-----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, Ni8UZDWMgw11G76JJBCNLgxuGSpbiE+9vUtmmAXmQuXHm5Adr0Szmykr4mf8I2FN yvAIt1CJNJ4ghlrSDsbkSg== 0000950152-99-009127.txt : 19991117 0000950152-99-009127.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950152-99-009127 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99753850 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. FORM 10-Q 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 October 31, 1999 was 212,170,680. ================================================================================ 2 TABLE OF CONTENTS
Item Number Page - ------ PART I - FINANCIAL INFORMATION 1. Financial Statements Consolidated Statements of Financial Condition -- September 30, 1999 and December 31, 1998............................. 1 Consolidated Statements of Income -- Three and nine months ended September 30, 1999 and 1998.............. 2 Consolidated Statement of Shareholders' Equity -- Nine months ended September 30, 1999................................. 3 Consolidated Statements of Cash Flows -- Nine months ended September 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.............. 29 PART II - OTHER INFORMATION 5. Other Information...................................................... 29 6. Exhibits and Reports on Form 8-K....................................... 34 Signatures...................................................................... 34
i 3 PART I - FINANCIAL CONDITION ITEM 1. Financial Statements CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)
SEPTEMBER 30, 1999 DECEMBER 31, 1998 ------------------ ----------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS Cash and deposits with banks......................................... $ 242,126 $ 334,054 Federal funds sold and other......................................... 451 65,453 ------------- ----------- Total cash and cash equivalents................................. 242,577 399,507 Investment securities: Available for sale, at fair value.................................. 161,906 253,317 Held to maturity (fair value of $21,431 and $42,554)............... 21,395 42,256 Mortgage-backed securities: Available for sale, at fair value.................................. 3,392,529 2,299,204 Held to maturity (fair value of $1,863,387 and $2,716,740)......... 1,847,591 2,668,980 Loans and leases, net................................................ 17,970,757 17,502,729 Loans held for sale.................................................. 53,306 175,107 Federal Home Loan Bank stock......................................... 399,166 319,993 Premises and equipment............................................... 233,301 218,788 Accrued interest receivable.......................................... 122,306 117,493 Real estate and other collateral owned............................... 19,220 18,094 Loan servicing assets................................................ 106,129 90,838 Goodwill............................................................. 148,667 158,709 Other assets......................................................... 782,348 202,240 ------------- ----------- Total assets.................................................... $ 25,501,198 $24,467,255 ============= =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Checking accounts: Interest-bearing................................................ $ 1,540,728 $ 1,204,221 Noninterest-bearing............................................. 758,579 1,015,650 Money market accounts.............................................. 2,925,139 2,505,846 Savings accounts................................................... 1,417,868 1,828,087 Certificates of deposit............................................ 8,417,522 8,611,260 ------------- ----------- Total deposits.................................................. 15,059,836 15,165,064 Federal Home Loan Bank advances...................................... 7,803,384 6,186,118 Reverse repurchase agreements........................................ 127,435 685,024 Other borrowings..................................................... 135,799 130,336 Advance payments by borrowers for taxes and insurance................ 56,074 60,383 Accrued interest payable............................................. 55,641 45,584 Accrued expenses and other liabilities............................... 299,981 319,634 ------------- ----------- Total liabilities............................................... 23,538,150 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; 172,277,706 and 165,399,180 shares issued and outstanding...................................................... 1,723 1,654 Additional paid-in capital......................................... 1,265,224 1,130,398 Retained earnings.................................................. 708,645 704,661 Borrowings of employee investment and stock ownership plan......... (3,632) (5,288) Accumulated other comprehensive income............................. (8,912) 43,687 ------------- ----------- Total shareholders' equity.................................. 1,963,048 1,875,112 ------------- ----------- Total liabilities and shareholders' equity.................. $ 25,501,198 $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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- -------------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INTEREST INCOME: Loans and leases ............................ $ 342,906 $ 332,171 $ 1,021,381 $ 980,122 Mortgage-backed securities: Available for sale ........................ 51,712 40,054 131,969 97,748 Held to maturity .......................... 32,605 55,745 110,822 190,141 Investment securities: Available for sale ........................ 2,753 4,577 8,804 22,891 Held to maturity .......................... 336 1,112 1,412 3,347 Other interest-earning assets ............... 7,085 9,996 20,544 31,582 ------------ ------------ ------------ ------------ Total interest income .................... 437,397 443,655 1,294,932 1,325,831 ------------ ------------ ------------ ------------ INTEREST EXPENSE: Deposits .................................... 145,094 156,259 436,838 460,904 FHLB advances ............................... 97,076 74,774 259,329 220,982 Other borrowings ............................ 5,083 32,154 22,791 101,273 ------------ ------------ ------------ ------------ Total interest expense ................... 247,253 263,187 718,958 783,159 ------------ ------------ ------------ ------------ Net interest income ...................... 190,144 180,468 575,974 542,672 Provision for loan and lease losses ........... 7,365 7,555 21,979 21,323 ------------ ------------ ------------ ------------ Net interest income after provision for loan and lease losses .............. 182,779 172,913 553,995 521,349 ------------ ------------ ------------ ------------ OTHER INCOME: Retail banking .............................. 37,150 28,654 108,081 80,416 Mortgage banking ............................ 11,609 14,492 34,182 46,042 Leasing operations .......................... 4,093 1,463 7,798 7,114 Net gains ................................... 6,353 5,813 16,185 14,425 Other ....................................... 8,268 2,026 18,901 5,315 ------------ ------------ ------------ ------------ Total other income ....................... 67,473 52,448 185,147 153,312 ------------ ------------ ------------ ------------ ADMINISTRATIVE EXPENSES: Compensation and employee benefits .......... 53,098 49,784 158,788 151,330 Net occupancy and equipment ................. 17,140 17,294 51,634 51,650 Federal deposit insurance premiums .......... 1,521 1,542 4,665 4,787 Merger expenses ............................. 1,921 -- 7,640 -- Amortization of goodwill .................... 3,300 3,373 9,963 10,105 Other administrative expenses ............... 34,769 33,977 100,595 108,571 ------------ ------------ ------------ ------------ Total administrative expenses ............ 111,749 105,970 333,285 326,443 ------------ ------------ ------------ ------------ Income before income taxes .................... 138,503 119,391 405,857 348,218 Income taxes .................................. 44,486 39,161 131,204 114,576 ------------ ------------ ------------ ------------ Net income ............................... $ 94,017 $ 80,230 $ 274,653 $ 233,642 ============ ============ ============ ============ Basic earnings per share(1) ................... $ .54 $ .46 $ 1.58 $ 1.34 ============ ============ ============ ============ Diluted earnings per share(1) ................. $ .53 $ .45 $ 1.54 $ 1.30 ============ ============ ============ ============ Average common shares outstanding(1) .......... 172,746,331 173,535,805 173,788,665 173,888,635 ============ ============ ============ ============ Average common and common equivalent shares outstanding(1) ....................... 176,319,032 178,161,303 177,861,881 179,732,233 ============ ============ ============ ============ Cash dividends declared per share(1) .......... $ .16 $ .13 $ .44 $ .37 ============ ============ ============ ============ (1) Restated to reflect the 5% stock dividend issued September 30, 1999 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 ............ -- -- -- -- (52,599) -- (52,599) Net income ................ -- -- 274,653 -- -- -- 274,653 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Comprehensive income ........ 1,654 1,130,398 979,314 -- (8,912) (5,288) 2,097,166 Treasury stock purchased 2,635,100 shares .......... -- -- -- (70,301) -- -- (70,301) EISOP loan payment .......... -- -- -- -- -- 1,656 1,656 Issuance of common shares for stock option plans, 1,319,884 shares .......... 10 8,028 (5,004) 7,880 -- -- 10,914 Stock dividend, 8,193,742 shares .......... 59 126,798 (189,504) 62,421 -- -- (226) Dividends paid ($.44 per share)(1) ................. -- -- (76,161) -- -- -- (76,161) ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, September 30, 1999 . $ 1,723 $ 1,265,224 $ 708,645 $ -- $ (8,912) $ (3,632) $ 1,963,048 =========== =========== =========== =========== =========== =========== =========== (1) Restated to reflect the 5% stock dividend issued September 30, 1999.
