetings were held with their managers to answer any questions and reinforce the information being provided to customers. In these meetings they were instructed how to handle customer inquiries and where to direct customers for further information. We have launched a "Y2K Ready" certificate of deposit product with a preferred rate in order to entice customers into asking about the status of our Y2K project. Logs of customer questions are being maintained by our call center and main reception area so that customer material content may be updated to include answers to their most recent concerns. 27 30 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK A comprehensive qualitative and quantitative analysis regarding market risk was disclosed in our December 31, 1998 Form 10-K. No material changes in the assumptions used or results obtained from the model have occurred. PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION DIVIDEND On July 21,1999, the Directors of Charter One Financial, Inc. declared a quarterly cash dividend of 16 cents per common share. The dividend will be payable on August 20, 1999 to shareholders of record as of August 6, 1999. On July 21, 1999, the Directors of Charter One Financial, Inc. declared a 5% stock dividend, payable on September 30, 1999, to shareholders of record on September 14, 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 11 - Computation of Per Share Earnings Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K On April 20, 1999, a Form 8-K was filed with the SEC (i) to report the slide presentation to be delivered during our annual meeting of shareholders held on April 21, 1999 and (ii) to file a press release dated April 16, 1999 to announce that the 1999 annual meeting of shareholders will be available via a live webcast. On May 3, 1999, a Form 8-K was filed with the SEC to announce that Charter One was scheduled to speak at an investors conference sponsored by Merrill Lynch in New York on May 4, 1999. On May 17, 1999, a Form 8-K was filed with the SEC to report an Agreement and Plan of Merger between Charter One and St. Paul Bancorp, Inc. On June 8, 1999, a Form 8-K was filed with the SEC to file the press release announcing Charter One's intention to repurchase up to 6 million shares of its outstanding common stock in a buyback program.18 28 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHARTER ONE FINANCIAL, INC. Date: August 13, 1999 /s/ Robert J. Vana ---------------------------------------------------- Robert J. Vana Chief Corporate Counsel and Secretary Date: August 13, 1999 /s/ Richard W. Neu ---------------------------------------------------- Richard W. Neu Executive Vice President and Chief Financial Officer 29 EX-11 2 EXHIBIT 11 1 EXHIBIT 11 CHARTER ONE FINANCIAL, INC. COMPUTATION OF PER SHARE EARNINGS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------------- ------------------------------------ 1999 1998 1999 1998 ------------------ ----------------- ----------------- ---------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE) BASIC EARNINGS PER SHARE(1): Weighted average number of common shares outstanding ......................... 166,238,400 165,978,203 166,009,365 165,771,076 ================== ================= ================= ================ Net income ................................... $ 92,501 $ 79,359 $ 180,636 $ 153,412 ================== ================= ================= ================ Basic earnings per share ..................... .56 .48 1.09 .93 ================== ================= ================= ================ DILUTED EARNINGS PER SHARE(1): Weighted average number of common shares outstanding ......................... 166,238,400 165,978,203 166,009,365 165,771,076 Add common stock equivalents for shares issuable under Stock Option Plan ........... 3,993,263 6,445,160 4,117,594 6,145,382 ------------------ ----------------- ----------------- ---------------- Weighted average number of common and common equivalent shares outstanding ....... 170,231,663 172,423,363 170,126,959 171,916,458 ================== ================= ================= ================ Net income ................................... $ 92,501 $ 79,359 $ 180,636 $ 153,412 ================== ================= ================= ================ Diluted earnings per share ................... .54 .46 1.06 .89 ================== ================= ================= ================
- ----------------------- (1) Restated to reflect the 5% stock dividend issued September 30, 1998. 30 EX-27 3 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 215,473 5,214 446 0 3,330,359 2,048,022 2,074,481 17,772,892 142,653 24,952,604 15,087,605 1,513,541 393,240 6,002,803 0 0 1,664 1,953,751 24,952,604 678,475 165,601 13,459 857,535 291,744 471,705 385,830 14,614 9,832 221,536 267,354 180,636 0 0 180,636 1.09 1.06 3.32 101,828 4,777 682 43,998 144,566 20,550 4,023 142,653 142,653 0 0
EX-27.1 4 EXHIBIT 27.1
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 263,543 4,533 125,000 0 2,725,366 3,493,878 3,545,788 16,609,120 141,858 24,326,695 14,755,347 969,105 457,164 6,209,556 0 0 1,689 1,883,834 24,326,695 647,951 212,639 21,586 882,176 304,645 519,972 362,204 13,768 8,074 220,473 228,827 153,412 0 0 153,412 .93 .89 3.13 90,337 20,061 6,281 36,300 142,985 18,002 3,107 141,858 141,858 0 0
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