##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 OR [
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE
SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-15495 CHARTER ONE FINANCIAL, INC. 
  Delaware
    
    34-1567092(State or other jurisdiction of incorporation
or organization)
    
    (I.R.S. Employer
Identification No.)
 1215 Superior Avenue, Cleveland, Ohio
    
    44114(Address of principal executive offices)
    
    (Zip Code)
 (216) 566-5300   NOT APPLICABLE   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  [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes  [X] No [  ] The number of shares outstanding of the registrants sole class of common stock
as of July 31, 2004 was 225,814,336.




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TABLE OF CONTENTS  
 ItemNumber
    
    PagePART I - FINANCIAL STATEMENTS1. Financial StatementsConsolidated Statements of Financial Condition 
June 30, 2004 and December 31, 2003
    
    
    1Consolidated Statements of Income  Three and six months ended June 30, 2004 and 2003
    
    
    2Consolidated
Statements of Cash Flows 
Six months ended June 30, 2004 and 2003
    
    
    3Notes to Consolidated Financial Statements
    
    
    42. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    63. Quantitative and Qualitative Disclosure About Market Risk
    
    
    204. Controls and Procedures
    
    
    20PART II  OTHER INFORMATION2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    214. Submission of Matters to a Vote of Security Holders
    
    
    215. Other Information
    
    
    226. Exhibits and Reports on Form 8-K
    
    
    22Signatures
    
    
    23Index to Exhibits
    
    
    24EX-11 COMPUTATION OF PER SHARE EARNINGSEX-31.1 CEO CERTIFICATIONEX-31.2 CFO CERTIFICATIONEX-32 906 CERTIFICATION




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PART I  FINANCIAL INFORMATION 
 ITEM 1. Financial Statements CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
  6/30//04
    
    12/31/03(Dollars in thousands,except per share data)ASSETSCash accounts
    
    $
    580,706
    
    
    $
    518,976Interest-bearing deposits with banks
    
    
    10,507
    
    
    
    8,673Federal funds sold and other
    
    
    520
    
    
    
    517Total cash and cash equivalents
    
    
    591,733
    
    
    
    528,166Investment securities:Available for sale (amortized cost of $190,924 and $260,501)
    
    
    190,634
    
    
    
    273,260Held to maturity (fair value of $3,598 and $3,741)
    
    
    3,432
    
    
    
    3,505Mortgage-backed securities:Available for sale (amortized cost of $5,903,361 and $10,159,102)
    
    
    5,796,777
    
    
    
    10,193,798Held to maturity (fair value of $192,437 and $262,155)
    
    
    185,627
    
    
    
    251,449Loans and leases, net
    
    
    32,321,116
    
    
    
    28,130,017Loans held for sale
    
    
    284,400
    
    
    
    120,431Bank owned life insurance
    
    
    842,075
    
    
    
    828,678Federal Home Loan Bank and Federal Reserve Bank stock
    
    
    712,925
    
    
    
    705,244Premises and equipment, net
    
    
    433,478
    
    
    
    404,086Accrued interest receivable
    
    
    133,279
    
    
    
    140,857Real estate and other collateral owned
    
    
    27,274
    
    
    
    36,643Mortgage servicing rights, net
    
    
    188,177
    
    
    
    177,244Goodwill
    
    
    415,696
    
    
    
    415,696Other assets
    
    
    378,050
    
    
    
    418,992Total assets
    
    $
    42,504,673
    
    
    $
    42,628,066LIABILITIES AND SHAREHOLDERS EQUITYDeposits
    
    $
    27,228,560
    
    
    $
    27,203,319Federal Home Loan Bank advances
    
    
    9,970,594
    
    
    
    9,847,293Federal funds purchased and repurchase agreements
    
    
    100,756
    
    
    
    269,319Other borrowings
    
    
    596,260
    
    
    
    697,753Advance payments by borrowers for taxes and insurance
    
    
    77,545
    
    
    
    61,054Accrued interest payable
    
    
    20,218
    
    
    
    35,944Accrued expenses and other liabilities
    
    
    1,202,749
    
    
    
    1,237,515Total liabilities
    
    
    39,196,682
    
    
    
    39,352,197Commitments and contingencies
    
    
    
    
    
    
    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; 229,924,425 and 229,940,729 shares issued
    
    
    2,299
    
    
    
    2,299Additional paid-in capital
    
    
    2,299,786
    
    
    
    2,280,335Retained earnings
    
    
    1,231,486
    
    
    
    1,178,803Less 5,321,530 and 6,767,285 shares of common stock held in treasury at cost
    
    
    (171,409
    )
    
    
    (209,653
    )Accumulated other comprehensive income
    
    
    (54,171
    )
    
    
    24,085Total shareholders equity
    
    
    3,307,991
    
    
    
    3,275,869Total liabilities and shareholders equity
    
    $
    42,504,673
    
    
    $
    42,628,066See Notes to Consolidated Financial Statements.
 1




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##### Table of Contents



CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF INCOME
  Three Months Ended
    
    Six Months Ended6/30/04
    
    6/30/03
    
    6/30/04
    
    6/30/03(Dollars in thousands, except per share data)Interest income:Loans and leases
    
    $
    387,217
    
    
    $
    367,602
    
    
    $
    754,561
    
    
    $
    745,326Mortgage-backed securities:Available for sale
    
    
    80,146
    
    
    
    154,490
    
    
    
    187,813
    
    
    
    303,801Held to maturity
    
    
    2,823
    
    
    
    6,858
    
    
    
    6,194
    
    
    
    15,127Investment securities:Available for sale
    
    
    2,992
    
    
    
    3,297
    
    
    
    6,596
    
    
    
    6,340Held to maturity
    
    
    47
    
    
    
    56
    
    
    
    95
    
    
    
    110Other interest-earning assets
    
    
    7,586
    
    
    
    7,856
    
    
    
    15,379
    
    
    
    15,241Total interest income
    
    
    480,811
    
    
    
    540,159
    
    
    
    970,638
    
    
    
    1,085,945Interest expense:Deposits
    
    
    90,659
    
    
    
    126,734
    
    
    
    186,545
    
    
    
    260,477Federal Home Loan Bank advances
    
    
    71,036
    
    
    
    104,025
    
    
    
    147,283
    
    
    
    203,824Other borrowings
    
    
    10,917
    
    
    
    13,969
    
    
    
    24,057
    
    
    
    27,172Total interest expense
    
    
    172,612
    
    
    
    244,728
    
    
    
    357,885
    
    
    
    491,473Net interest income
    
    
    308,199
    
    
    
    295,431
    
    
    
    612,753
    
    
    
    594,472Provision for loan and lease losses
    
    
    7,160
    
    
    
    35,360
    
    
    
    25,776
    
    
    
    96,831Net interest income after provision for loan
and lease losses
    
    
    301,039
    
    
    
    260,071
    
    
    
    586,977
    
    
    
    497,641Other income:Retail banking
    
    
    115,197
    
    
    
    97,087
    
    
    
    214,810
    
    
    
    181,187Mortgage banking
    
    
    59,343
    
    
    
    (23,895
    )
    
    
    42,661
    
    
    
    (23,922
    )Leasing operations
    
    
    (597
    )
    
    
    (12,230
    )
    
    
    1,528
    
    
    
    (19,086
    )Net gains (losses)
    
    
    (14,240
    )
    
    
    108,549
    
    
    
    (105,267
    )
    
    
    185,202Bank owned life insurance and other
    
    
    7,120
    
    
    
    8,450
    
    
    
    18,288
    
    
    
    16,406Total other income
    
    
    166,823
    
    
    
    177,961
    
    
    
    172,020
    
    
    
    339,787Administrative expenses:Compensation and employee benefits
    
    
    102,109
    
    
    
    90,790
    
    
    
    204,077
    
    
    
    177,846Net occupancy and equipment
    
    
    34,329
    
    
    
    30,466
    
    
    
    68,678
    
    
    
    61,652Marketing expenses
    
    
    31,051
    
    
    
    20,205
    
    
    
    59,860
    
    
    
    33,852Federal deposit insurance premiums
    
    
    1,052
    
    
    
    1,125
    
    
    
    2,135
    
    
    
    2,267Other administrative expenses
    
    
    57,360
    
    
    
    52,168
    
    
    
    109,186
    
    
    
    102,429Total administrative expenses
    
    
    225,901
    
    
    
    194,754
    
    
    
    443,936
    
    
    
    378,046Income before income taxes
    
    
    241,961
    
    
    
    243,278
    
    
    
    315,061
    
    
    
    459,382Income taxes
    
    
    75,615
    
    
    
    77,241
    
    
    
    98,459
    
    
    
    145,854Net income
    
    $
    166,346
    
    
    $
    166,037
    
    
    $
    216,602
    
    
    $
    313,528Basic earnings per share
    
    $
    .74
    
    
    $
    .74
    
    
    $
    .96
    
    
    $
    1.40Diluted earnings per share
    
    $
    .72
    
    
    $
    .72
    
    
    $
    .94
    
    
    $
    1.36Average common shares outstanding:Basic
    
    
    224,089,781
    
    
    
    225,501,687
    
    
    
    223,811,719
    
    
    
    225,249,543Diluted
    
    
    231,827,268
    
    
    
    231,095,694
    
    
    
    231,023,165
    
    
    
    230,778,271Cash dividends declared per share
    
    $
    .29
    
    
    $
    .24
    
    
    $
    .55
    
    
    $
    .46See Notes to Consolidated Financial Statements.
 2




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CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Six Months Ended6/30/04
    
    6/30/03(Dollars in thousands)Cash flows from operating activities:Net income
    
    $
    216,602
    
    
    $
    313,528Adjustments to reconcile net income to net cash provided by
operating activities:Provision for loan and lease losses
    
    
    25,776
    
    
    
    96,831Net (gains) losses
    
    
    105,267
    
    
    
    (185,202
    )Accretion of discounts, amortization of premiums, and amortization of
depreciation, net
    
    
    50,720
    
    
    
    137,532Origination of loans held for sale
    
    
    (920,390
    )
    
    
    (1,648,230
    )Proceeds from sale of loans held for sale
    
    
    908,195
    
    
    
    1,646,068Increase (decrease) in accrued interest payable
    
    
    (15,726
    )
    
    
    8,046Other
    
    
    (112,687
    )
    
    
    179,197Net cash provided by operating activities
    
    
    257,757
    
    
    
    547,770Cash flows from investing activities:Net principal disbursed on loans and leases
    
    
    (2,929,891
    )
    
    
    (4,770,293
    )Proceeds from principal repayments and maturities of:Mortgage-backed securities held to maturity
    
    
    66,079
    
    
    
    180,454Mortgage-backed securities available for sale
    
    
    1,103,003
    
    
    
    2,544,391Investment securities held to maturity
    
    
    332
    
    
    
    541Investment securities available for sale
    
    
    10,206
    
    
    
