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annual REPORT  |  02

WHAT DOES IT TAKE ?

[CHARTER ONE FINANCIAL, INC.^® LOGO]

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TO MAKE A GREAT BANK.

It takes a lot of things to be a truly superior bank. In this year’s annual report, we have highlighted five elements that will help us hit that target: high earnings growth; innovative execution in retail banking; leadership in retail consumer lending; and, finally, commitment to the communities we serve. As you read, we hope you will better understand what makes Charter One different, and why we have what it takes to deliver superior results to all of our stakeholders – not only this year but in the years to come.

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core VALUES

		OUR CORE VALUES ARE:
		WINNING ATTITUDE. By working together, we celebrate successes, welcome new challenges, realize – and exceed – the goals we set out to achieve.
		EFFICIENCY. Our strong work ethic, results-oriented culture, great product mix and ability to grow revenue while streamlining expenses provide us with a competitive advantage.
		INNOVATIVE EXECUTION. We anticipate, understand and respond to customer needs – thanks to innovative products and services, and an aggressive, competitive sales culture.
		INTEGRITY. We pride ourselves on our honesty, respect for others and a refusal to be anything less than totally responsible for our actions.
		INCLUSIVE RELATIONSHIPS. The Charter One team values, supports and encourages the contributions of all employees.
		COMMUNITY COMMITMENT. We strive to be involved in our communities by providing affordable financial products and services and by infusing our internal “Charter One community” with a strong sense of purpose and maintenance of inclusive relationships.

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2     THE CHARTER ONE FINANCIAL, INC. ANNUAL REPORT

			about CHARTER ONE
			Headquartered in Cleveland, Ohio, Charter One is one of the best retail banks in the country, focusing on the financial needs of the average consumer and local small- to medium-sized businesses. Ranking among the 25 largest banks in the U.S., it operates through 461 retail banking centers located in Ohio, Illinois, Michigan, New York, Vermont and Massachusetts. The Company’s diverse product set includes: consumer banking, indirect auto finance, commercial leasing, business lending, commercial real estate lending, mortgage banking, and retail investment products.

FINANCIAL HIGHLIGHTS

(1) Restated for stock dividends

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4     THE CHARTER ONE FINANCIAL, INC. ANNUAL REPORT

letter to SHAREHOLDERS

		Dear friends of Charter One: Wrapping up a year always leads to comparisons – comparisons to budget, comparisons to last year, comparisons to peers, and comparisons to what we see coming for next year and beyond.
		Any way you look at 2002, it was a terrific year. Against a backdrop of challenges presented by declining interest rates and a softening economy, we continued our momentum in building a great retail banking franchise. We hit nearly every goal we set for ourselves in 2002, and our performance stands tall next to any peer. Perhaps more important, we’re very well positioned for 2003 and beyond.
		2002 will be remembered as the year Charter One converted to a national bank charter, officially leaving our thrift heritage behind. We have clarified our niche, and are being described as “a high-performing retail bank that couples superior sales execution with an obsessive focus on efficiency.” Emerging early in the year as a newly minted national bank led to a great deal of positive recognition for much of what we’ve been working on for several years. During 2002, the American Banker honored us by selecting us as its Innovator of the Year, and we were featured in the Platinum 400 List of America’s Best Big Companies published by Forbes magazine.
		The year 2002 was marked by a 17% increase in earnings per share, driven by a 17% increase in top-line revenue. If we adjust for the accounting change which eliminated goodwill expense in 2002, earnings per share would have been up 13%. Once again we followed the time-proven adage of growing revenue faster than expenses. Our basic business plan has remained dedicated to that goal for nearly a decade. Charter One’s cost culture has long been recognized as among the best in banking. But the focus of our plan has truly been top-line revenue. The emphasis on core deposit growth and household acquisition helps drive retail banking revenue and support net interest income, while increasing the value of our franchise. On the lending side, we drive revenue by dealing directly with customers and providing the products they need. We continue to work diligently to remix the loan portfolio, moving away from single-family loans yet retaining a concentration in consumer-oriented products. Over time, we believe our cost efficiency and retail focused strategy will deliver the best value to all of our stakeholders – stockholders, employees, customers and communities.

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earnings GROWTH

		WHAT DOES IT TAKE  ?

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TO GENERATE A SUPERIOR
RATE OF TOTAL RETURN?

87%

total return on common stock over the past three years

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a.

