CHARTER ONE FINANCIAL INC - 10-K Annual Report


shareholder message
management team message
uncompromising vision
obsessive execution
aggressive culture
attracting great customers
selected financial data
financial review
consolidated statements of financial condition
consolidated statements of income
consolidated statements of shareholders’ equity
consolidated statements of cash flows
notes to consolidated financial statements
independent auditors’ report
form 10-k
	form 10-k cross reference index
	item 1. business
	item 2. properties
	item 3. legal proceedings
signatures
charter one financial, inc., corporate directory
index to exhibits
EX-11 COMPUTATION OF PER SHARE EARNINGS
EX-21 SUBSIDIARIES OF THE REGISTRANTS
EX-23 CONSENT OF DELOITTE & TOUCHE LLP

l e a d e r s h i p + p e r f o r m a n c e =

annual report 2001

CHARTER ONE
FINANCIAL, INC.^®

charter one’s
S U C C E S S
is not a matter of chance

TABLE OF CONTENTS

shareholder message 4-6 management team message 7
uncompromising vision 8-9 obsessive execution 10-11 aggressive culture 12-13
attracting great customers 14-15

we achieve great
r e s u l t s



		2001			2000			1999

Net interest income		$	990,416		$	903,035		$	934,104




Other income			473,624			392,871			230,597




Recurring administrative expenses(1)			629,662			574,464			569,801




Operating earnings(1)			500,714			453,918			432,099




Net income			500,714			433,962			333,976




Earnings per share(2):




	Operating earnings(1)		2.21			1.99			1.80




	Net income		2.21			1.90			1.39

Return on average assets:




	Using operating earnings(1)		1.41	%		1.43	%		1.39	%




	Using net income		1.41	%		1.36	%		1.08	%




Return on average equity:




	Using operating earnings(1)		18.17	%		18.82	%		17.46	%




	Using net income		18.17	%		18.00	%		13.50	%




Return on average tangible equity			20.25	%		19.99	%		14.84	%




Efficiency ratio(1)			41.91	%		43.39	%		45.49	%

Total assets		$	38,174,516		$	32,971,427		$	31,819,063




Loans and leases, net			25,728,700			24,008,174			22,312,850




Total deposits			25,123,309			19,605,671			19,073,975




Shareholders’ equity			2,928,500			2,456,204			2,397,700

Shareholders’ equity to assets			7.67	%		7.45	%		7.54	%

(1) Excludes the impact of merger-related and special charges in 2000 and 1999
(2) Restated for stock dividends

LEADERSHIP + PERFORMANCE = RESULTS

WE DO IT BETTER

Regional bank headquartered in Cleveland, Ohio
21st largest bank in the United States
456 branches in 6 states: OH, MI, NY, IL, MA, VT


12%	20%	48%
operating EPS compounded growth, originally stated, for 10 years	deposit-related revenue growth, for 5th consecutive year	organic core deposit growth


17%	33%	19%




organic increase in total deposits	increase in home equity lines of credit outstanding	increase in nonresidential lending portfolios


89%	42%	25%




organic increase in checking balances, now 31% of total deposits	efficiency ratio, the cornerstone to delivering value to customers	of retail banking sales outside normal business hours and locations

2 + 3

[PICTURE]

LEADERSHIP + PERFORMANCE = RESULTS

shareholder message

dear shareholder:

Despite a year of unprecedented events, 2001 was the best year in Charter One’s history. Perhaps more importantly, many of this year’s successes were built on momentum from the past and laid a firm foundation for years to come. Because of record-setting deposit growth and asset generation, along with the cultural and operational components that made them possible, we now have an enhanced franchise and a much stronger balance sheet than a year ago.

our strategy is
p r o d u c i n g
value

performance

We reported net income above $500 million for the first time, and posted industry-leading retail deposit and revenue growth while maintaining one of the best efficiency ratios in the industry. Our earnings per share increased 11% again this year, and contributed to a 12% compounded growth rate (on an originally stated operating basis) over the past ten years.

the consumer banking niche and efficiency

This year’s performance reinforces the importance of our consumer banking niche. We describe ourselves as retailers delivering attractive banking products to consumers and small businesses in the markets we serve. For the past several years, we have been dedicated to building a highly effective sales force and sales culture. But without terrific products, you get only mediocre results. For results, we focus on the best checking and lending products and services, often with pricing as our entry vehicle. + The key to our product pricing is our cost structure. We reported a 42% efficiency ratio this year — among the best in banking. With an industry average of 55%, this is an important competitive advantage and translates into powerful pricing power.

deposits and related revenue

Aggressive organizations not only take advantage of opportunities, they create their own. With the disruption in the equities markets, it was easy to predict significant fund flows into depository institutions. But few banks could take full advantage of this unique turn of events as successfully as Charter One. As a result, we posted organic retail deposit growth of 17% and a 48% rate in core deposits — again among the best in banking. + This kind of success only adds franchise value if we continue to monitor and enhance the profitability of each customer relationship. While aggressively attracting new customers, we also were effective at encouraging retention and improving the overall profitability of our household base. In addition to being a key element in strengthening

4 + 5

[PICTURE]

CHARLES JOHN KOCH

chief executive officer

our company, deposit growth yielded another benefit: a 20% increase in deposit-related revenue. This was the fifth consecutive year that we reported growth of deposit-related revenue in excess of 20%, and we’re projecting an additional 20% in 2002.

record asset generation and balance sheet management

This year’s interest rate environment drove residential lending volumes to extraordinary levels. More than any other time in recent memory, we saw the importance of residential mortgage production in providing flexibility in our balance sheet and to serve as a natural hedge against various market risks. We generated $9.2 billion in retail originations, far exceeding our portfolio goals, leading us to create $5.3 billion in new mortgage-backed securities. Additionally, sales of such mortgage-backed securities generated a record level of gains. These gains helped provide a cushion against a modest increase in credit costs associated with the softening economy and accelerated mortgage servicing amortization costs associated with higher prepayment rates. + The residential mortgage origination process helped us in other ways, too. It provided us with opportunities to cross-sell profitable home equity lines of credit (60% of all new loans) and high-balance core deposit accounts (26% of new loans). Indeed, despite this year’s refinance environment where it was very difficult to increase home equity lines, we posted a 33% increase, to $2 billion in outstandings. Our loan officers also opened nearly $200 million in new high-balance core deposit accounts. + Additionally, we continued to make significant progress in our long-stated goal to lessen our dependence on single-family loans. While the total loan portfolio increased by 7%, non-single-family loans jumped 19% and now represent 61% of our total portfolio.

fortress-like balance sheet

We have always prided ourselves on our strong balance sheet and our conservative accounting policies. Together, they represent true balance sheet integrity. Our consumer banking success last year led to an even stronger balance sheet: deposit growth improved our loan-to-deposit ratio to 102% from 122%, and we moved the reserve ratio to .98% of loans from .78%. Additionally, our internal capital generation rate allowed us to repurchase 4.3 million common shares and end the year with 7.7% capital and 6.7% tangible capital.

outlook

In closing, we have confidence in our business strategy, and believe we are poised to deliver terrific results in 2002 and beyond to our customers, employees and shareholders. Furthermore, we expect to accomplish this in a conservative manner that reflects our commitment to an organization built on an aggressive sales culture, obsessive execution and measurable results. The importance of these to our success is discussed in the following pages of this year’s annual report. As you read ahead, it becomes obvious that we have an exceptional group of employees dedicated to delivering exceptional results. On behalf of the Board of Directors, I thank them for making Charter One all that it is. I’d also like to recognize our Directors for their counsel and support. We are fortunate to have such a talented and experienced group of men and women helping guide our direction. And, above all, I thank our shareholders for embracing and believing in Charter One and our prospects.

/s/ Charles John Koch

Charles John Koch
Chairman, President and Chief Executive Officer
February 22, 2002

LEADERSHIP + PERFORMANCE = RESULTS

management team message


[PICTURE] RICHARD W. NEU	[PICTURE] MARK D. GROSSI	[PICTURE] JOHN D. KOCH

chief financial officer	chief retail officer	chief lending officer

rick neu, chief financial officer

In my mind, 2001 marked a maturing of our consumer bank strategy. The success of our retail efforts is clearly driving earnings momentum while allowing us to maintain a very low risk profile. We became a core-funded bank with a mix of assets approaching that of many regional banks. That helped open up the interest margin and, when combined with record-breaking asset generation volumes, provided us with great tools for managing the balance sheet risk in terms of interest rates, credit and capital. On the earnings side, we hit 20% retail revenue growth for the fifth straight year. That alone is a powerful part of our earnings momentum and repeating that in 2002 would contribute half of our EPS growth target.

mark grossi, chief retail officer

I love to say we outperformed every retail bank in the country in 2001. We truly have an organization built around focus, accountability and execution. We led the industry in every category that defines a successful retail bank: retail deposit growth, core deposit growth, checking account sales, and revenue growth. Every sales channel — traditional banking centers from Chicago to Burlington, in-grocery store banking centers, the telephone center, and the online bank — delivered explosive results. We acquired more new customers last year than ever before. Not only that, but we have made great strides in customer profitability and retention. I believe our retail franchise is quickly becoming one of the strongest in banking.

john koch, chief lending officer

We generated more loans in 2001 than any other year in our history, easily exceeding our portfolio goals. What makes this claim different from many others? We capitalized on our customer access by cross-selling profitable lending and deposit products, and we used the stream of originations to manage our portfolio mix. Today, residential mortgages account for 39% of our portfolio, down from 66% in 1997. Nonetheless, 95% of this diverse loan mix is secured, with 60% backed by single and multifamily real estate. What’s more, we continue to see charge-off levels running at half those of our banking peers. We believe that trend will continue in 2002. As a result, I can honestly say we are positioned to continue delivering great results in 2002 and beyond.

[PICTURE]


	+		=
TAKING CARE OF BUSINESS		CHARTER ONE TOP PERFORMER From Monday through Friday, my sales team and I are out making deals. But Saturdays are my most productive times. I usually work from about 7:00 a.m. to 2:00 p.m. This is when I tie up any loose ends and make my attack plan for the next week.

LEADERSHIP + PERFORMANCE = RESULTS

WE DO IT BETTER

Retail revenue up 20% to $292 million, 5th year at 20%
Loan to deposit ratio 101%, down from 122%
Repurchased 4.3 million shares in 2001, 24 million in last 3 years

uncompromising
v i s i o n
our best is yet to come

They say hindsight is 20-20. But we believe our future has never been as clear as it is now. Our vision is to become a world-class consumer bank that delivers high growth, high financial returns and low risk to our shareholders. It is a goal that is well within our reach. Why are we so confident? First of all, we have a successful track record. For the past 10 years, earnings per share (on an originally stated operating basis) have had a compounded annual growth rate of 12% while our common stock has had a compounded annual return of 22%. More important, all the necessary elements are in place to continue delivering this kind of earnings growth. Put simply, it is a matter of continuing to grow revenues faster than expenses. This isn’t rocket science, but it does require an organization and culture that is aligned to execute this vision. Our organization is. Our systems and products are world-class. So are our people. They are not only committed to meeting and exceeding their business objectives, but also to sharing their best practices (or their best secrets) with their co-workers, even when they compete head-to-head. This is why the overall performance of Charter One continues to grow and improve, and why the best is yet to come.

8 + 9

[PICTURE]


	+		=
IT’S ALL IN THE DELIVERY		CHARTER ONE TOP PERFORMER Competition brings out the best in me. My customers benefit from this because for me to succeed, I have to have the right attitude and I have to focus on what the customer wants. I’m not the only one who’s hungry to compete and succeed. It’s the one common denominator here.

LEADERSHIP + PERFORMANCE = RESULTS

WE DO IT BETTER

48% organic growth rate — core deposits grew by $4.5 billion
89% organic growth rate — checking account balances, average balance over $5,000
In-grocery store branches reached $1 billion in deposits in only 6 years

obsessive
e x e c u t i o n
come in every day to sell or go home

It’s one thing to do something well. But at Charter One, doing something well is not enough. We are continuously improving our systems, procedures and sales goals necessary to guarantee improved annual performance. Best practices, for example, are more than just encouraging the sharing of ideas to help lower performers meet their sales and other targets. Instead, we institutionalize the practices of our top performers and make their practices next year’s minimum expectations. As we continually raise our standards, we also are refining our training programs, sales platforms and sales management systems so that we can meet these new goals. We train and deploy sales teams for specific sales opportunities, and we methodically micromanage the entire process. Regular daily and weekly sales meetings ensure initial sales and follow-up calls are made. Successes are rewarded. Failures are analyzed so that we can bring to bear whatever additional resources are needed for the next sales opportunity. These same procedures are applied across all sales channels, including our branches, our telephone centers and our online bank.

10 + 11

[PICTURE]


	+		=
ANYTHING BUT AVERAGE		CHARTER ONE TOP PERFORMER





		I try to make each day more productive than the last. I work very hard. But I always keep things simple whether I’m out in the field talking to builders or if I’m in the office encouraging my managers. It comes down to this: I’m always selling our products and our pricing. The results, I’m happy to say, are much better than average.

LEADERSHIP + PERFORMANCE = RESULTS

WE DO IT BETTER

Direct Bank 2001 — $1.2 billion in loans disbursed and $200 million
in deposits, with $300 million through web
Top performers hit 182% of goal; bottom at 102%
Handing out 22 million coupons led to 25% of new checking accounts

aggressive

c u l t u r e

competitive, accountable, innovative

A successful corporate culture goes to the heart of what defines an organization. We’re not shy about saying that our culture revolves around one premise: dramatic sales translate into increased revenues year after year. Indeed, we tell our people to come to work each day prepared to sell or just go home. This is reinforced in a number of ways, from the design of our sales programs to how we reward our people. Our stack-ranking system, for example, not only recognizes top sellers, but it holds every employee accountable for their performance. At the end of each day, every banking center team knows where they rank compared to their peers, whether it’s posted in the break rooms of each of our 456 branches, or on computer screens after employees log on. We hold meetings to review and improve sales performance and use propensity computer modeling to identify new sales and revenue opportunities. We reward all sales employees with incentive pay and provide stock options for the best performers. This culture has the overall effect of motivating the entire organization. Top-tier employees continue to achieve annual double-digit sales increases while bottom-tier employees have improved their individual performances by as much as 80%.

12 + 13

[PICTURE]


	+		=
CLOSED THE DEAL		CHARTER ONE TOP PERFORMER

		I have a database of more than 1,000 business contacts with whom I have worked and have closed deals. I update it daily. If business is slow, I’ll call one and ask if they are working on something that I could help on. Relationships and service are the names of the game.

LEADERSHIP + PERFORMANCE = RESULTS

WE DO IT BETTER

Opened 467,000 checking accounts, 17% net increase
First year of online banking... 200,000 users
Online bill payers running at $.5 billion annual rate

attracting great
c u s t o m e r s
drives profitability

We are constantly looking for new customers to make Charter One their primary financial institution where they will take advantage of the many products and services we continually offer them. Between deposit and lending sales efforts, we attracted nearly 600,000 new customers last year. All of our new customer programs are ongoing initiatives, emphasizing our aggressive pricing. These programs combine a mix of convenience, creativity in execution and sheer determination. They include: onsite sales visits to businesses and other organizations; extended office hours, typified by Prime Time Tuesday where our retail offices remain open as late as 7:30 p.m.; event programming where we create location-specific sales opportunities out of venues such as art festivals and sporting events; and a grocery store branch program that is second to none in generating new deposit and checking accounts. Finally, we make extensive use of direct mail. In 2001 alone, we sent nearly 15 million Totally Free Checking and other direct mail pieces designed to attract the next potential great customer of Charter One.

14 + 15

[PICTURE]

LEADERSHIP + PERFORMANCE = RESULTS

f i n a n c i a l s

our business objective has been, and will continue
to be, to create value for our shareholders


Selected Financial Data			18




Financial Review			20




Consolidated Statements of Financial Condition			32




Consolidated Statements of Income			33




Consolidated Statements of Shareholders’ Equity			34




Consolidated Statements of Cash Flows			35




Notes to Consolidated Financial Statements			36




Independent Auditors’ Report			51




Form 10-K			52

16 + 17

selected financial data

The selected financial data presented below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as the audited Consolidated Financial Statements contained elsewhere in this Annual Report. The selected financial data presented below is not necessarily indicative of future results due to, among other things, the effect of acquisitions. For a discussion of the impact of recent business combinations and branch acquisitions, see Notes 2 and 18 to the Notes to Consolidated Financial Statements.

Under the caption “performance returns” in the table below, we report actual returns, operating returns and returns as initially reported. We believe that presentation of operating returns and returns as initially reported will provide additional comparability and insight into the operations of Charter One. Operating returns for 2000, 1999, 1998 and 1997 are computed using net income, excluding the after-tax impact of merger-related and other special charges. Returns as initially reported for 1999, 1998, and 1997 exclude the after-tax impact of merger-related and other special charges and are computed as the sum of 1) amounts we reported in the respective year’s quarterly reports to shareholders for the three quarters ended September 30, not restated for mergers accounted for as pooling of interests that occurred in the fourth quarter of the respective year, and 2) fourth quarter results as reported in the Quarterly Financial Data table in the respective year’s Annual Report to Shareholders, restated for the respective year’s mergers accounted for as pooling of interests. Per share data has been restated to reflect all stock dividends and stock splits as of December 31, 2001.






		At and for the Year Ended December 31,


(Dollars in thousands, except per share data)		2001			2000			1999			1998			1997


Financial condition:
Cash, federal funds sold and other		$	516,520		$	531,257		$	693,532		$	722,260		$	650,238
Investment securities			135,586			449,215			542,081			629,072			1,131,078
Mortgage-backed securities			9,014,416			5,593,371			6,100,380			5,570,286			6,743,347
Loans and leases, net			25,728,700			24,008,174			22,312,850			22,219,411			19,509,520
Other assets			2,779,294			2,389,410			2,170,220			1,339,178			1,399,409

	Total assets	$	38,174,516		$	32,971,427		$	31,819,063		$	30,480,207		$	29,433,592

Deposits		$	25,123,309		$	19,605,671		$	19,073,975		$	19,023,700		$	17,901,125
FHLB advances			8,657,238			9,636,277			9,226,150			7,512,203			5,778,649
Other borrowings			507,669			547,134			515,574			1,009,954			2,817,041
Other liabilities			957,800			726,141			605,664			549,314			638,549
Capital securities			—			—			—			—			50,000
Shareholders’ equity			2,928,500			2,456,204			2,397,700			2,385,036			2,248,228

	Total liabilities and shareholders’ equity	$	38,174,516		$	32,971,427		$	31,819,063		$	30,480,207		$	29,433,592

Other data:
Loan servicing portfolio		$	13,846,807		$	10,379,644		$	10,798,563		$	9,916,922		$	10,140,387
Book value per share			13.05			11.23			10.39			10.11			9.54
Tangible book value per share			11.47			10.44			9.56			9.41			8.78
Dividend payout ratio			33.94	%		33.16	%		38.85	%		45.54	%		37.50	%
Net yield on average interest-earning assets			3.00			3.02			3.19			3.11			3.10
Interest rate spread			2.84			2.84			3.01			2.85			2.81
Average shareholders’ equity to average assets			7.76			7.58			7.99			7.96			7.64
Total shareholders’ equity to total assets			7.67			7.45			7.54			7.82			7.64
Number of offices:
	Full service branches		456			419			417			405			395
	Loan production offices		29			32			36			41			37
Number of employees (FTEs)			6,850			6,573			7,055			7,104			7,155

selected financial data






		At and for the Year Ended December 31,


(Dollars in thousands, except per share data)		2001			2000			1999			1998			1997


Results of operations:
Interest income		$	2,378,246		$	2,247,088		$	2,128,455		$	2,130,332		$	2,032,443
Interest expense			1,387,830			1,344,053			1,194,351			1,244,108			1,205,241

Net interest income			990,416			903,035			934,104			886,224			827,202
Provision for loan and lease losses			100,766			54,205			35,237			31,325			48,653

Net interest income after provision for loan and lease losses			889,650			848,830			898,867			854,899			778,549
Other income			473,624			392,871			230,597			272,594			185,966
Administrative expenses			629,662			603,955			633,327			665,340			598,040

Income before income taxes and extraordinary item			733,612			637,746			496,137			462,153			366,475
Income taxes			232,898			203,784			160,607			156,429			112,892

Income before extraordinary item			500,714			433,962			335,530			305,724			253,583
Extraordinary item — early extinguishment of debt, net of tax benefit			—			—			1,554			61,658			3,131

Net income		$	500,714		$	433,962		$	333,976		$	244,066		$	250,452

Basic earnings per share:
Income before extraordinary item		$	2.25		$	1.93		$	1.43		$	1.30		$	1.09
Extraordinary item			—			—			(.01	)		(.26	)		(.01	)

Net income		$	2.25		$	1.93		$	1.42		$	1.04		$	1.08

Diluted earnings per share:
Income before extraordinary item		$	2.21		$	1.90		$	1.40		$	1.26		$	1.05
Extraordinary item			—			—			(.01	)		(.25	)		(.01	)

Net income		$	2.21		$	1.90		$	1.39		$	1.01		$	1.04

Operating earnings:
Net interest income		$	990,416		$	903,035		$	934,104		$	886,224		$	827,202
Provision for loan and lease losses			100,766			54,205			28,708			31,325			37,409
Other income			473,624			392,871			301,680			272,594			209,916
Administrative expenses			629,662			574,464			569,801			575,658			534,923
Income taxes			232,898			213,319			205,176			180,461			142,723

Operating earnings		$	500,714		$	453,918		$	432,099		$	371,374		$	322,063

Operating earnings per share		$	2.21		$	1.99		$	1.80		$	1.53		$	1.34

Performance returns:
Actual:
	Return on average assets		1.41	%		1.36	%		1.08	%		.82	%		.90	%
	Return on average equity		18.17			18.00			13.50			10.26			11.77
	Efficiency ratio		41.91			45.68			50.69			57.79			58.08
Operating:
	Return on average assets		1.41			1.43			1.39			1.24			1.16
	Return on average equity		18.17			18.82			17.46			15.61			15.14
	Efficiency ratio		41.91			43.39			45.49			49.83			50.93
As initially reported:
	Return on average assets		1.41			1.43			1.48			1.36			1.26
	Return on average equity		18.17			18.82			18.57			18.18			18.26
	Average shareholders’ equity to average assets		7.76			7.58			8.01			7.50			6.94
	Efficiency ratio		41.91			43.39			43.16			43.94			42.18
	Diluted earnings per share	$	2.21		$	1.99		$	1.90		$	1.69		$	1.50
	Total assets⁽¹⁾		38,174,516			32,971,427			31,819,063			24,467,255			19,760,265


⁽¹⁾	Represents the amount we reported in the respective year’s Annual Report to Shareholders.

financial review

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 in the Annual Report. The data presented in the following pages should be read in conjunction with the audited Consolidated Financial Statements contained elsewhere in this Annual Report.

