SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): July 28, 2004
CHARTER ONE FINANCIAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 001-15495 34-1567092
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(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification Number)
incorporation)
1215 SUPERIOR AVENUE, CLEVELAND, OHIO 44114
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(Address of principal executive offices)
(216) 566-5300
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(Registrant's telephone number, including area code)
ITEM 5. OTHER EVENTS
On July 28, 2004, Charter One Financial, Inc. ("Charter One"),
Citizens Financial, Inc. ("Citizens") and The Royal Bank of
Scotland Group plc ("The Royal Bank of Scotland Group"), the
indirect parent company of Citizens, agreed in principle to
settle the previously disclosed purported stockholder class
actions pending against them, which challenged the proposed
acquisition of Charter One by Citizens.
Under the terms of the settlement, all claims relating to the
merger agreement and the proposed merger will be dismissed and
released on behalf of the settlement class. The settlement is
subject to court approval. Upon court approval, plaintiff's
attorneys are expected to apply for an award of attorneys'
fees and expenses.
In the settlement, Citizens has agreed to waive its right to
receive any portion of the termination fee payable under the
merger agreement in excess of $375 million. The other terms of
the merger agreement are not affected by the proposed
settlement. In the settlement, it was also agreed that Charter
One would make the disclosures set forth below.
Information concerning the proposed merger is set forth or
incorporated by reference in the proxy statement of Charter
One dated July 9, 2004. This information is supplemented by
the additional information filed in this current report on
Form 8-K, including specifically the following:
SELECTED HISTORICAL FINANCIAL INFORMATION
The table below presents summary historical financial and
other data for Charter One as of the dates and for the periods
indicated. The summary data for Charter One is based on and
should be read in conjunction with Charter One's historical
consolidated financial statements and related notes which were
presented in its prior filings with the SEC, and which are
incorporated by reference into the July 9, 2004 proxy
statement.
Charter One derived the following historical financial
information from its consolidated financial statements as of
December 31, 2003, 2002, 2001, 2000 and 1999 and for each of
the years then ended, audited by Deloitte & Touche LLP, and
from its unaudited consolidated financial statements at and
for the three months ended March 31, 2004 and 2003.
In the opinion of management of Charter One, the unaudited
financial statements of Charter One include all normal
recurring adjustments necessary for a fair presentation of the
financial position and results of operations as of and for
these periods in accordance with United States generally
accepted accounting principles. You should not assume that the
results presented below are indicative of results for any
future period.
AT OR FOR THE THREE MONTHS AT AND FOR THE YEARS
ENDED MARCH, 31, ENDED DECEMBER 31,
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2004 2003 2003 2002 2001 2000 1999
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FINANCIAL CONDITION:
Cash, federal funds sold and
other $ 544,480 $1,858,239 $ 528,166 $ 447,213 $ 516,520 $ 531,257 $ 693,532
Investment securities 235,663 231,294 276,765 214,068 135,586 449,215 542,081
Mortgage-backed securities 7,687,264 13,244,713 10,445,247 12,077,389 9,014,416 5,593,371 6,100,380
Loans and leases, net 29,785,432 24,976,987 28,250,448 26,204,738 25,728,700 24,008,174 22,312,850
Other assets 3,026,090 2,937,370 3,127,440 2,952,664 2,779,294 2,389,410 2,170,220
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total assets $41,278,929 $43,248,603 $42,628,066 $41,896,072 $38,174,516 $32,971,427 $31,819,063
=========== =========== =========== =========== =========== =========== ===========
Deposits $26,939,001 $27,383,615 $27,203,319 $27,527,843 $25,123,309 $19,605,671 $19,073,975
FHLB advances 8,661,607 10,446,630 9,847,293 9,037,925 8,657,238 9,636,277 9,226,150
Other borrowings 596,571 707,591 967,072 992,765 507,669 547,134 515,574
Other liabilities 1,824,718 1,478,635 1,334,513 1,253,714 957,800 726,141 605,664
