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| CF > SEC Filings for CF > Form 10-Q on 10-Aug-2004 | All Recent SEC Filings |
10-Aug-2004
Quarterly Report
HOLDING COMPANY BUSINESS
The following financial review presents an analysis of the asset and liability structure of Charter One Financial, Inc. and a discussion of the results of operations for each of the periods presented.
General
Headquartered in Cleveland, Ohio, Charter One Financial, Inc., hereafter referred to as "Charter One" or the "Company," is a financial holding company. Charter One is a Delaware corporation and owns all of the outstanding capital stock of Charter One Bank, N.A., which we sometimes refer to in this document as the "Bank." The Bank's primary business is providing consumer banking services to certain major markets in Ohio, Michigan, Illinois, New York, Vermont and in some markets of Massachusetts, Indiana, Connecticut and Pennsylvania. As of June 30, 2004, the Bank and its subsidiaries were doing business through 478 traditional banking centers, 174 in-store banking centers, 29 loan production offices and 1,017 ATMs.
Acquisition
On May 4, 2004, Citizens Financial Group, Inc. ("Citizens"), a subsidiary of The Royal Bank of Scotland Group plc, announced it reached an agreement to acquire Charter One in a cash transaction. The cash purchase price is $44.50 per share or approximately $10.5 billion. The transaction is expected to close by the fourth quarter of 2004, subject to regulatory approval and approval by Charter One shareholders. A special shareholder meeting to vote on the transaction is scheduled for August 23, 2004. As part of this transaction, Charter One's national bank charter will remain.
Citizens is a $78 billion commercial bank holding company. It is headquartered in Providence, Rhode Island, and has more than 880 offices, approximately 1,650 ATMs and more than 15,500 employees in seven states. It operates as Citizens Bank in Connecticut, Delaware, Massachusetts, New Hampshire, New Jersey, Pennsylvania and Rhode Island. Citizens is one of the 20 largest commercial bank holding companies in the United States. Citizens is owned by The Royal Bank of Scotland Group plc.
Discussion of Forward-Looking Statements
This document, including information incorporated by reference, contains, and future filings by Charter One on Form 10-K, Form 10-Q and Form 8-K and future oral and written statements and press releases by Charter One and its management may contain, forward-looking statements about Charter One which we believe are within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements with respect to anticipated future operating and financial performance, including revenue creation, lending origination, operating efficiencies, loan sales, charge-offs and loan loss provisions, deposits and refinancing of liabilities, growth opportunities, interest rates, acquisition and divestiture opportunities, and synergies, efficiencies, cost savings and funding advantages expected to be realized from prior acquisitions. These forward-looking statements are based on currently available competitive, financial and economic data and management's views and assumptions regarding future events. These forward-looking statements are inherently uncertain, and investors must recognize that actual results may differ from those expressed or implied in the forward-looking statements. Accordingly, Charter One cautions readers not to place undue reliance on any forward-looking statements.
Many of these forward-looking statements appear throughout this document. Words such as may, could, should, would, believe, anticipate, estimate, expect, intend, plan and similar expressions are intended to identify these forward-looking statements. The important factors discussed below, as well as other factors discussed elsewhere in this document and factors identified in our filings with the Securities and Exchange Commission and those presented elsewhere by our management from time to time, could cause actual results to differ materially from those indicated by the forward-looking statements made in this document. Among the factors that could cause our actual results to differ from these forward-looking statements are:
• the strength of the United States economy in general and the strength of the local economies in which we conduct our operations; general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in the credit quality of our loans and leases and other assets;
• the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;
• financial markets, monetary and interest rate fluctuations, particularly the relative relationship of short-term interest rates to long-term interest rates;
• the timely development of and acceptance of new products and services of Charter One and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services;
• the impact of changes in financial services laws and regulations (including laws and regulations concerning taxes, accounting standards, banking, securities and insurance); legislative or regulatory changes may adversely affect the business in which we are engaged;
• the impact of technological changes;
• our ability to successfully integrate acquisitions into our existing operations, and the availability of new acquisitions, joint ventures and alliance opportunities that build shareholder value;
• changes in consumer spending and saving habits; and
• our success at managing the risks involved in the foregoing.
Charter One disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise.
RESULTS OF OPERATIONS
Performance Overview
Figure 1 sets forth financial results and annualized performance ratios for the three and six months ended June 30, 2004 and 2003, respectively. On January 27, 2004, we prepaid $2.3 billion in fixed rate Federal Home Loan Bank ("FHLB") advances and incurred a prepayment penalty of $164.5 million before tax ($113.1 million after tax). Because of the unusual nature of the debt prepayment penalty, we believe it is important for comparability purposes to present selected financial results and ratios for the six months ended June 30, 2004 excluding the debt prepayment penalty.