Over the past three years, Charter One’s common stock has generated a total return of 87%, while the Lehman Brothers Bank Universe Index returned 24% and the S&P 500 lost 40%. We believe a long track record of consistent, high-quality earnings growth is the most important driver of stock appreciation over time. Delivering that earnings record and resulting stock appreciation requires certain necessary components be in place. At Charter One, we begin with an obsessive sales focus to ensure strong revenue growth. Last year, top-line revenues increased 17%, more than double our expense growth. Our operations are among the most efficient in the industry, enabling us to outperform others and generate record earnings without taking on unnecessary risks. Because of this potent combination of high growth, low risk and low costs, we can meet our earnings targets with minimal asset growth. This, in turn, provides us with tremendous capital flexibility to continue this enviable and profitable cycle.

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6     THE CHARTER ONE FINANCIAL, INC. ANNUAL REPORT

		One of the biggest highlights of the year was the tremendous value coming out of our retail residential lending operations. While we have a long-standing objective of reducing the single-family component within our balance sheet, we continue to emphasize originating residential loans.
		Providing home mortgages is one of the best ways to open access to new customers. The point of sale contact with those customers provides us the very best opportunities to cross-sell both home equity lines of credit and high-balance core deposits, both of which help feed top-line revenue. Our retail residential lending originations totaled over $10 billion in 2002, substantially all of which was originated directly to retail customers.
		Because of our strong sales culture, we typically do well in a declining rate environment as refinance activity jumps up. Not only do we do a great job of capturing our own refinances, we tend to win a disproportionate share of refinances from our competition. In essence, we enjoy our status as an excess asset generator – originating more product than we need to meet our balance sheet targets. During 2002, the value of our operation was most visible in the unusually high gains from the sale of mortgage-backed securities, which included primarily bank-originated product. Although this revenue stream is transitory in nature, and a direct by-product of this low-interest rate environment, it enabled Charter One to absorb additional costs related to loan loss and mortgage servicing rights valuation allowances. Most important, the gains allowed us to keep our deposit strategy intact by reinvesting in the retail franchise through product design and pricing support.
		Industry wide, loan portfolio growth was hard to come by in 2002. Certainly the lower rates resulted in a flood of activity as homeowners refinanced their homes; but other areas of originations slowed considerably. Businesses reduced capital expenditures, and consumers used home refinances to reduce other debt, which translated into very little overall portfolio growth.

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EFFICIENCY

			WHAT DOES IT TAKE ?

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TO BE ONE OF THE INDUSTRY’S
MOST EFFICIENT RETAIL BANKS?

40%

this efficiency ratio provides tremendous pricing power

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a.

The successful execution of our business plan is based on our position as one of the industry’s low-cost providers. We enjoy as much as a 15 point advantage over our peers, enabling us to generate higher earnings with lower levels of financial and credit risk. But cost control is only part of the story. Our highly efficient operation is also the platform of our consumer banking strategy; it provides us with a tremendous pricing advantage that we use every day to aggressively compete for loans and deposits, grow revenues, capture new households and build market share. The final component that helps explain why revenues grow faster than expenses at Charter One is our employees. Last year, net income per Charter One employee was $83,000 compared to $50,000 for our peers. Put simply, Charter One employees deliver.

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8     THE CHARTER ONE FINANCIAL, INC. ANNUAL REPORT

		But at Charter One, the non-single family portfolio increased by 13% in 2002 thanks to growth in all our consumer-related product lines, especially home equity and auto loans. Balances outstanding in home equity lines increased by nearly 40%, quite an accomplishment during a wave of home refinances.
		Our success has been driven by using the point-of-sale on the first mortgage to capture the line of credit, followed up by very targeted offerings that encourage utilization. The auto portfolio turned out to be an outperformer as well, posting growth of nearly 30%. We believe our approach to strict credit control and extremely low operating costs provides a nice short-term asset that beats the optionality of residential mortgages. We ended 2002 with approximately 33% of our loan portfolio in single-family mortgages. Looking out a few years, we think that can be reduced to 15%.
		Of course, portfolio growth at any cost can end up costing a great deal if the credit profile erodes. Given all the turmoil in the economy during 2002, we were extremely happy with the performance of our lending operations. Overall charge-offs came in at .48% of average loans for the year, including $27 million in accelerated charge-offs related to a change in policy associated with our charter conversion. Absent that change in policy, our charge-off ratio would have been a very respectable and industry-low .37%. Building up the loan and lease loss reserve has been a priority for the past few years given the state of the economy and the remixing of our balance sheet. At the end of 2002, it represented 1.24% of our total loan portfolio, up from .98% at the end of 2001.
		Deposit growth continued to be one of the clearest measurements of our retail success. Over the past two years, we’ve added $8 billion in deposits, including a phenomenal $5.5 billion in deposit growth from same store sales. That same-store sales growth equates to a 28% increase in deposits away from acquisitions and building new branches. Clearly, this is one of the best track records in the country. During 2002, we focused most heavily on adding core deposits, or deposits in checking, money market and savings accounts. The goal is to reach new households and attract that household’s primary account. Our core deposits increased more than $3 billion, up more than 20%! In addition to building franchise value, this deposit growth fueled a 14% increase in deposit-related revenue.