    28,825Proceeds from sale of:Mortgage-backed securities available for sale
    
    
    5,128,951
    
    
    
    5,821,613Investment securities available for sale
    
    
    96,237
    
    
    
    2,379Federal Home Loan Bank and Federal Reserve Bank stock
    
    
    6,202
    
    
    
    15,107Purchase of:Mortgage-backed securities available for sale
    
    
    (1,824,544
    )
    
    
    (5,108,641
    )Investment securities available for sale
    
    
    (18,328
    )
    
    
    (57,171
    )Federal Home Loan Bank and Federal Reserve Bank stock
    
    
    (516
    )
    
    
    (7,430
    )Loans
    
    
    (1,559,178
    )
    
    
    (44,874
    )Net cash received in connection with business combinations
    
    
    
    
    
    
    77,944Other
    
    
    (66,397
    )
    
    
    (111,290
    )Net cash provided by (used in) investing activities
    
    
    12,156
    
    
    
    (1,428,445
    )Cash flows from financing activities:Net increase (decrease) in short-term borrowings
    
    
    1,707,437
    
    
    
    (762,513
    )Proceeds from long-term borrowings
    
    
    509,092
    
    
    
    2,007,512Repayments of long-term borrowings
    
    
    (2,359,313
    )
    
    
    (9,860
    )Increase (decrease) in deposits
    
    
    26,170
    
    
    
    (85,758
    )Increase in advance payments by borrowers for taxes and insurance
    
    
    16,491
    
    
    
    34,998Payment of dividends on common stock
    
    
    (123,206
    )
    
    
    (103,514
    )Proceeds from issuance of common stock
    
    
    79,049
    
    
    
    31,761Purchase of treasury stock
    
    
    (62,066
    )
    
    
    (82,632
    )Net cash provided by (used in) financing activities
    
    
    (206,346
    )
    
    
    1,029,994Net increase in cash and cash equivalents
    
    
    63,567
    
    
    
    149,319Cash and cash equivalents, beginning of the period
    
    
    528,166
    
    
    
    447,213Cash and cash equivalents, end of period
    
    $
    591,733
    
    
    $
    596,532Supplemental disclosure of cash flow information:Cash paid for interest on deposits and borrowings
    
    $
    372,682
    
    
    $
    482,629Cash paid for income taxes
    
    
    
    
    
    
    12,000Supplemental schedule of noncash activities:Loans exchanged for mortgage-backed securities
    
    
    124,678
    
    
    
    5,765,725See Notes to Consolidated Financial Statements.
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##### Table of Contents



CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   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 for the year ended December 31, 2003.
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.
    
    Charter One has one operating segment, consumer banking, which offers an
array of products and services to its customers. Pursuant to its consumer
banking strategy, emphasis is placed on building relationships and
identifying cross-sell opportunities with its customers, as opposed to
building specific lines of business. As a result, Charter One works as an
integrated unit to customize solutions for its customers, with business
line emphasis and product offerings changing over time as needs and
demands change.3.
    
    On December 31, 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 148,
Accounting for Stock-Based Compensation -Transition and Disclosure, an
amendment of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS
No. 148 provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. It also amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about the
effects on reported net income of an entitys accounting policy decisions
with respect to stock-based employee compensation. Finally, SFAS No. 148
amends Accounting Principles Board (APB) Opinion No. 28, Interim
Financial Reporting, to require disclosure about those effects in interim
financial information. The Company has elected to continue application of
APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for its stock-based employee
compensation plans. Accordingly, no stock-based employee compensation
cost is, or is expected to be, reflected in net income, as all options
granted under the Companys stock-based employee compensation plans had an
exercise price equal to the market value of the underlying common stock on
the date of grant. Had stock-based employee compensation costs of the
Companys stock option plans been determined based on the fair value at
the grant dates for awards under those plans consistent with the method of
SFAS No. 123, as amended by SFAS No. 148, the Companys net income and
earnings per share would have been reduced to the pro forma amounts
indicated below: Three Months Ended
    
    Six Months Ended6/30/04
    
    6/30/03
    
    6/30/04
    
    6/30/03(Dollars in thousands, except per share data)Net income:As reported
    
    $
    166,346
    
    
    $
    166,037
    
    
    $
    216,602
    
    
    $
    313,528Less: Total stock-based employee compensation
expense determined under the fair value
method
for all awards, net of tax
    
    
    7,845
    
    
    
    7,448
    
    
    
    15,741
    
    
    
    15,018Pro forma
    
    $
    158,501
    
    
    $
    158,589
    
    
    $
    200,861
    
    
    $
    298,510Basic earnings per share:As reported
    
    $
    .74
    
    
    $
    .74
    
    
    $
    .96
    
    
    $
    1.40Pro forma
    
    
    .71
    
    
    
    .70
    
    
    
    .90
    
    
    
    1.33Diluted earnings per share:As reported
    
    
    .72
    
    
    
    .72
    
    
    
    .94
    
    
    
    1.36Pro forma
    
    
    .68
    
    
    
    .69
    
    
    
    .86
    
    
    
    1.29
 The fair value of each stock option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
used for grants in the three and six months ended June 30, 2004 and 2003: Three Months Ended
    
    Six Months Ended6/30/04
    
    6/30/03
    
    6/30/04
    
    6/30/03Dividend yield
    
    
    3.00
    %
    
    
    3.00
    %
    
    
    3.00
    %
    
    
    3.00
    %Volatility
    
    
    45.52
    %
    
    
    47.17-47.19
    %
    
    
    45.48-45.59
    %
    
    
    47.17-47.26
    %Risk-free interest rate
    
    
    3.81-3.88
    %
    
    
    2.68-3.33
    %
    
    
    3.03-3.88
    %
    
    
    2.68-3.36
    %Life of grant
    
    6 years
    
    6 years
    
    6 years
    
    6 years
 4




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The estimated weighted-average date of grant fair value (based on the above
option-pricing model and assumptions) was $12.47 and $10.76 for stock
options granted in the three months ended June 30, 2004 and 2003,
respectively, and $12.44 and $10.98 for stock options granted in the six
months ended June 30, 2004 and 2003, respectively.4.
    
    In January 2003, the FASB issued Interpretation No. (FIN) 46, which
provides guidance on how to identify a variable interest entity (VIE)
and determine when the assets, liabilities, noncontrolling interests, and
results of operations of a VIE are to be included in a companys
consolidated financial statements. A VIE exists when either the total
equity investment at risk is not sufficient to permit the entity to
finance its activities by itself, or the equity investors lack one of
three characteristics associated with owning a controlling financial
interest. Those characteristics include the direct or indirect ability to
make decisions about an entitys activities through voting rights or
similar rights, the obligation to absorb the expected losses of an entity
if they occur, or the right to receive the expected residual returns of
the entity if they occur. In December 2003, the FASB reissued FIN 46 with
certain modifications and clarifications. Application of this guidance
was effective for interests in certain VIEs commonly referred to as
special-purpose entities as of December 31, 2003. Application for all
other types of entities was required for periods ending after March 15,
2004, unless previously applied. The adoption of FIN 46 did not have a
material impact on the Companys consolidated financial condition or
results of operations.5.
    
    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. 5




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations 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; 6




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##### Table of Contents




    
    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 Ended6/30/04
    
    6/30/03
    
    6/30/04
    
    6/30/03PrepaymentActual
    
    Penalty
    
    Adjusted(Dollars in thousands, except per share data)Results and ratios:Net income
    
    $
    166,346
    
    
    $
    166,037
    
    
    $
    216,602
    
    
    $
    113,068
    
    
    $
    329,670
    
    
    $
    313,528Diluted earnings per share
    
    
    .72
    
    
    
    .72
    
    
    
    .94
    
    
    
    .49
    
    
    
    1.43
    
    
    
    1.36Return 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
    
    
    
    19.17Return on average tangible
equity(1)
    
    
    23.82
    
    
    
    22.74
    
    
    
    15.51
    
    
    
    16.14
    
    
    
    23.59
    
    
    
    22.02Average equity to average assets
    
    
    7.62
    
    
    
    7.55
    
    
    
    7.61
    
    
    
    
    
    
    
    7.61
    
    
    
    7.51Net interest income to
administrative expenses
    
    
    1.36
    x
    
    
    1.52
    x
    
    
    1.38
    x
    
    
    
    
    
    
    1.38
    x
    
    
    1.57
    xAdministrative 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
   (1)
    
    Computed as the ratio of net income, excluding the amortization of other
intangible assets, to average tangible equity.(2)
    
    Computed as the ratio of total administrative expenses to net interest
income and total other income. Net Interest Income 7




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##### Table of Contents



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 Ended6/30/04
    
    6/30/03Avg.
    
    
    
    
    
    
    
    
    
    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
    
    
    
    4.41Held to maturity
    
    
    196,265
    
    
    
    2,823
    
    
    
    5.75
    
    
    
    395,598
    
    
    
    6,858
    
    
    
    6.94Investment securities:Available for sale
    
    
    224,495
    
    
    
    2,992
    
    
    
    5.33
    
    
    
    256,677
    
    
    
    3,297
    
    
    
    5.14Held to maturity
    
    
    3,595
    
    
    
    47
    
    
    
    5.28
    
    
    
    3,957
    
    
    
    56
    
    
    
    5.74Other interest-earning assets
    
    
    751,409
    
    
    
    7,586
    
    
    
    3.99
    
    
    
    839,597
    
    
    
    7,856
    
    
    
    3.70Total interest-earning assets
    
    
    40,052,697
    
    
    
    480,811
    
    
    
    4.80
    
    
    
    41,607,705
    
    
    
    540,159
    
    
    
    5.19Allowance for loan and lease losses
    
    
    (390,693
    )
    
    
    
    
    
    
    
    
    
    
    (360,448
    )Noninterest-earning assets
    
    
    2,963,313
    
    
    
    
    
    
    
    
    
    
    
    3,044,576Total assets
    
    $
    42,625,317
    
    
    
    
    
    
    
    
    
    
    $
    44,291,833Interest-bearing liabilities:Deposits:Checking accounts
    
    $
    4,874,822
    
    
    
    9,730
    
    
    
    .80
    
    
    $
    6,951,974
    
    
    
    23,412
    
    
    
    1.35Money market and savings
accounts
    
    
    8,546,445
    
    
    
    20,233
    
    
    
    .95
    
    
    
    8,332,278
    
    
    
    31,204
    
    
    
    1.50Certificates of deposit
    
    
    9,976,862
    
    
    
    60,696
    
    
    
    2.45
    
    
    
    9,733,110
    
    
    
    72,118
    
    
    
    2.97Total deposits
    
    
    23,398,129
    
    
    
    90,659
    
    
    
    1.56
    
    
    
    25,017,362
    
    
    
    126,734
    
    
    
    2.03Federal Home Loan Bank advances
    
    
    10,166,098
    
    
    
    71,036
    
    
    
    2.80
    
    
    
    11,397,410
    
    
    