Selected Financial Results and Ratios (Figure 1)
Three Months Ended Six Months Ended
------------------------------ ----------------------------------------------------------------
6/30/04 6/30/03 6/30/04 6/30/03
------------- ------------- ----------------------------------------------- -------------
Prepayment
Actual Penalty Adjusted
------------- ------------- -------------
(Dollars in thousands, except per share data)
Results and ratios:
Net income $ 166,346 $ 166,037 $ 216,602 $ 113,068 $ 329,670 $ 313,528
Diluted earnings per share .72 .72 .94 .49 1.43 1.36
Return on average assets 1.56 % 1.50 % 1.02 % 1.06 % 1.54 % 1.44 %
Return on average equity 20.50 19.86 13.34 13.91 20.30 19.17
Return on average tangible
equity(1) 23.82 22.74 15.51 16.14 23.59 22.02
Average equity to average assets 7.62 7.55 7.61 - 7.61 7.51
Net interest income to
administrative expenses 1.36 x 1.52 x 1.38 x - 1.38 x 1.57 x
Administrative expenses to
average assets 2.12 % 1.76 % 2.08 % - 2.08 % 1.74 %
Efficiency ratio(2) 47.56 41.14 56.57 24.41 46.77 40.46
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(2) Computed as the ratio of total administrative expenses to net interest income and total other income.
Net Interest Income
Net interest income is the difference between the interest and dividend income earned on our loans and investments and the interest expense on our deposits and borrowings. Net interest income is our principal source of 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, interest rate fluctuations and asset quality, as well as general economic conditions and regulatory policies.
The following table shows average balances, interest earned or paid, and average interest rates for the periods indicated. Nonaccrual loans are included in the average balance of loans. The mark-to-market adjustments on securities available for sale are included in noninterest-earning assets. Noninterest-bearing demand deposit accounts are included in noninterest-bearing liabilities. The cost of liabilities includes the annualized effect of interest rate risk management instruments.
Average Balances, Interest Rates and Yields/Costs (Figure 2)
Three Months Ended
------------------------------------------------------------------------------------------------------
6/30/04 6/30/03
------------------------------------------------- -------------------------------------------------
Avg. Avg.
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------------------- ------------ ---------- ------------------- ------------ ----------
(Dollars in thousands)
Interest-earning assets:
Loans and leases $ 31,454,312 $ 387,217 4.93 % $ 26,101,819 $ 367,602 5.64 %
Mortgage-backed securities:
Available for sale 7,422,621 80,146 4.32 14,010,057 154,490 4.41
Held to maturity 196,265 2,823 5.75 395,598 6,858 6.94
Investment securities:
Available for sale 224,495 2,992 5.33 256,677 3,297 5.14
Held to maturity 3,595 47 5.28 3,957 56 5.74
Other interest-earning assets 751,409 7,586 3.99 839,597 7,856 3.70
---------- ------- ---------- -------
Total interest-earning assets 40,052,697 480,811 4.80 41,607,705 540,159 5.19
------- -------
Allowance for loan and lease
losses (390,693 ) (360,448 )
Noninterest-earning assets 2,963,313 3,044,576
---------- ----------
Total assets $ 42,625,317 $ 44,291,833
---------- ----------
Interest-bearing liabilities:
Deposits:
Checking accounts $ 4,874,822 9,730 .80 $ 6,951,974 23,412 1.35
Money market and savings
accounts 8,546,445 20,233 .95 8,332,278 31,204 1.50
Certificates of deposit 9,976,862 60,696 2.45 9,733,110 72,118 2.97
---------- ------- ---------- -------
Total deposits 23,398,129 90,659 1.56 25,017,362 126,734 2.03
---------- ------- ---------- -------
Federal Home Loan Bank advances 10,166,098 71,036 2.80 11,397,410 104,025 3.66
Other borrowings 968,900 10,917 4.50 874,062 13,969 6.38
---------- ------- ---------- -------
Total borrowings 11,134,998 81,953 2.95 12,271,472 117,994 3.85
---------- ------- ---------- -------
Total interest-bearing
liabilities 34,533,127 172,612 2.01 37,288,834 244,728 2.63
---------- ------- ---------- -------
Noninterest-bearing liabilities:
Demand deposit accounts 3,524,462 2,308,993
Other noninterest-bearing
liabilities 1,321,750 1,349,173
---------- ----------
Total noninterest-bearing
liabilities 4,846,212 3,658,166
---------- ----------
Total liabilities 39,379,339 40,947,000
---------- ----------
Shareholders' equity 3,245,978 3,344,833
---------- ----------
Total liabilities and
shareholders' equity $ 42,625,317 $ 44,291,833
---------- ----------
Net interest income $ 308,199 $ 295,431
------- -------
Interest rate spread 2.79 2.56
Net yield on average interest-
earning assets 3.08 2.84
Average interest-earning assets
to average interest-bearing
liabilities 115.98 % 111.58 %
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Six Months Ended
---------------------------------------------------------------------------------------------------------
6/30/04 6/30/03
------------------------------------------------- -----------------------------------------------------
Avg. Avg.