Shareholders' equity 3,257,032 3,232,132 3,275,869 3,083,825 2,928,500 2,456,204 2,397,700
Total liabilities and ----------- ----------- ----------- ----------- ----------- ----------- -----------
shareholders' equity $41,278,929 $43,248,603 $42,628,066 $41,896,072 $38,174,516 $32,971,427 $31,819,063
=========== =========== =========== =========== =========== =========== ===========
RESULTS OF OPERATIONS:
Interest income $ 489,827 $ 545,786 $2,112,029 $2,286,461 $2,378,246 $2,247,088 $2,128,455
Interest expense 185,273 246,745 943,142 1,116,631 1,387,830 1,344,053 1,194,351
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Net interest income 304,554 299,041 1,168,887 1,169,830 990,416 903,035 934,104
Provision for loan and lease
losses 18,616 61,471 152,272 192,003 100,766 54,205 35,237
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Net interest income after
provision for loan and
lease losses 285,938 237,570 1,016,615 977,827 889,650 848,830 898,867
Other income 5,197 161,826 698,470 547,546 473,624 392,871 228,206
Administrative expenses 218,035 183,292 790,721 678,972 629,662 603,955 633,327
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Income before income taxes 73,100 216,104 924,364 846,401 733,612 637,746 493,746
Income taxes 22,844 68,613 293,473 268,733 232,898 203,784 159,770
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Net income $50,256 $147,491 $630,891 $577,668 $500,714 $433,962 $333,976
======= ======== ======== ======== ======== ======== ========
Basic earning per share $ 0.22 $ 0.66 $ 2.82 $ 2.52 $ 2.15 $ 1.84 $ 1.35
======= ======== ======== ======== ======== ======== ========
Diluted earnings per share $ 0.22 $ 0.64 $ 2.74 $ 2.45 $ 2.10 $ 1.81 $ 1.32
======= ======== ======== ======== ======== ======== ========
PERFORMANCE RETURNS:
Return on average assets 0.47% 1.38% 1.45% 1.47% 1.41% 1.36% 1.08%
Return on average equity 6.18 18.48 19.45 19.38 18.17 18.00 13.50
Efficiency ratio 70.39 39.77 42.34 39.54 41.91 45.68 50.69
OTHER DATA:
Loan servicing portfolio $16,124,233 $18,713,649 $16,877,169 $16,893,609 $13,846,807 $10,379,644 $10,798,563
Book value per share 14.56 14.36 14.68 13.72 12.43 10.70 9.90
Tangible book value per share 12.56 12.50 12.67 11.86 10.92 9.94 9.11
Dividend payout ratio 118.18% 34.38% 35.77% 33.88% 33.81% 33.15% 38.64%
Net yield on average
interest-earning assets 3.04 2.99 2.87 3.19 3.00 3.02 3.19
Average shareholders' equity
to average assets 7.61 7.46 7.45 7.59 7.76 7.58 7.99
Total shareholders' equity to
total assets 7.89 7.47 7.68 7.36 7.67 7.45 7.54
Total tangible shareholders'
equity to total assets 6.80 6.50 6.63 6.36 6.74 6.92 6.93
NUMBER OF OFFICES:
Branches 616 477 592 461 456 419 417
Loan production offices 30 26 33 26 29 32 36
Number of employees (FTEs) 7,843 7,198 7,804 6,997 6,850 6,573 7,055
RECENT DEVELOPMENTS
On July 19, 2004, Charter One announced net income of $166
million, or $0.72 per diluted share, for the three months
ended June 30, 2004. Net income in the year-ago quarter was
also $166 million, or $0.72 per diluted share. Net income for
the second quarter of 2004 generated annualized returns of
1.56% on average assets, 20.50% on average equity, and 23.82%
on average tangible equity. In the year-ago quarter, the
returns were 1.50% on average assets, 19.86% on average equity
and 22.74% on average tangible equity. As of June 30, 2004,
Charter One had total consolidated assets of approximately
$42.5 billion, total liabilities of approximately $39.2
billion, and shareholders' equity of approximately $3.3
billion.
CERTAIN PROJECTIONS
During due diligence, Charter One provided to its financial
advisors, The Royal Bank of Scotland Group and Citizens
internal earnings per share projections for 2004. This
information was provided as part of the due diligence process
and to confirm the reasonableness and achievability of the
$2.95 per diluted share consensus Institutional Brokerage
Estimate System (I/B/E/S) 2004 earnings estimates for Charter
One. This information was consistent with the forecast
publicly provided by Charter One in its January 20, 2004 press
release (subsequently affirmed in its April 19, 2004 press
release) of $2.90 to $3.00 per diluted share (excluding a
projected prepayment penalty of $0.45 to $0.50 per share
resulting from the prepayment of $2.25 billion in Federal Home
Loan Bank advances). Stockholders are cautioned that these
projections constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of
1995 and involve significant risks and uncertainties.