    104,025
    
    
    
    3.66Other borrowings
    
    
    968,900
    
    
    
    10,917
    
    
    
    4.50
    
    
    
    874,062
    
    
    
    13,969
    
    
    
    6.38Total borrowings
    
    
    11,134,998
    
    
    
    81,953
    
    
    
    2.95
    
    
    
    12,271,472
    
    
    
    117,994
    
    
    
    3.85Total interest-bearing liabilities
    
    
    34,533,127
    
    
    
    172,612
    
    
    
    2.01
    
    
    
    37,288,834
    
    
    
    244,728
    
    
    
    2.63Noninterest-bearing liabilities:Demand deposit accounts
    
    
    3,524,462
    
    
    
    
    
    
    
    
    
    
    
    2,308,993Other noninterest-bearing
liabilities
    
    
    1,321,750
    
    
    
    
    
    
    
    
    
    
    
    1,349,173Total noninterest-bearing
liabilities
    
    
    4,846,212
    
    
    
    
    
    
    
    
    
    
    
    3,658,166Total liabilities
    
    
    39,379,339
    
    
    
    
    
    
    
    
    
    
    
    40,947,000Shareholders equity
    
    
    3,245,978
    
    
    
    
    
    
    
    
    
    
    
    3,344,833Total liabilities and
shareholders equity
    
    $
    42,625,317
    
    
    
    
    
    
    
    
    
    
    $
    44,291,833Net interest income
    
    
    
    
    
    $
    308,199
    
    
    
    
    
    
    
    
    
    
    $
    295,431Interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.79
    
    
    
    
    
    
    
    
    
    
    
    2.56Net yield on average interest-
earning assets
    
    
    
    
    
    
    
    
    
    
    3.08
    
    
    
    
    
    
    
    
    
    
    
    2.84Average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    115.98
    %
    
    
    
    
    
    
    
    
    
    
    111.58
    %
 8




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##### Table of Contents



Six Months Ended6/30/04
    
    6/30/03Avg.
    
    
    
    
    
    
    
    
    
    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
    
    
    
    4.56Held to maturity
    
    
    212,886
    
    
    
    6,194
    
    
    
    5.82
    
    
    
    438,005
    
    
    
    15,127
    
    
    
    6.91Investment securities:Available for sale
    
    
    239,964
    
    
    
    6,596
    
    
    
    5.50
    
    
    
    231,906
    
    
    
    6,340
    
    
    
    5.47Held to maturity
    
    
    3,598
    
    
    
    95
    
    
    
    5.30
    
    
    
    4,008
    
    
    
    110
    
    
    
    5.51Other interest-earning assets
    
    
    787,304
    
    
    
    15,379
    
    
    
    3.86
    
    
    
    801,391
    
    
    
    15,241
    
    
    
    3.78Total interest-earning assets
    
    
    40,058,148
    
    
    
    970,638
    
    
    
    4.85
    
    
    
    40,789,744
    
    
    
    1,085,945
    
    
    
    5.33Allowance for loan and lease losses
    
    
    (389,199
    )
    
    
    
    
    
    
    
    
    
    
    (343,860
    )Noninterest-earning assets
    
    
    3,008,141
    
    
    
    
    
    
    
    
    
    
    
    3,097,175Total assets
    
    $
    42,677,090
    
    
    
    
    
    
    
    
    
    
    $
    43,543,059Interest-bearing liabilities:Deposits:Checking accounts
    
    $
    5,206,702
    
    
    
    20,166
    
    
    
    .78
    
    
    $
    7,245,197
    
    
    
    54,030
    
    
    
    1.50Money market and savings
accounts
    
    
    8,549,931
    
    
    
    39,987
    
    
    
    .94
    
    
    
    8,131,890
    
    
    
    61,530
    
    
    
    1.53Certificates of deposit
    
    
    10,074,494
    
    
    
    126,392
    
    
    
    2.52
    
    
    
    9,648,034
    
    
    
    144,917
    
    
    
    3.03Total deposits
    
    
    23,831,127
    
    
    
    186,545
    
    
    
    1.57
    
    
    
    25,025,121
    
    
    
    260,477
    
    
    
    2.10Federal Home Loan Bank advances
    
    
    10,177,800
    
    
    
    147,283
    
    
    
    2.90
    
    
    
    10,906,526
    
    
    
    203,824
    
    
    
    3.76Other borrowings
    
    
    1,035,442
    
    
    
    24,057
    
    
    
    4.64
    
    
    
    870,299
    
    
    
    27,172
    
    
    
    6.24Total borrowings
    
    
    11,213,242
    
    
    
    171,340
    
    
    
    3.06
    
    
    
    11,776,825
    
    
    
    230,996
    
    
    
    3.95Total interest-bearing liabilities
    
    
    35,044,369
    
    
    
    357,885
    
    
    
    2.05
    
    
    
    36,801,946
    
    
    
    491,473
    
    
    
    2.69Noninterest-bearing liabilities:Demand deposit accounts
    
    
    3,064,520
    
    
    
    
    
    
    
    
    
    
    
    2,163,822Other noninterest-bearing
liabilities
    
    
    1,319,588
    
    
    
    
    
    
    
    
    
    
    
    1,306,110Total noninterest-bearing
liabilities
    
    
    4,384,108
    
    
    
    
    
    
    
    
    
    
    
    3,469,932Total liabilities
    
    
    39,428,477
    
    
    
    
    
    
    
    
    
    
    
    40,271,878Shareholders equity
    
    
    3,248,613
    
    
    
    
    
    
    
    
    
    
    
    3,271,181Total liabilities and
shareholders equity
    
    $
    42,677,090
    
    
    
    
    
    
    
    
    
    
    $
    43,543,059Net interest income
    
    
    
    
    
    $
    612,753
    
    
    
    
    
    
    
    
    
    
    $
    594,472Interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.80
    
    
    
    
    
    
    
    
    
    
    
    2.64Net yield on average interest-
earning assets
    
    
    
    
    
    
    
    
    
    
    3.06
    
    
    
    
    
    
    
    
    
    
    
    2.91Average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    114.31
    %
    
    
    
    
    
    
    
    
    
    
    110.83
    %
 9




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##### Table of Contents



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. 2003Increase (decrease) due to
    
    Increase (decrease) due toRate
    
    Volume
    
    Total
    
    Rate
    
    Volume
    
    Total(Dollars in thousands)Interest income:Loans and leases
    
    $
    (50,976
    )
    
    $
    70,591
    
    
    $
    19,615
    
    
    $
    (108,444
    )
    
    $
    117,679
    
    
    $
    9,235Mortgage-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
    
    
    
    256Held to maturity
    
    
    (4
    )
    
    
    (5
    )
    
    
    (9
    )
    
    
    (4
    )
    
    
    (11
    )
    
    
    (15
    )Other interest-earning assets
    
    
    592
    
    
    
    (862
    )
    
    
    (270
    )
    
    
    409
    
    
    
    (271
    )
    
    
    138Total
    
    
    (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 income
    
    $
    (946
    )
    
    $
    13,714
    
    
    $
    12,768
    
    
    $
    (12,096
    )
    
    $
    30,377
    
    
    $
    18,281
 Net interest income was $308.2 million for the three months ended June 30,
2004, up $12.8 million, or 4.3%, from the second quarter of 2003. Net yield on
average interest-earning assets during the second quarter of 2004 was 3.08%, up
24 basis points from the second quarter of 2003. The improvement was
attributable to the increase in average noninterest-bearing deposits, as well
as a full quarters benefit from the prepayment of $2.3 billion in fixed rate FHLB
advances on January 27, 2004. These FHLB advances carried a weighted average
cost of 6.27% and were due to mature between June 2005 and January 2006. Net interest income was $612.8 million for the six months ended June 30, 2004,
up $18.3 million, or 3.1%, from the comparable period of 2003. Net yield on
average interest-earning assets during the six months ended June 30, 2004 was
3.06%, up 15 basis points from the six months ended June 30, 2003. The
improvement was attributable to the increase in average noninterest-bearing
deposits, as well as five months benefit from the prepayment of $2.3 billion
in fixed rate FHLB advances discussed above. Provision for Loan and Lease Losses The provision for loan and lease losses for the three months ended June 30,
2004 was $7.2 million, a decrease of $28.2 million from the three months ended
June 30, 2003. Net charge-offs totaled $17.8 million for the three months
ended June 30, 2004, compared to $19.9 million for the three months ended June
30, 2003. The ratio of net charge-offs as a percent of average loans and
leases decreased seven basis points to .23% (annualized) for the second quarter
of 2004 compared to .30% (annualized) for the second quarter of 2003. The
underlying trends in asset classifications, charge-offs and other credit
indicators warranted a reduction in the provision for loan and lease losses
year over year. The provision for loan and lease losses for the six months ended June 30, 2004
was $25.8 million, a decrease of $71.1 million from the comparable period of
2003. Net charge-offs totaled $35.3 million for the six months ended 10