Holding Company Business

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 Michigan Bancorp, Inc. and Charter One Commercial. Charter Michigan Bancorp, Inc. owns all of the outstanding capital stock of Charter One Bank, F.S.B., a federally chartered thrift. The primary business of Charter One is operating these financial institutions which we sometimes refer to in this document collectively 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. At the end of 2001, the Bank and its subsidiaries were doing business through 456 full-service branches and 29 loan production offices.

On January 7, 2002, Charter One Bank, F.S.B. filed an application with the Office of the Comptroller of the Currency to convert to a national bank. During the past five years, our business strategy has been to shift our product mix away from that of a traditional thrift into a product mix more closely associated with that of a regional bank. The conversion to a national bank charter is another natural step in completing that migration. We expect the conversion to be effective during the first quarter of 2002. Given the Bank’s capital levels and asset mix, management does not anticipate any significant financial or regulatory impact from the switch in regulators. See Note 5 to the Notes to Consolidated Financial Statements for information on our loan and lease portfolio and the changes in product mix during the past five years. See Note 7 to the Notes to Consolidated Financial Statements for information on our deposit products during the past three years.

Recent Acquisitions

On July 2, 2001, Charter One completed its acquisition of Alliance Bancorp, the holding company of Liberty Federal Bank in Hinsdale, Illinois. At June 30, 2001, Alliance had assets of $2.0 billion and deposits of $1.3 billion. Charter One issued 6.9 million shares in conjunction with the merger, and paid $50.2 million in cash consideration. The Company recorded $138.8 million of goodwill based on a determination of the estimated fair values of the assets and liabilities acquired as a result of this transaction. The merger was treated as a tax-free reorganization under Section 368 of the Internal Revenue Code and accounted for as a purchase.

As of the close of business on November 19, 2001, the Bank completed its acquisition of the branches and retail deposits of Superior Federal Bank, F.S.B. Illinois-based Superior Federal Bank, F.S.B. was the conservatorship established by the Federal Deposit Insurance Corporation (“FDIC”) after Superior Bank, F.S.B. was closed on July 27, 2001. Superior Federal had 17 branches and $1.0 billion in deposits. In its agreement with the FDIC, the Bank paid $52.5 million in cash for the franchise. In addition to assuming all the deposits, the Bank acquired $40.9 million of Superior’s assets. These assets consisted mainly of home equity lines of credit and cash and cash equivalents. The Company recorded $56.0 million of goodwill based on a determination of the estimated fair values of the assets and liabilities acquired as a result of this transaction.

On January 11, 2002, the Boards of Directors of the Company and Charter National Bancorp, Inc. announced a definitive agreement pursuant to which the Company will acquire Charter National in a cash-out merger. Charter Bank, the principal subsidiary of Charter National, is a state-chartered commercial bank headquartered in Wyandotte, Michigan with approximately $300 million in assets, $250 million in deposits, and eight branch offices located south of Detroit, Michigan. The merger, which will be accounted for as a purchase, is expected to close in the second or third quarter of 2002. The transaction is subject to required bank regulatory approvals and approval by Charter National shareholders.

Results of Operations

For the year ended December 31, 2001, Charter One reported net income of $500.7 million, compared to $434.0 million and $334.0 million for the years ended December 31, 2000 and 1999, respectively. On a diluted per share basis, net income was $2.21, $1.90 and $1.39 in 2001, 2000 and 1999, respectively. Operating results were affected by the following merger-related and other special charges in 2000 and 1999:

2000 Merger-Related Charges:






			Effect on Year Ended
			December 31, 2000


(Dollars in thousands)			Pretax		After Tax


St. Paul Bancorp, Inc. merger-related charges:
	Severance and other termination costs		$	20,710	$	14,024
	Duplicate assets, lease terminations and other costs to combine operations			8,781		5,932

		Total merger-related charges	$	29,491	$	19,956

1999 Merger-Related and Other Special Charges:






				Effect on Year Ended
				December 31, 1999


(Dollars in thousands)				Pretax		After Tax


St. Paul and ALBANK Financial Corporation merger-related charges:
	Transaction costs			$	10,053	$	10,053
	Severance and other termination costs				39,928		26,352
	Duplicate assets, lease terminations and other costs to combine operations				13,545		8,940

		Merger-related charges			63,526		45,345

Other special charges:
	Additional loan loss provisions				6,529		4,309
	Asset/liability management actions				71,083		46,915
	Loss on termination of debt				2,391		1,554

		Other special charges			80,003		52,778

			Total merger-related and other special charges	$	143,529	$	98,123

Net Interest Income – Net interest income is the difference between the interest and dividend income earned on our loans and investments and the interest expense on our deposits and borrowings. Net interest income is our principal source of earnings. Net interest income is affected by a number of factors including the level, pricing and maturity of interest-earning assets and interest-bearing liabilities, interest rate fluctuations and asset quality, as well as general economic conditions and regulatory policies.

The following table shows average balances, interest earned or paid and average interest rates for the years indicated. Nonaccrual loans and leases are included in the average balance of loans and leases. The mark-to-market adjustments on securities available for sale are included in noninterest-earning assets. The cost of liabilities includes the annualized effect of interest rate risk management instruments.






				Year Ended December 31,



				2001								2000								1999


									Avg.								Avg.								Avg.
				Average					Yield/			Average					Yield/			Average					Yield/
(Dollars in thousands)				Balance			Interest		Cost			Balance			Interest		Cost			Balance			Interest		Cost


Interest-earning assets:
	Loans and leases			$	25,463,666		$	1,872,270		7.35	%	$	23,830,266		$	1,810,608		7.60	%	$	22,646,524		$	1,683,662		7.43	%
	Mortgage-backed securities:
		Available for sale			5,574,832			366,475		6.57			3,342,744			241,369		7.22			3,195,738			214,119		6.70
		Held to maturity			1,243,975			86,952		6.99			1,690,002			120,812		7.15			2,249,771			155,141		6.90
	Investment securities:
		Trading			—			—		—			183			38		20.67			11,005			363		3.30
		Available for sale			138,811			11,180		8.05			458,299			33,412		7.29			578,607			36,276		6.27
		Held to maturity			7,853			409		5.21			29,008			1,594		5.49			39,860			2,453		6.15
	Other interest-earning assets				628,560			40,960		6.43			543,450			39,255		7.10			557,417			36,441		6.45

			Total interest-earning assets		33,057,697			2,378,246		7.19			29,893,952			2,247,088		7.51			29,278,922			2,128,455		7.27

Allowance for loan and lease losses					(211,859	)							(185,623	)							(181,503	)
Noninterest-earning assets					2,651,957								2,097,990								1,882,972

			Total assets	$	35,497,795							$	31,806,319							$	30,980,391

Interest-bearing liabilities:
	Deposits:
		Checking accounts		$	5,345,061		$	118,800		2.22	%	$	3,632,640		$	57,229		1.58	%	$	2,952,893		$	29,968		1.01	%
		Money market and savings accounts			6,433,557			207,586		3.23			5,401,048			168,379		3.12			5,464,447			145,556		2.66
		Certificates of deposit			10,230,112			528,897		5.17			9,821,168			540,501		5.50			10,482,915			542,523		5.18

			Total deposits		22,008,730			855,283		3.89			18,854,856			766,109		4.06			18,900,255			718,047		3.80

	FHLB advances				9,361,225			498,444		5.32			9,309,296			532,583		5.71			8,434,318			432,043		5.12
	Other borrowings				515,345			34,103		6.58			613,875			45,361		7.32			717,173			44,261		6.13

			Total borrowings		9,876,570			532,547		5.39			9,923,171			577,944		5.81			9,151,491			476,304		5.20

			Total interest-bearing liabilities		31,885,300			1,387,830		4.35			28,778,027			1,344,053		4.67			28,051,746			1,194,351		4.26

Noninterest-bearing liabilities					856,906								616,804								454,312

			Total liabilities		32,742,206								29,394,831								28,506,058

Shareholders’ equity					2,755,589								2,411,488								2,474,333

			Total liabilities and shareholders’ equity	$	35,497,795							$	31,806,319							$	30,980,391

Net interest income							$	990,416							$	903,035							$	934,104

Interest rate spread										2.84	%							2.84	%							3.01	%

Net yield on average interest-earning assets										3.00	%							3.02	%							3.19	%

Average interest-earning assets to average interest-bearing liabilities										103.68	%							103.88	%							104.37	%

The following rate/volume analysis shows the approximate relative contribution of changes in average interest rates and volume to changes in net interest income for the years 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 $81.0 million, $55.1 million, and $45.7 million in 2001, 2000 and 1999, respectively.

Rate/Volume Analysis






				Year Ended December 31, 2001 v. 2000									Year Ended December 31, 2000 v. 1999



				Increase (Decrease) due to									Increase (Decrease) due to


(Dollars in thousands)				Rate			Volume			Total			Rate			Volume			Total


Interest income:
	Loans and leases			$	(64,103	)	$	125,765		$	61,662		$	31,728		$	95,218		$	126,946
	Mortgage-backed securities:
		Available for sale			(23,334	)		148,440			125,106			17,115			10,135			27,250
		Held to maturity			(2,628	)		(31,232	)		(33,860	)		5,505			(39,834	)		(34,329	)
	Investment securities:
		Trading			(19	)		(19	)		(38	)		1,340			(1,665	)		(325	)
		Available for sale			3,181			(25,413	)		(22,232	)		5,368			(8,232	)		(2,864	)
		Held to maturity			(79	)		(1,106	)		(1,185	)		(243	)		(616	)		(859	)
	Other interest-earning assets				(4,066	)		5,771			1,705			3,748			(934	)		2,814

			Total		(91,048	)		222,206			131,158			64,561			54,072			118,633

Interest expense:
	Checking accounts				28,672			32,899			61,571			19,237			8,024			27,261
	Money market and savings accounts				(7,822	)		47,029			39,207			12,171			10,652			22,823
	Certificates of deposit				(33,554	)		21,950			(11,604	)		33,325			(35,347	)		(2,022	)
	FHLB advances				(37,439	)		3,300			(34,139	)		52,832			47,708			100,540
	Other borrowings				(7,085	)		(4,173	)		(11,258	)		6,652			(5,552	)		1,100

			Total		(57,228	)		101,005			43,777			124,217			25,485			149,702

Change in net interest income				$	(33,820	)	$	121,201		$	87,381		$	(59,656	)	$	28,587		$	(31,069	)

Our net interest income for the year ended December 31, 2001 was $990.4 million, an increase of $87.4 million, or 9.7%, over the $903.0 million for 2000. The yield on interest-earning assets declined to 7.19% in 2001 from 7.51% in 2000. However, interest-earning assets increased $3.2 billion in 2001 due to acquisitions and internal growth. The increase in interest-earning assets more than offset the downward pricing of assets in this lower interest rate environment. The increase in net interest income was also attributed to the reduction in the cost of interest-bearing liabilities from 4.67% in 2000 to 4.35% in 2001.

Our net interest income for the year ended December 31, 2000 was $903.0 million, a decrease of $31.1 million, or 3.3%, over the $934.1 million of net interest income for the year ended December 31, 1999. The net yield on interest-earning assets during the year ended December 31, 2000 declined to 3.02% from 3.19% for the year ended December 31, 1999. The compression in the net yield on interest-earning assets was primarily attributed to the fact that our liabilities repriced more quickly than our assets, as well as the effect of our stock buyback program. Interest rates rose considerably during 2000. This increase was accompanied by a flattening of the yield curve. Given this interest rate environment, management decided to slow balance sheet growth, with particular emphasis on accelerating the shift away from residential loans and securities by selling more of those portfolios. See “Financial Condition — Loans and Leases” for a summary of our loan securitizations for each of the past three years.

The following table sets forth Charter One’s yields and costs at period end for the dates indicated. The yields on leases exclude the impact of the related tax benefit. The cost of liabilities includes the annualized effect of interest rate risk management instruments.

Yields and Costs At End of Period






			December 31,


			2001			2000			1999


Weighted average yield:
	One-to-four family loans			6.89	%		7.31	%		7.15	%
	Commercial real estate loans			7.43			8.48			8.06
	Retail consumer loans			6.35			7.86			7.59
	Automobile loans			7.67			8.67			8.52
	Consumer finance loans			8.15			8.91			9.76
	Leases			5.87			6.33			6.08
	Corporate banking loans			6.07			8.89			8.58

		Total loans and leases		6.91			7.73			7.53

	Mortgage-backed securities			6.18			7.29			7.04
	Investment securities			8.21			7.40			7.26
	Other interest-earning assets			5.43			7.46			6.97

		Total interest-earning assets		6.71			7.64			7.41

Weighted average cost:
	Checking accounts			1.86			1.73			1.27
	Money market and savings accounts			2.26			3.29			2.70
	Certificates of deposit			4.03			5.93			5.13

		Total deposits		2.88			4.35			3.79

	FHLB advances			5.02			5.86			5.32
	Other borrowings			5.86			7.21			6.99

		Total interest-bearing liabilities		3.46			4.89			4.34

Interest rate spread				3.25			2.75			3.07

Net yield on interest-earning assets				3.38			2.91			3.19

Provision for Loan and Lease Losses – The provision for loan and lease losses in 2001 was $100.8 million, an increase of $46.6 million from 2000. The increased provision during 2001 was necessary to cover higher charge-offs and maintain the allowance for loan and leases losses at a level considered adequate to absorb losses inherent in the loan and lease portfolio. Net charge-offs totaled $68.7 million in 2001, compared to $51.0 million in 2000. The ratio of net charge-offs as a percent of average loans and leases increased 6 basis points to .27% in 2001 from .21% in 2000. At December 31, 2001, nonperforming assets, net of government guaranteed loans, were $244.4 million, an increase of $54.0 million from December 31, 2000. This resulted in a ratio of nonperforming assets to total assets of .64%, an increase of 6 basis points from the 2000 ratio of .58%. The increase in net charge-offs and nonperforming assets was primarily attributed to a general weakening in the national economy. Additionally, the provision for loan and lease losses was increased to reflect the continuing change in our loan mix. Over the past few years, we have continued our emphasis in originating consumer and commercial loans and leases due to the higher yields and shorter terms provided by these loans and leases. The consumer and commercial loan and lease portfolio, before the allowance for loan and lease losses, represented 60.8% of loans and leases at December 31, 2001, compared to 55.0% at December 31, 2000. Despite the increases in net charge-offs and nonperforming assets, our lending strategy, which includes emphasis on a well-diversified and collateralized portfolio of loans and leases, has produced above average credit quality, as measured by the relative levels of net charge-offs and nonperforming assets to industry averages. See “Financial Condition — Loans and Leases” below and Note 5 to the Notes to Consolidated Financial Statements for further information regarding our allowance for loan and lease losses.

The provision for loan and lease losses in 2000 was $54.2 million, up from $35.2 million in 1999. The increase in the provision for loan and lease losses of $19.0 million, or 53.8%, was primarily attributable to increased inherent losses in the loan and lease portfolio and a change in the loan mix related to growth in loans and leases with higher risk/reward profiles.

Other Income – Other income for 2001 was $473.6 million, compared to $392.9 million for 2000. This $80.8 million, or 20.6%, increase was primarily attributable to income from retail banking and net gains on sales. Retail banking income increased $48.3 million, or 19.9%, over 2000. The growth was attributed to successful integration of our acquisitions together with ongoing franchise development initiatives. Additionally, we experienced increases in debit card and transaction-related revenues. Net gains on sales were $114.3 million in 2001, compared to $9.3 million in 2000. The mortgage-backed securities sold during the year consisted primarily of bank-originated, fixed-rate residential mortgage and consumer products, as we generated significantly more residential mortgage and consumer loans than we needed to meet our balance sheet size and mix objectives. We did not utilize any special-purpose entities for the sale of any of our mortgage-backed securities. The increases in retail banking and net gains on sales were partially offset by a $53.0 million, or 68.1%, decrease in mortgage banking income. This decline in mortgage banking income resulted primarily from an increase of $24.6 million to the valuation allowance on loan servicing assets in response to faster prepayment speeds resulting from higher levels of refinancing.

Other income for 2000 was $392.9 million, compared to $230.6 million for 1999. This $162.3 million, or 70.4%, increase was primarily attributable to increases in income from retail banking, mortgage banking and net gains on sales. Retail banking income increased $46.3 million, or 23.5%, over 1999. The growth in income from retail banking was driven by mergers, account acquisition in mature markets and continual product development. Mortgage banking income increased $29.3 million, or 60.4%, during 2000 and was primarily attributable to a $21.3 million gain resulting from a $3.0 billion sale of mortgage servicing. Net gains on sales were $9.3 million in 2000, compared to net losses of $57.0 million in 1999.

Administrative Expenses – Administrative expenses were $629.7 million for 2001, an increase of $25.7 million from 2000. There were $29.5 million in merger-related expenses recorded in 2000 related to the St. Paul acquisition. Excluding the merger-related charges, our administrative expenses were $574.5 million for 2000. The increase in administrative expenses was primarily attributable to costs associated with the operational integration of recent acquisitions and $12.2 million in higher marketing costs as we implemented

various programs geared to support sales efforts throughout the Bank. Additionally, during the fourth quarter of 2001, Charter One contributed $7.5 million to a newly formed charitable foundation. Despite the increase in administrative expenses, our efficiency ratio (excluding merger-related charges) improved to 41.91% for 2001 from 43.39% in 2000 and our ratio of administrative expenses to average assets (excluding merger-related charges) improved to 1.77% in 2001 from 1.81% in 2000.

Administrative expenses were $604.0 million for 2000, a decrease of $29.4 million, or 4.6%, from 1999. Each year included significant merger-related expenses. There were $29.5 million in merger-related expenses recorded in 2000 related to the St. Paul acquisition, and $63.5 million in 1999 related to the St. Paul and ALBANK acquisitions. Excluding the merger-related charges, our administrative expenses were $574.5 million for 2000 and $569.8 million for 1999. This resulted in a ratio of administrative expenses to average assets of 1.81% for 2000 and 1.84% for 1999. Our efforts to control overhead costs were illustrated by an efficiency ratio (excluding merger-related and other special charges) of 43.39% for 2000, an improvement when compared to 45.49% for 1999.

Income Tax Expense – The provision for income taxes was $232.9 million, $203.8 million and $160.6 million for the years ended December 31, 2001, 2000, and 1999, respectively. The effective tax rates were 31.7%, 32.0%, and 32.4% for the years ended December 31, 2001, 2000, and 1999, respectively. For a further analysis of our income taxes, see Note 12 to the Notes to Consolidated Financial Statements.