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------------------- ------------- ----------- ------------------- ----------------- -----------
(Dollars in thousands)
Interest-earning assets:
Loans and leases $ 30,336,896 $ 754,561 4.98 % $ 25,977,336 $ 745,326 5.75 %
Mortgage-backed securities:
Available for sale 8,477,500 187,813 4.43 13,337,098 303,801 4.56
Held to maturity 212,886 6,194 5.82 438,005 15,127 6.91
Investment securities:
Available for sale 239,964 6,596 5.50 231,906 6,340 5.47
Held to maturity 3,598 95 5.30 4,008 110 5.51
Other interest-earning assets 787,304 15,379 3.86 801,391 15,241 3.78
---------- ------- ---------- ---------
Total interest-earning assets 40,058,148 970,638 4.85 40,789,744 1,085,945 5.33
------- ---------
Allowance for loan and lease
losses (389,199 ) (343,860 )
Noninterest-earning assets 3,008,141 3,097,175
---------- ----------
Total assets $ 42,677,090 $ 43,543,059
---------- ----------
Interest-bearing liabilities:
Deposits:
Checking accounts $ 5,206,702 20,166 .78 $ 7,245,197 54,030 1.50
Money market and savings
accounts 8,549,931 39,987 .94 8,131,890 61,530 1.53
Certificates of deposit 10,074,494 126,392 2.52 9,648,034 144,917 3.03
---------- ------- ---------- ---------
Total deposits 23,831,127 186,545 1.57 25,025,121 260,477 2.10
---------- ------- ---------- ---------
Federal Home Loan Bank advances 10,177,800 147,283 2.90 10,906,526 203,824 3.76
Other borrowings 1,035,442 24,057 4.64 870,299 27,172 6.24
---------- ------- ---------- ---------
Total borrowings 11,213,242 171,340 3.06 11,776,825 230,996 3.95
---------- ------- ---------- ---------
Total interest-bearing
liabilities 35,044,369 357,885 2.05 36,801,946 491,473 2.69
---------- ------- ---------- ---------
Noninterest-bearing liabilities:
Demand deposit accounts 3,064,520 2,163,822
Other noninterest-bearing
liabilities 1,319,588 1,306,110
---------- ----------
Total noninterest-bearing
liabilities 4,384,108 3,469,932
---------- ----------
Total liabilities 39,428,477 40,271,878
Shareholders' equity 3,248,613 3,271,181
---------- ----------
Total liabilities and
shareholders' equity $ 42,677,090 $ 43,543,059
---------- ----------
Net interest income $ 612,753 $ 594,472
------- ---------
Interest rate spread 2.80 2.64
Net yield on average interest-
earning assets 3.06 2.91
Average interest-earning assets
to average interest-bearing
liabilities 114.31 % 110.83 %
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Figure 3 shows the approximate relative contribution of changes in average interest rates and volume to changes in net interest income for the periods indicated. Changes not solely attributable to volume or rate have been allocated in proportion to the changes due to volume and rate. Amortization of net deferred loan costs and automobile dealer reserves included as a reduction in interest income was $31.4 and $28.9 million for the three months ended June 30, 2004 and 2003, respectively, and $63.7 and $56.4 million for the six months ended June 30, 2004 and 2003, respectively.
Rate/Volume Analysis (Figure 3)
Three Months Ended June 30, Six Months Ended June 30,
2004 v. 2003 2004 v. 2003
-------------------------------------------------- --------------------------------------------------------
Increase (decrease) due to Increase (decrease) due to
-------------------------------------------------- --------------------------------------------------------
Rate Volume Total Rate Volume Total
-------------- -------------- -------------- ---------------- ---------------- ----------------
(Dollars in thousands)
Interest income:
Loans and leases $ (50,976 ) $ 70,591 $ 19,615 $ (108,444 ) $ 117,679 $ 9,235
Mortgage-backed
securities:
Available for sale (3,152 ) (71,192 ) (74,344 ) (8,115 ) (107,873 ) (115,988 )
Held to maturity (1,019 ) (3,016 ) (4,035 ) (2,096 ) (6,837 ) (8,933 )
Investment securities:
Available for sale 120 (425 ) (305 ) 35 221 256
Held to maturity (4 ) (5 ) (9 ) (4 ) (11 ) (15 )
Other interest-earning
assets 592 (862 ) (270 ) 409 (271 ) 138
------- ------- ------- -------- -------- --------
Total (54,439 ) (4,909 ) (59,348 ) (118,215 ) 2,908 (115,307 )
------- ------- ------- -------- -------- --------
Interest expense:
Checking accounts (7,893 ) (5,789 ) (13,682 ) (21,360 ) (12,504 ) (33,864 )
Money market and savings
accounts (11,934 ) 962 (10,972 ) (24,964 ) 3,421 (21,543 )
Certificates of deposit (13,187 ) 1,766 (11,421 ) (24,707 ) 6,182 (18,525 )
Federal Home Loan Bank
advances (18,892 ) (14,097 ) (32,989 ) (33,823 ) (22,718 ) (56,541 )
Other borrowings (1,587 ) (1,465 ) (3,052 ) (1,265 ) (1,850 ) (3,115 )
------- ------- ------- -------- -------- --------
Total (53,493 ) (18,623 ) (72,116 ) (106,119 ) (27,469 ) (133,588 )
------- ------- ------- -------- -------- --------
Change in net interest
. . .
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