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INNOVATIVE execution

		WHAT DOES IT TAKE ?

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TO BE A HIGHLY
EFFECTIVE RETAIL BANK?

23%

increase in checking account deposits

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a.

Banking is our profession, but sales is our business. We reinforce this commitment through our rewards and compensation systems, accountability on both an individual and office-wide basis, employee training and sharing of best practices. This focus last year helped drive a 23% increase in checking account deposits (which is the largest component of core deposits), over a year earlier. We also effectively use all of our sales channels: our online bank has enrolled 400,000 users in two years, 30% of whom hold checking accounts. Our grocery store branches are the best performing in the industry, while ongoing deposit and lending sales efforts continue to deliver tremendous results at all of our 461 banking centers. Finally, we have an industry-leading cross-sell track record. Last year, 60% of all new mortgages came attached with home equity lines, and 38% of all new mortgages came attached with high-balance core accounts.

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10     THE CHARTER ONE FINANCIAL, INC. ANNUAL REPORT

		Our focus will remain essentially the same in 2003, working on core deposit growth but emphasizing the checking account products even more than in the past. Today, our deposit mix includes 65% in core deposits, including 35% of the total in checking account products.
		Over the next few years, we’d like to see that move to 70% core and 40% checking. What’s more, the initiatives are in place to accomplish that.
		The underpinning of our overall business model, as well as any initiative we launch, is the compelling advantage of our operating efficiency. We have consistently operated with one of the lowest efficiency ratios in the industry. That gives us a vitally important advantage when competing for customers, and we use that advantage to win households. We offer attractive pricing on deposit and home equity products, along with an unparalleled bundle of free services to acquire and retain households. Additionally, that advantage enables us to originate loans in the safer end of the credit spectrum, giving up a little yield to take on less credit risk. In essence, our operating efficiency allows us to live with a lower net interest margin than our peers.
		Given our focus on top-line revenue growth, you should know how we intend to continue that growth over the next several years. We are describing the future growth path as, “Buy, Grow and Build.”
		Buy – As many of you know, we cut our teeth on acquiring institutions and instilling our sales culture to generate above average growth. Our last significant acquisition was in 1999, when our St. Paul Bancorp merger brought us to Chicago. Since then, we have completed or announced four small acquisitions within existing markets. We think these in-fill opportunities not only contribute nicely to our revenue growth, they further strengthen our retail franchise. We will continue to pursue similar transactions as they become available.

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retail consumer LENDER

		WHAT DOES IT TAKE ?

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TO BE A TOP RETAIL
CONSUMER LENDER?

11th

being the 11th largest retail residential originator creates terrific cross-selling opportunities

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a.

For some mortgage originators, residential lending is an end in itself. At Charter One, residential lending is a core competency because mortgages provide us with tremendous selling opportunities. That is, we use mortgages to cross-sell our retail products. Being the nation’s 11th largest retail residential lender also has other advantages: we receive a sizable earnings stream from mortgage loans we service for others. Ironically, as critical as mortgage originations are to obtaining retail customers, we do not rely on residential mortgages to grow our balance sheet. Instead, we rely on shorter duration, non-single family loans such as home equity lines of credit, commercial loans and auto loans.

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12     THE CHARTER ONE FINANCIAL, INC. ANNUAL REPORT

		Grow – Since 2000, much of our growth has come from same store sales, grabbing market share every day with our aggressive sales approach. We have a number of initiatives planned for 2003 that should keep that momentum going, ranging from fine tuning our mail programs to new product launches.
		Build – Now it’s time to take what we’ve learned and earned in terms of experience, expertise and infrastructure, and devote that energy to building new branches. We ended 2002 with 461 branches, 411 traditional centers and 50 in-store centers. Over the next 18 months, we expect to add approximately 125 branches, 28 traditional centers and 97 in-stores. While these new branches will be sprinkled throughout our franchise, they will be concentrated in Western New York and Ohio. The focus on the in-store channel is prompted by the tremendous success we’ve had thus far with that model. That success has provided us the opportunity to strike innovative partnerships with ideal retail chains. In our view, this constitutes a low-risk approach to De Novo branching that will quickly contribute to top-line revenue. We are very excited about this new phase in Charter One’s retail strategy, and think it will pay great dividends.
		My final remarks in this year’s annual report letter deal with Charter One’s corporate governance and core values. Over the past several years, we have taken a hard look at many of the issues revolving around corporate governance. We believe that prudent corporate governance provides an important framework for a healthy environment. Our current guidelines reflect much of what we view as critical in that framework. We are fortunate to have a strongly independent group of highly qualified directors, who take an active interest in Charter One. And I thank them for their dedication over the past year.