See Notes to Consolidated Financial Statements 3 6
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 ----------- ----------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income ................................................................... $ 274,653 $ 233,642 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses ........................................ 21,979 21,323 Net gains .................................................................. (12,290) (7,514) Accretion of discounts, amortization of premiums, amortization of goodwill and depreciation, net ............................ 76,804 23,681 Origination of real estate loans held for sale ............................. (1,416,649) (1,456,280) Proceeds from sale of loans held for sale .................................. 1,413,019 1,449,207 Other ...................................................................... (90,231) (13,950) ----------- ----------- Net cash provided by operating activities ................................ 267,285 250,109 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Net principal disbursed on loans and leases .................................. (2,876,207) (2,617,781) Proceeds from principal repayments and maturities of: Mortgage-backed securities held to maturity ................................ 821,950 1,175,713 Investment securities held to maturity ..................................... 21,499 43,919 Mortgage-backed securities available for sale .............................. 398,034 93,099 Investment securities available for sale ................................... 111,547 802,146 Proceeds from sale of: Mortgage-backed securities available for sale .............................. 937,063 705,642 Investment securities available for sale ................................... 67,768 272 Federal Home Loan Bank stock ............................................... 1,809 95,942 Loan servicing assets ...................................................... -- 13,937 Purchases of: Mortgage-backed securities held to maturity ................................ -- (713) Investment securities held to maturity ..................................... (472) (82,853) Investment securities available for sale ................................... (90,949) (166,816) Loans ...................................................................... (15,041) (140,616) Federal Home Loan Bank stock ............................................... (62,632) (4,456) Loan servicing assets, including those originated .......................... (24,193) (34,725) Bank owned life insurance .................................................. (497,296) -- Other ...................................................................... (39,084) 62,714 ----------- ----------- Net cash used in investing activities .................................... (1,246,204) (54,576) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings ............................. 862,231 (1,484,473) Proceeds from long-term borrowings ........................................... 725,662 2,438,650 Repayments of long-term borrowings ........................................... (520,905) (1,548,074) Increase (decrease) in deposits .............................................. (104,916) 642,362 Decrease in advance payments by borrowers for taxes and insurance ............ (4,309) (100,182) Payment of dividends on common stock ......................................... (76,387) (59,254) Proceeds from issuance of common stock ....................................... 10,914 -- Purchase of treasury stock ................................................... (70,301) (51,336) ----------- ----------- Net cash provided by (used in) financing activities ........................ 821,989 (162,307) ----------- ----------- Net increase (decrease) in cash and cash equivalents ........................... (156,930) 33,226 Cash and cash equivalents, beginning of the period ............................. 399,507 412,105 ----------- ----------- Cash and cash equivalents, end of the period ................................... $ 242,577 $ 445,331 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest on deposits and borrowings ............................ $ 708,288 $ 885,651 Cash paid for income taxes ................................................... 23,000 58,967 SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES: Transfers from loans to real estate owned .................................... 3,639 9,082 Loans exchanged for mortgage-backed securities ............................... 2,513,605 1,816,088 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 October 1, 1999, Charter One completed a strategic alliance with St. Paul Bancorp, Inc. ("St. Paul"), which was accounted for as a pooling of interests. Headquartered in Chicago, Illinois, St. Paul was the holding company of St. Paul Federal Bank for Savings, a $6.2 billion savings bank that operates 58 branch offices in the metropolitan Chicago area. The merger was effected through the issuance of .99225 shares of Charter One common stock for each share of St. Paul's common stock, resulting in the issuance of 39,892,023 shares (as adjusted for the 5% stock dividend issued September 30, 1999). The pro forma net income and earnings per share (as adjusted for the 5% stock dividend issued September 30, 1999) are set forth below:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- -------------------------- 1999 1998 1999 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net income................................ $ 104,502 $ 68,536 $ 315,824 $ 249,164 ========== ========== ========== ========== Basic earnings per share.................. $ .49 $ .32 $ 1.48 $ 1.16 ========== ========== ========== ========== Diluted earnings per share................ $ .48 $ .31 $ 1.44 $ 1.13 ========== ========== ========== ==========
For the month ended October 31, 1999, the combined operations of Charter One and St. Paul produced interest income of $179.7 million, other income of $25.5 million, and net income of $31.5 million, inclusive of transaction-related charges in the month. 3. On November 5, 1999, the Company completed its previously announced acquisition of 14 Vermont National Bank offices from Chittenden Corporation ("Chittenden"), which was accounted for as a purchase. The acquisition was 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. Charter One acquired $90.2 million in commercial real estate and business loans and assumed $320.9 million in deposits. Management does not expect fair market values to differ materially from book values. It is anticipated that none of the purchased branches will be closed. The pro forma effect of the Chittenden acquisition is not material. 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 Corporation ("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, F.S.B. in May 1999 and New ALBANK Commercial was formed. New ALBANK Commercial was subsequently renamed ALBANK Commercial in August 1999. In November 1999, ALBANK Commercial was renamed Charter One Commercial. Charter One 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 Charter One 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 third quarter of 1999, the bank and its subsidiaries were doing business through 344 full-service banking branches and 37 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. These forward-looking statements include statements about our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond our control. The following factors, among others, could cause our financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in the forward-looking statements: (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 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. The list of important factors stated above is not exclusive and may be contained in discussions throughout the document. We do not undertake--and specifically decline 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 $94.0 million, or $0.53 per diluted share, for the three months ended September 30, 1999. This was a $13.8 million, or 17.2%, increase over the results of the third quarter of 1998 when net income was $80.2 million, or $0.45 per diluted share. This increase was primarily attributable to increases in net interest income, retail banking income, Bank Owned Life Insurance ("BOLI") income and income from leasing operations. Our net income for the third quarter of 1999 resulted in a return on average equity of 18.97% and a return on average assets of 1.49%. The comparable returns for the third quarter of 1998 were 16.81% and 1.31%, respectively. 7 10 For the nine months ended September 30, 1999, Charter One reported net income of $274.7 million, or $1.54 per diluted share. This was a $41.0 million, or 17.6%, increase over the results for the same period in 1998. This increase, just as in the third 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 18.59% and a return on average assets of 1.48%. The comparable returns for the nine months ended September 30, 1998 were 16.72% and 1.28%, respectively.
SELECTED OPERATING RATIOS (Figure 1) THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------- ----------------------------------- 1999 1998 1999 1998 --------------- ----------------- -------------- ---------------- ANNUALIZED RETURNS Return on average assets........................... 1.49% 1.31% 1.48% 1.28% Return on average equity........................... 18.97 16.81 18.59 16.72 Average equity to average assets................... 7.85 7.82 7.94 7.66 ANNUALIZED OPERATING RATIOS Net interest income to administrative expenses..... 1.70x 1.70x 1.73x 1.66x Administrative expenses to average assets.......... 1.77% 1.74% 1.79% 1.79% Efficiency ratio................................... 43.16 45.18 43.40 46.41
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 our 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 SEPTEMBER 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) ..................... $18,187,983 $342,906 7.53% $16,950,871 $332,171 7.83% Mortgage-backed securities: Available for sale .................... 3,039,832 51,712 6.80 2,175,992 40,054 7.36 Held to maturity ...................... 1,900,947 32,605 6.86 3,178,051 55,745 7.02 Investment securities: Available for sale .................... 157,075 2,753 7.01 361,537 4,577 5.06 Held to maturity ...................... 21,285 336 6.32 68,345 1,112 6.51 Other interest-earning assets(2) .............................. 393,083 7,085 7.05 568,588 9,996 6.88 -------- ------ -------- ------ Total interest-earning assets ........ 23,700,205 437,397 7.37 23,303,384 443,655 7.60 -------- -------- Allowance for loan and lease losses ..... (142,019) (141,078) Noninterest-earning assets(3) ........... 1,681,669 1,265,492 ---------- --------- Total assets ....................... $25,239,855 $24,427,798 ============ =========== Interest-bearing liabilities(4): Deposits: Checking accounts ..................... $ 2,322,737 6,996 1.19 $ 1,974,561 3,730 0.75 Savings accounts ...................... 1,450,593 6,481 1.77 1,881,956 11,158 2.35 Money market accounts ................. 2,980,619 23,863 3.18 2,207,918 18,814 3.38 Certificates of deposit ............... 8,268,329 107,754 5.17 8,686,739 122,557 5.60 ---------- -------- ---------- -------- Total deposits ...................... 15,022,278 145,094 3.83 14,751,174 156,259 4.20 ----------- -------- ----------- -------- FHLB advances ........................... 7,551,072 97,076 5.10 5,282,556 74,774 5.61 Other borrowings ........................ 264,435 5,083 7.63 1,992,472 32,154 6.34 -------- ------ ---------- ------- Total borrowings ..................... 7,815,507 102,159 5.18 7,275,028 106,928 5.81 ---------- -------- ---------- -------- Total interest-bearing liabilities ......................... 22,837,785 247,253 4.29 22,026,202 263,187 4.73 -------- -------- Non interest-bearing liabilities ........ 419,762 464,220 -------- ------- Total liabilities .................... 23,257,547 22,490,422 Corporation-obligated mandatorily redeemable capital securities of subsidiary trust ...................... -- 27,995 Shareholders' equity ...................... 1,982,308 1,909,381 ---------- --------- Total liabilities and shareholders' equity ................ $25,239,855 $24,427,798 ============ =========== Net interest income ....................... $190,144 $180,468 ========= ======== Interest rate spread ...................... 3.08 2.87 Net yield on average interest- earning assets(5) ........................ 3.21 3.10 Average interest-earning assets to average interest-bearing liabilities .............................. 103.78% 105.80% (1) Average balances include nonaccrual loans and interest income includes loan fee amortization. (2) Includes FHLB stock, federal funds sold, interest-bearing deposits with banks and other. (3) Includes mark-to-market adjustments on securities available for sale. (4) The costs of liabilities include the annualized effect of interest rate risk management instruments. (5) Annualized net interest income divided by the average balance of interest-earning assets.