Financial Condition

At December 31, 2001, total assets were $38.2 billion, an increase of $5.2 billion, or 15.8%, from $33.0 billion at December 31, 2000. Contributing to the increase in total assets were our Alliance and Superior acquisitions. Additionally, we experienced an increase in our mortgage-backed securities available for sale portfolio, as well as growth in our loans and leases. The mortgage-backed securities portfolio increased primarily due to the residential mortgage and consumer loan securitizations that occurred in 2001. See “Loans and Leases” below for further discussion regarding our loan and lease activity.

Loans and Leases – Total loans and leases at December 31, 2001 were $25.7 billion, compared to $24.0 billion at December 31, 2000. The increase of $1.7 billion was attributable to the Alliance merger in which we acquired $1.4 billion of loans. Additionally, as illustrated in the table below, we originated $17.8 billion of loans and leases during 2001, compared to $11.8 billion of loan and lease originations in 2000. Offsetting the originations in 2001 were $6.7 billion of residential mortgage and consumer loan securitizations, as we generated significantly more residential mortgage and consumer loans than we needed to meet our balance sheet size and mix objectives. These residential mortgage and consumer loans were exchanged for government agency mortgage-backed securities. We did not retain any credit enhancing residual interests, nor are we subject to any significant recourse obligations.

Loan and Lease Activity






				Year Ended December 31,


(Dollars in thousands)				2001		2000		1999


Originations:
	Real estate mortgage:
		Permanent:
			One-to-four family	$	8,814,430	$	4,916,631	$	5,101,662
			Multifamily		42,453		34,454		205,876
			Commercial		155,604		199,648		241,568

			Total permanent loans		9,012,487		5,150,733		5,549,106

		Construction:
			One-to-four family		349,510		605,240		542,903
			Multifamily		138,861		78,542		71,748
			Commercial		195,896		104,045		89,331

			Total construction loans		684,267		787,827		703,982

			Total real estate mortgage loans originated		9,696,754		5,938,560		6,253,088

	Retail consumer				3,536,687		2,063,352		1,968,091
	Automobile				2,715,921		1,791,772		1,406,966
	Consumer finance				259,458		405,193		386,998
	Leases				502,073		794,947		552,142
	Corporate banking				1,138,496		818,394		666,972

			Total loans and leases originated		17,849,389		11,812,218		11,234,257

	Acquired through business combinations and purchases				1,425,549		18,809		465,773

	Sales and principal reductions:
		Loans sold			1,635,903		472,622		989,571
		Loans exchanged for mortgage-backed securities			6,708,253		3,991,087		3,606,946
		Principal reductions			9,111,479		5,593,663		6,942,978

			Total sales and principal reductions		17,455,635		10,057,372		11,539,495

			Increase before net items	$	1,819,303	$	1,773,655	$	160,535

Our lending operations are primarily concentrated in Ohio, Michigan, New York, Illinois, Vermont and Massachusetts. As a result, our financial condition and results of operations will be subject to general economic conditions prevailing in those states. If economic conditions in those states worsen, we may experience higher default rates in our existing portfolio as well as a reduction in the value of collateral securing individual loans. Separately, our ability to originate the volume of loans or achieve the level of deposits currently anticipated could be affected.

The following table sets forth certain information concerning our nonperforming assets for the periods reported. Nonperforming assets consist of (1) nonaccrual loans and leases, (2) loans and leases past due 90 days or more as to principal or interest, (3) restructured real estate mortgage loans and (4) real estate acquired through foreclosure and other collateral owned. See Note 1 to the Notes to Consolidated Financial Statements for further discussion regarding our nonperforming assets.

Nonperforming Assets




					December 31,

(Dollars in thousands)					2001			2000			1999			1998			1997

Nonperforming loans and leases:




	Nonaccrual loans and leases:




		Real estate mortgage loans:




			One-to-four family(1)		$	79,394		$	71,269		$	75,682		$	79,768		$	54,144




			Multifamily and commercial			13,552			8,132			3,369			7,002			6,034




			Construction and land			10,276			8,806			1,095			1,178			1,943

				Total real estate mortgage loans		103,222			88,207			80,146			87,948			62,121




		Retail consumer				16,592			11,120			16,607			14,888			749




		Automobile				—			130			482			454			37




		Consumer finance				68,485			48,673			23,031			7,752			811




		Leases				904			—			—			—			—




		Corporate banking				10,551			18,707			6,037			9,559			7,179

			Total nonaccrual loans and leases			199,754			166,837			126,303			120,601			70,897

	Accruing loans and leases delinquent more than 90 days:




		Real estate mortgage loans:




			One-to-four family(2)			—			—			—			5,690			14,171




			Multifamily and commercial			—			—			—			—			251




			Construction and land			—			—			—			—			3

				Total real estate mortgage loans		—			—			—			5,690			14,425




		Retail consumer(1)				4,519			2,586			2,562			3,878			8,516




		Automobile				6,000			6,911			4,973			5,873			3,695




		Consumer finance				—			—			—			—			—




		Leases				—			2,956			—			—			—




		Corporate banking				4,691			2,086			2,463			904			976

			Total accruing loans and leases delinquent more than 90 days			15,210			14,539			9,998			16,345			27,612

		Restructured real estate mortgage loans				653			666			1,009			4,193			7,579

			Total nonperforming loans and leases			215,617			182,042			137,310			141,139			106,088




Real estate acquired through foreclosure and other collateral owned						50,265			27,523			24,453			19,900			18,997

			Total nonperforming assets			265,882			209,565			161,763			161,039			125,085




			Less government guaranteed loans			21,506			19,225			18,841			22,429			—

			Nonperforming assets net of guaranteed loans		$	244,376		$	190,340		$	142,922		$	138,610		$	125,085

Ratio of:




	Nonperforming loans and leases to total loans and leases					.84	%		.76	%		.62	%		.64	%		.54	%




	Nonperforming assets to total assets					.70			.64			.51			.53			.42




	Allowance for loan and lease losses to:




	Nonperforming loans and leases					118.49			104.16			135.75			131.07			171.14




	Total loans and leases before allowance					.98			.78			.83			.83			.92




Ratio of (excluding guaranteed nonperforming loans):




	Nonperforming loans and leases to total loans and leases					.75	%		.68	%		.53	%		.53	%		.54	%




	Nonperforming assets to total assets					.64			.58			.45			.45			.42




	Allowance for loan and lease losses to:




	Nonperforming loans and leases					131.61			116.46			157.34			155.83			171.14




	Total loans and leases before allowance					.98			.78			.83			.83			.92


(1)	Includes government guaranteed loans.

(2)	In 1998, Charter One changed the accrual policy on one-to-four family loans to stop accruing on loans delinquent 90 or more days. Balance of $5.7 million at December 31, 1998 represents one-to-four family loans related to St. Paul Bancorp, Inc. Following Charter One’s acquisition of St. Paul in October 1999, St. Paul’s accrual policy was conformed to Charter One’s policy. The change in the accrual policy did not have a material impact on interest income.

At December 31, 2001, there were $166.6 million of loans and leases not reflected in the table above where known information about possible credit problems of borrowers caused management to have doubts as to the ability of the borrowers to comply fully with present loan repayment terms, and which may result in disclosure of such loans and leases in the future. The vast majority of these loans and leases, as well as our nonperforming assets, are collateralized. As such, we would anticipate that any losses resulting from possible future charge-offs would be substantially less than the respective loan and lease balances.

Although loans may be classified as nonaccruing, many continue to pay interest on an irregular basis or at levels less than the contractual amounts due. Income recorded on nonaccruing and restructured loans amounted to $5.0 million and the potential income based upon full contractual yields was $16.1 million for the year ended December 31, 2001.

The Company maintains an allowance for loan and lease losses adequate to absorb estimated probable losses inherent in the loan and lease portfolio. The allowance for loan and lease losses consists of specific reserves for individual credits and general reserves for types or portfolios of loans based on historical loan loss experience, adjusted for concentrations and the current economic environment. All outstanding loans, leases, letters of credit and legally binding commitments to provide financing are considered in evaluating the adequacy of the allowance for loan and lease losses. Increases to the allowance for loan and lease losses are made by charges to the provision for loan and lease losses. Loans deemed to be uncollectible are charged against the allowance for loan and lease losses. Recoveries of previously charged-off amounts are credited to the allowance for loan and leases losses.

The following table details certain information relating to the allowance for loan and lease losses for the five years ended December 31, 2001.

Analysis of Allowance for Loan and Lease Losses






		Year Ended December 31,


(Dollars in thousands)		2001			2000			1999			1998			1997


Balance, beginning of year		$	189,616		$	186,400		$	184,989		$	181,554		$	158,211
Provision for loan and lease losses			100,766			54,205			35,237			31,325			48,653
Acquired through business combination			33,782			—			3,603			—			5,613
Charge-offs:
	Mortgage		(4,335	)		(6,064	)		(8,040	)		(7,052	)		(11,949	)
	Retail consumer		(7,613	)		(12,508	)		(3,952	)		(3,823	)		(5,626	)
	Automobile		(40,097	)		(27,827	)		(28,012	)		(25,670	)		(19,128	)
	Consumer finance		(11,246	)		(4,994	)		(1,340	)		(71	)		—
	Leases		(7,496	)		—			(900	)		—			—
	Corporate banking		(7,672	)		(8,938	)		(3,240	)		(1,440	)		(1,532	)

	Total charge-offs		(78,459	)		(60,331	)		(45,484	)		(38,056	)		(38,235	)

Recoveries:
	Mortgage		207			1,396			868			3,767			2,063
	Retail consumer		1,972			1,610			789			1,051			1,188
	Automobile		6,603			5,810			6,172			4,953			3,846
	Consumer finance		227			17			19			—			—
	Leases		220			—			—			—			—
	Corporate banking		544			509			207			395			215

	Total recoveries		9,773			9,342			8,055			10,166			7,312

	Net loan and lease charge-offs		(68,686	)		(50,989	)		(37,429	)		(27,890	)		(30,923	)

Balance, end of year		$	255,478		$	189,616		$	186,400		$	184,989		$	181,554

Net charge-offs to average loans and leases			.27	%		.21	%		.17	%		.13	%		.17	%

individual loans and leases such as current and past delinquency, financial statements of the borrower, current net realizable value of collateral, the general economic environment and the specific economic trends affecting the individual loan or lease. During this evaluation process, individual loans are identified and evaluated for impairment as prescribed under Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan.” Impairment losses are recognized when, based upon current information, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impairment is measured either by a loan’s observable market value, fair value of the collateral or the present value of future cash flows discounted at the loan’s effective interest rate. These impairment losses, combined with other probable losses as determined in the loan and lease portfolio evaluation process, are charged to the allowance for loan and lease losses. This data is then presented to the Company’s Reserve Adequacy Committee, comprised of senior members of management and outside directors. The Reserve Adequacy Committee determines the level of provision for loan and lease losses necessary to maintain the allowance for loan and lease losses at an amount considered adequate to absorb probable loan and lease losses inherent in the portfolio. Although management believes that it uses the best information available to determine the adequacy of the allowance for loan and lease losses, future adjustments to the allowance may be necessary and results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations. See Notes 1 and 5 to the Notes to Consolidated Financial Statements for additional information concerning the Company’s allowance for loan and lease losses.

The following table sets forth the allocation of the allowance for loan and lease losses to the respective loan and lease classifications, in dollar and percentage terms. During 2001, we reallocated $30.0 million and $10.0 million of our allowance for loan and lease losses from the mortgage and retail consumer portfolios, respectively. Of those reallocated funds, $25.0 million was allocated to the consumer finance portfolio and $15.0 million was allocated to the lease portfolio. The allocation of the allowance for loan and lease losses is based on a consideration of all of the factors discussed above that are used to determine the allowance for loans and leases as a whole. Since all of those factors are subject to change, the allocation of the allowance for loan and leases losses shown below is not necessarily indicative of future losses or future allocations. Management believes that the allowance for loan and lease losses at December 31, 2001 was adequate to absorb losses occurring in any category of loans and leases.

Allocation of Allowance for Loan and Lease Losses






			December 31,


(Dollars in thousands)			2001			2000			1999			1998			1997


Mortgage			$	73,311		$	103,989		$	107,576		$	110,635		$	107,564
Retail consumer				30,366			15,191			17,323			16,869			17,247
Automobile				65,606			42,206			38,301			39,585			40,734
Consumer finance				33,433			7,855			5,356			1,654			200
Leases				21,587			5,237			4,037			3,737			1,777
Corporate banking				31,175			15,138			13,807			12,509			14,032

		Total	$	255,478		$	189,616		$	186,400		$	184,989		$	181,554

Percent of net loans and leases to total net loans and leases:
	Mortgage			48.9	%		53.1	%		60.8	%		70.1	%		76.2	%
	Retail consumer			18.8			19.2			16.9			12.9			9.9
	Automobile			16.8			12.9			11.0			9.2			8.4
	Consumer finance			3.9			4.1			3.2			2.0			.7
	Leases			7.7			7.4			5.1			3.3			2.5
	Corporate banking			3.9			3.3			3.0			2.5			2.3

		Total		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

Investments and Mortgage-Backed Securities – The securities portfolio is comprised primarily of mortgage-backed securities, including government agency and AAA and AA rated private issues. We held no investments or mortgage-backed securities of any single non-governmental issuer which were in excess of 10% of shareholders’ equity at December 31, 2001. See Notes 3 and 4 to the Notes to Consolidated Financial Statements for additional discussion regarding our investments and mortgage-backed securities.

Deposits, Borrowings and Other Sources of Funds – Deposits are generally the most important source of our funds for use in lending and for general business purposes. Deposit inflows and outflows are significantly influenced by general interest rates and competitive factors. Consumer and commercial deposits are attracted principally within our primary market areas. Deposits totaled $25.1 billion and $19.6 billion at December 31, 2001 and 2000, respectively. See Note 7 to the Notes to Consolidated Financial Statements for further discussion regarding our deposits.

In addition to deposits, we obtain funds from different borrowing sources. The primary source of these borrowings is the Federal Home Loan Bank (“FHLB”) system. Those borrowings totaled $8.7 billion and $9.6 billion at December 31, 2001 and 2000, respectively. The FHLB functions as a central bank providing credit for member financial institutions. As a member of the FHLB of Cincinnati, the Bank is required to own capital stock in the FHLB. It is authorized to apply for advances on the security of this stock, certain home mortgages and other assets, provided certain standards related to creditworthiness have been met. Advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. See Note 8 to the Notes to Consolidated Financial Statements for further information as to the

composition, maturities and cost associated with these advances at December 31, 2001.

In addition to FHLB advances, we use federal funds purchased and repurchase agreements and other borrowings to fund operations. Federal funds purchased and repurchase agreements totaled $203.3 million and $262.3 million at December 31, 2001 and 2000, respectively. Other borrowings totaled $304.4 million and $284.8 million at December 31, 2001 and 2000, respectively. See Notes 9 and 10 to the Notes to Consolidated Financial Statements for further information concerning these borrowings.

We use our portfolio of investment securities, mortgage-backed securities, and loans as collateral for our borrowings, public deposits and for other purposes required or permitted by law. We do not hold any interests in or sponsor any special-purpose entities.

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 manage the pricing of deposits to maintain a steady deposit balance, but from time to time may decide not to pay rates on deposits as high as our competition and, when necessary, 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. Conversely, we may, from time to time, decide to price deposits aggressively due to strategic reasons which may result in significant deposit inflows.

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. See Notes 1, 5 and 16 to the Notes to Consolidated Financial Statements for further information concerning our commitments.

Quantitative and Qualitative Disclosure About Market Risk

We realize income principally from the difference or spread between the interest earned on loans, investments and other interest-earning assets and the interest paid on deposits and borrowings. Loan volume and yield, as well as the volume of and rates on investments, deposits and borrowings, are affected by market interest rates. Additionally, because of the terms and conditions of many of our loan documents and deposit accounts, a change in interest rates could also affect the projected maturities of the loan portfolio and/or the deposit base which could alter our sensitivity to future changes in interest rates. Accordingly, we consider interest rate risk to be our most significant market risk.

Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits while taking into consideration, among other factors, our overall credit, operating income, operating cost, and capital profile. Our Asset/ Liability Management Committee, which includes senior management representatives and reports to the Board of Directors, together with the Investment Committee of the Board of Directors, monitors and manages interest rate risk to maintain an acceptable level of potential change to net interest income as a result of changes in interest rates.

We use an internal earnings simulation model as our primary method to identify and manage our interest rate risk profile. The model is based on actual cash flows and repricing characteristics for all financial instruments and incorporates market-based assumptions regarding the impact of changing interest rates on future volumes and the prepayment rate of applicable financial instruments. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. 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.

Using this internal simulation model, net earnings projections reflect continued growth in net income when applying the interest rate environment as of December 31, 2001. Our base case shows our present estimated net earnings sensitivity profile and assumes no changes in the operating environment or operating strategies, but assumes interest rates increase or decrease gradually, in parallel fashion, over the next year and then remain unchanged. The table indicates the estimated impact on net income under the various interest rate scenarios as a percentage of base case earnings projections.






	Estimated Percentage Change
	in Future Net Income


Changes in Interest Rates (basis points)	12 Months			24 Months


+200 over one year		(3.87	)%		(4.25	)%
+100 over one year		(1.03	)		(.31	)
-100 over one year		(1.23	)		(5.84	)

A secondary method used to identify and manage our interest rate risk profile is the static gap analysis. Interest sensitivity gap analysis measures the difference between the assets and liabilities repricing or maturing within specific time periods. An asset-sensitive position indicates that there are more rate-sensitive assets than rate-sensitive liabilities repricing or maturing within specific time periods, which would generally imply a favorable impact on net interest income in periods of rising interest rates and a negative impact in periods of falling rates. A liability-sensitive position would generally imply a negative impact on net interest income in periods of rising rates and a positive impact in periods of falling rates.

Gap analysis has limitations because it cannot measure precisely the effect of interest rate movements and competitive pressures on the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities. In addition, a significant portion of our adjustable-rate assets have limits on their maximum yield, whereas most of our interest-bearing liabilities are not subject to these limitations. As a result, certain assets and liabilities indicated as repricing within a stated period may in fact reprice at different times and at different volumes, and certain adjustable-rate assets may reach their yield limits and not reprice.

The following table presents an analysis of our interest-sensitivity gap position at December 31, 2001. All interest-earning assets and interest-bearing liabilities are shown based on the earlier of their contractual maturity or repricing date adjusted by forecasted prepayment and decay rates. Asset prepayment and liability decay rates are selected after considering the current rate environment, industry prepayment and decay rates, our historical experience, and the repricing and prepayment characteristics of portfolios acquired through merger.

Maturity/Rate Sensitivity






				December 31, 2001


				0-6			7-12			1-3			3-5			5-10			Over 10
(Dollars in thousands)				Months			Months			Years			Years			Years			Years			Total


Interest-earning assets:
	Real estate mortgage loans and mortgage-backed securities:
		Adjustable rate		$	3,743,150		$	1,033,306		$	1,133,450		$	586,326		$	90,741		$	—		$	6,586,973
		Fixed rate			3,792,572			1,036,555			3,195,618			2,265,264			2,928,012			1,796,622			15,014,643
	Retail consumer loans				2,251,645			278,870			1,135,066			632,029			507,329			52,534			4,857,473
	Automobile loans				912,115			839,094			2,601,853			25,286			19,077			—			4,397,425
	Consumer finance loans				156,472			96,801			290,599			180,080			206,725			111,845			1,042,522
	Leases				121,384			99,168			440,226			318,252			334,597			680,897			1,994,524
	Corporate banking loans				432,990			86,742			242,600			201,931			63,339			15,408			1,043,010
	Investment securities, federal funds sold, interest-bearing deposits and other interest-earning assets				692,428			765			3,716			2,711			19,602			80,898			800,120

			Total		12,102,756			3,471,301			9,043,128			4,211,879			4,169,422			2,738,204		$	35,736,690

Interest-bearing liabilities:
	Deposits:
		Checking, money market and savings accounts and escrow accounts			1,170,961			1,072,145			6,164,833			6,164,833			—			—		$	14,572,772
		Certificates of deposit			5,526,083			3,804,062			893,713			213,085			97,583			21,597			10,556,123
	FHLB advances				1,253,934			279,317			1,241,999			2,774,208			3,105,789			1,991			8,657,238
	Federal funds purchased and repurchase agreements				203,259			—			—			—			—			—			203,259
	Other borrowings				8,542			16,611			125,497			131,427			12,261			10,072			304,410

			Total		8,162,779			5,172,135			8,426,042			9,283,553			3,215,633			33,660		$	34,293,802

Excess (deficiency) of interest-earning assets over interest-bearing liabilities					3,939,977			(1,700,834	)		617,086			(5,071,674	)		953,789			2,704,544
Impact of hedging					(120,395	)		155,000			(324,605	)		260,000			30,000			—

Adjusted interest-sensitivity gap				$	3,819,582		$	(1,545,834	)	$	292,481		$	(4,811,674	)	$	983,789		$	2,704,544

Cumulative excess (deficiency) of interest-earning assets over interest-bearing liabilities				$	3,819,582		$	2,273,748		$	2,566,229		$	(2,245,445	)	$	(1,261,656	)	$	1,442,888

Cumulative interest-sensitivity gap as a percentage of total assets at December 31, 2001					10.01	%		5.96	%		6.72	%		(5.88	)%		(3.30	)%		3.78	%

Capital and Dividends

Charter One, Charter One Bank, and Charter One Commercial are each subject to certain regulatory capital requirements. We believe that as of December 31, 2001, Charter One, Charter One Bank, and Charter One Commercial each individually met all capital requirements to which they were subject. See Note 13 to the Notes to Consolidated Financial Statements for an analysis of our regulatory capital.