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##### Table of Contents



June 30, 2004, compared to $53.4 million for the six months ended June 30,
2003. The ratio of net charge-offs as a percent of average loans and leases
decreased 18 basis points to .23% (annualized) for the six months ended June
30, 2004 compared to .41% (annualized) for the six months ended June 30, 2003. See Financial Condition  Asset Quality for further information regarding our
allowance for loan and lease losses. Other Income Other income for the three months ended June 30, 2004 was $166.8 million, a
decrease of $11.1 million, or 6.3%, from $178.0 million for the three months
ended June 30, 2003. This decrease was primarily attributable to net losses,
partially offset by an increase in retail banking income, mortgage banking
income and income from leasing operations. Net losses totaled $14.2 million for the second quarter of 2004, compared to
net gains of $108.5 million for the second quarter of 2003. Net losses for the
second quarter of 2004 included $26.0 million in net losses from the sale of
$1.9 billion of mortgage-backed securities. These mortgage-backed securities
were sold as part of our ongoing strategy to reduce single-family exposure and
the overall duration of interest-earning assets. We did not utilize any
special-purpose entities for the sale of any of our mortgage-backed securities. Mortgage banking income was $59.3 million for the three months ended June 30,
2004, compared to a loss of $23.9 million for the second quarter of 2003.
During the second quarter of 2004, we reduced our valuation allowance on
mortgage servicing rights by $47.0 million in response to the increase in
interest rates. In the year ago quarter, we increased the valuation allowance
on mortgage servicing rights by $9.5 million, and recorded a permanent
impairment charge of $37.2 million. Total mortgage banking income, excluding
the adjustments to the valuation allowance and the permanent impairment charge
discussed above, was $12.3 million and $22.8 million in the second quarters of
2004 and 2003, respectively. This reduction in year over year mortgage banking
income was due primarily to the decrease in the portfolio of loans serviced for
others and lower mortgage production as compared to 2003. The portfolio of
loans serviced for others totaled $15.1 billion, down 10.5% since December 31,
2003 and down 20.3% since June 30, 2003. The related mortgage servicing rights
totaled $188.2 million at June 30, 2004. With an average servicing spread of
35.6 basis points, that translates into a servicing asset valuation of 3.5
times the servicing spread. Retail banking income was $115.2 million for the three months ended June 30,
2004, an increase of $18.1 million, or 18.7%, over the three months ended June
30, 2003. The biggest driver of the increase was deposit-related revenue,
which totaled $101.7 million for the three months ended June 30, 2004, up 19.8%
over the year ago quarter. The increase in debit card transactions continued
to be one of the biggest contributors to deposit-related revenue growth. The
dollar volume of debit card transactions was 40% higher in the second quarter
of 2004 than in the same quarter of last year. The other components of retail
banking revenue included fees from retail brokerage activities ($9.8 million,
up 16.4% from the year ago quarter) and other revenue related to retail
operations ($3.7 million, down 3.0% from the year ago quarter). Income from leasing operations was a loss of $597,000 in the second quarter of
2004, compared with a loss of $12.2 million in the second quarter of 2003.
Residual value adjustments reduced income by $1.6 million in the three months
ended June 30, 2004, and $12.8 million in the year ago quarter. Other income for the six months ended June 30, 2004 was $172.0 million, a
decrease of $167.8 million, or 49.4%, from $339.8 million for the six months
ended June 30, 2003. This decrease was primarily attributable to net losses,
partially offset by an increase in income from leasing operations. Net losses
totaled $105.3 million for the six months ended June 30, 2004, compared to net
gains of $185.2 million for the six months ended June 30, 2003. Net losses for
the 2004 period included a $164.5 million debt prepayment penalty. As
discussed in Performance Overview above, we prepaid $2.3 billion in fixed
rate FHLB advances in January 2004 and incurred a debt prepayment penalty of
$164.5 million before tax. Transactions resulting in net gains and losses are
primarily undertaken in an effort to mitigate interest rate risk while still
achieving targeted net interest yield by managing the size and mix of the
Banks interest sensitive asset and liability portfolios. Income from leasing operations was $1.5 million for the six months ended June
30, 2004, compared with a loss of $19.1 million for the six months ended June
30, 2003. Residual value adjustments reduced income by $21.5 million in the six
months ended June 30, 2003. Administrative Expenses Administrative expenses were $225.9 million for the three months ended June 30,
2004, an increase of $31.1 million, or 16.0%, from the second quarter of 2003.
The increase in administrative expenses was primarily 11




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##### Table of Contents



attributable to increased compensation expense and marketing costs.
Compensation expense increased $11.3 million and was primarily due to operating
more banking centers than a year ago. During 2003, we initiated an aggressive
de novo branch expansion plan. These efforts led to the net addition of 130
new banking centers since June 30, 2003, including 36 net new banking centers
opened in the second quarter of 2004. Our plan is to continue the expansion in
2004 for a total of 125 additional banking centers. Marketing costs increased
by $10.8 million from the year-ago quarter as we provided ongoing support for
our retail bank expansion strategy and other franchise enhancing initiatives.
Our efficiency ratio was 47.56% for the three months ended June 30, 2004,
compared to 41.14% for the three months ended June 30, 2003. Administrative expenses were $443.9 million for the six months ended June 30,
2004, an increase of $65.9 million, or 17.4%, from the six months ended June
30, 2003. The increase in administrative expenses was substantially the same
as for the second quarter results discussed in the above paragraph. Due to the
penalty associated with the debt prepayment discussed in Performance Overview
above, the efficiency ratio was 56.57% for the six months ended June 30, 2004.
Excluding the $164.5 million debt prepayment penalty, the efficiency ratio was
46.77% for the six months ended June 30, 2004, compared to 40.46% for the six
months ended June 30, 2003. Federal Income Tax Federal income tax expense for the three months ended June 30, 2004 was $75.6
million, compared to $77.2 million for the same period in 2003. The primary
reason for this decrease in the provision for federal income taxes was a
decrease in pre-tax income. The effective tax rate was 31.3% for the 2004
period and 31.8% for the 2003 period. Federal income tax expense for the six months ended June 30, 2004 was $98.5
million, compared to $145.9 million for the same period in 2003. The primary
reason for this decrease in the provision for federal income taxes was a
decrease in pre-tax income. This decrease in pre-tax income was primarily
attributable to our prepayment penalty of $164.5 million on the early
termination of the FHLB advances in the first quarter of 2004. The effective
tax rate was 31.3% for the 2004 period and 31.8% for the 2003 period. FINANCIAL CONDITION Overview At June 30, 2004, total assets were $42.5 billion, compared to total assets of
$42.6 billion at December 31, 2003. Loans and Leases Composition of Loans and Leases(Figure 4) 6/30/04
    
    12/31/03(Dollars in thousands)One-to-four family:Permanent:Fixed rate
    
    $
    8,422,124
    
    
    $
    6,001,695Adjustable rate
    
    
    2,608,089
    
    
    
    2,830,677Construction
    
    
    510,957
    
    
    
    485,35411,541,170
    
    
    
    9,317,726Commercial real estate:Multifamily
    
    
    866,076
    
    
    
    776,528Commercial
    
    
    1,276,177
    
    
    
    1,193,377Construction
    
    
    583,999
    
    
    
    521,6802,726,252
    
    
    
    2,491,585Consumer:Retail
    
    
    6,899,475
    
    
    
    5,491,923Automobile
    
    
    6,245,154
    
    
    
    6,364,703Consumer finance
    
    
    1,395,972
    
    
    
    1,092,53314,540,601
    
    
    
    12,949,159Business:Leasing
    
    
    2,244,746
    
    
    
    2,195,418Corporate banking
    
    
    1,926,983
    
    
    
    1,680,2934,171,729
    
    
    
    3,875,711Loans and leases before allowance for loan and lease losses
    
    
    32,979,752
    
    
    
    28,634,181Allowance for loan and lease losses
    
    
    (374,236
    )
    
    
    (383,733
    )
 12




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##### Table of Contents



6/30/04
    
    12/31/03(Dollars in thousands)Loans and leases, net(1)
    
    $
    32,605,516
    
    
    $
    28,250,448Portfolio of loans serviced for others
    
    $
    15,104,799
    
    
    $
    16,877,169
   (1)
    
    Includes loans held for sale. Loan and Lease Activity(Figure 5) Three Months Ended
    
    Six Months Ended6/30/04
    
    6/30/03
    
    6/30/04
    
    6/30/03(Dollars in thousands)Originations:Real estate:Permanent:One-to-four family
    
    $
    1,807,730
    
    
    $
    3,555,968
    
    
    $
    2,969,276
    
    
    $
    6,651,686Multifamily
    
    
    100,048
    
    
    
    57,451
    
    
    
    176,040
    
    
    
    108,891Commercial
    
    
    134,427
    
    
    
    60,226
    
    
    
    262,697
    
    
    
    150,439Total permanent loans
    
    
    2,042,205
    
    
    
    3,673,645
    
    
    
    3,408,013
    
    
    
    6,911,016Construction:One-to-four family
    
    
    68,310
    
    
    
    53,537
    
    
    
    157,161
    
    
    
    89,093Multifamily
    
    
    36,545
    
    
    
    7,613
    
    
    
    67,286
    
    
    
    26,896Commercial
    
    
    123,846
    
    
    
    30,246
    
    
    
    241,079
    
    
    
    41,076Total construction loans
    
    
    228,701
    
    
    
    91,396
    
    
    
    465,526
    
    
    
    157,065Total real estate loans originated
    
    
    2,270,906
    
    
    
    3,765,041
    
    
    
    3,873,539
    
    
    
    7,068,081Retail consumer
    
    
    1,628,263
    
    
    
    1,209,221
    
    
    
    2,682,292
    
    
    
    2,288,511Automobile
    
    
    739,204
    
    
    
    1,026,245
    
    
    
    1,403,840
    
    
    
    2,007,359Consumer finance
    
    
    189,048
    
    
    
    122,839
    
    
    
    294,681
    
    
    
    224,766Leases
    
    
    122,334
    
    
    
    73,946
    
    
    
    277,613
    
    
    
    175,517Corporate banking
    
    
    677,889
    
    
    
    473,677
    
    
    
    1,193,153
    
    
    
    922,003Total loans and leases originated
    
    
    5,627,644
    
    
    
    6,670,969
    
    
    
    9,725,118
    
    
    
    12,686,237Acquired through business combinations and
purchases
    
    
    1,088,706
    
    
    
    403,324
    
    
    
    1,559,178
    
    
    
    407,089Sales and principal reductions:Loans sold
    
    
    605,930
    
    
    
    885,179
    
    
    
    920,390
    
    
    
    1,648,230Loans exchanged for mortgage backed securities
    
    
    51,929
    
    
    
    2,346,609
    
    
    
    124,678
    
    
    
    5,765,725Principal reductions
    
    
    3,180,918
    
    
    
    3,260,094
    
    
    
    5,787,110
    
    
    
    6,285,924Total sales and principal reductions
    
    
    3,838,777
    
    
    
    6,491,882
    
    
    
    6,832,178
    
    
    
    13,699,879Increase (decrease) before net items
    
    $
    2,877,573
    
    
    $
    582,411
    
    
    $
    4,452,118
    
    
    $
    (606,553
    )
 Investment and Mortgage-Backed Securities Figures 6 and 7 summarize our investment and mortgage-backed securities
portfolios at June 30, 2004 and December 31, 2003. The amounts reflected
represent the fair value of securities available for sale and the amortized
cost of securities held to maturity. Investment Securities(Figure 6) 6/30/04
    
    12/31/03(Dollars in thousands)Available for SaleU.S. Treasury and agency securities
    
    $
    55,333
    
    
    $
    101,406Securities of U.S. states and political subdivisions
    
    
    38,131
    
    
    
    40,180Corporate capital trust
    
    
    84,738
    
    
    
    115,908Other securities
    
    
    12,432
    
    
    
    15,766Total investment securities available for sale
    
    
    190,634
    
    
    
    273,260Held to MaturitySecurities of U.S. states and political subdivisions
    
    
    3,407
    
    
    
    3,480Corporate capital trust and other securities
    
    
    25
    
    
    
    25Total investment securities held to maturity
    
    
    3,432
    
    
    
    3,505Total
    
    $
    194,066
    
    
    $
    276,765Weighted average rate
    
    
    5.88
    %
    
    
    5.48
    %
 13




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##### Table of Contents



Mortgage-Backed Securities(Figure 7) 6/30/04
    
    12/10/03(Dollars in thousands)Available for SaleParticipation certificates:U.S. government and agency issues
    
    $
    5,552,108
    
    
    $
    9,670,524Collateralized mortgage obligations:U.S. government and agency issues
    
    
    237,790
    
    
    
    511,601Private issues
    
    
    6,879
    
    
    
    11,673Total mortgage-backed securities available for sale
    
    
    5,796,777
    
    
    