9 12
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------------------------------------------------- 1999 1998 ---------------------------------------- -------------------------------------- AVG. AVG. AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST COST BALANCE INTEREST COST ------- -------- ------ ------- -------- ------- (DOLLARS IN THOUSANDS) Interest-earning assets: Loans and leases(1) ................... $18,013,978 $ 1,021,381 7.56% $16,584,350 $980,122 7.88% Mortgage-backed securities: Available for sale .................. 2,613,669 131,969 6.73 1,825,757 97,748 7.14 Held to maturity .................... 2,139,688 110,822 6.91 3,578,879 190,141 7.08 Investment securities: Available for sale .................. 171,304 8,804 6.85 501,447 22,891 6.09 Held to maturity .................... 29,733 1,412 6.33 67,106 3,347 6.65 Other interest-earning assets(2) ............................ 406,923 20,544 6.66 612,583 31,582 6.80 ----------- ---------- ----------- ---------- Total interest-earning assets ...... 23,375,295 1,294,932 7.39 23,170,122 1,325,831 7.63 ---------- ---------- Allowance for loan and lease losses ... (142,103) (141,701) Noninterest-earning assets(3) ......... 1,580,294 1,290,654 ------------ ----------- Total assets ..................... $24,813,486 $24,319,075 ============ =========== Interest-bearing liabilities(4): Deposits: Checking accounts ................... $ 2,244,631 15,969 0.95 $ 1,850,727 11,288 0.82 Savings accounts .................... 1,620,282 22,867 1.89 1,918,692 34,121 2.38 Money market accounts ............... 2,773,895 68,541 3.30 2,178,520 54,583 3.35 Certificates of deposit ............. 8,423,707 329,461 5.23 8,581,620 360,912 5.62 ---------- -------- ----------- -------- Total deposits .................... 15,062,515 436,838 3.88 14,529,559 460,904 4.24 ----------- -------- ----------- -------- FHLB advances ......................... 6,890,798 259,329 5.03 5,225,458 220,982 5.65 Other borrowings ...................... 463,685 22,791 6.51 2,122,515 101,273 6.30 ----------- ------- ----------- -------- Total borrowings ................... 7,354,483 282,120 5.12 7,347,973 322,255 5.84 ----------- -------- ----------- -------- Total interest-bearing liabilities ....................... 22,416,998 718,958 4.29 21,877,532 783,159 4.78 -------- -------- Non interest-bearing liabilities ...... 427,024 536,332 ---------- ----------- Total liabilities .................. 22,844,022 22,413,864 Corporation-obligated mandatorily redeemable capital securities of subsidiary trust .................... -- 42,584 Shareholders' equity .................... 1,969,464 1,862,627 ---------- ----------- Total liabilities and shareholders' equity .............. $24,813,486 $24,319,075 ============ =========== Net interest income ..................... $ 575,974 $542,672 ========== ======== Interest rate spread .................... 3.10 2.85 Net yield on average interest- earning assets(5) ...................... 3.29 3.12 Average interest-earning assets to average interest-bearing liabilities ............................ 104.27% 105.91% (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 our interest income and interest expense resulting from changes in interest rates and the volume of interest-earning assets and interest-bearing liabilities. Changes not solely attributable to volume or rate have been allocated in proportion to the changes due to volume and rate.
RATE/VOLUME ANALYSIS (Figure 3) THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------- ---------------------------------------- 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 ....................... $(15,386) $ 26,121 $ 10,735 $(47,502) $ 88,761 $ 41,259 Mortgage-backed securities: Available for sale ................... (3,230) 14,888 11,658 (5,842) 40,063 34,221 Held to maturity ..................... (1,209) (21,931) (23,140) (4,665) (74,654) (79,319) Investment securities: Available for sale ................... 1,357 (3,181) (1,824) 2,576 (16,663) (14,087) Held to maturity ..................... (32) (744) (776) (153) (1,782) (1,935) Other interest-earning assets ........... 246 (3,157) (2,911) (642) (10,396) (11,038) -------- -------- -------- -------- -------- -------- Total .............................. (18,254) 11,996 (6,258) (56,228) 25,329 (30,899) -------- -------- -------- -------- -------- -------- Interest expense: Checking accounts ...................... 2,518 748 3,266 2,054 2,627 4,681 Savings accounts ....................... (2,424) (2,253) (4,677) (6,418) (4,836) (11,254) Money market accounts .................. (1,196) 6,245 5,049 (763) 14,721 13,958 Certificates of deposit ................ (9,074) (5,729) (14,803) (24,907) (6,544) (31,451) FHLB advances .......................... (7,338) 29,640 22,302 (26,168) 64,515 38,347 Other borrowings ....................... (1,402) (25,669) (27,071) (7,565) (70,917) (78,482) -------- -------- -------- -------- -------- -------- Total .............................. (18,916) 2,982 (15,934) (63,767) (434) (64,201) -------- -------- -------- -------- -------- -------- Change in net interest income ............ $ 662 $ 9,014 $ 9,676 $ 7,539 $ 25,763 $ 33,302 ======== ======== ======== ======== ======== ========
Net interest income for the third quarter of 1999 was $190.1 million, a $9.7 million, or 5.4%, increase as compared to $180.5 million for the third quarter of 1998. The interest rate spread increased by 21 basis points to 3.08% and the net yield on interest-earning assets increased by 11 basis points to 3.21% for the third quarter of 1999. The primary reason for these improvements related to the cost of funds which decreased by 44 basis points to 4.29% for the three months ended September 30, 1999. The lower cost of funds had the effect of reducing interest expense and therefore increasing net interest income by $18.9 million. The lower cost of funds is attributable to lower market interest rates as compared to the same period in 1998. This enabled the bank to reprice deposit liability accounts and matured borrowings at lower interest rates. The improvement in net interest income resulting from the lower cost of funds was partially offset by lower interest income. Interest income for the third quarter of 1999 was $437.4 million as compared to $443.7 million for the third quarter of 1998. This $6.3 million, or 1.4%, decline was primarily attributable to lower market interest rates. The yield on interest-earning assets declined to 7.37% for the third quarter of 1999 as compared to 7.60% for the same period in 1998. The lower yield had the effect of reducing interest income by $18.3 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 $396.8 million which had the effect of increasing interest income by $12.0 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 $1.2 billion higher during the third quarter of 1999 as compared to the same period in 1998. This growth was partially funded by repayments from the mortgage-backed securities, investments and other interest-earning assets portfolios. 11 14 AVERAGE BALANCE PORTFOLIO MIX (Figure 4)
THREE MONTHS ENDED SEPTEMBER 30, ----------------------------------------------------------------------- 1999 1998 --------------------------------- --------------------------------- AVERAGE YIELD/ % OF AVERAGE YIELD/ % OF BALANCE COST TOTAL BALANCE COST TOTAL ----------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Interest-earning assets: Loans and leases............................. $ 18,187,983 7.53% 76.7% $ 16,950,871 7.83% 72.7% Other interest-earning assets................ 5,512,222 6.86 23.3 6,352,513 7.02 27.3 ------------- -------- -------- ------------- ------- -------- Total..................................... $ 23,700,205 7.37% 100.0% $ 23,303,384 7.60% 100.0% ============= ======== ======== ============= ======= ======== Interest-bearing liabilities: Deposits..................................... $ 15,022,278 3.83% 65.8% $ 14,751,174 4.20% 67.0% Borrowings................................... 7,815,507 5.18 34.2 7,275,028 5.81 33.0 ------------- -------- -------- ------------- ------- -------- Total..................................... $ 22,837,785 4.29% 100.0% $ 22,026,202 4.73% 100.0% ============= ======== ======== ============= ======= ======== NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------------------------------------------- 1999 1998 --------------------------------- --------------------------------- AVERAGE YIELD/ % OF AVERAGE YIELD/ % OF BALANCE COST TOTAL BALANCE COST TOTAL ----------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Interest-earning assets: Loans and leases............................. $ 18,013,978 7.56% 77.1% $ 16,584,350 7.88% 71.6% Other interest-earning assets................ 5,361,317 6.80 22.9 6,585,772 7.00 28.4 ------------- -------- -------- ------------- ------- -------- Total..................................... $ 23,375,295 7.39% 100.0% $ 23,170,122 7.63% 100.0% ============= ======== ======== ============= ======= ======== Interest-bearing liabilities: Deposits..................................... $ 15,062,515 3.88% 67.2% $ 14,529,559 4.24% 66.4% Borrowings................................... 7,354,483 5.12 32.8 7,347,973 5.84 33.9 ------------- -------- -------- ------------- ------- -------- Total..................................... $ 22,416,998 4.29% 100.0% $ 21,877,532 4.78% 100.0% ============= ======== ======== ============= ======= ========
Net interest income for the nine months ended September 30, 1999 was $576.0 million, a $33.3 million, or 6.1%, increase as compared to $542.7 million for the same period in 1998. The interest rate spread increased by 25 basis points to 3.10% for the first nine months of 1999 as compared to 2.85% for the same period in 1998. The net yield on interest-earning assets increased by 17 basis points to 3.29% for the first nine months of 1999 as compared to 3.12% 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 49 basis points lower for the first nine months of 1999 as compared to the first nine months of 1998. This had the effect of reducing interest expense and therefore increasing net interest income by $63.8 million. The lower cost of funds is attributable to both a shift in the mix of interest-bearing liabilities and lower market interest rates. Relative to borrowed funds, retail deposits generally cost less. As such, shifting balances from borrowings to retail deposits generally lowers the overall cost of funds. As shown in Figure 4, we were able to shift balances from higher cost borrowings to lower cost retail deposits since September 30, 1998. This shift was achieved by growing the retail deposit balances since September 30, 1998 while holding the balance of borrowed funds at $7.35 billion. 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 nine months of 1999 was $1.29 billion as compared to $1.33 billion for the same period in 1998. The $30.9 million, or 2.3%, decline was primarily attributable to lower market interest rates. The yield on interest-earning assets declined to 7.39% for the first nine months of 1999 as compared to 7.63% for the same period in 1998. The lower yield had the effect of reducing interest income by $56.2 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 $205.2 million which had the effect of increasing interest income by $25.3 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 $1.4 billion higher for the first nine months of 1999 as compared to the same period in 1998. This growth was partially funded by repayments from the mortgage-backed securities, investments and other interest-earning assets portfolios. 12 15 Figure 5 sets forth Charter One's yields and costs at period end for the dates indicated. Yields and costs at end of period (Figure 5)