On July 18, 2000, the Board of Directors of Charter One authorized management to repurchase up to 10%, or 20.2 million shares, of the Company’s outstanding common stock in a program of open market purchases or privately negotiated transactions. As of February 22, 2002, we had purchased 15.0 million shares authorized under this program for a total cost of $394.8 million. These figures include the shares purchased under the agreement discussed below. The repurchased shares are utilized for later reissue in connection with employee benefit plans, acquisitions or stock dividends.

On September 12, 2001, the Company entered into an agreement with a third party that provided the Company with an option to purchase up to $100 million of Charter One common stock through the use of forward transactions. These transactions could have been settled at Charter One’s election on a physical, net cash or net share basis. On January 8, 2002, the Company settled open forward transactions for 3.5 million shares of its common stock through physical share settlement whereby the Company paid cash of $97.0 million, or $27.69 per share, to a third party in exchange for the 3.5 million shares. Common shares outstanding and shareholders’ equity were reduced accordingly on the January 8, 2002 settlement date.

We continually review the amount of our cash dividend and our policy of paying quarterly dividends. This payment will depend upon a number of factors, including capital requirements, regulatory limitations, our financial condition, results of operations and Charter One Bank’s ability to upstream funds. Charter One depends significantly upon dividends originating from Charter One Bank to accumulate earnings for payment of cash dividends to our shareholders. See Note 13 to the Notes to Consolidated Financial Statements for a discussion of restrictions on Charter One Bank’s ability to pay cash dividends.

Quarterly high and low sales prices, closing prices and cash dividends declared for our common stock are shown in the following table. All prices have been restated to reflect prior stock dividends. Our common stock is traded on the New York Stock Exchange under the symbol CF. As of February 22, 2002, there were approximately 20,000 shareholders of record.

Market Price and Dividends





		First		Second		Third		Fourth		Total
		Quarter		Quarter		Quarter		Quarter		Year


2001
	High	$	28.56	$	30.38	$	31.41	$	29.46	$	31.41
	Low		24.19		25.23		23.40		24.60		23.40
	Close		26.95		30.38		28.22		27.15		27.15
	Dividends declared and paid		.17		.19		.19		.20		.75

2000
	High	$	19.05	$	24.49	$	23.93	$	28.57	$	28.57
	Low		13.83		16.45		20.06		18.93		13.83
	Close		19.05		20.86		23.22		27.50		27.50
	Dividends declared and paid		.14		.16		.16		.17		.63

On January 22, 2002, Charter One declared a regular quarterly cash dividend of $.20 per share. The cash dividend is payable February 20, 2002 to shareholders of record on February 6, 2002.

Quarterly Results

The following table presents summarized quarterly data for each of the years indicated. Earnings per share have been restated to reflect prior stock dividends.

Quarterly Financial Data (Unaudited)





(Dollars in thousands,		First		Second		Third		Fourth			Total
except per share data)		Quarter		Quarter		Quarter		Quarter			Year


2001
	Total interest income	$	589,276	$	579,942	$	608,982	$	600,046		$	2,378,246
	Net interest income		229,481		227,671		253,324		279,940			990,416
	Provision for loan and lease losses		17,728		17,076		27,109		38,853			100,766
	Net gains		16,094		25,580		26,302		46,336			114,312
	Net income		114,790		120,412		130,433		135,079			500,714
	Basic earnings per share		.52		.55		.58		.60			2.25
	Diluted earnings per share		.51		.54		.57		.59			2.21

2000
	Total interest income	$	534,070	$	545,598	$	577,518	$	589,902		$	2,247,088
	Net interest income		233,003		232,033		223,169		214,830			903,035
	Provision for loan and lease losses		8,598		11,509		13,178		20,920			54,205
	Net gains (losses)		3,547		3,064		5,522		(2,862	)		9,271
	Merger expenses		3,258		20,845		1,961		3,427			29,491
	Net income		111,709		103,287		109,592		109,374			433,962
	Basic earnings per share		.48		.45		.50		.50			1.93
	Diluted earnings per share		.48		.44		.49		.49			1.90

New Accounting Standards

See Note 1 to the Notes to Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.

Discussion of Forward-looking Statements

This document, including information incorporated by reference, contains, and future filings by Charter One on Form 10-Q and Form 8-K and future oral and written statements by Charter One and its management may contain, forward-looking statements about Charter One and its subsidiaries 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, growth opportunities, interest rates, acquisition and divestiture opportunities, and synergies, efficiencies, cost savings and funding advantages expected to be realized from prior acquisitions. 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 we discuss below and under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this document, as well as other factors discussed elsewhere in this document and factors identified in our filings with the Securities and Exchange Commission (“SEC”) 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.

The following factors, many of which are subject to change based on various other factors beyond our control, could cause our operating and financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements:


•	the economic impact of the terrorist attacks on September 11, 2001, and the response of the United States to those attacks;
•	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 loan assets;
•	the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;
•	inflation, interest rate, market and monetary fluctuations;
•	the timely development of and acceptance of new products and services of Charter One and its subsidiaries 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 willingness of users to substitute competitors’ products and services for our products and services;
•	our success in gaining regulatory approval of our products and services, when required;
•	the impact of changes in financial services’ laws and regulations (including laws concerning taxes, banking, securities and insurance); legislative or regulatory changes may adversely affect the business in which we are engaged;
•	the impact of technological changes;
•	acquisitions;
•	changes in consumer spending and saving habits; and
•	our success at managing the risks involved in the foregoing.

Forward-looking statements by Charter One and its management are based on beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions of management as of the date made and are not guarantees of future performance. 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.

consolidated statements of financial condition






			December 31,


(Dollars in thousands, except per share data)			2001			2000


Assets
Cash accounts			$	472,658		$	514,152
Interest-bearing deposits with banks				8,355			16,619
Federal funds sold and other				35,507			486

		Total cash and cash equivalents		516,520			531,257
Investment securities:
	Available for sale			129,312			426,701
	Held to maturity (fair value of $6,467 and $22,671)			6,274			22,514
Mortgage-backed securities:
	Available for sale			8,030,512			4,087,196
	Held to maturity (fair value of $1,022,658 and $1,531,525)			983,904			1,506,175
Loans and leases, net				25,396,071			23,950,172
Loans held for sale				332,629			58,002
Bank owned life insurance				808,231			743,509
Federal Home Loan Bank stock				617,836			568,377
Premises and equipment				352,235			323,911
Accrued interest receivable				162,065			165,990
Real estate and other collateral owned				54,351			27,731
Loan servicing assets				139,840			121,735
Goodwill				350,839			172,411
Other assets				293,897			265,746

		Total assets	$	38,174,516		$	32,971,427

Liabilities
Deposits			$	25,123,309		$	19,605,671
Federal Home Loan Bank advances				8,657,238			9,636,277
Federal funds purchased and repurchase agreements				203,259			262,326
Other borrowings				304,410			284,808
Advance payments by borrowers for taxes and insurance				54,103			60,761
Accrued interest payable				57,704			54,499
Accrued expenses and other liabilities				845,993			610,881

		Total liabilities		35,246,016			30,515,223

Commitments 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; 224,855,827 and 212,684,698 shares issued				2,249			2,127
Additional paid-in capital				2,091,767			1,745,232
Retained earnings				811,093			786,793
Less 516,082 and 4,456,293 shares of common stock held in treasury at cost				(14,586	)		(100,545	)
Borrowings of employee investment and stock ownership plan				—			(1,256	)
Accumulated other comprehensive income				37,977			23,853

		Total shareholders’ equity		2,928,500			2,456,204

		Total liabilities and shareholders’ equity	$	38,174,516		$	32,971,427

See Notes to Consolidated Financial Statements.

consolidated statements of income






				Year Ended December 31,


(Dollars in thousands, except per share data)				2001		2000		1999


Interest income:
	Loans and leases			$	1,872,270	$	1,810,608	$	1,683,662
	Mortgage-backed securities:
		Available for sale			366,475		241,369		214,119
		Held to maturity			86,952		120,812		155,141
	Investment securities:
		Trading			—		38		363
		Available for sale			11,180		33,412		36,276
		Held to maturity			409		1,594		2,453
	Other interest-earning assets				40,960		39,255		36,441

		Total interest income			2,378,246		2,247,088		2,128,455

Interest expense:
	Deposits				855,283		766,109		718,047
	FHLB advances				498,444		532,583		432,043
	Other borrowings				34,103		45,361		44,261

		Total interest expense			1,387,830		1,344,053		1,194,351

		Net interest income			990,416		903,035		934,104
Provision for loan and lease losses					100,766		54,205		35,237

		Net interest income after provision for loan and lease losses			889,650		848,830		898,867

Other income:
	Retail banking				291,892		243,547		197,279
	Mortgage banking				24,878		77,914		48,570
	Leasing operations				4,020		14,919		10,480
	Net gains (losses)				114,312		9,271		(57,047	)
	Bank owned life insurance and other				38,522		47,220		31,315

			Total other income		473,624		392,871		230,597

Administrative expenses:
	Compensation and employee benefits				279,900		270,642		275,454
	Net occupancy and equipment				109,388		101,893		95,547
	Marketing				31,708		19,527		21,643
	Federal deposit insurance premiums				3,918		4,011		8,256
	Merger expenses				—		29,491		63,526
	Amortization of goodwill				16,156		16,180		14,011
	Other administrative expenses				188,592		162,211		154,890

			Total administrative expenses		629,662		603,955		633,327

Income before income taxes and extraordinary item					733,612		637,746		496,137
Income taxes					232,898		203,784		160,607

			Income before extraordinary item		500,714		433,962		335,530
Extraordinary item, net of tax benefit of $837					—		—		1,554

			Net income	$	500,714	$	433,962	$	333,976

Basic earnings per share⁽¹⁾:
	Income before extraordinary item			$	2.25	$	1.93	$	1.43
	Extraordinary item				—		—		(.01	)

			Net income	$	2.25	$	1.93	$	1.42

Diluted earnings per share⁽¹⁾:
	Income before extraordinary item			$	2.21	$	1.90	$	1.40
	Extraordinary item				—		—		(.01	)

			Net income	$	2.21	$	1.90	$	1.39

Weighted average common shares outstanding⁽¹⁾					221,473,731		224,397,762		234,930,650
Weighted average common and common equivalent shares outstanding⁽¹⁾					227,031,880		228,471,263		240,175,067

⁽¹⁾ Restated to reflect the 5% stock dividend issued September 28, 2001.

See Notes to Consolidated Financial Statements.

consolidated statements of shareholders’ equity





																Borrowings of
																Employee
													Accumulated			Investment
					Additional								Other			and Stock
		Common			Paid-In		Retained			Treasury			Comprehensive			Ownership
(Dollars in thousands, except per share data)		Stock			Capital		Earnings			Stock			Income (Loss)			Plan			Total


Balance, January 1, 1999		$	2,067		$	1,289,164	$	1,068,592		$	(15,325	)	$	45,826		$	(5,288	)	$	2,385,036
Comprehensive Income:
	Net income		—			—		333,976			—			—			—			333,976
	Change in net unrealized gain (loss) on securities, net of tax and reclassification adjustment		—			—		—			—			(52,846	)		—			(52,846	)

Comprehensive income			—			—		333,976			—			(52,846	)		—			281,130
5% stock dividend			58			126,121		(189,659	)		63,254			—			—			(226	)
Purchase of 6,799,102 shares of treasury stock			—			—		—			(160,381	)		—			—			(160,381	)
EISOP loan repayment			—			—		—			—			—			2,150			2,150
Dividends paid ($.54 per share)⁽¹⁾			—			—		(134,102	)		—			—			—			(134,102	)
Issuance of common shares in connection with stock options plans, 2,101,123 shares			13			10,615		(4,384	)		17,923			—			—			24,167
Other			(14	)		310,826		(339,913	)		29,027			—			—			(74	)

Balance, December 31, 1999			2,124			1,736,726		734,510			(65,502	)		(7,020	)		(3,138	)		2,397,700

Comprehensive income:
	Net income		—			—		433,962			—			—			—			433,962
	Change in net unrealized gain (loss) on securities, net of tax and reclassification adjustment		—			—		—			—			30,873			—			30,873

Comprehensive income			—			—		433,962			—			30,873			—			464,835
5% stock dividend			—			—		(220,721	)		220,505			—			—			(216	)
Purchase of 12,940,172 shares of treasury stock			—			—		—			(293,763	)		—			—			(293,763	)
EISOP loan repayment			—			—		—			—			—			1,882			1,882
Dividends paid ($.63 per share)⁽¹⁾			—			—		(144,443	)		—			—			—			(144,443	)
Issuance of common shares in connection with stock options plans, 2,028,110 shares			3			8,506		(16,515	)		38,215			—			—			30,209

Balance, December 31, 2000			2,127			1,745,232		786,793			(100,545	)		23,853			(1,256	)		2,456,204

Comprehensive income:
	Net income		—			—		500,714			—			—			—			500,714
	Change in net unrealized gain (loss) on securities, net of tax and reclassification adjustment		—			—		—			—			14,124			—			14,124

Comprehensive income			—			—		500,714			—			14,124			—			514,838
5% stock dividend			49			130,002		(279,968	)		149,461			—			—			(456	)
Purchase of 4,322,010 shares of treasury stock			—			—		—			(122,597	)		—			—			(122,597	)
EISOP loan repayment			—			—		—			—			—			1,256			1,256
Dividends paid ($.75 per share)⁽¹⁾			—			—		(166,596	)		—			—			—			(166,596	)
Issuance of common shares:
	Acquisition, 6,887,246 shares		69			196,339		—			—			—			—			196,408
	Stock option plans, 425,795 shares		4			20,194		(29,850	)		59,095			—			—			49,443

Balance, December 31, 2001		$	2,249		$	2,091,767	$	811,093		$	(14,586	)	$	37,977		$	—		$	2,928,500

⁽¹⁾ Restated to reflect the 5% stock dividend issued September 28, 2001.

See Notes to Consolidated Financial Statements.

consolidated statements of cash flows






					Year Ended December 31,


(Dollars in thousands)					2001			2000			1999


Cash Flows from Operating Activities
	Net income				$	500,714		$	433,962		$	333,976
	Adjustments to reconcile net income to net cash provided by operating activities:
		Provision for loan and lease losses				100,766			54,205			35,237
		Provision for deferred income taxes				186,502			170,321			98,449
		Net (gains) losses				(113,270	)		(7,167	)		61,602
		Accretion of discounts, amortization of premiums, amortization of goodwill and depreciation, net				129,008			95,360			59,716
		Origination of loans held for sale				(1,635,903	)		(472,622	)		(989,571	)
		Proceeds from sale of loans held for sale				1,634,460			470,584			985,403
		Proceeds from (purchases of) investment securities held for trading				—			13,418			(19,511	)
		Loss on extinguishment of debt				—			—			2,391
		Other				138,273			(195,470	)		139,247

			Net cash provided by operating activities			940,550			562,591			706,939

Cash Flows from Investing Activities
	Net principal disbursed on loans and leases					(7,156,533	)		(5,742,717	)		(3,283,758	)
	Proceeds from principal repayments and maturities of:
		Mortgage-backed securities held to maturity				524,010			400,738			1,026,772
		Mortgage-backed securities available for sale				1,172,379			277,562			485,434
		Investment securities held to maturity				16,960			9,298			23,423
		Investment securities available for sale				360,104			59,129			236,716
	Proceeds from sale of:
		Mortgage-backed securities available for sale				3,998,182			4,020,135			1,641,810
		Investment securities available for sale				9,656			25,535			539,163
		Federal Home Loan Bank stock				20,547			20,300			26,810
		Loan servicing assets				—			36,576			—
	Purchases of:
		Mortgage-backed securities available for sale				(2,065,543	)		(149,429	)		(210,389	)
		Investment securities available for sale				(4,398	)		(10,696	)		(711,087	)
		Loans				(58,723	)		(18,809	)		(465,773	)
		Federal Home Loan Bank stock				—			(80,838	)		(86,294	)
		Loan servicing assets				(61,897	)		(42,857	)		(35,757	)
		Bank owned life insurance				—			—			(630,000	)
	Net cash and cash equivalents received in connection with business combinations					866,742			—			133,845
	Other					63,640			(76,125	)		(73,737	)

			Net cash used in investing activities			(2,314,874	)		(1,272,198	)		(1,382,822	)

Cash Flows from Financing Activities
	Net increase (decrease) in short-term borrowings					(1,334,067	)		(1,936,001	)		1,347,712
	Proceeds from long-term borrowings					1,137,184			4,093,770			886,480
	Repayments of long-term borrowings					(1,329,166	)		(1,713,980	)		(1,014,893	)
	Increase (decrease) in, net of business combinations:
		Deposits				3,142,587			531,304			(306,969	)
		Advance payments by borrowers for taxes and insurance				(16,745	)		(19,548	)		5,441
	Payment of dividends on common stock					(167,052	)		(144,659	)		(134,328	)
	Proceeds from issuance of common stock					49,443			30,209			24,093
	Purchase of treasury stock					(122,597	)		(293,763	)		(160,381	)

			Net cash provided by financing activities			1,359,587			547,332			647,155

				Net decrease in cash and cash equivalents		(14,737	)		(162,275	)		(28,728	)
Cash and cash equivalents, beginning of year						531,257			693,532			722,260

Cash and cash equivalents, end of year					$	516,520		$	531,257		$	693,532

Supplemental Disclosures of Cash Flow Information
	Cash paid during the year for:
		Interest on deposits and borrowings			$	1,504,097		$	1,384,485		$	1,170,144
		Income taxes				31,500			31,296			65,445
Supplemental Schedule of Noncash Activities
	Loans exchanged for mortgage-backed securities					6,708,253			3,991,087			3,606,946

See Notes to Consolidated Financial Statements.

notes to consolidated financial statements

1. Summary of Significant Accounting Policies

The accounting policies of Charter One Financial, Inc. (“Charter One” or the “Company”), a financial holding company, and Charter One Commercial and Charter One Bank, F.S.B. (collectively, the “Bank”), conform to accounting principles generally accepted in the United States of America and prevailing practices within the banking and thrift industry. A summary of the more significant accounting policies follows:

Nature of Operations – Headquartered in Cleveland, Ohio, Charter One is a financial holding company. Charter One is a Delaware corporation and owns all of the outstanding capital stock of Charter Michigan Bancorp, Inc. and Charter One Commercial. Charter Michigan Bancorp, Inc. owns all of the outstanding capital stock of Charter One Bank, F.S.B., a federally chartered thrift. The Company’s principal line of business is consumer banking which includes retail banking, mortgage banking and other related financial services. Retail banking provides a full range of deposit products, consumer loans, business lending and commercial real estate loans.

On January 7, 2002, the Company announced that Charter One Bank, F.S.B. filed an application with the Office of the Comptroller of the Currency (“OCC”) to convert to a national bank charter. Charter One Bank, F.S.B. is currently a federal savings bank regulated by the Office of Thrift Supervision (“OTS”). The Company expects the conversion to be effective during the first quarter of 2002.

Basis of Presentation – The Consolidated Financial Statements include the accounts of the Company, the Bank and its subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain items in the Consolidated Financial Statements for 2000 and 1999 have been reclassified to conform to the 2001 presentation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Securities – Securities consist of mortgage-backed securities, U.S. Government and federal agency obligations, floating-rate notes, corporate bonds, commercial paper and state and local government obligations. Securities are classified as trading, available for sale or held to maturity upon their acquisition. Securities classified as trading on the Consolidated Statements of Financial Condition are carried at estimated fair value with the unrealized holding gain or loss recorded in the Consolidated Statements of Income. Securities classified as available for sale on the Consolidated Statements of Financial Condition are carried at estimated fair value with the unrealized holding gain or loss reflected as a component of shareholders’ equity. Securities classified as held to maturity on the Consolidated Statements of Financial Condition are carried at amortized cost. Premiums and discounts are recognized in interest income over the period to maturity by the level yield method. Realized gains or losses on the sale of debt securities are recorded based on the amortized cost of the specific securities sold.