    10,193,798Held to MaturityParticipation certificates:U.S. government and agency issues
    
    
    139,566
    
    
    
    186,740Private issues
    
    
    15,787
    
    
    
    20,454Collateralized mortgage obligations:U.S. government and agency issues
    
    
    19,720
    
    
    
    25,994Private issues
    
    
    10,554
    
    
    
    18,261Total mortgage-backed securities held to maturity
    
    
    185,627
    
    
    
    251,449Total
    
    $
    5,982,404
    
    
    $
    10,445,247Weighted average rate
    
    
    4.41
    %
    
    
    4.57
    %
 Asset Quality The allowance for loan and lease losses totaled $374.2 million at June 30,
2004, which was 1.13% of total loans and leases at June 30, 2004, and
represented 5.3 years coverage of annualized second quarter 2004 net
charge-offs. Analysis of the Allowance for Loan and Lease Losses(Figure 8) Three Months Ended
    
    Six Months Ended6/30/04
    
    6/30/03
    
    6/30/04
    
    6/30/03(Dollars in thousands)Allowance for loan and lease losses:Balance, beginning of period
    
    $
    384,842
    
    
    $
    355,926
    
    
    $
    383,733
    
    
    $
    328,017Provision for loan and lease losses
    
    
    7,160
    
    
    
    35,360
    
    
    
    25,776
    
    
    
    96,831Acquired through business combination
    
    
    
    
    
    
    4,969
    
    
    
    
    
    
    
    4,969Loans and leases charged off:One-to-four family
    
    
    (1,763
    )
    
    
    (1,036
    )
    
    
    (2,590
    )
    
    
    (1,706
    )Commercial real estate
    
    
    (6
    )
    
    
    (253
    )
    
    
    (878
    )
    
    
    (753
    )Retail consumer
    
    
    (3,322
    )
    
    
    (2,596
    )
    
    
    (5,856
    )
    
    
    (6,074
    )Automobile
    
    
    (9,698
    )
    
    
    (13,628
    )
    
    
    (23,377
    )
    
    
    (30,078
    )Consumer finance
    
    
    (4,468
    )
    
    
    (3,975
    )
    
    
    (7,947
    )
    
    
    (8,512
    )Leases
    
    
    
    
    
    
    (2,095
    )
    
    
    
    
    
    
    (8,156
    )Corporate banking
    
    
    (4,979
    )
    
    
    (2,652
    )
    
    
    (7,495
    )
    
    
    (9,897
    )Total charge-offs
    
    
    (24,236
    )
    
    
    (26,235
    )
    
    
    (48,143
    )
    
    
    (65,176
    )Recoveries:One-to-four family
    
    
    30
    
    
    
    41
    
    
    
    41
    
    
    
    58Commercial real estate
    
    
    46
    
    
    
    61
    
    
    
    110
    
    
    
    209Retail consumer
    
    
    752
    
    
    
    548
    
    
    
    1,386
    
    
    
    981Automobile
    
    
    4,845
    
    
    
    4,561
    
    
    
    9,266
    
    
    
    8,676Consumer finance
    
    
    370
    
    
    
    235
    
    
    
    598
    
    
    
    340Leases
    
    
    
    
    
    
    606
    
    
    
    433
    
    
    
    999Corporate banking
    
    
    427
    
    
    
    321
    
    
    
    1,036
    
    
    
    489Total recoveries
    
    
    6,470
    
    
    
    6,373
    
    
    
    12,870
    
    
    
    11,752Net loan and lease charge-offs
    
    
    (17,766
    )
    
    
    (19,862
    )
    
    
    (35,273
    )
    
    
    (53,424
    )Balance, end of period
    
    $
    374,236
    
    
    $
    376,393
    
    
    $
    374,236
    
    
    $
    376,393Net charge-offs to average loans and leases
(annualized)
    
    
    .23
    %
    
    
    .30
    %
    
    
    .23
    %
    
    
    .41
    %
 In determining the adequacy of the allowance for loan and lease losses,
management reviews and evaluates the potential credit risk inherent in the loan
and lease portfolio. All outstanding loans and leases are considered in this
evaluation process. The evaluation process includes such factors as historical
loss experience, credit scores, 14




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##### Table of Contents



delinquencies, loss migration analysis, concentration of credit and the current
economic environment. If this evaluation process indicates a need for either a
higher or lower allowance for loan and lease losses, that increase or reduction
is made via the provision for loan and lease losses. This evaluation process
is performed no less than quarterly and it is applied on a consistent basis.
Based upon this analysis, management believes that the allowance for loan and
lease losses at June 30, 2004 was adequate to absorb losses inherent in the
loan and lease portfolio. Figure 9 sets forth information concerning nonperforming and underperforming
assets for the periods reported. Underperforming assets consist of (1)
nonperforming assets (nonaccrual loans and leases, restructured real estate
mortgage loans, and real estate acquired through foreclosure and other
collateral owned) and (2) accruing loans and leases delinquent more than 90
days. At June 30, 2004, underperforming assets totaled $273.7 million, up from
$251.2 million at December 31, 2003. The primary driver behind the increase was
a $35.0 million nonaccrual loan for a shopping center under development. We
believe the loan is well collateralized, and anticipate no material loss at
this time. Nonperforming and Underperforming Assets(Figure 9) 6/30/04
    
    12/31/03(Dollars in thousands)Nonperforming assets:Nonaccrual loans and leases:Real estate mortgage loans:One-to-four family
    
    $
    25,065
    
    
    $
    23,301Multifamily and commercial
    
    
    37,768
    
    
    
    33,692Construction and land
    
    
    56,341
    
    
    
    25,161Total real estate mortgage loans
    
    
    119,174
    
    
    
    82,154Retail consumer
    
    
    11,988
    
    
    
    9,818Automobile
    
    
    
    
    
    
    Consumer finance
    
    
    38,667
    
    
    
    42,843Leases
    
    
    4,161
    
    
    
    6,360Corporate banking
    
    
    32,992
    
    
    
    28,408Total nonaccrual loans and leases
    
    
    206,982
    
    
    
    169,583Restructured loans
    
    
    
    
    
    
    474Total nonperforming loans and leases
    
    
    206,982
    
    
    
    170,057Real estate and other collateral owned
    
    
    26,938
    
    
    
    35,654Total nonperforming assets
    
    $
    233,920
    
    
    $
    205,711Ratio of:Nonperforming loans and leases to total loans and leases
    
    
    .63
    %
    
    
    .60
    %Nonperforming assets to total assets
    
    
    .55
    
    
    
    .48Nonperforming assets to total loans, leases and real estate and other collateral owned
    
    
    .72
    
    
    
    .73Allowance for loan and lease losses to:Nonperforming loans and leases
    
    
    180.81
    
    
    
    225.65Total loans and leases before allowance
    
    
    1.13
    
    
    
    1.34Accruing loans and leases delinquent more than 90 days:Real estate mortgage loans:One-to-four family
    
    $
    18,083
    
    
    $
    21,549Multifamily and commercial
    
    
    
    
    
    
    Construction and land
    
    
    
    
    
    
    Total real estate mortgage loans
    
    
    18,083
    
    
    
    21,549Retail consumer
    
    
    2,815
    
    
    
    2,722Automobile
    
    
    2,124
    
    
    
    2,771Consumer finance
    
    
    16,537
    
    
    
    17,839Leases
    
    
    
    
    
    
    52Corporate banking
    
    
    261
    
    
    
    522Total accruing loans and leases delinquent more than 90 days
    
    $
    39,820
    
    
    $
    45,455Total underperforming assets
    
    $
    273,740
    
    
    $
    251,166Ratio of:Underperforming assets to total assets
    
    
    .64
    %
    
    
    .59
    %Underperforming assets to total loans, leases and real estate and other collateral owned
    
    
    .84
    
    
    
    .89
 15




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##### Table of Contents



Loans and leases not reflected in the table above, but where known information
about possible credit problems of borrowers causes management to have serious
doubts as to the ability of the borrower to comply with present repayment terms
and that may result in disclosure of such loans and leases as underperforming
assets in the future, are commonly referred to as potential problem loans and
leases. The amount included in potential problem loans and leases results from
an evaluation, on a loan-by-loan basis, of loans and leases classified as
substandard. The amount of potential problem loans and leases was $31.4
million and $32.7 million at June 30, 2004 and December 31, 2003, respectively.
The vast majority of our potential problem loans and leases, as well as our
underperforming assets, are collateralized. SOURCES OF FUNDS Deposits Composition of Deposits(Figure 10) 6/30/04
    
    12/31/03Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageAmount
    
    Rate
    
    Amount
    
    Rate(Dollars in thousands)Checking accounts:Interest-bearing
    
    $
    4,632,750
    
    
    
    .73
    %
    
    $
    5,666,346
    
    
    
    .85
    %Noninterest-bearing
    
    
    3,549,865
    
    
    
    
    
    
    
    2,532,616
    
    
    
    Total checking accounts
    
    
    8,182,615
    
    
    
    .41
    
    
    
    8,198,962
    
    
    
    .59Money market and savings accounts
    
    
    9,032,492
    
    
    
    1.09
    
    
    
    8,686,356
    
    
    
    .97Total transactions accounts
    
    
    17,215,107
    
    
    
    .77
    
    
    
    16,885,318
    
    
    
    .78Certificates of deposit
    
    
    10,013,453
    
    
    
    2.85
    
    
    
    10,318,001
    
    
    
    2.97Total deposits, net
    
    $
    27,228,560
    
    
    
    1.53
    
    
    $
    27,203,319
    
    
    
    1.61Including the effect of interest rate swaps
    
    
    
    
    
    
    1.39
    %
    
    
    
    
    
    
    1.49
    %
 Investment securities and mortgage-backed securities with a par value of $576.8
million at June 30, 2004 and $637.9 million at December 31, 2003, were pledged
to secure public deposits and for other purposes required or permitted by law. Borrowings At June 30, 2004, borrowings consisted primarily of FHLB advances. These
positions were secured by our investment in the stock of the FHLB, as well as
$15.0 billion in certain real estate loans and $1.9 billion in mortgage-backed
securities. FHLB Advances(Figure 11) 6/30/04
    
    12/31/03Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageAmount
    
    Rate
    
    Amount
    
    Rate(Dollars in thousands)Short-term
    
    $
    3,824,100
    
    
    
    1.40
    %
    
    $
    1,719,800
    
    
    
    1.43
    %Long-term:Fixed rate advances
    
    
    3,227,269
    
    
    
    5.39
    
    
    
    5,706,614
    
    
    
    5.70Variable rate advances
    
    
    2,909,605
    
    
    
    1.21
    
    
    
    2,409,604
    
    
    
    1.19Total advances
    
    
    9,960,974
    
    
    
    2.64
    
    
    
    9,836,018
    
    
    
    3.85Plus unamortized premium on advances
    
    
    9,620
    
    
    
    
    
    
    
    11,275
    
    
    