SEPTEMBER 30, 1999 DECEMBER 31, 1998 -------------------- ------------------- YIELDS AND COSTS AT END OF PERIOD Weighted average yield: Real estate loans................................................................. 7.34% 7.45% Automobile loans.................................................................. 8.56 8.70 Retail consumer loans............................................................. 7.85 8.11 Leases (1)........................................................................ 5.80 6.22 Corporate banking loans........................................................... 8.42 8.40 Total loans and leases.......................................................... 7.57 7.69 Mortgage-backed securities........................................................ 6.81 6.88 Investment securities............................................................. 6.82 6.30 Other interest-earning assets..................................................... 7.20 6.38 Total interest-earning assets................................................. 7.39 7.48 Weighted average cost (2): Checking.......................................................................... 1.31 .67 Money market...................................................................... 3.32 3.36 Savings........................................................................... 1.46 2.15 Certificates of deposit........................................................... 5.05 5.46 Total deposits.................................................................. 3.80 4.02 FHLB advances..................................................................... 5.22 5.01 Other borrowings.................................................................. 7.57 6.15 Total interest-bearing liabilities........................................... 4.33 4.37 Interest rate spread................................................................ 3.06 3.11 Net yield on interest-earning assets................................................ 3.22 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 September 30, 1999 was $67.5 million as compared to $52.4 million for the third quarter of 1998. This $15.0 million, or 28.6%, increase was primarily attributable to increased retail banking income, income from the BOLI program and increased income from leasing operations. Retail banking income increased $8.5 million, or 29.7%, primarily due to increases in checking account fee income. 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. The increase in other income was attributable to the BOLI program. In 1999, we increased our BOLI portfolio by $497 million, bringing the total investment in BOLI to $549.5 million as of September 30, 1999. This asset is classified in other assets on the consolidated statement of financial condition and the related income is recorded in other income. The income from the BOLI program is the primary reason for the $6.2 million increase in other income over the comparable period in 1998. Leasing operations contributed $4.1 million of other income in the current quarter which is a $2.6 million increase as compared to the results for the third quarter of 1998. These increases in retail banking, leasing operations and other income were partially offset by a $2.9 million, or 19.9%, 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 nine months ended September 30, 1999 was $185.1 million as compared to $153.3 million for the same period in 1998. This $31.8 million, or 20.8%, increase was primarily attributable to increased retail banking income which increased $27.7 million, or 34.4%, and an increase in other income of $13.6 million. These increases were partially offset by a decrease of $11.9 million, or 25.8%, in mortgage banking income. The reasons for these increases and decreases are substantially the same as for the third quarter results discussed in the above paragraph. 13 16 ADMINISTRATIVE EXPENSES Administrative expenses were $111.7 million for the three months ended September 30, 1999, an increase of $5.8 million, or 5.5%, as compared to the third quarter of 1998. The third quarter of 1999 included $1.9 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 was substantially completed by the end of the third quarter of 1999. Our administrative expenses, excluding the merger-related expenses, resulted in a ratio of 1.74% of administrative expenses to average assets for the three months ended September 30, 1999, which was the same ratio for the comparable period in 1998. Our efficiency ratio (excluding the $1.9 million of merger expenses) for the third quarter of 1999 was 42.40%, an improvement when compared to the 45.18% efficiency ratio we experienced in the third quarter of 1998. Although administrative expenses increased, those increases were in line with management's expectations for increased asset growth and revenue generating activities. Administrative expenses were $333.3 million for the nine months ended September 30, 1999, an increase of $6.8 million, or 2.1%, as compared to the same period in 1998. The 1999 period included $7.6 million of merger related expenses. Our administrative expenses, excluding the merger-related expenses, resulted in a ratio of 1.75% of administrative expenses to average assets for the nine months ended September 30, 1999, as compared to 1.79% for the comparable period in 1998. Our efficiency ratio (excluding the $7.6 million of merger expenses) for the first nine months of 1999 was 42.38%, an improvement when compared to the 46.41% efficiency ratio we experienced in the comparable 1998 period. FEDERAL INCOME TAXES Federal income tax expense for the three months ended September 30, 1999 was $44.5 million as compared to $39.2 million for the same period in 1998. The primary reason for this 13.6% increase in the provision for federal income taxes was a 16.0% increase in pre-tax book income. The effective tax rates were 32.1% and 32.8% for the 1999 and 1998 periods, respectively. Federal income tax expense for the nine months ended September 30, 1999 was $131.2 million as compared to $114.6 million for the same period in 1998. The primary reason for this 14.5% increase in the provision for federal income taxes was a 16.6% increase in pre-tax book income. The effective tax rates were 32.3% and 32.9% for the 1999 and 1998 periods, respectively. FINANCIAL CONDITION OVERVIEW At September 30, 1999, total assets were $25.5 billion, as compared to total assets of $24.5 billion at December 31, 1998. The increase in total assets of $1.0 billion is primarily attributed to an increase in our loan and lease portfolio of $346 million and an increase in our BOLI investment of $497 million. See the above discussion in "Net Interest Income" and "Other Income" regarding the change in our mix of assets. 14 17 LOANS AND LEASES COMPOSITION OF LOANS AND LEASES(Figure 6)
SEPTEMBER 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 ................................. $ 6,037,535 33.50% $ 6,909,161 39.08% Adjustable rate ............................ 2,937,647 16.30 3,360,705 19.01 Construction ................................ 270,028 1.49 294,893 1.67 ----------- ------------- ----------- ------------- 9,245,210 51.29 10,564,759 59.76 Commercial real estate: Multifamily .................................... 249,038 1.38 242,776 1.38 Other .......................................... 536,550 2.98 475,753 2.69 ----------- ------------- ----------- ------------- 785,588 4.36 718,529 4.07 Consumer: Retail ......................................... 4,135,146 22.94 3,129,312 17.70 Automobile ..................................... 2,372,992 13.17 2,020,157 11.43 ----------- ------------- ----------- ------------- 6,508,138 36.11 5,149,469 29.13 Business: Leasing ........................................ 942,563 5.23 730,415 4.13 Corporate banking .............................. 542,564 3.01 514,664 2.91 ----------- ------------- ----------- ------------- 1,485,127 8.24 1,245,079 7.04 ----------- ------------- ----------- ------------- $18,024,063 100.00% $17,677,836 100.00% =========== ============= =========== ============= Portfolio of loans serviced for others ............. $ 9,559,425 $ 9,308,294 =========== ===========
15 18
LOAN AND LEASE ACTIVITY (Figure 7) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------ ---------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) ORIGINATIONS: Real estate: Permanent: One-to-four family ....................................... $1,211,443 $1,411,147 $3,676,397 $4,503,999 Multifamily .............................................. 15,084 6,656 32,588 23,844 Commercial ............................................... 31,316 45,763 120,087 88,427 ---------- ---------- ---------- ---------- Total permanent loans ................................. 1,257,843 1,463,566 3,829,072 4,616,270 ---------- ---------- ---------- ---------- Construction: One-to-four family ....................................... 149,410 120,638 412,045 331,054 Multifamily .............................................. 10,742 11,942 52,692 19,212 Commercial ............................................... 22,120 17,064 69,185 26,745 ---------- ---------- ---------- ---------- Total construction loans .............................. 182,272 149,644 533,922 377,011 ---------- ---------- ---------- ---------- Total real estate loans originated ............. 1,440,115 1,613,210 4,362,994 4,993,281 ---------- ---------- ---------- ---------- Retail consumer ................................................ 576,717 445,711 1,812,602 1,515,835 Automobile ..................................................... 342,327 302,568 1,079,032 918,543 Leases ......................................................... 190,814 62,539 323,334 279,987 Corporate banking .............................................. 165,666 63,743 449,714 156,620 ---------- ---------- ---------- ---------- Total loans and leases originated ..................... 2,715,639 2,487,771 8,027,676 7,864,266 ---------- ---------- ---------- ---------- Loans purchased ................................................ 3,528 2,708 15,041 19,605 Sales and principal reductions: Loans sold ................................................... 445,589 565,860 1,416,649 1,456,134 Loans exchanged for MBS ...................................... 647,560 468,666 2,513,605 1,816,088 Principal reductions ......................................... 1,239,506 1,209,717 3,685,463 3,783,749 ---------- ---------- ---------- ---------- Total sales and principal reductions .................. 2,332,655 2,244,243 7,615,717 7,055,971 ---------- ---------- ---------- ---------- Increase before net items ......................... $ 386,512 $ 246,236 $ 427,000 $ 827,900 ========== ========== ========== ==========
INVESTMENT SECURITIES Figure 8 summarizes our investment portfolio at September 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) SEPTEMBER 30, 1999 DECEMBER 31, 1998 ------------------ ---------------- (DOLLARS IN THOUSANDS) AVAILABLE FOR SALE U.S. Treasury and agency securities ..................................... $ 46,350 $ 48,999 Corporate notes and commercial paper .................................... 65,638 135,520 Other ................................................................... 49,918 68,798 -------- -------- Total investment securities available for sale ...................... 161,906 253,317 -------- -------- HELD TO MATURITY U.S. Treasury and agency securities ..................................... 15,687 35,932 Other ................................................................... 5,708 6,324 -------- -------- Total investment securities held to maturity ........................ 21,395 42,256 -------- -------- Total .......................................................... $183,301 $295,573 ======== ======== Weighted average rate ................................................... 6.82% 6.30% ======== ========