Loans – Loans intended for sale are carried at estimated market value determined on an aggregate basis. Net unrealized losses are recognized through a valuation allowance by a charge to income. Gains or losses on the sale of loans are determined under the specific identification method.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances, net of deferred fees or costs on originated loans or unamortized premiums or discounts on purchased loans. Discounts and premiums are accreted or amortized using the interest method over the remaining period to contractual maturity adjusted for anticipated prepayments. Unamortized net fees or costs are recognized upon early repayment of the loans. Unamortized net fees or costs on loans sold are included in the basis of the loans in calculating gains and losses.

A loan is considered to be impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. To determine if the impairment criteria have been met, the Bank performs a review of all corporate banking and commercial real estate loans over $1 million that are internally classified as substandard, doubtful or loss. If the impairment criteria have been met, a reserve is calculated according to Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan.”

Loans and leases considered to be nonperforming include nonaccrual loans and leases, accruing loans and leases delinquent more than 90 days, and restructured loans. A loan, including an impaired loan, is classified as nonaccrual when collectability is in doubt (this is generally when the borrower is 90 days past due on contractual principal or interest payments). A loan may be considered impaired but remain on accrual status when the borrower demonstrates (by continuing to make payments) a willingness to keep the loans current. When a loan is placed on nonaccrual status, unpaid interest is reversed and an allowance is established by a charge to interest income equal to all accrued interest. Income is subsequently recognized only to the extent that cash payments are received. Loans are returned to accrual status when, in management’s judgment, the borrower has the ability and intent to make periodic principal and interest payments (this generally requires that the loan be brought current in accordance with its original contractual terms). Loans and leases are classified as accruing loans or leases delinquent more than 90 days when the loan or lease is more than 90 days past due and, in

management’s judgment, the borrower has the ability and intent to make periodic interest and principal payments. Loans are classified as restructured when concessions are made to borrowers with respect to the principal balance, interest rate or other terms due to the inability of the borrower to meet the obligation under the original terms. The Bank charges off principal at the earlier of (i) when a total loss of principal has been deemed to have occurred as a result of the book value exceeding the fair value or net realizable value, or (ii) when collection efforts have ceased.

Lease Accounting – The Company classifies leases at the inception of the lease in accordance with SFAS No. 13, “Accounting for Leases.” Estimated residual values are reviewed periodically and reduced if necessary.

Direct Financing Leases — At lease inception, the present values of future rentals and of the residual are recorded as net investment in direct financing leases. Unearned interest income is amortized to interest income over the lease term to produce a constant percentage return on the investment. Sales commissions and other direct costs incurred in direct financing leases are capitalized and recorded as part of the net investment in leases and are amortized over the lease term.

Sales-Type-Leases — At the inception of the lease, the present value of future rentals is recorded as an equipment sale. Equipment cost less the present value of the residual is recorded as cost of equipment sold. Accordingly, a dealer profit is recognized at lease inception. The present values of future rentals and of the residual are recorded as net investment in sales-type leases. Unearned income is amortized to interest income over the lease term to produce a constant percentage return on the investment.

Leveraged Leases — Income on leveraged leases is recognized at a constant rate of return on the outstanding investment in the lease, net of the related deferred tax liability.

Allowance for Loan and Lease Losses – The Company maintains an allowance for loan and lease losses adequate to absorb estimated probable losses inherent in the loan and lease portfolio. The allowance for loan and lease losses consists of specific reserves for individual credits and general reserves for types or portfolios of loans based on historical loan loss experience, adjusted for concentrations and the current economic environment. All outstanding loans, leases, letters of credit and legally binding commitments to provide financing are considered in evaluating the adequacy of the allowance for loan and lease losses. Increases to the allowance for loan and lease losses are made by charges to the provision for loan and lease losses. Loans deemed to be uncollectible are charged against the allowance for loan and lease losses. Recoveries of previously charged-off amounts are credited to the allowance for loan and leases losses.

In determining the adequacy of the allowance for loan and lease losses, management reviews and evaluates on a quarterly basis the potential credit risk in the loan and lease portfolio. This evaluation process is documented by management and approved by the Company’s Board of Directors. It is performed by senior members of management with many years of banking and lending experience. Management evaluates homogeneous consumer-oriented loans, such as 1-4 family mortgage loans and retail consumer loans, based upon all or a combination of delinquencies, credit scores, loss migration analysis and charge-off experience. Management supplements this analysis by reviewing the geographical lending areas involved and their local economic and political trends, the nature and volume of the portfolio, regulatory examination findings, specific grading systems applied and any other known factors which may impact future credit losses. Nonhomogeneous loans, generally defined as commercial real estate loans, corporate banking loans, and leases are underwritten, approved and risk rated individually at inception. On a monthly basis, management re-evaluates the risk ratings on these nonhomogeneous loans if loan relationships exceed certain dollar thresholds established for the respective portfolios. The Company’s risk rating methodology uses nine grade levels to stratify each portfolio. Many factors are considered when these grades are assigned to individual loans and leases such as current and past delinquency, financial statements of the borrower, current net realizable value of collateral, the general economic environment and the specific economic trends affecting the individual loan or lease. During this evaluation process, individual loans are identified and evaluated for impairment as prescribed under SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” Impairment losses are recognized when, based upon current information, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impairment is measured either by a loan’s observable market value, fair value of the collateral or the present value of future cash flows discounted at the loan’s effective interest rate. These impairment losses, combined with other probable losses as determined in the loan and lease portfolio evaluation process, are charged to the allowance for loan and lease losses. This data is then presented to the Company’s Reserve Adequacy Committee, comprised of senior members of management and outside directors. The Reserve Adequacy Committee determines the level of provision for loan and lease losses necessary to maintain the allowance for loan and lease losses at an amount considered adequate to absorb probable loan and lease losses inherent in the portfolio. Although management believes that it uses the best information available to determine the adequacy of the allowance for loan and lease losses, future adjustments to the allowance may be necessary and results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations.

Loan Fees – Loan origination fees received for loans, net of direct origination costs, are deferred and amortized to interest income over the contractual lives of the loans using the level yield method.

Fees received for loan commitments that are expected to be drawn, based on the Bank’s experience with similar commitments, are deferred and amortized over the lives of the loans using the level yield method. Fees for other loan commitments are deferred and amortized over the loan commitment period on a straight-line basis. Unamortized deferred loan fees or costs related to loans paid off are included in income. Unamortized net fees or costs on loans sold are included in the basis of the loans in calculating gains and losses. Amortization of net deferred fees is discontinued for loans that are deemed to be nonperforming.

Loan Servicing Assets – The cost of mortgage loans sold, with servicing rights retained, is allocated between the loans and the servicing rights based on their estimated fair values at time of loan sale. The estimated fair value of loan servicing assets is determined based on expected future cash flows discounted at an interest rate commensurate with the servicing risks involved. In 2001 and 2000, virtually all such recorded assets related to residential mortgage loans. Loan servicing assets are presented in the Consolidated Statements of Financial Condition net of accumulated amortization, which is recorded in proportion to, and over the period of, net servicing income. Capitalized loan servicing assets are stratified based on predominant risk characteristics of underlying loans for the purpose of evaluating impairment. An allowance is then established in the event the recorded value of an individual stratum exceeds fair value.

Derivatives – The Company uses derivatives as a means of managing its interest rate risk profile (defined as the sensitivity of the Company’s earnings and net portfolio value to changes in interest rates). Interest rate swaps are the derivative instruments that Charter One uses as part of its interest rate risk management strategy. Interest rate swap contracts are exchanges of interest payments, based on a common notional amount and maturity date.

For those derivative instruments that are designated and qualify as hedging instruments, the Company designates the hedging instrument, based upon the exposure being hedged, as either a fair value or cash flow hedge in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued and the fair value of the derivative instrument is recorded in net income.

Off-Balance-Sheet Financial Instruments – In the ordinary course of business, the Company enters 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.

Premises and Equipment – Premises and equipment and real estate held for investment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the useful lives of the related assets.

Real Estate Owned – Real estate owned, including property acquired in settlement of foreclosed loans, is carried at the lower of cost or estimated fair value less estimated cost to sell at the date of foreclosure. Costs relating to the development and improvement of real estate owned are capitalized, whereas costs relating to holding and maintaining the property are charged to expense.

Goodwill – Goodwill represents the purchase price of acquired operations in excess of the fair value of their net identifiable assets at the date of acquisition. For business combinations and branch acquisitions completed prior to June 30, 2001, goodwill was being amortized using the straight-line method over 15 years or less. Amortization of goodwill for past business combinations ceased upon adoption of SFAS No. 142, “Goodwill and Other Intangible Assets” on January 1, 2002. Amortization of goodwill related to branch acquisitions will continue pending further clarification from the Financial Accounting Standards Board (“FASB”). See further discussion in the New Accounting Standards section below.

For business combinations initiated after June 30, 2001, goodwill is not subject to amortization in accordance with SFAS No. 142. Rather, goodwill will be tested for impairment on an annual basis or when events and circumstances indicate that the value of goodwill has been diminished or impaired.

Income Taxes – Income taxes have been provided using the liability method in accordance with SFAS No. 109, “Accounting for Income Taxes.” The Company files a consolidated federal income tax return.

Consolidated Statements of Cash Flows – For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid investments with a term of three months or less to be cash equivalents. Cash flows from interest rate risk management instruments are classified based on the assets or liabilities hedged.

Stock Dividends – On July 18, 2001, the Board of Directors of the Company approved a 5% stock dividend which was distributed on September 28, 2001 to shareholders of record on September 14, 2001. On July 18, 2000, the Board of Directors of the Company approved a 5% stock dividend which was distributed on September 30, 2000 to shareholders of record on September 14, 2000. On July 21, 1999, the Board of Directors of the Company approved a 5% stock dividend which was distributed on September 30, 1999 to shareholders of record on September 14, 1999.

Earnings Per Share – Basic earnings per share (“EPS”) is based on the weighted average number of common shares outstanding during the year. Diluted EPS is based on the weighted average number of common shares and common share equivalents outstanding during the year. All shares and per share data have been restated to reflect all prior stock dividends.






		Year Ended December 31,


(Dollars in thousands,
except per share data)		2001		2000		1999


Basic earnings per share:
	Income before extraordinary item	$	500,714	$	433,962	$	335,530

	Weighted average common shares outstanding		221,473,731		224,397,762		234,930,650

	Basic earnings per share before extraordinary item	$	2.25	$	1.93	$	1.43

Diluted earnings per share:
	Income before extraordinary item	$	500,714	$	433,962	$	335,530

	Weighted average common shares outstanding		221,473,731		224,397,762		234,930,650
	Add common stock equivalents for shares issuable under stock option plans		5,558,149		4,073,501		5,244,417

	Weighted average common and common equivalent shares outstanding		227,031,880		228,471,263		240,175,067

	Diluted earnings per share before extraordinary item	$	2.21	$	1.90	$	1.40

Comprehensive Income – In accordance with SFAS No. 130, “Reporting Comprehensive Income,” reclassification adjustments have been determined for all components of other comprehensive income reported in the Company’s Consolidated Statements of Shareholders’ Equity. Amounts presented within those statements are net of the following reclassification adjustments and related tax expense:






		Year Ended December 31,


(Dollars in thousands)		2001			2000			1999


Other comprehensive income (loss), before tax:
	Net unrealized holding gain (loss) on securities	$	134,533		$	54,580		$	(144,501	)
	Reclassification adjustment for (gains) losses included in net income		(112,804	)		(7,083	)		63,200

Other comprehensive income (loss), before tax			21,729			47,497			(81,301	)
Income tax expense (benefit) related to items of other comprehensive income			7,605			16,624			(28,455	)

	Other comprehensive income (loss), net of tax	$	14,124		$	30,873		$	(52,846	)

Segments – 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 prefers to work 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.

New Accounting Standards – Effective January 1, 2001, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, which requires that all derivative instruments be reported on the statement of financial condition at fair value and establishes criteria for designation and effectiveness of hedging relationships. At the time of adoption, the Company designated anew certain derivative instruments used for risk management into hedging relationships in accordance with the requirements of the new standard. Derivative instruments used to hedge changes in the fair value of liabilities due to changes in interest rates were designated as fair value hedges. Derivative instruments used to hedge the variability of forecasted cash flows attributable to interest rate risk were designated as cash flow hedges. The cumulative effect of adopting SFAS No. 133 was not material to the Company’s consolidated financial statements.

In September 2000, the FASB issued SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125.” SFAS No. 140 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. SFAS No. 140 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The adoption of SFAS No. 140 did not have a material impact on the Company’s financial condition or results of operations.

In July 2001, the FASB issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” These statements change the accounting for business combinations and goodwill. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is prohibited. SFAS No. 142 changes the accounting for goodwill and certain intangible assets from an amortization method to an impairment-only approach. Any goodwill arising from the result of business combinations initiated after June 30, 2001 is not amortized. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, goodwill and certain intangible assets must be tested for impairment and write-downs may be necessary. Additionally, amortization of goodwill recorded for past business combinations will cease upon adoption of SFAS No. 142 on January 1, 2002. The Company’s amortization of goodwill related to these past business combinations was $3.0 million after tax, or $.01 per diluted share in 2001.

In October 2001, the FASB decided to undertake a limited-scope project to reconsider part of the guidance in SFAS No. 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions.” In particular, the Board decided to reconsider whether the acquisition of a branch is a business combination and if goodwill recorded in connection with a branch acquisition (“Statement 72 Goodwill”) should continue to be amortized. Currently, Statement 72 Goodwill is excluded from the scope of SFAS No. 142. The Company’s amortization of goodwill related to branch acquisitions was $7.5 million after tax, or $.04 per diluted share in 2001. Pending further clarification from the FASB, the Company anticipates its amortization of goodwill related to branch acquisitions will be $10.0 million after tax, or $.04 per diluted share in 2002.

2. Business Combinations and Asset Acquisitions

The tables below set forth the Company’s business combinations and asset acquisitions during the past three years.

Business Combinations

Assets at

Common

Method

Date

Date of

Shares

Cash

Goodwill

(Dollars in thousands)

Completed

Merger

Issued

Consideration

Accounting

Recorded

Alliance Bancorp⁽¹⁾

July 2, 2001

2,019,000

6,887,605

50,234

Purchase

138,814

St. Paul Bancorp, Inc.

October 1, 1999

6,200,000

39,892,023

—

Pooling

—

⁽¹⁾ The results of this acquisition have been included in the consolidated financial statements since July 2, 2001. Pro forma results of operations for this acquisition, had the acquisition occurred as of January 1, 2001 and January 1, 2000, is not significant and accordingly, is not provided.

Branch Purchases





			Date		Deposits		Loans		Goodwill
(Dollars in thousands)	Branches		Completed		Assumed		Acquired		Recorded


Superior Federal Bank, F.S.B		17		November 19, 2001	$	1,022,023	$	3,370	$	55,984
Chittenden Corporation		14		November 5, 1999	$	357,500	$	84,700	$	43,600

The following tables reconcile merger-related charges in 2000 and 1999 between cash, noncash and accrual activity. The Company did not have any non-cash merger-related charges in 2000.





			2000				2000		2000			2000
			Period		2000		Total		Accrual			Ending
(Dollars in thousands)			Cost		Accrual		Expense		Charges			Accrual


Cash:
	Direct severance and termination costs		$	256	$	20,454	$	20,710	$	(29,227	)	$	10,186
	Premises and equipment			1,149		480		1,629		(70	)		503
	Professional fees			5,472		—		5,472		(34	)		19
	Conversion and other			1,680		—		1,680		(971	)		324

		Total merger- related charges	$	8,557	$	20,934	$	29,491	$	(30,302	)	$	11,032





				1999				1999		1999			1999
				Period		1999		Total		Accrual			Ending
(Dollars in thousands)				Cost		Accrual		Expense		Charges			Accrual


Cash:
	Direct severance and termination costs			$	23,293	$	16,403	$	39,696	$	(11,411	)	$	18,959
	Premises and equipment				3,757		65		3,822		(3,797	)		93
	Professional fees				14,872		75		14,947		(3,462	)		53
	Conversion and other				2,257		—		2,257		(6,504	)		1,295

		Total cash			44,179		16,543		60,722		(25,174	)		20,400

Non-cash:
	Write-off of discontinued assets				2,572		—		2,572		—			—
	Conversion and other				232		—		232		—			—

		Total non-cash			2,804		—		2,804		—			—

			Total merger- related charges	$	46,983	$	16,543	$	63,526	$	(25,174	)	$	20,400

3. Investment Securities

Investment securities at December 31, 2001, 2000 and 1999, are as follows:






				December 31, 2001


						Gross		Gross
				Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)				Cost		Gains		Losses		Value


Available for Sale
	U.S. Treasury and agency securities			$	30,344	$	586	$	1	$	30,929
	Securities of U.S. states and political subdivisions				8		—		—		8
	Other				101,899		830		4,354		98,375

		Total investment securities available for sale			132,251		1,416		4,355		129,312

Held to Maturity
	Securities of U.S. states and political subdivisions				5,839		194		2		6,031
	Other				435		1		—		436

		Total investment securities held to maturity			6,274		195		2		6,467

			Total	$	138,525	$	1,611	$	4,357	$	135,779






				December 31, 2000


						Gross		Gross
				Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)				Cost		Gains		Losses		Value


Available for Sale
	U.S. Treasury and agency securities			$	334,065	$	252	$	417	$	333,900
	Securities of U.S. states and political subdivisions				11		—		—		11
	Other				102,032		710		9,952		92,790

		Total investment securities available for sale			436,108		962		10,369		426,701

Held to Maturity
	U.S. Treasury and agency securities				15,000		3		—		15,003
	Securities of U.S. states and political subdivisions				7,074		160		6		7,228
	Other				440		—		—		440

		Total investment securities held to maturity			22,514		163		6		22,671

			Total	$	458,622	$	1,125	$	10,375	$	449,372






				December 31, 1999


						Gross		Gross
				Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)				Cost		Gains		Losses		Value


Trading
	Other			$	13,380	$	—	$	—	$	13,380

		Total investment securities held for trading			13,380		—		—		13,380

Available for Sale
	U.S. Treasury and agency securities				342,570		5,479		8,362		339,687
	Securities of U.S. states and political subdivisions				294		1		—		295
	Other				141,001		5,250		3,538		142,713

		Total investment securities available for sale			483,865		10,730		11,900		482,695

Held to Maturity
	U.S. Treasury and agency securities				17,058		—		292		16,766
	Securities of U.S. states and political subdivisions				8,279		75		53		8,301
	Other				20,669		—		1,326		19,343

		Total investment securities held to maturity			46,006		75		1,671		44,410

			Total	$	543,251	$	10,805	$	13,571	$	540,485

The Company did not have any investment securities held for trading at December 31, 2001 and 2000. The weighted average interest rate on investment securities was 8.21%, 7.40%, and 7.26% at December 31, 2001, 2000 and 1999, respectively.

Investment securities by contractual maturity as of December 31, 2001 are shown below:






									Due After One But
		Due Within One Year							Within Five Years


		Amortized		Fair					Amortized		Fair
		Cost		Value		Yield			Cost		Value		Yield


U.S. Treasury and agency securities		$	10,003	$	10,095		5.99	%	$	3,544	$	3,655		4.49	%
Securities of U.S. states and political subdivisions			235		243		5.84			2,477		2,569		5.09
Other			403		403		—			526		527		7.92

	Total	$	10,641	$	10,741		5.76		$	6,547	$	6,751		4.99






		Due After Five But
		Within Ten Years							Due After Ten Years


		Amortized		Fair					Amortized		Fair
		Cost		Value		Yield			Cost		Value		Yield


U.S. Treasury and agency securities		$	743	$	837		8.52	%	$	16,054	$	16,342		7.10	%
Securities of U.S. states and political subdivisions			3,135		3,227		5.22			—		—		—
Other			26		26		6.80			101,379		97,855		8.94

	Total	$	3,904	$	4,090		5.86		$	117,433	$	114,197		8.68

Gains on sales were $3.2 million, $11.2 million and $5.3 million for the years ended December 31, 2001, 2000 and 1999, respectively. Losses on sales were $9.8 million for the year ended December 31, 1999. No losses on sales were realized during the years ended December 31, 2001 and 2000, respectively.