    Total advances, net
    
    $
    9,970,594
    
    
    
    2.61
    
    
    $
    9,847,293
    
    
    
    3.81Including the effect of interest rate swaps
    
    
    
    
    
    
    2.98
    %
    
    
    
    
    
    
    3.89
    %
 On January 27, 2004, we prepaid $2.3 billion in fixed rate FHLB advances with a
weighted average cost of 6.27%, and incurred a prepayment penalty of $164.5
million before tax. These FHLB advances were due to mature between June 2005
and January 2006. Interest Rate Swaps We use interest rate swaps as one of the tools to manage our interest rate risk
profile (defined as the sensitivity of our earnings and economic value to
changes in interest rates). We utilize fixed receipt callable interest rate
swaps to convert certain longer-term callable certificates of deposit into
short-term and medium-term variable instruments. 16




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##### Table of Contents



Under certain of these agreements totaling $280.0 million in notional principal
amount, 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 during the entire term of the interest rate
swap. In other agreements totaling $2.4 billion in notional principal amount,
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 fixed rate,
converting to floating rate indexed to LIBOR after the first two years of the
interest rate swap term. Such interest rate swaps are designated and qualify
as fair value hedges under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended. We have assumed no ineffectiveness in the
respective hedging relationships. Any gain or loss on the interest rate swap
was offset by a gain or loss on the certificates of deposit during the period
of change in fair values. We utilize fixed payment interest rate swaps to convert certain floating rate
FHLB advances into fixed rate instruments. Under these agreements totaling
$1.9 billion in notional principal amount, 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. Such interest rate swaps are designated and qualify as cash flow
hedges under SFAS No. 133. We have assumed no ineffectiveness in the
respective hedging relationships. Any gain or loss on the interest rate swaps
was offset by the expected future cash flows on the FHLB advances during the
period of change in fair values. We utilized a fixed receipt interest rate swap to convert our $400.0 million of
subordinated notes into a variable instrument. Under this agreement, 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. Such interest rate swap is designated and qualifies as a
fair value hedge under SFAS No. 133. We have assumed no ineffectiveness in the
hedging relationship. Any gain or loss on the interest rate swap was offset by
a gain or loss on the subordinated notes during the period of change in fair
values. Additionally, in 2002, we entered into $575.0 million of fixed payment and
variable receipt interest rate swaps related to the issuance of the
subordinated notes discussed above. However, these interest rate swaps did not
qualify for hedge accounting under SFAS No. 133. For the three months ended
June 30, 2004, the net unrealized loss attributed to these interest rate swaps
decreased $6.5 million to an ending balance of $6.2 million. The corresponding
interest rate swap liabilities were recognized in our Consolidated Statement of
Financial Condition at June 30, 2004 under the caption Accrued expenses and
other liabilities. On May 15, 2004, $375.0 million of these interest rate
swaps matured. Information on the interest rate swaps, by maturity date, is as follows: Interest Rate Swaps(Figure 12) 6/30/04
    
    12/31/03Notional
    
    Receiving
    
    Paying
    
    Notional
    
    Receiving
    
    PayingPrincipal
    
    Interest
    
    Interest
    
    Principal
    
    Interest
    
    InterestAmount
    
    Rate
    
    Rate
    
    Amount
    
    Rate
    
    Rate(Dollars in thousands)Fixed Payment and Fixed
Receipt(1)2007
    
    $
    825,000
    
    
    
    4.14
    %
    
    
    2.58
    %
    
    $
    1,005,000
    
    
    
    4.31
    %
    
    
    2.75
    %2008
    
    
    940,000
    
    
    
    3.65
    
    
    
    1.99
    
    
    
    940,000
    
    
    
    3.65
    
    
    
    1.992009
    
    
    585,000
    
    
    
    4.02
    
    
    
    2.39
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    2,350,000
    
    
    
    3.92
    %
    
    
    2.30
    %
    
    $
    1,945,000
    
    
    
    3.99
    %
    
    
    2.38
    %Fixed Payment and Variable
Receipt2004
    
    $
    
    
    
    
    
    %
    
    
    
    %
    
    $
    375,000
    
    
    
    1.18
    %
    
    
    3.66
    %2006
    
    
    1,609,605
    
    
    
    1.20
    
    
    
    3.08
    
    
    
    609,605
    
    
    
    1.16
    
    
    
    3.572007
    
    
    500,000
    
    
    
    1.18
    
    
    
    2.95
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    2,109,605
    
    
    
    1.20
    %(2)
    
    
    3.05
    %
    
    $
    984,605
    
    
    
    1.17
    %(2)
    
    
    3.60
    %Variable Payment and Fixed
Receipt2005
    
    $
    80,000
    
    
    
    2.27
    %
    
    
    1.46
    %
    
    $
    230,000
    
    
    
    2.29
    %
    
    
    1.17
    %2006
    
    
    200,000
    
    
    
    2.51
    
    
    
    1.28
    
    
    
    
    
    
    
    
    
    
    
    2012
    
    
    400,000
    
    
    
    5.76
    
    
    
    1.25
    
    
    
    400,000
    
    
    
    5.76
    
    
    
    1.18Total
    
    $
    680,000
    
    
    
    4.39
    %
    
    
    1.28
    %(2)
    
    $
    630,000
    
    
    
    4.49
    %
    
    
    1.18
    %(2)
   (1)
    
    Converts to variable payment indexed to LIBOR after the first two years
of the interest rate swap agreement.(2)
    
    Rates are based upon LIBOR. 17




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##### Table of Contents



Additionally, as of June 30, 2004, we have entered into forward fixed payment
and variable receipt interest rate swaps totaling $2.0 billion in notional
principal amount that are not reflected in the table above. 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. Settlements under these forward interest
rate swaps begin between August 2004 and January 2005. The forward interest
rate swaps mature between January 2007 and August 2007. The weighted average
fixed payment rate on these forward interest rate swaps is 3.18%. The forward
interest rate swaps will convert certain floating rate FHLB advances into fixed
rate instruments. Such interest rate swaps are designated and qualify as cash
flow hedges under SFAS No. 133. Information on these forward interest rate swaps, by effective date, is as
follows: Forward Interest Rate Swaps(Figure 13) PayingNotional
    
    InterestAmount
    
    Rate(Dollars in thousands)Fixed Payment and Variable Receipt ForwardInterest Rate Swaps Effective Date:Third quarter 2004
    
    $
    1,000,000
    
    
    
    2.79
    %First quarter 2005
    
    
    1,000,000
    
    
    
    3.57
    %Total
    
    $
    2,000,000
    
    
    
    3.18
    %
 In January 2004, we terminated $1.0 billion of our forward interest rate swaps.
A deferred after-tax loss of $8.4 million was included in other comprehensive
income and will be amortized over the next 24 months as the related interest
expense on FHLB advances is recognized. The fair value of our interest rate swap contracts is estimated as the
difference in the present value of future cash flows between our existing
agreements and current market rate agreements of the same duration.
Information on the fair values of the interest rate swaps is as follows: Fair Value of Interest Rate Swaps(Figure 14) 6/30/04
    
    12/31/03(Dollars in thousands)Unrealized gain (loss):Fair value hedges
    
    $
    11,194
    
    
    $
    44,750Cash flow hedges
    
    
    33,180
    
    
    
    (10,495
    )Unhedged interest rate swaps
    
    
    (6,154
    )
    
    
    (14,151
    )Total fair value
    
    $
    38,220
    
    
    $
    20,104
 The net benefit of interest rate swaps included in interest expense is as
follows: Net Benefit of Interest Risk Management(Figure 15) Three Months Ended
    
    Six Months Ended6/30/04
    
    6/30/03
    
    6/30/04
    
    6/30/03(Dollars in thousands)Interest expense (income):Deposits
    
    $
    (10,168
    )
    
    $
    (7,408
    )
    
    $
    (19,116
    )
    
    $
    (17,190
    )FHLB advances
    
    
    7,009
    
    
    
    2,335
    
    
    
    10,043
    
    
    
    4,579Subordinated notes
    
    
    (4,566
    )
    
    
    (4,434
    )
    
    
    (9,165
    )
    
    
    (8,825
    )Unhedged interest rate swaps
    
    
    2,884
    
    
    
    3,860
    
    
    
    6,982
    
    
    
    7,658Total net benefit
    
    $
    (4,841
    )
    
    $
    (5,647
    )
    
    $
    (11,256
    )
    
    $
    (13,778
    )
 Liquidity Our principal sources of funds are deposits, advances from the FHLB of
Cincinnati, federal funds purchased and 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 flows 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. We generally 18




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##### Table of Contents



manage the pricing of deposits to maintain a steady deposit balance, but from
time to time may decide to supplement deposits with longer term and/or lower
cost alternative sources of funds such as FHLB advances and federal funds
purchased and repurchase agreements. We may, from time to time, decide to
price deposits aggressively for strategic reasons which may result in
significant deposit inflows. Contractual Obligations A comprehensive table of significant fixed and determinable contractual
obligations to third parties by payment date was disclosed in our Annual Report
on Form 10-K for the year ended December 31, 2003. There have been no material
changes to that disclosure, except for our prepayment of $2.3 billion in fixed
rate FHLB advances on January 27, 2004. See Borrowings above for further
discussion. Off-Balance Sheet Arrangements In the ordinary course of business, we enter into off-balance-sheet financial
instruments consisting of commitments to extend credit, commercial letters of
credit, standby letters of credit and commitments to purchase or sell assets.
Such financial instruments are recorded in the financial statements when they
are funded or the related fees are incurred or received. We anticipate that we
will have sufficient funds available to meet our commitments. As of June 30,
2004, there were outstanding commitments to originate $2.1 billion of mortgage
loans and other loans and leases, all at market rates. Terms of the
commitments extend up to nine months, but are generally less than two months.
Additionally, there were outstanding unfunded consumer lines of credit of $5.5
billion and corporate banking lines of credit of $403.4 million as of June 30,
2004. Substantially all of the consumer loans, including consumer lines of
credit, are secured by equity in the borrowers residences. We do not expect
all of these lines to be used by the borrowers. Outstanding letters of credit
totaled $149.1 million as of June 30, 2004. Capital and Dividends Charter One, a financial holding company, is subject to regulation by the
Federal Reserve Board (FRB) under the Bank Holding Company Act of 1956 as
amended, and the regulations of the FRB, including various capital
requirements. The Bank is subject to various regulatory capital requirements
administered by the Office of the Comptroller of the Currency. 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, 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. The institutions capital
classification is also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy
require Charter One and the Bank 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. The actual
regulatory capital ratios calculated for Charter One and the Bank, along with
the capital amounts and ratios for capital adequacy purposes and the amounts
required to be categorized as well capitalized, are as follows: Regulatory Capital(Figure 16) 6/30/04To Be Well
CapitalizedFor Capital
    
    Under Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)Charter One:Total capital to risk-weighted assets
    
    $
    3,670,891
    
    
    