16 19 MORTGAGE-BACKED SECURITIES Figure 9 summarizes our mortgage-backed securities portfolios at September 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) SEPTEMBER 30, 1999 DECEMBER 31, 1998 --------------------- ----------------- (DOLLARS IN THOUSANDS) AVAILABLE FOR SALE Participation certificates: Government agency issues: FNMA ........................................................ $2,313,516 $1,053,324 FHLMC ....................................................... 72,222 140,273 GNMA ........................................................ 2,720 3,327 Collateralized mortgage obligations: Government agency issues: FHLMC ....................................................... 293,925 337,658 FNMA ........................................................ 232,310 255,238 GNMA ........................................................ 7,778 9,374 Private issues ................................................ 470,058 500,010 ---------- ---------- Total mortgage-backed securities available for sale ......... 3,392,529 2,299,204 ---------- ---------- HELD TO MATURITY Participation certificates: Government agency issues: FNMA ........................................................ 572,021 741,828 FHLMC ....................................................... 210,415 285,131 GNMA ........................................................ 106,748 132,066 Private issues ................................................ 155,862 219,256 Collateralized mortgage obligations: Government agency issues: FNMA ........................................................ 222,481 261,528 FHLMC ....................................................... 86,244 126,279 Private issues ................................................ 493,820 902,892 ---------- ---------- Total mortgage-backed securities held to maturity ......... 1,847,591 2,668,980 ---------- ---------- Total .................................................. $5,240,120 $4,968,184 ========== ==========
17 20
MORTGAGE-BACKED SECURITIES BY PAYMENT TYPE (Figure 10) SEPTEMBER 30, 1999 DECEMBER 31, 1998 ----------------------------- --------------------------- BOOK AVERAGE BOOK AVERAGE VALUE RATE VALUE RATE ----------------------------- ------------- ----------- (DOLLARS IN THOUSANDS) AVAILABLE FOR SALE Adjustable rate: Participation certificates .......................... $ 72,713 6.71% $ 104,582 6.77% Collateralized mortgage obligations ................. 945,406 6.71 1,005,868 6.69 ---------- ---------- Total adjustable rate ............................. 1,018,119 6.71 1,110,450 6.70 ---------- ---------- Fixed rate: Participation certificates .......................... 2,315,745 6.78 1,092,342 6.87 Collateralized mortgage obligations ................. 58,665 6.37 96,412 6.36 ---------- ---------- Total fixed rate .................................. 2,374,410 6.77 1,188,754 6.83 ---------- ---------- Total available for sale ........................ 3,392,529 6.75 2,299,204 6.76 ---------- ---------- HELD TO MATURITY Adjustable rate: Participation certificates .......................... 408,615 6.56 547,989 6.92 Collateralized mortgage obligations ................. 234,241 7.14 278,841 7.30 ---------- ---------- Total adjustable rate ............................. 642,856 6.79 826,830 7.05 ---------- ---------- Fixed rate: Participation certificates .......................... 636,431 7.28 830,292 7.30 Collateralized mortgage obligations ................. 568,304 6.63 1,011,858 6.65 ---------- ---------- Total fixed rate .................................. 1,204,735 6.98 1,842,150 6.94 ---------- ---------- Total held to maturity .......................... 1,847,591 6.91 2,668,980 6.98 ---------- ---------- Total mortgage-backed securities .............. $5,240,120 6.81% $4,968,184 6.88% ========== ==========
18 21 ASSET QUALITY ANALYSIS OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES (Figure 11)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------- ---------------------------------- 1999 1998 1999 1998 ---------------- ---------------- ---------------- -------------- (DOLLARS IN THOUSANDS) ALLOWANCE FOR LOAN AND LEASE LOSSES Balance, beginning of period ....................... $ 142,653 $ 141,858 $ 144,566 $ 142,985 Provision for loan and lease losses ................ 7,365 7,555 21,979 21,323 Loans and leases charged off: Mortgage ......................................... (1,494) (1,892) (4,724) (4,701) Automobile ....................................... (6,394) (5,957) (20,645) (18,877) Retail consumer .................................. (428) (798) (2,333) (2,801) Leases ........................................... -- -- (900) -- Corporate banking ................................ (1,472) (211) (1,736) (481) --------- --------- --------- --------- Total charge-offs ............................. (9,788) (8,858) (30,338) (26,860) --------- --------- --------- --------- Recoveries: Mortgage ......................................... 32 448 659 768 Automobile ....................................... 1,668 1,440 4,708 3,652 Retail consumer .................................. 238 256 481 717 Leases ........................................... -- -- -- -- Corporate banking ................................ 79 192 192 306 --------- --------- --------- --------- Total recoveries .............................. 2,017 2,336 6,040 5,443 --------- --------- --------- --------- Net loan and lease charge-offs ........... (7,771) (6,522) (24,298) (21,417) --------- --------- --------- --------- Balance, end of period ............................. $ 142,247 $ 142,891 $ 142,247 $ 142,891 ========= ========= ========= ========= Net charge-offs to average loans and leases (annualized) ...................................... .17% .15% .18% .17%
Figure 12 sets forth information concerning nonperforming assets and the allowance for loan and lease losses. At September 30, 1999, we had no outstanding commitments to lend additional funds to borrowers whose loans were on nonaccrual or restructured status. 19 22 NONPERFORMING ASSETS (Figure 12)
SEPTEMBER 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) ...................................................... $ 63,918 $ 73,175 Multifamily and commercial ................................................. 1,493 3,958 Construction and land ...................................................... 1,842 1,178 -------- -------- Total real estate mortgage loans ......................................... 67,253 78,311 Retail consumer .............................................................. 39,233 21,032 Automobile ................................................................... 504 327 Leases ....................................................................... -- -- Corporate banking ............................................................ 4,775 8,810 -------- -------- Total nonaccrual loans and leases ........................................ 111,765 108,480 -------- -------- Accruing loans and leases delinquent more than 90 days: Real estate mortgage loans ................................................... -- -- Retail consumer .............................................................. 1,448 3,878 Automobile ................................................................... 4,763 5,873 Leases ....................................................................... 162 -- Corporate banking ............................................................ 1,711 904 -------- -------- Total accruing loans and leases more than 90 days ........................ 8,084 10,655 -------- -------- Restructured real estate mortgage loans ........................................ 690 3,936 -------- -------- Total nonperforming loans and leases ..................................... 120,539 123,071 Real estate acquired through foreclosure and other ............................. 18,990 17,803 -------- -------- Total nonperforming assets ............................................... 139,529 140,874 Less government guaranteed loans ......................................... 18,041 22,429 -------- -------- Nonperforming assets net of guaranteed loans ............................. $121,488 $118,445 ======== ======== Ratio of: Nonperforming loans and leases to total loans and leases ..................... .67% .70% Nonperforming assets to total assets ......................................... .55 .58 Allowance for loan and lease losses to: Nonperforming loans and leases ............................................. 118.01 117.47 Total loans and leases before allowance .................................... .78 .81 Ratio of (excluding guaranteed nonperforming loans): Nonperforming loans and leases to total loans and leases ..................... .57% .57% Nonperforming assets to total assets ......................................... .48 .48 Allowance for loan and lease losses to: Nonperforming loans and leases ............................................. 138.78 143.64 Total loans and leases before allowance .................................... .78 .81 (1) Includes $18.0 million and $22.4 million of government guaranteed loans at September 30, 1999 and December 31, 1998, respectively.
At September 30, 1999, there were $41.7 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 $5.3 million loan to a trucking and warehousing company where the borrower is experiencing operating losses but the loan is current. 20 23 SOURCES OF FUNDS GENERAL Deposits have historically been the most important source of 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 September 30, 1999 and December 31, 1998, 65% and 68% of interest-bearing liabilities were in the form of deposits and 35% and 32% were in the form of borrowings, respectively. 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)
SEPTEMBER 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 ............... $ 1,540,728 1.96% 10.23% $ 1,204,221 1.22% 7.94% Noninterest-bearing ............ 758,579 -- 5.04 1,015,650 -- 6.70 Money market accounts ............ 2,925,139 3.32 19.42 2,505,846 3.37 16.52 Savings accounts ................. 1,417,868 1.46 9.42 1,828,087 2.15 12.06 Certificates of deposit .......... 8,316,753 5.27 55.23 8,610,177 5.62 56.78 Brokered certificates of deposit . 100,000 7.14 .66 -- -- -- ----------- ------- ----------- ------- Total deposits .............. 15,059,067 3.93 100.00% 15,163,981 4.10 100.00% ======= ======= Plus unamortized premium on deposits purchased ........... 769 1,083 ----------- ----------- Total deposits, net ......... $15,059,836 $15,165,064 =========== =========== Including the annualized effect of applicable interest rate risk management instruments .......... 3.80% 4.02% ====== =====
BORROWINGS At September 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 $10.2 billion in real estate loans and $3.2 billion in mortgage-backed securities. 21 24
FEDERAL HOME LOAN BANK ADVANCES (Figure 14) SEPTEMBER 30, 1999 DECEMBER 31, 1998 ----------------------------- ---------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE ----------- ---------- ------------- ---------- (DOLLARS IN THOUSANDS) Short-term ........................................... $2,115,000 5.66% $ 803,000 5.10% Long-term: Fixed-rate advances ................................ 5,107,498 5.04 5,109,388 4.99 Variable-rate advances ............................. 580,886 5.30 273,730 5.35 ---------- ---------- Total advances, net .............................. $7,803,384 5.22 $6,186,118 5.02 ========== ========== Including the annualized effect of applicable interest rate risk management instruments ................... 5.22% 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)
SEPTEMBER 30, 1999 DECEMBER 31, 1998 ----------------------------- ---------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE ------------- --------- ----------- ------------ (DOLLARS IN THOUSANDS) Short-term, fixed-rate ........................................ $127,435 5.63% $ 39,962 4.57% Long-term: Fixed-rate .................................................. -- -- 275,062 5.99 Variable-rate ............................................... -- -- 370,000 5.30 -------- -------- Weighted average cost including amortization of fees .................................................... $127,435 5.63 $685,024 5.53 ======== ======== Including the annualized effect of applicable interest rate risk management instruments ............................ 5.63% 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 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. 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. 22 25 INTEREST RATE SWAPS (Figure 16)
SEPTEMBER 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% 5.46% $120,000 5.80% 5.31% 2001 ................. 270,000 6.14 5.41 -- -- -- 2003 ................. 120,000 6.14 5.44 230,000 6.32 5.30 2004 ................. 380,000 6.68 5.38 -- -- -- 2005 ................. 15,000 7.00 5.53 -- -- -- 2009 ................. 65,000 7.32 5.31 -- -- -- -------- ---- ---- --------- ---- ---- Total ............. $890,000 6.44% 5.40%(1) $350,000 6.14% 5.30%(1) ======== ==== ==== ========= ==== ==== (1) Rates are based upon LIBOR.