INFORMATION REGARDING THE OPINION OF CHARTER ONE'S FINANCIAL
ADVISOR
As disclosed in the July 9, 2004 proxy statement, Charter One
engaged Lehman Brothers, Inc. to act as its financial advisor
in connection with the merger and render its opinion with
respect to the fairness, from a financial point of view, to
Charter One's stockholders of the consideration to be offered
to those stockholders in the merger. Information regarding the
opinion and the financial analyses performed by Lehman
Brothers, as well as a copy of the opinion itself, are
included in the July 9, 2004 proxy statement.
Among the analyses performed by Lehman Brothers was an
analysis of transaction pricing multiples. Lehman Brothers
noted the transaction value to Charter One stockholders of
$44.50 per share of Charter One common stock as a premium to
Charter One's closing price per share of common stock on May
3, 2004 (one day prior to the announcement of the transaction)
and Charter One's closing price per share of common stock on
April 2, 2004 (one month prior to May 3, 2004). The one-day
premium was 24.7% and the one-month premium was 26.9%.
Lehman Brothers also calculated the transaction value as a
multiple of Charter One's book value and tangible book value
at March 31, 2004 and as a multiple of Charter One's estimated
earnings for 2004 (based on consensus I/B/E/S earnings
estimates for Charter One). These transaction values as
multiples of book value, tangible book value and estimated
earnings for 2004 were 3.06, 3.54 and 15.1 times,
respectively. Lehman Brothers also calculated the implied
premium to total deposits and the implied premium to core
deposits (total deposits minus all certificates of deposit
with face values in excess of $100,000). These implied
premiums were 27.0% and 28.9%, respectively.
As disclosed in the July 9, 2004 proxy statement, Lehman
Brothers received a fee from Charter One upon announcement of
the merger of $2.0 million, and will receive an additional fee
of $21.2 million contingent upon completion of the merger.
Also as disclosed in the July 9, 2004 proxy statement, Lehman
Brothers provides a full range of financial advisory and
securities services, and has performed various investment
banking services for Charter One, Citizens and The Royal Bank
of Scotland Group in the past. These services have included
acting as lead manager on a subordinate debt offering by
Charter One's bank subsidiary, as well as acting as joint book
runner or co-manager for various securities offerings by The
Royal Bank of Scotland Group or its affiliates. During the two
years prior to the date of the merger agreement, Lehman
Brothers received fees for investment banking and financial
advisory services provided to Charter One and
its affiliates (excluding fees described above in connection
with the merger) of approximately $2 million, in the
aggregate. During that period, Lehman Brothers received fees
for investment banking and financial advisory services
provided to The Royal Bank of Scotland Group and its
affiliates of approximately $7.1 million, in the aggregate.
BACKGROUND
Pages 10-12 of the July 9, 2004 proxy statement describes the
background of the merger. As disclosed in the proxy statement,
prior to and during the discussions with The Royal Bank of
Scotland and Citizens, Charter One also engaged in exploratory
discussions with other financial institutions. Of the two
institutions with whom Charter One engaged in discussions
during this process, one informed Charter One - prior to
proposing any transaction pricing to Charter One - that it had
determined to discontinue its exploration of a potential
transaction with Charter One because it was not then prepared
to proceed with a transaction of this magnitude. The other
institution continued discussions from time to time regarding
a potential stock-for-stock merger; however, at the time that
the merger agreement with The Royal Bank of Scotland Group and
Citizens was entered into, the institution was not prepared to
proceed with a transaction, and in any event had stated that
it was unwilling to engage in a transaction at a valuation
other than one substantially below the consideration offered
in the merger with Citizens.
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this
report to be signed on its behalf by the undersigned hereunder
duly authorized.
CHARTER ONE FINANCIAL, INC.
By: /s/ Mark D. Grossi
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Name: Mark D. Grossi
Title: Executive Vice President
Date: July 28, 2004