    11.28
    %
    
    $
    2,603,789
    
    
    
    38.00
    %
    
    $
    3,254,737
    
    
    
    310.00
    %Tier 1 capital to risk-weighted assets
    
    
    2,898,327
    
    
    
    8.90
    
    
    
    1,301,895
    
    
    
    34.00
    
    
    
    1,952,842
    
    
    
    36.00Tier 1 capital to average assets
    
    
    2,898,327
    
    
    
    6.86
    
    
    
    1,689,577
    
    
    
    34.00
    
    
    
    N/A
    
    
    
    N/ACharter One Bank:Total capital to risk-weighted assets
    
    
    3,603,196
    
    
    
    11.08
    
    
    
    2,602,760
    
    
    
    38.00
    
    
    
    3,253,450
    
    
    
    310.00Tier 1 capital to risk-weighted assets
    
    
    2,638,076
    
    
    
    8.11
    
    
    
    1,301,380
    
    
    
    34.00
    
    
    
    1,952,070
    
    
    
    3  6.00Tier 1 capital to average assets
    
    
    2,638,076
    
    
    
    6.24
    
    
    
    1,690,404
    
    
    
    34.00
    
    
    
    2,113,005
    
    
    
    35.00
 19




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##### Table of Contents



12/31/03To Be Well
CapitalizedFor Capital
    
    Under Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)Charter One:Total capital to risk-weighted assets
    
    $
    3,573,655
    
    
    
    11.68
    %
    
    $
    2,448,394
    
    
    38.00%
    
    $
    3,060,493
    
    
    3 10.00%Tier 1 capital to risk-weighted assets
    
    
    2,790,462
    
    
    
    9.12
    
    
    
    1,224,197
    
    
    34.00
    
    
    1,836,296
    
    
    3
6.00Tier 1 capital to average assets
    
    
    2,790,462
    
    
    
    6.50
    
    
    
    1,716,047
    
    
    34.00
    
    
    N/A
    
    
    N/ACharter One Bank:Total capital to risk-weighted assets
    
    
    3,525,567
    
    
    
    11.52
    
    
    
    2,447,262
    
    
    38.00
    
    
    3,059,077
    
    
    3
10.00Tier 1 capital to risk-weighted assets
    
    
    2,409,716
    
    
    
    7.88
    
    
    
    1,223,631
    
    
    34.00
    
    
    1,835,446
    
    
    3
6.00Tier 1 capital to average assets
    
    
    2,409,716
    
    
    
    5.65
    
    
    
    1,706,068
    
    
    34.00
    
    
    2,132,585
    
    
    3
5.00
 Management believes that, as of June 30, 2004, Charter One and the Bank
individually met the capital adequacy requirements to which they were subject.
Events beyond managements control, such as fluctuations in interest rates or a
downturn in the economy in areas in which the institutions loans and
securities are concentrated could adversely affect future earnings and,
consequently, the institutions ability to meet its future capital
requirements. Quarterly Stock Prices and Dividends(Figure 17) Three Months Ended6/30/04
    
    3/31/04
    
    12/31/03
    
    9/30/03
    
    6/30/03Market price of common stock (NYSE: CF)High
    
    $
    44.82
    
    
    $
    37.96
    
    
    $
    34.87
    
    
    $
    33.20
    
    
    $
    32.59Low
    
    
    33.10
    
    
    
    32.91
    
    
    
    30.31
    
    
    
    30.10
    
    
    
    27.24Close
    
    
    44.19
    
    
    
    35.36
    
    
    
    34.55
    
    
    
    30.60
    
    
    
    31.18Dividends declared and paid
    
    
    .29
    
    
    
    .26
    
    
    
    .26
    
    
    
    .26
    
    
    
    .24
 
 ITEM 3. Quantitative and Qualitative Disclosure About Market Risk Management considers our interest-sensitivity profile when deciding on sources
of funds. At June 30, 2004, our one-year gap was a negative 5.32% of total
interest-earning assets. A comprehensive qualitative and quantitative analysis regarding market risk was
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2003. The assumptions used in our model have been updated as of June 30, 2004.
The table below indicates the estimated impact on net interest income under
the various interest rate scenarios as a percentage of base case net interest
income projections. Changes in
    
    Estimated Percentage ChangeInterest Rates
    
    in Future Net Interest Income(basis points) (1)
    
    12 Months+200 over one year
    
    
    (1.38
    )%+100 over one year
    
    
    (.24
    )- 100 over one year
    
    
    (.48
    )
   (1)
    
    In general, short and long-term
rates are assumed to increase or decrease, in parallel
fashion, across all four quarters and then remain
unchanged. However, the rates paid on core deposits are
assumed to reprice at only half the increment. Actual results will differ from simulated results due to timing, magnitude, and
frequency of interest rate changes, as well as changes in market conditions and
management strategies. 
 ITEM 4. Controls and Procedures An evaluation of the Companys disclosure controls and procedures (as defined
in Section 13a-15(e) of the Securities Exchange Act of 1934 (the Act)) as of
June 30, 2004 was carried out under the supervision and with the participation
of the Companys Chief Executive Officer, Chief Financial Officer and several
other members of the Companys senior management. The Companys Chief
Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures as currently in effect are effective in
ensuring that the information required to be disclosed by the Company in the
reports it files or submits under the Act is (i) accumulated and communicated
to the Companys management (including the Chief Executive Officer and Chief
Financial Officer) in a timely manner, and (ii) recorded, processed, summarized
and reported within the time periods 20




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##### Table of Contents



specified in the SECs rules and forms. There have been no changes in our
internal control over financial reporting (as defined in Rule 13a-15(f) of the
Act) that occurred during the quarter ended June 30, 2004, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. The Company intends to continually review and evaluate the design and
effectiveness of its disclosure controls and procedures and to improve its
controls and procedures over time and to correct any deficiencies that it may
discover in the future. The goal is to ensure that senior management has
timely access to all material financial and non-financial information
concerning the Companys business. While the Company believes the present
design of its disclosure controls and procedures is effective to achieve its
goal, future events affecting its business may cause the Company to modify its
disclosure controls and procedures. 
 PART II  OTHER INFORMATION 
 ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities On April 23, 2002, the Companys Board of Directors authorized management to
repurchase up to 10% of the Companys outstanding common stock, or
approximately 22 million shares, under a program of open market purchases or
privately negotiated transactions. The plan does not have an expiration date.
Information on the shares purchased during the first and second quarters of
2004 is as follows. Quarterly Stock Repurchase Activity(Figure 18) Total Number of
    
    Maximum Number ofShares Purchased
    
    Shares that May YetTotal Number of
    
    Average Price
    
    As Part of Publicly
    
    Be PurchasedShares Purchased
    
    Per Share
    
    Announced Plan
    
    Under the PlanJanuary 1, 2004  January 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,424,163
    (1)February 1, 2004  February 29, 2004
    
    
    1,715,900
    
    
    $
    35.72
    
    
    
    1,715,900
    
    
    
    4,708,263March 1, 2004  March 31, 2004
    
    
    21,200
    
    
    
    36.41
    
    
    
    21,200
    
    
    
    4,687,063First quarter 2004
    
    
    1,737,100
    
    
    
    35.73
    
    
    
    1,737,100April 1, 2004  April 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,687,063May 1, 2004  May 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,687,063June 1, 2004  June 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,687,063Second quarter 2004
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,737,100
    
    
    $
    35.73
    
    
    
    1,737,100
   (1)
    
    Amount represents the number of shares available to be repurchased under
the plan as of December 31, 2003. 
 ITEM 4. Submission of Matters to a Vote of Security Holders (a) (b) (c) The Company held its annual meeting of shareholders on April 21,
2004. The following matters were voted on at the meeting: For
    
    Withheld1. The election of six directors, set forth
below, with terms ending in 2007:Patrick J. Agnew
    
    
    181,975,886
    
    
    
    9,270,513Denise Marie Fugo
    
    
    182,529,324
    
    
    
    8,717,074Charles J. Koch
    
    
    187,292,843
    
    
    
    3,953,556Ronald F. Poe
    
    
    176,666,837
    
    
    
    14,579,562Jerome L. Schostak
    
    
    179,696,126
    
    
    
    11,550,272Mark Shaevsky
    
    
    176,721,167
    
    
    
    14,525,232
 The following are the names of the directors (and remaining terms) whose terms continued after the meeting: Phillip Wm. Fisher (term ending 2006)
Mark D. Grossi (term ending 2006)
Karen R. Hitchcock (term ending 2006)
John D. Koch (term ending 2006)
Michael P. Morley (term ending 2006)
Joseph C. Scully (term ending 2006)
John P. Tierney (term ending 2006)
Herbert G. Chorbajian (term ending 2005) 21




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##### Table of Contents



Barbara J. Mahone (term ending 2005)
Richard W. Neu (term ending 2005)
Victor A. Ptak (term ending 2005)
Melvin J. Rachal (term ending 2005)
Leonard S. Simon (term ending 2005) BrokerFor
    
    Against
    
    Abstain
    
    Non-Votes2. Approval of the proposed amendments to the
Charter One Financial, Inc. 1997 Stock Option and
Incentive Plan.
    
    
    135,827,157
    
    
    
    16,021,098
    
    
    
    2,984,746
    
    
    
    36,413,3963. Ratification of the appointment of Deloitte &
Touche LLP as Charter One Financial, Inc.s
independent auditors for the year ending
December 31, 2004.
    