4. Mortgage-Backed Securities

Mortgage-backed securities at December 31, 2001, 2000 and 1999, are as follows:






					December 31, 2001


							Gross		Gross
					Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)					Cost		Gains		Losses		Value


Available for Sale
	Participation certificates:
		U.S. government and agency issues			$	6,914,397	$	58,000	$	21,972	$	6,950,425
	Collateralized mortgage obligations:
		U.S. government and agency issues				508,093		10,168		10		518,251
		Private issues				545,998		16,245		407		561,836

			Total mortgage- backed securities available for sale			7,968,488		84,413		22,389		8,030,512

Held to Maturity
	Participation certificates:
		U.S. government and agency issues				475,622		19,871		4		495,489
		Private issues				90,203		973		171		91,005
	Collateralized mortgage obligations:
		U.S. government and agency issues				185,944		10,187		80		196,051
		Private issues				232,135		8,212		234		240,113

			Total mortgage- backed securities held to maturity			983,904		39,243		489		1,022,658

				Total	$	8,952,392	$	123,656	$	22,878	$	9,053,170






					December 31, 2000


							Gross		Gross
					Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)					Cost		Gains		Losses		Value


Available for Sale
	Participation certificates:
		U.S. government and agency issues			$	3,012,369	$	39,162	$	3,959	$	3,047,572
	Collateralized mortgage obligations:
		U.S. government and agency issues				519,746		4,970		722		523,994
		Private issues				507,395		9,840		1,605		515,630

			Total mortgage-backed securities available for sale			4,039,510		53,972		6,286		4,087,196

Held to Maturity
	Participation certificates:
		U.S. government and agency issues				672,638		12,600		308		684,930
		Private issues				128,407		518		1,787		127,138
	Collateralized mortgage obligations:
		U.S. government and agency issues				268,575		9,139		439		277,275
		Private issues				436,555		7,351		1,724		442,182

			Total mortgage-backed securities held to maturity			1,506,175		29,608		4,258		1,531,525

				Total	$	5,545,685	$	83,580	$	10,544	$	5,618,721






					December 31, 1999


							Gross		Gross
					Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)					Cost		Gains		Losses		Value


Available for Sale
	Participation certificates:
		U.S. government and agency issues			$	3,145,128	$	4,797	$	29,055	$	3,120,870
	Collateralized mortgage obligations:
		U.S. government and agency issues				530,123		15,015		865		544,273
		Private issues				525,345		8,702		6,056		527,991

			Total mortgage-backed securities available for sale			4,200,596		28,514		35,976		4,193,134

Held to Maturity
	Participation certificates:
		U.S. government and agency issues				848,038		4,859		7,128		845,769
		Private issues				162,485		545		4,315		158,715
	Collateralized mortgage obligations:
		U.S. government and agency issues				304,772		11,781		1,907		314,646
		Private issues				591,951		3,436		5,204		590,183

			Total mortgage-backed securities held to maturity			1,907,246		20,621		18,554		1,909,313

				Total	$	6,107,842	$	49,135	$	54,530	$	6,102,447

Sales of mortgage-backed securities resulted in gains of $109.6 million in 2001, $19.7 million in 2000 and $12.4 million in 1999. Losses on sales were $23.9 million in 2000 and $71.1 million in 1999. No losses on sales were realized in 2001.

5. Loans and Leases

Loans and leases consist of the following:






						At December 31,



						2001						2000						1999						1998						1997


									% of						% of						% of						% of						% of
(Dollars in thousands)						Amount			Total			Amount			Total			Amount			Total			Amount			Total			Amount			Total


Real estate mortgage loans:
	Permanent:
		One-to-four family				$	9,317,810			36.7	%	$	10,413,005			43.5	%	$	11,365,545			51.1	%	$	13,311,870			60.6	%	$	12,471,500			65.1	%
		Multifamily					989,169			3.9			1,064,796			4.4			1,224,348			5.5			1,027,320			4.7			1,203,277			6.3
		Commercial					1,076,493			4.2			769,589			3.2			624,517			2.8			663,448			3.0			627,816			3.3

			Total permanent				11,383,472			44.8			12,247,390			51.1			13,214,410			59.4			15,002,638			68.3			14,302,593			74.7

	Construction:
		One-to-four family					666,982			2.6			611,317			2.6			486,512			2.2			453,762			2.1			342,915			1.7
		Multifamily					359,848			1.4			90,129			.4			75,171			.3			45,064			.2			36,234			.2
		Commercial					313,725			1.3			163,544			.6			92,993			.4			73,641			.3			48,716			.3

			Total construction				1,340,555			5.3			864,990			3.6			654,676			2.9			572,467			2.6			427,865			2.2

				Total real estate mortgage loans			12,724,027			50.1			13,112,380			54.7			13,869,086			62.3			15,575,105			70.9			14,730,458			76.9
Retail consumer loans							4,808,390			18.9			4,583,770			19.1			3,745,633			16.8			2,841,225			12.9			1,943,287			10.1
Automobile loans							4,244,070			16.7			3,046,038			12.7			2,413,531			10.8			2,011,968			9.2			1,624,612			8.5
Consumer finance loans							1,027,392			4.0			974,852			4.1			700,259			3.2			443,301			2.0			127,420			.7
Leases							1,994,524			7.9			1,778,021			7.4			1,137,895			5.1			734,152			3.3			439,004			2.3
Corporate banking loans							1,043,714			4.1			802,379			3.4			679,397			3.0			575,042			2.6			512,595			2.7

					Total loans and leases held for investment		25,842,117			101.7			24,297,440			101.4			22,545,801			101.2			22,180,793			100.9			19,377,376			101.2

Less:
		Loans in process					387,264			1.5			345,341			1.4			259,680			1.2			163,277			.8			143,750			.8
		Unamortized net discounts (premiums)					20,527			—			(6,763	)		—			(7,430	)		—			(14,282	)		(.1)			(5,292	)		—
		Allowance for loan and lease losses					255,478			1.0			189,616			.8			186,400			.8			184,989			.8			181,554			.9
		Net deferred loan costs					(86,007	)		(.3)			(83,388	)		(.4)			(91,133	)		(.4)			(66,927	)		(.3)			(35,368	)		(.2)
		Automobile dealer reserve					(131,216	)		(.5)			(97,538	)		(.4)			(78,578	)		(.4)			(65,214	)		(.3)			(55,613	)		(.3)

				Total net items			446,046			1.7			347,268			1.4			268,939			1.2			201,843			.9			229,031			1.2

	Loans and leases held for investment, net					$	25,396,071			100.0	%	$	23,950,172			100.0	%	$	22,276,862			100.0	%	$	21,978,950			100.0	%	$	19,148,345			100.0	%

Loans held for sale						$	332,629					$	58,002					$	35,988					$	240,461					$	361,175

Loan servicing portfolio						$	13,846,807					$	10,379,644					$	10,798,563					$	9,916,922					$	10,140,387

As of December 31, 2001, there was no concentration of loans or leases in any type of industry which exceeded 10% of the Bank’s total loans and leases that is not included as a loan or lease category in the table above.

The following table reflects the principal payments contractually due (assuming no prepayments) on the Bank’s construction portfolio, net of loans in process, and corporate banking loan portfolio at December 31, 2001. Management expects prepayments will cause actual maturities to be shorter.






		Principal Payments Contractually Due in the Year(s)
		Ended December 31,


				2003-		2007 and
(Dollars in thousands)		2002		2006		Thereafter		Total


Construction loans		$	672,739	$	265,839	$	6,490	$	945,068
Corporate banking loans			260,146		476,119		307,449		1,043,714

	Total⁽¹⁾	$	932,885	$	741,958	$	313,939	$	1,988,782


⁽¹⁾	Of the $1.1 billion of loans due after December 31, 2002, 41% are fixed rate and 59% are adjustable rate.

The Company normally has outstanding a number of commitments to extend credit. At December 31, 2001, there were outstanding commitments to originate $2.6 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. At December 31, 2001, there were also outstanding unfunded consumer lines of credit of $3.7 billion and corporate banking lines of credit of $404.4 million. Substantially all of the consumer loans, including consumer lines of credit, are secured by equity in the borrowers’ residences. The Company does not expect all of these lines to be used by the borrowers. Outstanding letters of credit totaled $106.4 million as of December 31, 2001.

The Bank is engaged in equipment leasing through a subsidiary, ICX Corporation (“ICX”). The equipment leased by ICX is for commercial and industrial use only, with primary lease concentrations to Fortune 1000 companies for large capital equipment acquisitions. A lessee is evaluated from a credit perspective using the same underwriting standards and procedures as for a borrower. A

lessee is expected to be able to make the rental payments based on its business’ cash flow and the strength of its balance sheet. Leases are usually not evaluated as collateral-based transactions and, therefore, the lessee’s overall financial strength is the most important credit evaluation factor.

A summary of the investment in leases, before the allowance for lease losses, is as follows:






		December 31,

(Dollars in thousands)		2001		2000


Direct financing leases		$	1,277,979	$	1,186,961
Sales-type leases			49,793		54,369
Leveraged leases			666,752		536,691

	Total lease financings	$	1,994,524	$	1,778,021

The components of the investment in lease financings, before the allowance for lease losses, are as follows:






		December 31,


(Dollars in thousands)		2001		2000


Total future minimum lease rentals		$	1,512,225	$	1,400,651
Estimated residual value of leased equipment			1,076,772		972,822
Initial direct costs			11,397		10,768
Less unearned income on minimum lease rentals and estimated residual value of leased equipment			605,870		606,220

	Total lease financings	$	1,994,524	$	1,778,021

At December 31, 2001, future minimum lease rentals on direct financing, sales-type and leveraged leases are as follows: $258.1 million in 2002; $224.2 million in 2003; $186.2 million in 2004; $153.1 million in 2005; $124.4 million in 2006; and $566.2 million thereafter.

Allowance for Loan and Lease Losses – Changes in the allowance for loan and lease losses are as follows:






		Year Ended December 31,


(Dollars in thousands)		2001			2000			1999


Balance, beginning of year		$	189,616		$	186,400		$	184,989
	Provision		100,766			54,205			35,237
	Acquired through business combination		33,782			—			3,603
	Charge-offs		(78,459	)		(60,331	)		(45,484	)
	Recoveries		9,773			9,342			8,055

Balance, end of year		$	255,478		$	189,616		$	186,400

The total investment in impaired loans was $12.3 million and $23.0 million at December 31, 2001 and 2000, respectively. These loans were subject to allowances for loan and lease losses of $3.8 million and $12.9 million as of December 31, 2001 and 2000, respectively.

The average recorded investment in impaired loans was $10.9 million, $21.3 million, and $17.6 million for the years ended December 31, 2001, 2000, and 1999, respectively. Interest income recognized was $.7 million, $.6 million and $1.4 million for the years ended December 31, 2001, 2000, and 1999, respectively. The interest income potential based upon the original terms of the contracts for these impaired loans was $1.0 million, $2.1 million, and $1.8 million for 2001, 2000 and 1999, respectively.

6. Loan Servicing Assets

Activity in loan servicing assets is summarized as follows:






	Year Ended December 31,


(Dollars in thousands)	2001			2000


Beginning balance	$	121,735		$	118,792
Amount capitalized		61,897			42,860
Sales		—			(36,576	)
Amortization		(19,178	)		(13,341	)
Net change in valuation allowance		(24,614	)		10,000

Ending balance	$	139,840		$	121,735

Loans serviced for others were $13.8 billion and $10.4 billion at December 31, 2001 and 2000, respectively. At December 31, 2001, the fair value of loan servicing assets approximated book value. At December 31, 2000, the fair value of loan servicing assets was $138.3 million.

The Bank securitized residential mortgage and consumer loans of $6.7 billion and $4.0 billion in 2001 and 2000, respectively, in which the Bank retained servicing. The residential mortgage and consumer loans were exchanged for government agency mortgage-backed securities. The Bank did not retain any credit enhancing residual interests, nor is the Bank subject to any significant recourse obligations. The Company does not hold any interests in or sponsor any special-purpose entities.

7. Deposits

Deposits consist of the following:






			December 31,



			2001					2000					1999


					Weighted					Weighted					Weighted
					Average					Average					Average
(Dollars in thousands)			Amount		Rate			Amount		Rate			Amount		Rate


Checking accounts:
	Interest-bearing		$	5,973,545		2.45	%	$	2,547,726		2.68	%	$	2,066,453		2.05	%
	Noninterest-bearing			1,856,481		—			1,394,186		—			1,263,290		—
Money market and savings accounts				6,737,160		2.26			5,486,158		3.30			5,235,562		2.70
Certificates of deposit				10,556,123		4.43			10,177,601		5.99			10,508,670		5.31

		Total deposits, net	$	25,123,309		3.05		$	19,605,671		4.38		$	19,073,975		3.89

Including the effect of interest rate swaps						2.88					4.35					3.79

A summary of all certificates of deposit by maturity follows:





(Dollars in thousands)		December 31, 2001


Within 12 months		$	8,118,917
Over 12 months to 36 months			1,123,640
Over 36 months			1,313,566

	Total	$	10,556,123

A summary of retail certificates of deposit with balances of $100,000 or more by maturity follows:





(Dollars in thousands)		December 31, 2001


Three months or less		$	356,070
Over three months to six months			729,021
Over six months to twelve months			742,362
Over twelve months			170,814

	Total	$	1,998,267

Investment securities and mortgage-backed securities with a par value of $573.0 million, $594.6 million and $546.2 million at December 31, 2001, 2000, and 1999, respectively, are pledged to secure public deposits and for other purposes required or permitted by law.

8. Federal Home Loan Bank Advances

Federal Home Loan Bank (“FHLB”) advances at December 31, 2001 are secured by the Company’s investment in the stock of the FHLB, as well as $12.6 billion in certain real estate loans and $2.4 billion in mortgage-backed securities. FHLB advances are comprised of the following:






		December 31,



		2001					2000


				Weighted					Weighted
				Average					Average
(Dollars in thousands)		Amount		Rate			Amount		Rate


Fixed rate advances		$	8,218,827		5.19	%	$	9,011,799		5.81	%
Variable rate advances			424,477		1.75			624,478		6.59

	Total advances		8,643,304		5.02			9,636,277		5.86
Plus amortized premium on advances			13,934		—			—		—

	Total advances, net	$	8,657,238		4.95		$	9,636,277		5.86

Including the effect of interest rate swaps					5.02	%				5.86	%

Scheduled repayments of FHLB advances are as follows:






			December 31, 2001



			Fixed Rate Advances					Variable Rate Advances


					Weighted					Weighted
					Average					Average
(Dollars in thousands)			Amount		Rate			Amount		Rate


Maturing in:
	2002		$	1,100,000		3.04	%	$	14,873		2.05	%
	2003			1,105,000		4.66			—		—
	2004			125,000		5.64			—		—
	2005			2,265,200		6.23			—		—
	2006			500,112		4.98			—		—
	Thereafter			3,123,515		5.39			409,604		1.74

		Total advances, net	$	8,218,827		5.19	%	$	424,477		1.75	%

At December 31, 2001, certain fixed rate agreements are convertible to LIBOR at the counterparty’s option beginning in 2002. If the counterparty exercises its option, the Company can prepay the advance in full or part on the effective conversion date or on the quarterly repricing date.

9. Federal Funds Purchased and Repurchase Agreements

The Company enters into federal funds purchased and repurchase agreements. The agreements to repurchase assets correspond with sales of the Company’s securities which are treated as financings for financial statement purposes. The securities subject to repurchase agreements were delivered to the FHLB or brokers arranging the transactions who hold the collateral until maturity of the agreements.

Federal funds purchased and repurchase agreements consist of the following:

December 31,

2001

2000

Weighted

Average

(Dollars in thousands)

Amount

Rate

Amount

Rate

Due within 30 days

203,259

1.67

262,326

5.64

At December 31, 2001, there were no amounts at risk with any counterparties exceeding 10% of shareholders’ equity. The amount at risk is equal to the excess of the carrying value (or market value if greater) of the securities sold under agreements to repurchase over the amount of the repurchase liability.

10. Other Borrowings

Other borrowings consist of the following:






		December 31,


(Dollars in thousands)		2001		2000


Senior notes, due February 15, 2004, interest payable at 7.125% (net of unamortized discount of $.6 million in 2001 and $.8 million in 2000)		$	94,524	$	94,284
Zero coupon bonds of $151 million at December 31, 2001 and $156 million at December 31, 2000, due February 2005, with yield to maturity of 11.37%			106,162		98,028
Installment obligations without recourse			85,482		73,660
Variable-rate bonds, due December 1, 2015, interest payable semi-annually at 4.75% with a ceiling of 9.50%			10,000		10,000
Other			8,242		8,836

	Total	$	304,410	$	284,808

The zero coupon bonds are collateralized by mortgage-backed securities with a par value of $202.3 million and $186.2 million at December 31, 2001 and 2000, respectively.

11. Interest Rate Swaps

The Company uses interest rate swaps as a means of managing its interest rate risk profile (defined as the sensitivity of the Company’s earnings and net portfolio value to changes in interest rates). The Company utilizes fixed receipt callable interest rate swaps to convert certain longer-term callable certificates of deposit into short-term variable instruments. Under these agreements Charter One has 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 swaps are designated and qualify as fair value hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. The Company 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.

The Company also utilizes fixed payment interest rate swaps to convert certain floating-rate FHLB advances into fixed-rate instruments. Under these agreements, Charter One has 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. The Company assumed no ineffectiveness in the respective hedging relationships. Any gain or loss on the interest rate swap was offset by the expected future cash flows on the FHLB advances during the period of change in fair values.

Information on the interest rate swaps, by maturity date, is as follows:






		December 31,



		2001								2000


				Receiving			Paying					Receiving			Paying
		Notional		Interest			Interest			Notional		Interest			Interest
(Dollars in thousands)		Amount		Rate			Rate			Amount		Rate			Rate


Fixed Payment and Variable Receipt
2002		$	25,000		3.73	%		6.44	%	$	25,000		6.94	%		6.44	%
2003			409,605		1.94			3.55			—		—			—

	Total	$	434,605		2.04	%⁽¹⁾		3.71	%	$	25,000		6.94	%⁽¹⁾		6.44	%

Variable Payment and Fixed Receipt
2001		$	—		—			—		$	420,000		6.38	%		6.73	%
2002			—		—			—			155,000		7.03			6.73
2003			255,000		4.08			2.14			120,000		6.14			6.68
2004			—		—			—			478,000		6.84			6.75
2005			—		—			—			445,000		7.89			6.68
2006			930,000		5.80			2.12			70,000		7.07			6.59
2007			10,000		7.25			2.36			10,000		7.25			6.71
2009			—		—			—			65,000		7.32			6.53
2010			10,000		7.40			2.06			10,000		7.50			6.65
2011			45,000		6.33			1.94			—		—			—

	Total	$	1,250,000		5.49	%		2.12	% ⁽¹⁾	$	1,773,000		7.00	%		6.71	% ⁽¹⁾


⁽¹⁾	Rates are based on LIBOR.

The fair value of the Company’s interest rate swap contracts is estimated as the difference in the present value of future cash flows between the Company’s existing agreements and current market rate agreements of the same duration. Information on the fair values of the interest rate swaps is as follows:






			December 31,


(Dollars in thousands)			2001			2000


Unrealized gain (loss):
	Fair value hedges		$	23,376		$	20,980
	Cash flow hedges			(3,584	)		(258	)

		Total fair value	$	19,792		$	20,722

The net benefit of interest rate swaps included in interest expense is as follows:






			Year Ended December 31,


(Dollars in thousands)			2001			2000			1999


Interest (income) expense:
	Deposits		$	(21,774	)	$	(8,879	)	$	(9,886	)
	FHLB advances			1,241			—			86
	Federal funds purchased and repurchase agreements			—			—			(236	)
	Mortgage loans			—			—			273

		Total	$	(20,533	)	$	(8,879	)	$	(9,763	)

The Company is exposed to credit loss in the event of nonperformance by the swap counterparties; however, the Company does not currently anticipate nonperformance by the counterparties.