Interest rate risk management instruments reduced interest expense as follows: BENEFIT OF INTEREST RATE RISK MANAGEMENT (Figure 17)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, --------------------------------- -------------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Interest income: Deposits ........................................... $2,534 $1,462 $6,842 $5,814 FHLB advances ...................................... -- 71 63 213 Reverse repurchase agreements ...................... -- 110 236 219 ------ ------ ------ ------ Total ............................................ $2,534 $1,643 $7,141 $6,246 ====== ====== ====== ======
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 securities 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 September 30, 1999, our one-year gap was a negative 10.89% of total assets. It is anticipated that this level will be reduced as a result of the St. Paul and Chittenden transactions together with various future asset/liability management activities. 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 third quarter of 1999 was 9.45%. 23 26 Management anticipates that we will have sufficient funds available to meet current and future loan commitments. At September 30, 1999, we had outstanding commitments to originate loans and leases of $967.3 million, unfunded lines of consumer credit totaling $1.9 billion (a significant portion of which normally remains undrawn) and unfunded lines of commercial (business loans) credit totaling $186.7 million. Outstanding letters of credit totaled $50.0 million as of September 30, 1999. Certificates of deposit scheduled to mature in one year or less at September 30, 1999 totaled $6.9 billion. Management believes that a significant portion of the amounts maturing will remain with us because they are retail deposits. At September 30, 1999, we had $2.1 billion of advances from the FHLB system and $127.4 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 Federal Reserve Board under the Bank Holding Company Act of 1956, and the regulations of the Federal Reserve Board, including various capital requirements. ALBANK Commercial (renamed Charter One Commercial in November 1999) 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 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 institution's 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, 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: 24 27
REGULATORY CAPITAL (Figure 18) AS OF SEPTEMBER 30, 1999 ----------------------------------------------------------------- TO BE WELL CAPITALIZED UNDER PROMPT FOR CAPITAL CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ---------------- ----------------- ----------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- (DOLLARS IN THOUSANDS) CHARTER ONE: Total capital to risk-weighted assets.... $ 1,968,964 11.02% $1,429,728 *8.00% $1,787,159 *10.00% Tier 1 capital to risk-weighted assets... 1,820,598 10.19 714,864 *4.00 1,072,296 *6.00 Tier 1 capital to average assets......... 1,820,598 7.26 1,002,426 *4.00 1,253,033 *5.00 ALBANK COMMERCIAL(1): Total capital to risk-weighted assets.... 40,820 42.24 7,730 *8.00 9,663 *10.00 Tier 1 capital to risk-weighted assets... 40,820 42.24 3,865 *4.00 5,798 *6.00 Tier 1 capital to average assets......... 40,820 18.68 8,739 *4.00 10,923 *5.00 CHARTER ONE BANK, F.S.B.: Total capital to risk-weighted assets.... 1,831,181 10.40 1,408,716 *8.00 1,760,894 *10.00 Tier 1 capital to risk-weighted assets... 1,503,930 8.54 N/A N/A 1,056,537 *6.00 Core capital to adjusted tangible assets. 1,514,465 5.95 1,017,633 *4.00 1,272,041 *5.00 Tangible capital to tangible assets...... 1,514,465 5.95 381,612 *1.50 N/A N/A *Greater Than or equal to AS OF DECEMBER 31, 1998 ------------------------------------------------------------------- TO BE WELL CAPITALIZED UNDER PROMPT FOR CAPITAL 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 *8.00% $1,668,841 *10.00% Tier 1 capital to risk-weighted assets... 1,659,578 9.94 667,537 *4.00 1,001,305 *6.00 Tier 1 capital to average assets......... 1,659,578 6.86 967,071 *4.00 1,208,838 *5.00 ALBANK COMMERCIAL(1) : Total capital to risk-weighted assets.... 40,720 14.55 22,392 *8.00 27,990 *10.00 Tier 1 capital to risk-weighted assets... 39,037 13.95 11,196 *4.00 16,794 *6.00 Tier 1 capital to average assets......... 39,037 5.92 26,375 *4.00 32,969 *5.00 CHARTER ONE BANK, F.S.B.: Total capital to risk-weighted assets.... 1,575,652 10.00 1,259,984 *8.00 1,574,980 *10.00 Tier 1 capital to risk-weighted assets... 1,246,542 7.91 N/A N/A 944,988 *6.00 Core capital to adjusted tangible assets. 1,246,542 5.19 720,077 *3.00 1,200,128 *5.00 Tangible capital to tangible assets...... 1,246,542 5.19 360,038 *1.50 N/A N/A *Greater than or equal to (1) In May 1999, ALBANK Commercial was merged into Charter One Bank, F.S.B. and New ALBANK Commercial was formed. New ALBANK Commercial was subsequently renamed ALBANK Commercial in August 1999. In November 1999, ALBANK Commercial was renamed Charter One Commercial.
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, Charter One Bank, F.S.B. 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 Charter One Bank, F.S.B.'s category. Charter One's and ALBANK Commercial's capital ratios exceed the minimum required to be well capitalized. Management does not know of any reasons why Charter One and ALBANK Commercial would not be considered well capitalized; however, as of September 30, 1999, Charter One and ALBANK Commercial had not received a classification from their respective regulators. Management believes that, as of September 30, 1999, Charter One, 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. 25 28
QUARTERLY STOCK PRICES AND DIVIDENDS (Figure 19) 3RD QTR 1999 2ND QTR 1999 1ST QTR 1999 4TH QTR 1998 3RD QTR 1998 -------------- -------------- -------------- -------------- ------------- MARKET PRICE OF COMMON STOCK (1): High................................. $26.91 $30.60 $30.53 $29.10 $32.54 Low.................................. 21.08 25.18 23.99 16.79 20.81 Close................................ 23.13 26.49 27.49 26.43 23.70 Dividends declared and paid.......... .16 .15 .13 .13 .13 (1) Restated to reflect the 5% stock dividend issued September 30, 1999.
YEAR 2000 STATE OF Y2K READINESS Preparing for the Year 2000 ("Y2K") is the result of the century date change issue by computer systems and related technology which are designed to recognize only the last two digits of a year and may recognize the date change from 12/31/99 to 01/01/00 as January 1, 1900 rather then January 1, 2000. We have substantially completed the implementation of our Y2K plan, which has included the remediation, testing and, if required, the implementation of upgrades or replacements of those systems and equipment which may be impacted by the century date change. Also included in this process are post-implementation tasks such as planning for the physical date change and continued monitoring of vendor and borrower relationships. 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. ASSESSMENT PHASE: The Y2K compliance status of computer systems and related technology has been completed. Also, the analysis of risks to major customers, vendors, suppliers of information and electronic data exchange partners has been 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. All changes have been implemented to a production environment. POST IMPLEMENTATION: Follow-up and the monitoring of problem resolution of Y2K solutions will be performed throughout 1999. This phase also includes the creation, testing and continual monitoring of our Y2K business resumption plan as well as plans for verifying systems over the date change weekend. As of June 30, 1999, we had successfully completed our Y2K remediation, testing and implementation for mission critical systems. We have also completed testing and implementation of our significant applications although there is no regulatory requirement to do so. 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 these risks to an acceptable level, were developed. At this time there appears to be no critical Y2K risk associated with these groups, however, we will continue to monitor these groups. As of September 30, 1999, 99.5% of all personal computer systems requiring replacement or upgrade have been fixed or replaced. For the remaining 0.5%, we have purchased and have in stock the required upgrades. As new acquisitions occur, equipment will be evaluated and upgraded or replaced as needed. 26 29 Efforts have also 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 had been successfully Y2K tested by us. Security monitoring systems have been certified as Y2K compliant and contingency plans have been developed should they fail. All mission critical equipment (other than PC systems) has been replaced. For equipment that could not be tested by us as Y2K compliant, contingency plans were developed and validated. COSTS TO ADDRESS Y2K ISSUES Our estimate of the out-of-pocket Y2K initiative has been and remains approximately $4 million. This includes replacement or upgrade of PC 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 computer programs unless approved by Executive Management. The Y2K risk of major customers and their impact on Charter One was determined to be immaterial, as we have a widely diversified portfolio of major customers. To avoid future impact, credit approval procedures for large lending relationships have been implemented which take into account the Y2K risks prior to the loan being approved. Also, large depositor balances are reviewed and monitored on a regular basis. In November 1999, the retail branch staff will begin formal monitoring of large cash withdrawal requests. 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 completed. We have successfully participated with the Mortgage Bankers Association (MBA) and Alltel as a part of a nationwide test for several software applications used for mortgage origination and servicing, as well as interfacing to third party investors such as Fannie Mae and Ginnie Mae. We have also participated in certification testing with our payroll provider, ADP. We have identified those business functions critical to the corporation as well as their minimum requirements for continuing to do business. For each function, a business resumption plan has been created by the Y2K project team members and reviewed by our Internal Audit Department. Testing of these plans was completed by September 30, 1999. No significant issues have been identified from these tests. A quarterly review of all business functions is completed by management to ensure that the core functions identified remain accurate and up to date. 