    
    173,595,381
    
    
    
    15,267,702
    
    
    
    2,383,315
    
    
    
    
 
 ITEM 5. Other Information Cash Dividend On July 21, 2004, the Companys Board of Directors declared a
regular quarterly cash dividend of $.29 per share. The cash dividend is
payable August 20, 2004 to shareholders of record on August 6, 2004. 
 ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits: See Index to Exhibits. (b) Reports on Form 8-K: On April 5, 2004, the Company filed a report on Form 8-K correcting its
proxy statement for its April 21, 2004 annual meeting of shareholders.
Additionally, the Company clarified its disclosure regarding the total tax
fees paid to its principal independent auditors. On April 19, 2004, the Company filed a report on Form 8-K containing its
earnings release dated April 19, 2004. On May 5, 2004, the Company filed a report on Form 8-K announcing that it
had entered into Agreement and Plan of Merger (the Merger Agreement) by
and among the Company, Citizens Financial Group, Inc., a Delaware
corporation (Citizens), Cardinal Acquisition Corp., a Delaware corporation
and wholly owned subsidiary of Citizens, and, solely with respect to Article
11 of the Merger Agreement, The Royal Bank of Scotland Group plc, a public
limited liability company incorporated under the laws of Scotland and an
indirect parent of Citizens. 22




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. CHARTER ONE FINANCIAL, INC.Date: August 10, 2004
    
    /s/ Charles John KochCharles John KochChairman of the Board, President and ChiefExecutive Officer(Duly Authorized Officer and PrincipalExecutive Officer)Date: August 10, 2004
    
    /s/ Richard W. NeuRichard W. NeuExecutive Vice President and Chief Financial Officer(Duly Authorized Officer and PrincipalFinancial and Accounting Officer)
 23




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##### Table of Contents



INDEX TO EXHIBITS EXHIBITNUMBER
    
    DESCRIPTION2.1
    
    Agreement and Plan of Merger, dated as
of May 4, 2004, by and between Charter
One Financial, Inc., Citizens
Financial Group, Inc., Cardinal
Acquisition Corp. and, solely with
respect to Article 11 of the
Agreement, The Royal Bank of Scotland
Group plc, filed on May 10, 2004 as
Exhibit 2.1 to Registrants Report on
Form 8-K (File No. 001-15495), is
incorporated herein by reference.3.1
    
    Registrants Second Restated
Certificate of Incorporation, as
amended and currently in effect, filed
as Exhibit 3.1 to Registrants Report
on Form 10-K for the fiscal year ended
December 31, 2000 (File No.
001-15495), is incorporated herein by
reference.3.2
    
    Registrants Bylaws, as amended and
restated and currently in effect,
filed as Exhibit 3.2 to Registrants
Report on Form 10-K for the fiscal
year ended December 31, 1999 (File No.
001-15495), is incorporated herein by
reference.4.1
    
    Form of Certificate of Common Stock,
as currently in effect, filed as
Exhibit 4.1 to Registrants Report on
Form 10-K for the fiscal year ended
December 31, 2000 (File No.
001-15495), is incorporated herein by
reference.4.2
    
    Amended and Restated Stockholder
Protection Rights Agreement, dated
October 20, 1999, between the Company
and Fleet National Bank (f/k/a
BankBoston, N.A.), as rights agent,
filed as Exhibit 2 to the Companys
Registration Statement on Form 8-A/A
filed on October 30, 1999 (File No.
001-15495), is incorporated herein by
reference.4.3
    
    The Registrant hereby agrees to
furnish to the Securities and Exchange
Commission, upon request, with copies
of all instruments defining rights of
holders of long-term debt of Charter
One and its consolidated subsidiaries.10.1
    
    Registrants Long-Term Stock Incentive
Plan, filed on January 22, 1988 as
Exhibit 10.1 to Registrants
Registration Statement on Form S-1
(File No. 33-16207), is incorporated
herein by reference.10.2
    
    Registrants Directors Stock Option
Plan, filed on January 22, 1988 as
Exhibit 10.2 to Registrants
Registration Statement on Form S-1
(File No. 33-16207), is incorporated
herein by reference.10.3
    
    Charter One Bank, F.S.B. Executive
Incentive Goal Achievement Plan, filed
as Exhibit 10.8 to Registrants Report
on Form 10-K for the fiscal year ended
December 31, 1994 (File No. 000-16311)
is incorporated herein by reference.10.4
    
    First American Savings Bank, F.S.B.
Nonqualified Retirement Plan and First
Amendment thereto, filed as Exhibit
10.17 to Registrants Report on Form
10-K for the fiscal year ended
December 31, 1993 (File No.
000-16311), are incorporated herein by
reference.10.5
    
    Amendment 1, dated May 3, 1996, to
Forms of Supplemental Retirement
Agreements, dated October 31, 1995,
between Charter One and Charles John
Koch, Richard W. Neu, John David Koch,
Mark D. Grossi, and Robert J. Vana
filed as Exhibit 10.7 to the
Registrants Report on Form 10-K for
the fiscal year ended December 31,
1998 (File No. 000-16311), is
incorporated herein by reference. The
Agreements, originally filed on July
25, 1995 as Exhibits 10.4 and 10.5 to
Registrants Registration Statement on
Form S-4 (File No. 33-61273), are
incorporated herein by reference.10.6
    
    Amended and Restated Employment
Agreements, effective August 1, 1999,
between Charter One Financial, Inc.
and Charles John Koch, Richard W. Neu,
John D. Koch, Mark D. Grossi, and
Robert J. Vana filed as Exhibit 10.8
to Registrants Report on Form 10-K
for the fiscal year ended December 31,
1999 (File No. 000-16311), is
incorporated herein by reference.10.7
    
    Alliance Bancorp 1997 Long-Term
Incentive Stock Benefit Plan, filed as
an attachment to the proxy statement
for the annual meeting of stockholders
of Alliance held on May 28, 1997 (File
No. 000-20082), is incorporated herein
by reference.10.8
    
    Hinsdale Financial Corporation 1994
Incentive Stock Option Plan, filed as
an attachment to the proxy statement
for the annual meeting of stockholders
of Alliance held on February 8, 1995
(File No. 000-20082), is incorporated
herein by reference.
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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION10.9
    
    Hinsdale Financial Corporation 1992
Stock Option Plan for Outside
Directors and the Hinsdale Financial
Corporation 1992 Incentive Stock
Option Plan, filed as attachments to
the proxy statement for the annual
meeting of stockholders of Alliance
held on February 10, 1993 (File No.
000-20082) is incorporated herein by
reference.10.10
    
    Charter One Financial, Inc. 1997 Stock
Option and Incentive Plan, as amended
and restated, filed as Exhibit 10.13
to the Registrants Quarterly Report
on Form 10-Q for the quarter ended
June 30, 2002 (File No. 001-15495), is
incorporated herein by reference.10.11
    
    1992 Stock-Based Compensation Plan of
RCSB Financial, Inc., filed on October
8, 1997, as an exhibit to
Post-Effective Amendment Number One on
Form S-8 to Form S-4 (File No.
333-33259), is incorporated herein by
reference.10.12
    
    Home Federal Savings Bank Stock
Compensation Program, filed on
September 29, 1997 as an exhibit to
Post-Effective Amendment Number One on
Form S-8 to Form S-4 (File No.
333-33169), is incorporated herein by
reference.10.13
    
    The RCSB Financial, Inc. Non-Employee
Director Deferred Compensation Plan,
as amended and restated on December 1,
1998, filed as Exhibit 10.16 to
Registrants Annual Report on Form
10-K for the fiscal year ended
December 31, 1998 (File No.
000-16311), is incorporated herein by
reference.10.14
    
    ALBANK Financial Corporation 1992
Stock Incentive Plan for Key
Employees, as amended and restated as
of December 18, 1995, filed as Exhibit
10.11 to ALBANKs Annual Report on
Form 10-K for the year ended December
31, 1995 (File No. 000-19843), is
incorporated herein by reference.10.15
    
    ALBANK Financial Corporation 1995
Stock Incentive Plan for Outside
Directors, filed as Exhibit 10.12.1 to
ALBANKs Annual Report on Form 10-K
for the year ended December 31, 1995
(File No. 000-19843), is incorporated
herein by reference.10.16
    
    ALBANK Financial Corporation 1992 Stock Incentive Plan for Outside Directors, filed
as an appendix to the Proxy Statement for the 1992 Annual Meeting of the
Stockholders of ALBANK held on October 26, 1992 (File No. 001-19843), is
incorporated herein by reference.10.17
    
    Employment Agreement, dated November 30, 1998, between Charter One Financial, Inc.
and Herbert G. Chorbajian, filed as Exhibit 10.20 to Registrants Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 (File No. 000-16311), is
incorporated herein by reference.10.18
    
    Charter One Financial, Inc. Top Executive Incentive Goal Achievement Plan, filed as
Appendix A to the Registrants Proxy Statement for the 2003 Annual Meeting of
Shareholders held on April 22, 2003 (File No. 001-15495), is incorporated herein by
reference.10.19
    
    Charter One Bank, N.A.s Director Non-Stock Deferred Compensation Plan, filed as
Exhibit 10.20 to the Registrants Annual Report on Form 10-K for the fiscal year
ended December 31, 2002 (File No. 001-15495), is incorporated herein by reference.10.20
    
    Charter One Bank, N.A.s Non-Stock Deferred Compensation Plan, filed as Exhibit
10.21 to the Registrants Annual Report on Form 10-K for the fiscal year ended
December 31, 2002 (File No. 001-15495), is incorporated herein by reference.10.21
    
    Charter One Bank, N.A.s Stock Deferred Compensation Plan, filed as Exhibit 10.22
to the Registrants Annual Report on Form 10-K for the fiscal year ended December
31, 2002 (File No. 001-15495), is incorporated herein by reference.10.22
    
    Master Trust Agreement for Charter One Financial, Inc. Deferred Compensation Plans,
filed as Exhibit 10.23 to the Registrants Annual Report on Form 10-K for the
fiscal year ended December 31, 2002 (File No. 001-15495), is incorporated herein by
reference.10.23
    
    Amendment No. 1 to the amended and restated Charter One Financial, Inc. 1997 Stock
Option and Incentive Plan, filed as Exhibit 10.24 to the Registrants Annual Report
on Form 10-K for the fiscal year ended December 31, 2002 (File No. 001-15495), is
incorporated herein by reference.
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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION10.24
    
    Charter One Financial, Inc. 2004 Senior Executive Stock Unit Deferred Compensation
Plan and Charter One Financial, Inc. 2004 Senior Executive Cash Deferred
Compensation Plan, effective February 1, 2004, filed as Exhibit 10.24 to the
Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 2003
(File No. 001-15495), is incorporated herein by reference.10.25
    
    Charter One Financial, Inc. 2004 Senior Executive Stock Unit Deferred Compensation
Plan Agreements, effective February 1, 2004, between Charter One Financial, Inc.
and Charles John Koch, Richard W. Neu, John D. Koch, Mark D. Grossi, and Robert J.
Vana, filed as Exhibit 10.25 to the Registrants Annual Report on Form 10-K for the
fiscal year ended December 31, 2003 (File No. 001-15495), is incorporated herein by
reference.10.26
    
    Amendment 2, dated July 31, 2002 (but effective March 20, 2001), to Forms of
Supplemental Retirement Agreements between Charter One Financial, Inc. and Charles
John Koch, Richard W. Neu, John D. Koch, Mark D. Grossi, and Robert J. Vana, filed
as Exhibit 10.26 to the Registrants Annual Report on Form 10-K for the fiscal year
ended December 31, 2003 (File No. 001-15495), is incorporated herein by reference.10.27
    
    Amendment 3, dated February 1, 2004, to Forms of Supplemental Retirement Agreements
between Charter One Financial, Inc. and Charles John Koch, Richard W. Neu, John D.
Koch, Mark D. Grossi, and Robert J. Vana, filed as Exhibit 10.27 to the
Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 2003
(File No. 001-15495), is incorporated herein by reference.11
    
    Statement Regarding Computation of Per Share Earnings31.1
    
    Certification Required by Securities Exchange Act of 1934 Rule 13a-14(a) (Chief
Executive Officer)31.2
    
    Certification Required by Securities Exchange Act of 1934 Rule 13a-14(a) (Chief
Financial Officer)32
    
    Certifications Required by Section 1350 of Title 18 of the United States Code
 26