12. Income Taxes

The provision for income taxes consists of the following components:






		Year Ended December 31,


(Dollars in thousands)		2001		2000		1999


Current		$	46,396	$	33,463	$	62,158
Deferred			186,502		170,321		98,449

	Total	$	232,898	$	203,784	$	160,607

A reconciliation from tax at the statutory rate to the income tax provision is as follows:






			Year Ended December 31,



			2001						2000						1999


(Dollars in thousands)			Amount			Rate			Amount			Rate			Amount			Rate


Tax at statutory rate			$	257,057			35.0	%	$	223,211			35.0	%	$	173,648			35.0	%
Decrease due to:
	Bank owned life insurance			(13,615	)		(1.9	)		(13,429	)		(2.1	)		(9,191	)		(1.9	)
	General business credits			(3,443	)		(.5	)		(2,500	)		(.4	)		(1,821	)		(.3	)
	Other			(7,101	)		(.9	)		(3,498	)		(.5	)		(2,029	)		(.4	)

		Income tax provision	$	232,898			31.7	%	$	203,784			32.0	%	$	160,607			32.4	%

Significant components of the deferred tax assets and liabilities are as follows:






				Year Ended December 31,


(Dollars in thousands)				2001			2000			1999


Deferred tax assets:
	Book allowance for loan losses			$	84,466		$	62,581		$	61,847
	Accrued and deferred compensation				1,936			3,267			3,176
	Net unrealized loss on securities				—			—			3,774
	Alternative minimum tax credit				47,638			53,728			22,850
	Other				27,886			53,170			51,317

		Total deferred tax assets			161,926			172,746			142,964

Deferred tax liabilities:
	Leasing activities, net				557,246			386,053			225,459
	FHLB stock dividend				58,018			45,307			32,709
	Deferred loan costs				28,731			29,136			33,656
	Tax allowance for loan losses				2,285			3,640			5,081
	Net unrealized gain on securities				20,586			12,825			—
	Other				10,099			44,346			7,700

		Total deferred tax liabilities			676,965			521,307			304,605

			Net deferred tax liability	$	(515,039	)	$	(348,561	)	$	(161,641	)

In 2001 and 2000, Charter One recaptured excess bad debt reserves of $3.8 million and $4.1 million, respectively, resulting in payments of $1.3 million and $1.4 million which were previously accrued. The pre-1988 reserve provisions are subject only to recapture requirements in the case of certain excess distributions to, and redemptions of, shareholders or if the Bank no longer qualifies as a “bank”. Tax bad debt deductions accumulated prior to 1988 by the Bank are approximately $321.3 million. No deferred income taxes have been provided on these bad debt deductions and no recapture of these amounts is anticipated.

13. Regulatory Matters

Federal Reserve Board (“FRB”) regulations require depository institutions to maintain certain minimum reserve balances. These reserves, which consisted of vault cash and deposits at the Federal Reserve Bank, totaled $78.5 million and $54.9 million at December 31, 2001 and 2000, respectively.

The Bank may not declare or pay cash dividends on its shares of common stock if the payment would cause shareholders’ equity to be reduced below applicable regulatory capital maintenance requirements, or if such declaration and payment would otherwise violate regulatory requirements. At December 31, 2001, approximately $62.8 million of the Company’s retained earnings was available to pay dividends to shareholders or to be used for other corporate purposes.

As a financial holding company, Charter One is subject to regulation by the FRB under the Bank Holding Company Act of 1956 as amended, and the regulations of the FRB, including various capital requirements. Charter One Commercial and Charter One Bank, F.S.B. are subject to various regulatory capital requirements administered by the Federal Deposit Insurance Corporation (“FDIC”) and the OTS, respectively. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by each regulator that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines must be met that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. 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 Charter One Commercial to individually maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets. Charter One Bank, F.S.B. is required to maintain minimum amounts and ratios (also set forth in the table below) of total and Tier 1 capital to risk-weighted assets, of core capital to adjusted tangible assets, and of tangible capital to tangible assets. The actual regulatory capital ratios calculated for Charter One, Charter One Commercial and Charter One Bank, F.S.B., along with the capital amounts and ratios for capital adequacy purposes and the amounts required to be categorized as well capitalized under the regulatory framework for prompt corrective action are as follows:






		December 31, 2001



												To Be “Well
												Capitalized”
												Under Prompt
							For Capital					Corrective
		Actual					Adequacy Purposes					Action Provisions


(Dollars in thousands)		Amount		Ratio			Amount		Ratio			Amount		Ratio


Charter One:
	Total capital to risk-weighted assets	$	2,773,390		10.23	%	$	2,168,434		³8.00	%	$	2,710,542		³10.00	%
	Tier 1 capital to risk-weighted assets		2,517,875		9.29			1,084,217		³4.00			1,626,325		³6.00
	Tier 1 capital to average assets		2,517,875		6.81			1,479,451		³4.00			1,849,313		³5.00
Charter One Commercial:
	Total capital to risk-weighted assets		39,729		46.21			6,877		³8.00			8,597		³10.00
	Tier 1 capital to risk-weighted assets		39,729		46.21			3,439		³4.00			5,158		³6.00
	Tier 1 capital to average assets		39,729		13.72			11,579		³4.00			14,474		³5.00
Charter One Bank, F.S.B.:
	Total capital to risk-weighted assets		2,659,977		10.01			2,125,856		³8.00			2,657,320		³10.00
	Tier 1 capital to risk-weighted assets		1,910,830		7.19			N/A		N/A			1,594,392		³6.00
	Core capital to adjusted tangible assets		1,932,552		5.12			1,509,358		³4.00			1,886,698		³5.00
	Tangible capital to tangible assets		1,932,552		5.12			566,009		³1.50			N/A		N/A






		December 31, 2000



												To Be “Well
												Capitalized”
												Under Prompt
							For Capital					Corrective
		Actual					Adequacy Purposes					Action Provisions


(Dollars in thousands)		Amount		Ratio			Amount		Ratio			Amount		Ratio


Charter One:
	Total capital to risk-weighted assets	$	2,448,962		10.29	%	$	1,906,468		³8.00	%	$	2,380,585		³10.00	%
	Tier 1 capital to risk-weighted assets		2,259,030		9.49			952,234		³4.00			1,428,351		³6.00
	Tier 1 capital to average assets		2,259,030		6.89			1,310,915		³4.00			1,638,643		³5.00
Charter One Commercial:
	Total capital to risk-weighted assets		30,213		30.56			7,910		³8.00			9,887		³10.00
	Tier 1 capital to risk-weighted assets		30,213		30.56			3,955		³4.00			5,932		³6.00
	Tier 1 capital to average assets		30,213		8.67			13,941		³4.00			17,427		³5.00
Charter One Bank, F.S.B.:
	Total capital to risk-weighted assets		2,376,443		10.23			1,858,583		³8.00			2,323,229		³10.00
	Tier 1 capital to risk-weighted assets		1,673,360		7.20			N/A		N/A			1,393,938		³6.00
	Core capital to adjusted tangible assets		1,687,568		5.15			1,310,207		³4.00			1,637,759		³5.00
	Tangible capital to tangible assets		1,687,300		5.15			491,324		³1.50			N/A		N/A

Management believes that, as of December 31, 2001, Charter One, Charter One Commercial and Charter One Bank, F.S.B., 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.

As discussed in Note 1 to the Notes to Consolidated Financial Statements, the Company announced on January 7, 2002, that Charter One Bank, F.S.B. filed an application with the OCC to convert to a national bank charter. The Company expects the conversion to be effective during the first quarter of 2002, at which time Charter One Bank will be subject to various regulatory capital requirements administered by the OCC.

14. Stock Purchase Rights

On October 20, 1999, the Board of Directors of the Company approved an amendment and restatement of the Company’s stockholder rights plan, extending the plan that was adopted in 1989 and scheduled to expire on November 20, 1999. Under the Amended and Restated Stockholder Protection Rights Agreement, each share of the Company’s common stock outstanding entitles the shareholder to one stock purchase right. Each right will entitle its holder to purchase one one-hundredth of a share of a new series of preferred stock (Series A Preferred Stock), at a price of $100.00 (subject to adjustment) (the “Exercise Price”) and will generally become exercisable if any person or group (1) acquires 20% or more of the Company’s common stock or (2) commences a tender or exchange offer to acquire 20% or more of the Company’s common stock. Upon announcement that any person or group has acquired 20% or more of the Company’s common stock (“Acquiring Person”), rights owned by the Acquiring Person will become void and each other right will “flip-in,” entitling its holder to purchase for the Exercise Price either Series A Preferred Stock or, at the option of the Company, common stock, having a market value of twice the Exercise Price. In addition, after any person has become an Acquiring Person, the Company may not consolidate or merge with any person or sell 50% or more of its assets or earning power to any person if at the time of such merger or sale the Acquiring Person controls the Company’s Board of Directors and, in the case of a merger, will receive different treatment than the other shareholders, unless provision is made such that each right would thereafter entitle its holder to buy, for the Exercise Price, the number of shares of common stock of such other person having a market value of twice the Exercise Price.

The rights may be redeemed by the Company for $.01 per right at any time prior to an acquisition of 20% or more of the common stock of the Company. The rights will expire on October 20, 2009 or before that date under certain circumstances, including in connection with the acquisition of the Company in a merger before any person has acquired more than 20% of the Company’s common stock.

15. Stock Option Plans

At December 31, 2001, the Company has several stock option plans under which 9.1 million shares of common stock are reserved for grant to officers, key employees and directors. The plans provide that option prices will not be less than the fair market value of the stock at the grant date. The date on which the options are first exercisable is determined by the Stock Option Committee of the Board of Directors (the “Committee”). The options expire no later than 10 years from the grant date. The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost 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, “Accounting for Stock-Based Compensation,” the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below (per share data has been restated to reflect all stock dividends as of December 31, 2001):






		Year Ended December 31,


(Dollars in thousands, except per share data)		2001		2000		1999


Net income:
	As reported	$	500,714	$	433,962	$	333,976
	Pro forma		474,945		409,818		310,549
Basic earnings per share:
	As reported		2.25		1.93		1.42
	Pro forma		2.14		1.83		1.32
Diluted earnings per share:
	As reported		2.21		1.90		1.39
	Pro forma		2.09		1.79		1.29

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2001, 2000 and 1999:






	Year Ended December 31,


	2001			2000			1999


Dividend yield		2.00	%		2.00	%		2.00	%
Volatility		34.40- 43.66	%		43.00- 45.41	%		32.66- 33.65	%
Risk-free interest rate		4.42-5.55	%		5.20-6.78	%		4.91-6.49	%
Life of grant		7 years			7 years			7 years

The estimated weighted-average grant-date fair value (based on the above option-pricing model and assumptions) for options granted in 2001, 2000, and 1999 was $10.68, $8.45, and $9.84, respectively.

The following is an analysis of the stock option activity for each of the years in the three-year period ended December 31, 2001 and the stock options outstanding at the end of the respective periods. Amounts have been restated to reflect all prior stock dividends.





				Weighted Average
	Number of			Exercise Price of
	Option Shares			Option Shares


Outstanding at January 1, 1999		18,592,315			$13.58
Granted		3,849,020			23.99
Exercised		(2,316,488	)		8.84
Forfeited		(367,732	)		23.18

Outstanding at December 31, 1999		19,757,115			15.99
Granted		4,193,258			17.32
Exercised		(2,246,472	)		10.79
Forfeited		(807,945	)		20.85

Outstanding at December 31, 2000		20,895,956			16.63
Granted		7,792,756			25.95
Acquired through acquisition		1,034,488			17.54
Exercised		(2,936,151	)		11.85
Forfeited		(604,489	)		20.36

Outstanding at December 31, 2001		26,182,560			19.89

Financial data pertaining to outstanding stock options were as follows:






December 31, 2001


									Weighted
									Average
					Weighted				Exercise Price
			Average		Average		Number of		of Exercisable
Ranges of	Number of		Remaining		Exercise Price of		Exercisable		Option
Exercise Prices	Option Shares		Years		Option Shares		Option Shares		Shares


$ 2.54 - 9.98		2,049,530		1.5		$ 6.44		2,049,530		$ 6.44
10.07 - 14.04		3,597,619		4.1		11.20		3,597,619		11.20
15.14 - 20.00		5,648,320		7.1		17.31		2,063,228		17.71
20.24 - 24.58		6,900,793		6.6		23.45		3,584,347		22.99
25.21 - 25.99		3,849,517		9.0		25.23		75,396		25.83
26.07 - 30.59		4,136,781		9.8		26.69		143,175		27.26

		26,182,560		6.8		19.89		11,513,295		15.48

The Committee may also award restricted shares of common stock to officers and key employees. The terms of the grants are determined by the Committee at the date of the award. As of December 31, 2001, no awards of restricted shares of common stock had been made.

16. Fair Value of Financial Instruments

The estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Cash, Cash Equivalents, Accrued Interest Receivable and Payable and Advance Payments by Borrowers for Taxes and Insurance – The carrying amount as reported in the Consolidated Statements of Financial Condition is a reasonable estimate of fair value.

Mortgage-Backed and Investment Securities – Fair values are based on quoted market prices, dealer quotes and prices obtained from independent pricing services.

Loans and Leases – The fair value is estimated by discounting the future cash flows using the current market rates for loans and leases of similar maturities with adjustments for market and credit risks.

Federal Home Loan Bank Stock – The fair value is estimated to be the carrying value which is par. All transactions in the capital stock of the FHLB are executed at par.

Deposits – The fair value of demand deposits, savings accounts and money market deposit accounts is the amount payable on demand

at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using rates currently offered for advances of similar remaining maturities.

Federal Home Loan Bank Advances, Federal Funds Purchased and Repurchase Agreements and Other Borrowings – Rates currently available to the Bank for borrowings with similar terms and remaining maturities are used to estimate fair value of existing borrowings and capital securities.

Forward Commitments – Quoted market prices are utilized to determine fair value disclosures when such prices are available.

The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2001 and 2000. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.






			December 31, 2001				December 31, 2000


			Carrying		Fair		Carrying		Fair
(Dollars in thousands)			Value		Value		Value		Value


Assets:
	Cash and cash equivalents		$	516,520	$	516,520	$	531,257	$	531,257
	Investment securities			135,586		135,779		449,215		449,372
	Mortgage-backed securities			9,014,416		9,053,170		5,593,371		5,618,721
	Loans and leases, net			25,728,700		26,102,123		24,008,174		23,953,841
	Federal Home Loan Bank stock			617,836		617,836		568,377		568,377
	Accrued interest receivable			162,065		162,065		165,990		165,990
Liabilities:
	Deposits:
		Checking, money market and savings accounts		14,567,186		14,567,186		9,428,070		9,428,070
		Certificates of deposit		10,556,123		10,695,580		10,177,601		10,213,966
	Federal Home Loan Bank advances			8,657,238		9,017,975		9,636,277		9,582,491
	Federal funds purchased and repurchase agreements			203,259		203,259		262,326		262,326
	Other borrowings			304,410		323,957		284,808		322,212
	Advance payments by borrowers for taxes and insurance			54,103		54,103		60,761		60,761
	Accrued interest payable			57,704		57,704		54,499		54,499
Off-Balance-Sheet Items:
	Forward commitments to purchase/ sell/originate loans or mortgage-backed securities					4,397				843

17. Parent Company Financial Information

The summarized financial statements of Charter One (parent company only) as of December 31, 2001 and 2000 and for the three years ended December 31, 2001 are as follows:

Statements of Financial Condition






				December 31,


(Dollars in thousands)				2001			2000


Assets:
	Deposits with subsidiaries			$	55,043		$	81,655
	Cash equivalents				138			131
	Investment in subsidiaries, at equity				2,401,473			1,941,579
	Securities and other				570,318			530,770

		Total assets		$	3,026,972		$	2,554,135

Liabilities:
	Other borrowings			$	94,524		$	94,284
	Accrued expenses and other liabilities				3,948			3,647

		Total liabilities			98,472			97,931

Shareholders’ Equity:
	Common stock and additional paid-in capital				2,094,016			1,747,359
	Retained earnings				811,093			786,793
	Treasury stock, at cost				(14,586	)		(100,545	)
	Borrowings of employee investment and stock ownership plan				—			(1,256	)
	Accumulated other comprehensive income				37,977			23,853

		Total shareholders’ equity			2,928,500			2,456,204

			Total liabilities and shareholders’ equity	$	3,026,972		$	2,554,135

Statements of Income






			Year Ended December 31,


(Dollars in thousands)			2001		2000			1999


Income:
	Dividends from subsidiaries		$	407,300	$	1,022,400		$	145,000
	Interest and dividends on securities			39,382		17,914			1,347
	Other income			1,064		1,238			982

		Total income		447,746		1,041,552			147,329

Expenses:
	Interest expense			7,015		7,022			1,766
	Administrative expenses			6,566		5,663			7,787

		Total expenses		13,581		12,685			9,553

Income before undistributed net earnings of subsidiaries				434,165		1,028,867			137,776
Equity in undistributed net earnings (loss) of subsidiaries				66,549		(594,905	)		196,200

		Net income	$	500,714	$	433,962		$	333,976

Statements of Cash Flows






				Year Ended December 31,


(Dollars in thousands)				2001			2000			1999


Cash Flows from Operating Activities:
	Net income			$	500,714		$	433,962		$	333,976
	Adjustments to reconcile net income to net cash provided by operating activities:
		Equity in undistributed net (earnings) loss of subsidiaries			(66,549	)		594,905			(196,200	)
		Other			(219,564	)		(35,980	)		54,621

			Net cash provided by operating activities		214,601			992,887			192,397

Cash Flows from Investing Activities:
	Payments for investments in and advances to subsidiaries				—			(530,000	)		—
	Repayment of investments in and advances to subsidiaries				—			27,000			—
	Purchases of securities				(1,000	)		—			—
	Maturity of securities				—			—			1,000

			Net cash provided by (used in) investing activities		(1,000	)		(503,000	)		1,000

Cash Flows from Financing Activities:
	Proceeds from long-term borrowings				—			—			95,104
	Proceeds from issuance of common stock				49,443			30,209			24,093
	Payment of dividends on common stock				(167,052	)		(144,659	)		(134,328	)
	Net purchases of treasury stock				(122,597	)		(293,763	)		(160,381	)

			Net cash used in financing activities		(240,206	)		(408,213	)		(175,512	)

Increase (decrease) in deposits with subsidiaries and cash equivalents				$	(26,605	)	$	81,674		$	17,885

18. Subsequent Event

INDEPENDENT AUDITORS’ REPORT

[Deloitte & Touche Logo]

To the Shareholders
and Board of Directors
Charter One Financial, Inc.

We have audited the accompanying consolidated statements of financial condition of Charter One Financial, Inc. and its subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Charter One Financial, Inc. and its subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Cleveland, Ohio
January 22, 2002

FORM 10-K

This Annual Report includes the information required in our Form 10-K filed with the SEC. The integration of the two documents gives our shareholders and other interested parties timely, efficient and comprehensive information on our financial condition and results of operations for the year ended December 31, 2001. Portions of this Annual Report are not required by the Form 10-K report and are not filed as part of the Company’s Form 10-K filed with the SEC. Only those portions of this Annual Report referenced in the cross reference index are incorporated in the Form 10-K filed with the SEC. The report has not been approved or disapproved by the SEC, nor has the SEC passed upon its accuracy or adequacy.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2001.

o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to .

Commission file number 001-15495

CHARTER ONE FINANCIAL, INC.

(Exact name of Registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		34-1567092 (I.R.S. Employer Identification No.)
1215 Superior Avenue, Cleveland, Ohio (Address of principal executive offices)		44114 (Zip Code)

(Registrant’s telephone number, including area code): (216) 566-5300

Securities Registered Pursuant to Section 12(b) of the Act:


Common Stock ($0.01 par value), including related preferred stock purchase rights (Title of Each Class)		New York Stock Exchange (Name of Each Exchange on which Registered)

Securities Registered Pursuant to Section 12(g) of the Act:

None

____________________________________

(Title of Class)

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 ü NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

The aggregate market value of the common stock held by non-affiliates of the Registrant as of February 22, 2002 was $6,212,900,000. For this purpose, directors and executive officers of Charter One Financial, Inc. are considered affiliates. The number of shares outstanding of the Registrant’s sole class of common stock as of February 22, 2002 was 219,306,710.

Portions of the Registrant’s proxy statement for the April 23, 2002 Annual Meeting of Shareholders are incorporated by reference in Part III.

Form 10-K Cross Reference Index


Item
Number			Pages


PART I
	1.	Business		53–54
	2.	Properties		54–55
	3.	Legal Proceedings		55
	4.	Submission of Matters to a Vote of Security Holders — Not Applicable

PART II
	5.	Market for Registrant’s Common Equity and Related Shareholder Matters		30
	6.	Selected Financial Data		18–19
	7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20–31
	7A.	Quantitative and Qualitative Disclosure About Market Risk		28–29
	8.	Financial Statements and Supplementary Data		32–51
	9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures — Not Applicable

PART III
	10.	Directors and Executive Officers of the Registrant — Note (1)
	11.	Executive Compensation — Note (1)
	12.	Security Ownership of Certain Beneficial Owners and Management — Note (1)
	13.	Certain Relationships and Related Transactions — Note (1)

PART IV
	14.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		32–53
Signatures				56

Exhibits — The index of exhibits has been filed as separate pages of the 2001 Form 10-K and is available to shareholders on request from the Registrant’s Investor Relations Department. Copies of the exhibits may be obtained at a cost of 30 cents per page.