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. We have received written assurances from these providers that they will be Y2K compliant and have tested many of the electronic interfaces with them; 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 are prepared to implement contingency plans which are continually being refined by various corporate departments of Charter One. These contingency plans provide departments with the ability to implement either alternative computer systems and equipment or manual procedures or outsourcing activities to provide alternative means for servicing customers and/or processing data. 27 30 We have also addressed and will continue to monitor global facilities issues such as electrical and heating needs through systematic reviews of all locations. Where warranted, we have developed contracts with alternate source vendors. We have also developed a formal liquidity contingency plan which has been approved by senior management. Cash monitoring will begin in the fourth quarter of 1999. To ensure Y2K preparedness of branches and corporate departments, training was completed for branch staff in August 1999 to inform them of Y2K issues and fourth quarter and rollover procedures. In November, our employees will undergo additional training on security, cash monitoring, and alternative methods of servicing customers. A review of specific rollover procedures will also be completed for those designated employees in November 1999. We have also developed plans for the physical date rollover that will allow all issues to be identified quickly and communicated to both regional and corporate command centers. From these sites, resources will be dispatched to resolve issues on a priority basis and issue resolutions will be tracked. CUSTOMER AND EMPLOYEE AWARENESS Our ongoing "Y2K Ready" campaign included a questions 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) and website information (available through charterone.com as well as albank.com, charteronemortgage.com and ffom.com). An employee newsletter was also distributed which informed all of our employees about the Y2K issues and our progress thus far. Another newsletter is expected to go out in November 1999. Our Marketing Department, in cooperation with our Retail Banking Department, also launched a "Y2K Ready" certificate of deposit product with a preferred rate in order to entice customers into asking about the Year 2000 and our Y2K project progress. Branch and customer contact staff were given samples of all the paper materials, and review meetings were held with their managers to answer any questions and reinforce the information provided to customers. In these meetings the branch and customer contact staff were instructed how to handle customer inquiries and where to direct customers for further information. Verification of the effectiveness of this training occurred through mystery shops of various locations. The results were reviewed by senior retail management and additional training will be scheduled in those areas where reinforcement is required. Logs of customer questions are being maintained by our call center and main reception areas so that customer material content may be updated to include answers to their most recent frequently asked questions. Additionally, our Regional Managers have been trained as Y2K public speakers and are participating at community group meetings. ST. PAUL BANCORP, INC. As a result of our merger with St. Paul, we performed a review of St. Paul's year 2000 project plan and documentation. Because of this Y2K due diligence, St. Paul was required to perform additional integrated tests of their mission critical mainframe systems. These additional tests were completed prior to June 30, 1999 and the results were reviewed by our Y2K project team. All documentation reviewed to date has been deemed adequate. St. Paul's business resumption plans for core business functions had been developed. We reviewed these plans in September 1999. No significant issues were found, however those issues identified were documented to management and are being tracked for resolution by the Y2K project team. The Y2K team is working with St. Paul's staff on developing their event horizon plans and validation procedures and expect to have this completed by November 15, 1999. Training and customer awareness plans for St. Paul have been modeled after our plans since June 1999. 28 31 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On September 30, 1999, Charter One held a Special Meeting of Shareholders to consider and vote upon a proposal to issue shares of Charter One common stock in connection with the merger of St. Paul into Charter Michigan Bancorp, Inc., pursuant to the Agreement and Plan of Merger, dated as of May 17, 1999, by and between Charter One, Charter Michigan Bancorp, Inc., and St. Paul. The results of the shareholder voting are set forth below: FOR AGAINST ABSTAIN BROKER NON-VOTES --- ------- ------- ---------------- 132,377,553 1,080,696 373,688 0 ITEM 5. OTHER INFORMATION DIVIDEND On October 20, 1999, Charter One declared a regular quarterly cash dividend of 16 cents per common share. The dividend is payable November 22, 1999 to shareholders of record as of November 8, 1999. Quarterly information for the periods from October 1, 1998 through September 30, 1999, as restated for the pooling of interests with St. Paul, is being provided on a supplemental basis. See Note 2 to the Consolidated Financial Statements for the combined operations of Charter One and St. Paul for the month ended October 31, 1999. 29 32
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME RESTATED FOR POOLING OF INTERESTS WITH ST. PAUL BANCORP, INC. (unaudited) THREE MONTHS ENDED ---------------------------------------------------------------- 9/30/99 6/30/99 3/31/99 12/31/98 ------------- ------------- ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INTEREST INCOME: Loans and leases ........................................$ 420,295 415,076 421,789 412,114 Mortgage-backed securities: Available for sale .................................... 58,909 52,667 40,326 45,923 Held to maturity ...................................... 35,629 39,758 46,072 53,448 Investment securities: Trading ............................................... 147 58 Available for sale .................................... 14,177 6,001 6,923 8,658 Held to maturity ...................................... 510 560 812 919 Other interest-earning assets ........................... 9,171 8,706 9,471 11,052 ------------- ------------- ------------- ------------- Total interest income ............................. 538,838 522,826 525,393 532,114 ------------- ------------- ------------- ------------- INTEREST EXPENSE: Deposits ................................................ 178,278 178,083 181,726 190,072 FHLB advances ........................................... 114,539 102,156 94,840 93,124 Other borrowings ........................................ 12,912 9,414 13,278 22,964 ------------- ------------- ------------- ------------- Total interest expense ............................ 305,729 289,653 289,844 306,160 ------------- ------------- ------------- ------------- Net interest income ............................... 233,109 233,173 235,549 225,954 Provision for loan and lease losses ..................... 7,366 7,843 6,770 8,142 ------------- ------------- ------------- ------------- Net interest income after provision for loan and lease losses .................................... 225,743 225,330 228,779 217,812 ------------- ------------- ------------- ------------- OTHER INCOME: Retail banking .......................................... 52,960 54,608 47,166 47,542 Mortgage banking ........................................ 11,810 11,482 11,369 15,854 Leasing operations ...................................... 4,093 1,657 2,048 1,075 Net gains (losses) ...................................... (1,856) 6,988 6,817 9,719 Other ................................................... 8,768 8,273 3,403 3,061 ------------- ------------- ------------- ------------- Total other income ................................ 75,775 83,008 70,803 77,251 ------------- ------------- ------------- ------------- ADMINISTRATIVE EXPENSES: Compensation and employee benefits ...................... 67,814 67,867 68,514 69,526 Net occupancy and equipment ............................. 23,567 23,293 23,720 24,142 Federal deposit insurance premiums ...................... 1,998 2,048 2,101 1,896 Merger expenses ......................................... 1,921 3,519 2,200 55,657 Amortization of goodwill ................................ 3,326 3,326 3,389 3,376 Other administrative expenses ........................... 49,034 48,933 46,813 51,023 ------------- ------------- ------------- ------------- Total administrative expenses ...................... 147,660 148,986 146,737 205,620 ------------- ------------- ------------- ------------- Income before income taxes and extraordinary item ....... 153,858 159,352 152,845 89,443 Income taxes ............................................ 49,356 50,976 49,899 32,883 ------------- ------------- ------------- ------------- Income before extraordinary item ........................ 104,502 108,376 102,946 56,560 Extraordinary item, net of tax benefit .................. -- -- -- 61,658 ------------- ------------- ------------- ------------- Net income (loss) ..................................$ 104,502 108,376 102,946 (5,098) ============= ============= ============= ============= Basic earnings per share: Income before extraordinary item ........................ .49 .51 .48 .27 Extraordinary item ...................................... -- -- -- (.29) ------------- ------------- ------------- ------------- Net income (loss) ..................................$ .49 .51 .48 (.02) ============= ============= ============= ============= Diluted earnings per share: Income before extraordinary item ........................ .48 .49 .47 .26 Extraordinary item ...................................... -- -- -- (.28) ------------- ------------- ------------- ------------- Net income (loss)...................................$ .48 .49 .47 (.02) ============= ============= ============= ============= Average common shares outstanding ......................... 212,523,836 214,209,456 214,167,501 213,848,671 ============= ============= ============= ============= Average common and common equivalent shares outstanding - assuming dilution ......................... 217,097,361 219,525,186 219,672,612 219,331,467 ============= ============= ============= ============= Cash dividends declared per share..........................$ .16 .15 .13 .13 ============= ============= ============= =============
30 33