Financial Statement Schedules — All financial statement schedules are omitted because the required information is not applicable or is included in the Consolidated Financial Statements or related notes.

Reports on Form 8-K — On October 12, 2001, the Registrant filed a report on Form 8-K containing a press release announcing that it was holding an Investor Day on November 2, 2001 at the Federal Reserve Bank of Cleveland in Cleveland, Ohio.

Note (1): Incorporated by reference from the Registrant’s Proxy Statement for the April 23, 2002 Annual Meeting of Shareholders. None of the foregoing incorporation by reference shall include the information referred to in Item 306 or Item 402(a)(8) of Regulation S-K.

Item 1. Business

Headquartered in Cleveland, Ohio, Charter One Financial, Inc., hereafter referred to as “Charter One” or the “Registrant,” is a financial holding company. Charter One’s principal line of business is consumer banking which is primarily conducted through the operations of Charter One Bank, F.S.B. and its subsidiaries. The executive offices of Charter One are located at 1215 Superior Avenue, Cleveland, Ohio 44114, and the telephone number is (216) 566-5300. See “Selected Financial Data” under Part II, Item 6, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II, Item 7 and Note 1 to the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K for additional information relating to Charter One’s business.

Charter One has a long history of completing mergers and acquisitions, which have had a significant effect on its business. See Note 2 and 18 to the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K for a discussion of the impact of recent business combinations and branch acquisitions.

Market Area and Competition

As of December 31, 2001, Charter One was ranked among the 25 largest bank holding companies in the country and operated through numerous banking offices: 113 in Ohio, 95 in Michigan, 126 in New York, 87 in Illinois, 26 in Vermont and 9 in Massachusetts. The branch locations operate under the Charter One Bank name in all areas except in Michigan, where the Bank is currently known as First Federal of Michigan. On January 11, 2002, the Registrant announced an agreement to acquire Charter National Bancorp, Inc. At the same time, the Registrant announced its plans to adopt the Charter One name for its Michigan operations as soon as the merger is complete, sometime in the second or third quarter of 2002. See Note 18 to the Notes to Consolidated Financial Statements for further information on this proposed acquisition.

Based on 2001 data from SNL Datasource, the counties served by the Bank include approximately 36% of the population of Ohio, 55% of Michigan, 52% of New York (excluding New York City), 65% of Illinois, 80% of Vermont and 10% of Massachusetts.

The consumer banking business is highly competitive. Charter One competes actively in all aspects and areas of its business with consumer and commercial banks, savings and loans, mortgage bankers and other financial service entities. The Registrant also competes with non-financial institutions, including retail stores that maintain their own credit programs and governmental agencies that make available low cost or guaranteed loans to certain borrowers.

Regulation

As a financial holding company, Charter One is subject to regulation by the Federal Reserve Board. Charter One is required to file reports with the Federal Reserve Board and is subject to regular inspections by that agency. Financial holding companies may engage in a broad array of banking, insurance and securities activities. The insurance activities include both underwriting and agency activities, as well as title insurance activities, and are generally subject to state law licensing requirements. However, state anti-affiliation laws have been generally preempted. The securities activities include both underwriting and agency activities. Aside from activities expressly permitted under the Gramm-Leach-Bliley Act, financial holding companies may engage in activities which the Federal Reserve Board in consultation with, and with the non-objection of, the U.S. Treasury Department, determines to be (i) financial in nature or (ii) incidental to a financial activity, or activities which the Federal Reserve Board determines on its own to be “complementary” to a financial activity without posing a substantial risk to the safety and soundness of the depository institution or the financial system generally. With the exception of our minor real estate development activities, the list of permissible activities includes all current operations of Charter One. We intend to comply with the Federal Reserve Board’s divestiture orders with respect to these real estate development activities, the time period for which may be extended under the law.

As a federally chartered savings bank, Charter One Bank remains subject to supervision, regulation and examination by its primary regulator, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation. On January 7, 2002, Charter One Bank filed an application to become a national bank. Once it becomes a national bank, its primary regulator will be the Office of the Comptroller of the Currency. Charter One Bank expects the conversion to be effective during the first quarter of 2002.

As a New York chartered commercial bank, Charter One Commercial is subject to supervision, regulation and examination by the Federal Deposit Insurance Corporation and the New York State Banking Department.

See Management’s Discussion and Analysis — “Capital and Dividends” under Part II, Item 7 of this Form 10-K, and Note 13 to the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K, for a discussion of the regulatory capital calculations and compliance with regulatory capital requirements as well as regulatory restrictions on cash dividends.

Executive Officers

Executive Officers of the Registrant. The executive officers of Charter One, each of whom is currently an executive officer of Charter One Bank, are identified below. The executive officers of Charter One are appointed annually by its Board of Directors to serve until the next annual election of officers following the Annual Meeting of Shareholders.





	Age at
	December 31,			Officer
Name	2001		Position	Since


Charles John Koch		55	Chairman of the Board, President and Chief Executive Officer		1987
Mark D. Grossi		48	Executive Vice President		1992
John David Koch		49	Executive Vice President		1987
Richard W. Neu		45	Executive Vice President and Chief Financial Officer		1995
Robert J. Vana		52	Senior Vice President, Chief Corporate Counsel and Corporate Secretary		1987

Charles John Koch has been President of Charter One Bank since 1980 and was Chief Operating Officer of Charter One from 1980 to 1988, when he was appointed Chief Executive Officer of Charter One. In February 1995, he was appointed Chairman of the Board of Charter One and of Charter One Bank. Mr. Koch is the brother of John David Koch.

Mark D. Grossi is an Executive Vice President of Charter One and of Charter One Bank, and has been responsible for retail banking and branch administration since Charter One’s merger with First American Savings Bank in 1992.

John David Koch joined Charter One Bank in 1982 and is Executive Vice President of Charter One and of Charter One Bank. Mr. Koch is responsible for the credit and lending functions of Charter One Bank and has management responsibility for numerous subsidiary corporations. Mr. Koch is the brother of Charles John Koch.

Richard W. Neu is Executive Vice President and Chief Financial Officer of Charter One and Charter One Bank. He joined Charter One in 1995 following Charter One’s merger with FirstFed Michigan Corporation. Prior to the merger he had served as FirstFed’s Executive Vice President and Chief Financial Officer.

Robert J. Vana has been Chief Corporate Counsel and Corporate Secretary of Charter One since 1988 and joined Charter One Bank as Senior Vice President and Corporate Secretary in 1982.

Item 2. Properties

The executive offices of Charter One and Charter One Bank are located at 1215 Superior Avenue, Cleveland, Ohio in a seven-story office building owned by Charter One. Charter One Bank also maintains an operations center and a service center in single-story buildings owned by the Bank and located in Cleveland, Ohio. The Bank owns various other office buildings including a 15-story office building in Cleveland, Ohio, two four-story office buildings in Rochester, New York, a two-story and three-story building in Albany, New York, a nine-story office building in Toledo, Ohio, a four-story office building in downtown Canton, Ohio, a three-story office building in Akron, Ohio, two two-story buildings in Michigan and nine two-story office buildings, three three-story office buildings and a four-story office building in metropolitan Chicago, Illinois. Most buildings include space for a branch office and various divisional administrative functions, with any remaining space leased to tenants.

As of December 31, 2001, in addition to the Bank’s 456 banking locations, Charter One Bank and its subsidiaries operated 29 loan production offices in 10 states. At December 31, 2001, Charter One Bank owned 236 of these banking facilities and leased the remainder. We operate 919 ATMs at various banking offices and are a member of the Money Access Center System (“MAC”) and the New York Cash Exchange (“NYCE”), which provide our customers access to ATMs nationwide. The lease terms for branch offices are not individually material. Lease terms range from monthly to seven years.


Item 3.	Legal Proceedings

Charter One and its subsidiaries are involved as plaintiff or defendant in various actions incident to their business, none of which is believed to be material to the financial condition of Charter One, except as discussed below.

Prior to the merger with FirstFed Michigan Corporation in 1995, Charter One and FirstFed each filed a lawsuit against the United States based upon the breach of certain agreements between Charter One and First Federal, respectively, and the government involving supervisory goodwill and capital credits in the aggregate amount of approximately $126 million. First Federal of Michigan v. United States, No. 95-464C was filed in the United States Court of Federal Claims (“CFC”) on July 20, 1995. Charter One Bank, F.S.B. v. United States, No. 95-528C was filed in the same court on August 8, 1995. These actions, claiming damages for the government’s breach of four separate contractual agreements, have been consolidated and the case is proceeding under docket number 95-464C. Charter One filed motions for summary judgment on liability as to the four contractual agreements at issue. These motions are currently pending pursuant to the terms of a case management order entered by the court to govern all similar goodwill contract cases.

The status of the litigation is dependent to some degree upon factors that are out of the control of Charter One, including, but not limited to, the outcome of other “Winstar-related” cases in the CFC and the Court of Appeals for the Federal Circuit. On July 1, 1996, the United States Supreme Court in United States v. Winstar Corp. affirmed the CFC’s finding that the government had breached contractual agreements with Glendale Federal Bank, Statesman Savings Bank, and Winstar Federal Savings and Loan for the regulatory capital treatment of goodwill and capital credits, and remanded the cases to the CFC for trials on damages. Glendale’s initial award of $909 million was reversed by the Federal Circuit and remanded to the CFC, where Glendale’s damages case is still pending. The Statesman and Winstar cases settled.

In 1992, Alliance Bancorp’s predecessor, Liberty Federal Bank, filed a similar breach of contract lawsuit against the United States involving approximately $47 million of supervisory goodwill in Liberty Federal Bank v. United States, No. 92-876. Alliance filed a short form motion for summary judgment in 1998, which is still pending. In light of Charter One’s acquisition of Alliance in July 2001, Charter One will request that the Court also consolidate that action into docket number 95-464C, such that all of the previously-separate cases now controlled by Charter One can proceed together.

As of January 31, 2002, the CFC had granted plaintiffs summary judgment on contract liability in 16 Winstar-related cases. In several cases, the CFC found a contract for the regulatory treatment of goodwill even though the parties had not executed an assistance agreement regarding the transaction (as the parties had in Winstar and other related cases). The CFC also has completed nine damages trials in Winstar-related cases and issued eight decisions, all but one of which were appealed to the Federal Circuit Court of Appeals. The Federal Circuit’s decisions have been favorable to plaintiffs on some issues but unfavorable on others. For example, in the California Federal Bank case, the Court affirmed the CFC’s rulings on restitution and reliance damages, but remanded the case for trial of plaintiff’s “lost profits” claim that the CFC had dismissed prior to trial. In the Bluebonnet Savings Bank case, the Federal Circuit reversed the CFC’s decision awarding no damages, found that damages were due to the investor plaintiffs, and remanded for a determination of the amount of those damages. (The bank settled its case in 1995.) In the Landmark Land Company case, the Court affirmed the CFC’s award of $21.5 million (the amount invested in the transaction) to Landmark, the shareholder plaintiff, but rejected its other damages claims. In the Glass case, the Federal Circuit reversed on liability grounds and remanded the case to the CFC for further proceedings.

Due to the number of pending cases, the case management order provides for a sequencing process whereby approximately 30 cases proceed to pretrial discovery each year and thereafter to trial. Pretrial discovery in Charter One’s case (and the Liberty Federal Bank case, whether or not consolidated with Charter One’s case), are scheduled to begin on June 7, 2002. Given the pendency of the other related cases, and the uncertainty inherent in the litigation, Charter One is not able to estimate either the time frame for resolution of its claims, or the final outcome of its litigation against the government, including the damages, if any, which could be awarded if Charter One ultimately prevails on liability issues.


	Signatures
	Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Cleveland, State of Ohio, as of March 15, 2002.

	CHARTER ONE FINANCIAL, INC.

	By: /s/ Charles John Koch Director, Chairman of the Board, President and Chief Executive Officer

	Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and as of the date indicated above.

	/s/ Charles John Koch (Principal Executive Officer) Director, Chairman of the Board, President and Chief Executive Officer

	/s/ Richard W. Neu (Principal Financial and Accounting Officer) Director, Executive Vice President and Chief Financial Officer

	/s/ Patrick J. Agnew, Director /s/ Herbert G. Chorbajian, Director /s/ Phillip Wm. Fisher, Director /s/ Denise Marie Fugo, Director /s/ Mark D. Grossi, Director, Executive Vice President /s/ Charles M. Heidel, Director /s/ Karen R. Hitchcock, Director /s/ John D. Koch, Director, Executive Vice President /s/ Michael P. Morley, Director /s/ Ronald F. Poe, Director /s/ Victor A. Ptak, Director /s/ Melvin J. Rachal, Director /s/ Jerome L. Schostak, Director /s/ Joseph C. Scully, Director /s/ Mark Shaevsky, Director /s/ Leonard S. Simon, Director /s/ John P. Tierney, Director /s/ Eresteen R. Williams, Director

charter one financial, inc., corporate directory

DIRECTORS AND
EXECUTIVE OFFICERS

Charles John Koch (2)
Chairman, President and
Chief Executive Officer,
Charter One Financial, Inc.
and Charter One Bank, F.S.B.

Patrick J. Agnew
Former President and
Chief Operating Officer,
St. Paul Bancorp, Inc.
Chicago, Illinois

Herbert G. Chorbajian (1)
Vice Chairman,
Charter One Financial, Inc.
and former Chairman, President
and Chief Executive Officer,
ALBANK Financial Corporation
Albany, New York

Philip Wm. Fisher
Principal of The Fisher Group
Detroit, Michigan

Denise Marie Fugo
President of City Life, Inc.
Cleveland, Ohio

Mark D. Grossi (2)
Executive Vice President,
Charter One Financial, Inc.
and Charter One Bank, F.S.B.

Charles M. Heidel (4)
Retired President and
Chief Operating Officer,
The Detroit Edison Company
Detroit, Michigan

Karen R. Hitchcock, Ph.D. (2)
President, University at Albany
Albany, New York

John D. Koch (2)
Executive Vice President,
Charter One Financial, Inc.
and Charter One Bank, F.S.B.

Michael P. Morley
Executive Vice President and
Chief Administrative Officer,
Eastman Kodak Company
Rochester, New York

Richard W. Neu (2,3)
Executive Vice President
and Chief Financial Officer,
Charter One Financial, Inc.
and Charter One Bank, F.S.B.

Ronald F. Poe
President,
Ronald F. Poe & Associates
White Plains, New York

Victor A. Ptak
Vice President/
Investment Officer,
First Union Securities,
and formerly General
Partner of J.C. Bradford
Cleveland, Ohio

Melvin J. Rachal
President and
Chief Operating Officer,
Midwest Stamping, Inc.
Maumee, Ohio

Jerome L. Schostak
Vice Chairman,
Charter One Financial, Inc.
and Chairman of the Board
and Chief Executive Officer,
Schostak Brothers & Company, Inc.
Southfield, Michigan

Joseph C. Scully
Former Chairman and
Chief Executive Officer,
St. Paul Bancorp, Inc.
Chicago, Illinois

Mark Shaevsky
Counsel,
Honigman Miller
Schwartz and Cohn LLP
Detroit, Michigan

Leonard S. Simon
Former Chairman and
Chief Executive Officer,
RCSB Financial, Inc.
Rochester, New York

John P. Tierney
Retired Chairman and
Chief Executive Officer,
Chrysler Financial Corporation
Detroit, Michigan

Eresteen R. Williams
Retired Medical Office Manager
Detroit, Michigan

(1) Chairman and President, Charter One Commercial

(2) Director, Charter One Commercial

(3) Executive Vice President and Chief Financial Officer, Charter One Commercial

(4) Effective April 23, 2002, Mr. Heidel will retire from the Board of Directors and become director emeritus.

SHAREHOLDER
INFORMATION

Annual Meeting

The Annual Meeting of Shareholders of Charter One Financial, Inc. will be held at 11a.m. local time, Tuesday, April 23, 2002 at The Forum Conference Center in Cleveland, Ohio.

Direct Mailing of Annual Report

Shareholders whose common stock is held in a brokerage account or otherwise not in their own name may wish to receive copies of Charter One’s shareholder reports directly. Requests may be made through the corporate website, www.charterone.com, or mailed to the Investor Relations Department.

Dividend Policy and Dividend Reinvestment Plan

A corporate objective of Charter One is to allow shareholders to benefit from the growth of Charter One through the payment of quarterly cash dividends. Dividends have been paid each quarter since October 1988. Charter One has established a Dividend Reinvestment Plan to enable shareholders to purchase additional shares. Information on the Plan may be obtained from the corporate website, www.charterone.com, or from the Transfer Agent.

Stock Trading Information

Common stock of Charter One Financial, Inc. is traded on the New York Stock Exchange under the trading symbol “CF.”

Transfer Agent
EquiServe
Shareholder Services Department
P.O. Box 43010
Providence, Rhode Island 02940
(800) 733-5001
www.equiserve.com

Directors Emeriti
Charles Joseph Koch
Chairman Emeritus
Eugene B. Carroll, Sr.
Dr. Norman P. Auburn
Charles F. Ipavec
George M. Jones
Philip J. Meathe
Henry R. Nolte, Jr.
Fred C. Reynolds
Charles A. Shirk

CORPORATE INFORMATION

Corporate Website
www.charterone.com

Investor Relations
(800) 262-6301
Ellen L. Batkie
Senior Vice President
(734) 453-7334

Corporate Marketing and Communications
Cindy Schulze
Senior Vice President
(216) 298-7155

Independent Auditors
Deloitte & Touche LLP
127 Public Square
Suite 2500
Cleveland, Ohio 44114-1303
(216) 589-1300

Legal Counsel: Internal
Robert J. Vana
Chief Corporate Counsel
and Secretary

Legal Counsel: External
LaPorte & Ipavec, L.P.A.
1215 Superior Avenue
Cleveland, Ohio 44114

Headquarters
1215 Superior Avenue
Cleveland, Ohio 44114
(216) 566-5300

Design
Edward Howard & Co.

our
b e s t
is yet to come

www.charterone.com

CHARTER ONE FINANCIAL, INC. 1215 SUPERIOR AVENUE CLEVELAND, OHIO 44114

338-AR-02

INDEX TO EXHIBITS


EXHIBIT
NUMBER		DESCRIPTION
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 28, 1999 (File No. 000-16311), is incorporated herein by reference.

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		FirstFed Michigan Corporation 1983 Stock Option Plan, filed on November 1, 1995 as an exhibit to Registrant’s Registration Statement on Form S-8 (File No. 33-61273), is incorporated herein by reference.

10.6		FirstFed Michigan Corporation 1991 Stock Option Plan, filed on November 1, 1995 as an exhibit to Registrant’s Registration Statement on Form S-8 (File No. 33-61273), is incorporated herein by reference.

10.7		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.

10.8		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.

10.9		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.

10.10		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.


EXHIBIT
NUMBER		DESCRIPTION
10.11		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.

10.12		Form of Employment Agreement between Charter One and Leonard S. Simon, filed on August 8, 1997 as Exhibit 10.14 to Registrant’s Registration Statement on Form S-4 (File No. 333-33259), is incorporated herein by reference.

10.13		Charter One Financial, Inc. 1997 Stock Option and Incentive Plan, filed on December 19, 1997, as an exhibit to Registrant’s Registration Statement on Form S-8 (File No. 333-42823), is incorporated herein by reference.

10.14		1986 Stock Option 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.

10.15		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.

10.16		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.

10.17		Haverfield 1995 Stock Option Plan, 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.

10.18		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.

10.19		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.

10.20		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.

10.21		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.

10.22		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.

10.23		Charter One Financial, Inc. Top Executive Incentive Goal Achievement Plan, filed on October 1, 1998 as Annex E to the Prospectus contained in the Registrant’s Registration Statement on Form S-4 (File No. 333-65137), is incorporated herein by reference.

11		Statement Regarding Computation of Per Share Earnings

21		Subsidiaries of the Registrant

23		Consent of Deloitte & Touche LLP


⁽¹⁾	Restated to reflect the 5% stock dividend issued September 28, 2001.
See Notes to Consolidated Financial Statements.


⁽¹⁾	The results of this acquisition have been included in the consolidated financial statements since July 2, 2001. Pro forma results of operations for this acquisition, had the acquisition occurred as of January 1, 2001 and January 1, 2000, is not significant and accordingly, is not provided.

(1)		Chairman and President, Charter One Commercial

(2)		Director, Charter One Commercial

(3)		Executive Vice President and Chief Financial Officer, Charter One Commercial

(4)		Effective April 23, 2002, Mr. Heidel will retire from the Board of Directors and become director emeritus.