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION RESTATED FOR POOLING OF INTERESTS WITH ST. PAUL BANCORP, INC. (unaudited) 9/30/99 6/30/99 3/31/99 12/31/98 ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS Cash and deposits with banks ...................................$ 390,484 369,844 389,488 573,507 Federal funds sold and other ................................... 192,032 6,929 117,695 148,753 ------------ ------------ ------------ ------------ Total cash and cash equivalents ........................... 582,516 376,773 507,183 722,260 Investments securities: Trading, at fair value ....................................... 18,748 18,983 Available for sale, at fair value ............................ 842,950 646,063 444,552 576,857 Held to maturity ............................................. 33,634 31,875 51,285 52,215 Mortgage-backed securities: Available for sale, at fair value ............................ 3,817,278 3,619,059 3,321,995 2,636,755 Held to maturity ............................................. 2,016,275 2,217,616 2,527,743 2,933,531 Loans and leases, net .......................................... 22,293,951 22,006,979 21,736,799 21,977,655 Loans held for sale ............................................ 91,213 117,981 101,114 240,461 Federal Home Loan Bank stock ................................... 477,471 437,818 399,797 386,298 Premises and equipment ......................................... 309,454 307,879 300,879 297,867 Accrued interest receivable .................................... 163,114 152,161 150,413 152,626 Real estate and other collateral owned ......................... 32,459 25,783 30,026 32,588 Loan servicing assets .......................................... 107,676 102,769 98,874 93,173 Goodwill ....................................................... 149,220 152,599 155,894 159,339 Other assets ................................................... 795,982 754,133 685,424 217,288 ------------ ------------ ------------ ------------ Total assets ..............................................$ 31,731,941 30,968,471 30,511,978 30,478,913 ============ ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Checking accounts ............................................$ 2,796,706 2,972,309 2,802,066 2,867,636 Money market accounts ........................................ 3,217,921 3,202,227 2,960,556 2,789,509 Savings accounts ............................................. 2,206,390 2,313,355 2,527,952 2,610,510 Certificates of deposit ...................................... 10,415,172 10,323,387 10,609,444 10,756,045 ------------ ------------ ------------ ------------ Total deposits .......................................... 18,636,189 18,811,278 18,900,018 19,023,700 Federal Home Loan Bank advances ................................ 9,369,469 8,627,955 7,861,579 7,512,203 Reverse repurchase agreements .................................. 127,435 128,541 492,815 685,024 Other borrowings ............................................... 523,541 436,978 244,860 324,930 Advance payments by borrowers for taxes and insurance .......... 74,670 74,141 65,089 73,573 Accrued interest payable ....................................... 78,466 59,736 70,950 71,674 Accrued expenses and other liabilities ......................... 453,626 371,892 427,755 402,773 ------------ ------------ ------------ ------------ Total liabilities ....................................... 29,263,396 28,510,521 28,063,066 28,093,877 ------------ ------------ ------------ ------------ Shareholders' equity: Preferred stock - $.01 par value per share; 20,000,000 shares authorized and unissued Common stock - $.01 par value per share; 360,000,000 shares authorized; 213,543,983, 207,694,695, 207,513,833 and 206,668,865 shares issued .................. 2,135 2,077 2,075 2,067 Additional paid-in capital ................................... 1,423,443 1,296,817 1,295,677 1,289,164 Retained earnings ............................................ 1,089,729 1,214,116 1,140,331 1,068,592 Less 1,449,836, 2,721,878, 1,706,078 and 860,478 shares of common stock held in treasury at cost ........................................... (30,963) (65,043) (35,144) (15,325) Borrowings of employee investment and stock ownership plan ............................................. (3,632) (4,223) (4,758) (5,288) Accumulated other comprehensive income ....................... (12,167) 14,206 50,731 45,826 ------------ ------------ ------------ ------------ Total shareholders' equity .............................. 2,468,545 2,457,950 2,448,912 2,385,036 ------------ ------------ ------------ ------------ Total liabilities and shareholders' equity ..............$ 31,731,941 30,968,471 30,511,978 30,478,913 ============ ============ ============ ============
31 34
CHARTER ONE FINANCIAL, INC. SELECTED STATISTICAL DATA RESTATED FOR POOLING OF INTERESTS WITH ST PAUL BANCORP, INC. (unaudited) THREE MONTHS ENDED --------------------------------------------------------- 9/30/99 6/30/99 3/31/99 12/31/98 ------- ------- ------- -------- ANNUALIZED RETURNS (EXCLUDING MERGER EXPENSES AND OTHER SPECIAL CHARGES): Return on average assets............................... 1.34% 1.44% 1.38% 1.22% Return on average equity............................... 17.03 17.69 17.22 15.34 Average equity to average assets....................... 7.89 8.14 7.99 7.95 ANNUALIZED OPERATING RATIOS (EXCLUDING MERGER EXPENSES AND OTHER SPECIAL CHARGES): Net interest income to administrative expenses......... 1.60x 1.60x 1.63x 1.51x Administrative expenses to average assets.............. 1.85% 1.89% 1.91% 1.97% Efficiency ratio....................................... 45.83 45.97 47.12 49.95
32 35
CHARTER ONE FINANCIAL, INC. AVERAGE BALANCE SHEET, YIELDS AND COSTS RESTATED FOR POOLING OF INTERESTS WITH ST. PAUL BANCORP, INC. (unaudited) THREE MONTHS ENDED ------------------------------------------------------------------ 9/30/99 6/30/99 3/31/99 12/31/98 ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS) AVERAGE BALANCE SHEET DATA Interest-earning assets: Loans and leases ........................................$ 22,656,483 22,398,262 22,618,026 21,809,415 Mortgage-backed securities .............................. 5,575,147 5,487,326 5,098,114 5,784,557 Investment securities ................................... 935,993 469,194 542,034 704,499 Other interest-earning assets ........................... 533,142 537,051 638,578 710,989 ------------ ------------ ------------ ------------ Total interest-earning assets ......................... 29,700,765 28,891,833 28,896,752 29,009,460 Allowance for loan and lease losses ..................... (181,580) (181,778) (183,193) (186,227) Noninterest-earning assets .............................. 1,955,911 2,016,638 1,614,118 1,576,179 ------------ ------------ ------------ ------------ Total assets ........................................$ 31,475,096 30,726,693 30,327,677 30,399,412 ============ ============ ============ ============ Interest-bearing liabilities: Checking ................................................$ 2,950,726 2,974,490 2,879,090 2,682,934 Savings ................................................. 2,252,240 2,446,915 2,565,536 2,598,593 Money market ............................................ 3,278,637 3,082,974 2,729,363 2,640,865 Certificates of deposit ................................. 10,268,028 10,439,968 10,707,284 10,744,146 ------------ ------------ ------------ ------------ Total deposits ........................................ 18,749,631 18,944,347 18,881,273 18,666,538 FHLB advances ........................................... 8,887,304 8,166,811 7,652,085 7,272,302 Other borrowings ........................................ 826,138 554,400 851,530 1,437,223 ------------ ------------ ------------ ------------ Total interest-bearing liabilities .................... 28,463,073 27,665,558 27,384,888 27,376,063 Noninterest-bearing liabilities ........................... 528,320 559,476 518,228 604,927 ------------ ------------ ------------ ------------ Total liabilities ................................... 28,991,393 28,225,034 27,903,116 27,980,990 Corporation-obligated mandatorily redeemable capital securities of subsidiary trust .......................... -- -- -- 434 Shareholders' equity ...................................... 2,483,703 2,501,659 2,424,561 2,417,988 ------------ ------------ ------------ ------------ Total liabilities and shareholders' equity ..........$ 31,475,096 30,726,693 30,327,677 30,399,412 ============ ============ ============ ============ YIELDS AND COSTS DURING PERIOD Weighted average yield: Loans and leases ...................................... 7.41% 7.42% 7.48% 7.55% Mortgage-backed securities ............................ 6.78 6.74 6.78 6.87 Investment securities ................................. 6.34 5.64 5.71 5.44 Other interest-earning assets ......................... 6.73 6.41 5.93 6.08 Total interest-earning assets ....................... 7.24 7.24 7.29 7.33 Weighted average cost: Checking .............................................. 1.07 .97 .72 .69 Savings ............................................... 1.91 2.00 2.06 2.25 Money market .......................................... 3.20 3.25 3.42 3.24 Certificates of deposit ............................... 5.14 5.14 5.32 5.51 Total deposits ...................................... 3.77 3.77 3.90 4.04 FHLB advances ......................................... 5.11 5.01 5.02 5.08 Other borrowings ...................................... 6.17 6.76 6.24 6.29 Total interest-bearing liabilities ................ 4.26 4.20 4.29 4.43 Interest rate spread .................................... 2.98 3.04 3.00 2.90 Net yield on interest-earning assets .................... 3.14 3.23 3.26 3.12
33 36 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 September 22, 1999, Charter One filed a report on Form 8-K containing the press release announcing that (i) the merger of Charter One and St. Paul had received all regulatory approvals and was expected to close on or about October 1, 1999, and (ii) Charter One rescinded its stock buyback program effective as of September 22, 1999. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHARTER ONE FINANCIAL, INC. Date: November 15, 1999 /s/ Robert J. Vana --------------------------------------- Robert J. Vana Chief Corporate Counsel and Secretary Date: November 15, 1999 /s/ Richard W. Neu --------------------------------------- Richard W. Neu Executive Vice President and Chief Financial Officer 34 EX-11 2 EXHIBIT 11 1
EXHIBIT 11 CHARTER ONE FINANCIAL, INC. COMPUTATION OF PER SHARE EARNINGS THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------------- ------------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC EARNINGS PER SHARE(1): Weighted average number of common shares outstanding ............................. 172,746,331 173,535,805 173,788,665 173,888,635 ============ ============ ============ ============ Net income ....................................... $ 94,017 $ 80,230 $ 274,653 $ 233,642 ============ ============ ============ ============ Basic earnings per share ......................... .54 .46 1.58 1.34 ============ ============ ============ ============ DILUTED EARNINGS PER SHARE(1): Weighted average number of common shares outstanding ............................. 172,746,331 173,535,805 173,788,665 173,888,635 Add common stock equivalents for shares issuable under Stock Option Plan ............... 3,572,701 4,625,498 4,073,216 5,843,598 ------------ ------------ ------------ ------------ Weighted average number of common and common equivalent shares outstanding ........... 176,319,032 178,161,303 177,861,881 179,732,233 ============ ============ ============ ============ Net income ....................................... $ 94,017 $ 80,230 $ 274,653 $ 233,642 ============ ============ ============ ============ Diluted earnings per share ....................... .53 .45 1.54 1.30 ============ ============ ============ ============ (1) Restated to reflect the 5% stock dividend issued September 30, 1999.
35 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 236,687 5,439 451 0 3,554,435 1,868,986 1,884,818 18,166,310 142,247 25,501,198 15,059,836 2,242,435 382,519 5,824,183 0 0 1,723 1,961,325 25,501,198 1,021,381 253,007 20,544 1,294,932 436,838 718,958 575,974 21,979 16,185 333,285 405,857 0 0 0 274,653 1.58 1.54 3.22 111,765 8,084 690 41,726 144,566 30,338 6,040 142,247 142,247 0 0
EX-27.1 4 EXHIBIT 27.1
9 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 272,702 5,024 168,235 0 2,861,479 3,115,228 3,180,866 16,889,217 142,891 24,339,045 14,722,524 1,094,276 485,148 6,108,242 0 0 1,715 1,922,140 24,339,045 980,122 314,127 31,582 1,325,831 460,904 783,159 542,672 21,323 13,080 326,443 348,218 233,642 0 0 233,642 1.41 1.36 3.10 76,566 27,959 6,258 35,500 142,985 26,860 5,443 142,891 142,891 0 0
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