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community SERVICE

		WHAT DOES IT TAKE ?

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TO BE A PART OF THE
COMMUNITIES WE SERVE?

338

organizations supported company-wide

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a.

To be an important part of the community, you must be an integral part. Our charitable giving programs – in which we support over 338 organizations company-wide – is substantial, wide-ranging and is comprised of both financial and time commitments to help improve the effectiveness of the organizations we support. Of particular importance is our commitment to reducing the barriers to realizing the American dream of home ownership for low- to moderate-income individuals. We offer a combination of financial support, planning assistance, technical expertise and community development investments, as well as a vast range of loan products and services. Additionally, we work with leading community development groups to effectively direct our investments and community efforts. Our corporate-wide inclusion initiatives last year yielded impressive results: we developed very strong business partnerships with various minority- and women-owned businesses, increasing both the number and dollars spent with these groups; and we have hired more employees who reflect the increasingly diverse communities we serve.

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14     THE CHARTER ONE FINANCIAL, INC. ANNUAL REPORT

		Similarly, Charter One has long embraced certain core values as a foundation of our business and moral standards. Given the recent spate of corporate calamities, we believed it was important that we codify those values and endorse them for our employees, customers and shareholders. We intend to leave no room for interpretation as to how we conduct ourselves, or our business. We have chosen to highlight these values on the inside cover of this annual report. I encourage you to read them, and I expect you to hold us accountable to them. Adhering to these standards should help ensure success for a long time to come.
		I’d also like to publicly recognize and thank our 7,000 hard-working employees. Charter One’s employees continue to achieve industry-leading results by demonstrating industry-leading dedication, enthusiasm and innovation, which come together to make Charter One a truly superior retail bank.
		Thank you so much for your continued interest in Charter One.
		/s/ Bud Koch
		Charles John “Bud” Koch Chairman, President and Chief Executive Officer February 21, 2003

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		left to right	[PHOTO OF COMPANY OFFICERS]
		Richard W. Neu CHIEF FINANCIAL OFFICER
		Mark D. Grossi CHIEF RETAIL OFFICER
		John D. Koch CHIEF CREDIT OFFICER
		Charles John “Bud” Koch CHIEF EXECUTIVE OFFICER

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WHAT DOES IT TAKE ?     TO MAKE A GREAT BANK.

high earnings growth

innovative execution in retail banking

leadership in retail consumer lending

commitment to the communities we serve

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16     THE CHARTER ONE FINANCIAL, INC. ANNUAL REPORT

form 10-K AND CONSOLIDATED FINANCIAL STATEMENTS

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 3 and 19 to the Notes to Consolidated Financial Statements. Per share data has been restated to reflect all stock dividends and stock splits as of December 31, 2002.

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THE CHARTER ONE FINANCIAL, INC. ANNUAL REPORT       17

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18     THE CHARTER ONE FINANCIAL, INC. ANNUAL REPORT

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 One Bank, N.A., which we sometimes refer to in this document as the “Bank.” The Bank’s primary business is providing consumer banking services to certain major markets in Ohio, Michigan, Illinois, New York, Vermont and in some markets of Massachusetts. At the end of 2002, the Bank and its subsidiaries were doing business through 461 full-service branches, 26 loan production offices and 913 ATMs.

     On January 7, 2002, Charter One Bank, F.S.B. filed an application with the Office of the Comptroller of the Currency (“OCC”) to convert from a thrift to a national bank. The conversion was effective May 7, 2002 and resulted in changing the Bank’s name to Charter One Bank, N.A. from Charter One Bank, F.S.B. References to Charter One Bank or the Bank shall mean Charter One Bank, N.A. or Charter One Bank, F.S.B. as the context requires.

RECENT ACQUISITIONS

On May 24, 2002, the Company completed its acquisition of Charter National Bancorp, Inc., the holding company of Charter Bank in Wyandotte, Michigan. On May 24, 2002, Charter National had assets of $353.2 million and deposits of $242.3 million in eight branches located south of Detroit, Michigan. The Company paid $90.4 million in cash consideration and recorded $34.8 million of goodwill based on a preliminary determination of the estimated fair values of the assets and liabilities acquired as a result of this transaction. Additionally, the Company recorded $25.0 million as an indefinite-lived trademark name intangible. The Company accounted for this acquisition as a purchase, and included the results of operations of Charter National in its Consolidated Financial Statements from the effective date of the acquisition. The merger of Charter Bank into the Bank was effective August 9, 2002.

     On January 16, 2003, the Boards of Directors of the Company and Advance Bancorp, Inc. announced a definitive agreement pursuant to which the Company will acquire Advance Bancorp for $72 million in Charter One common stock. Advance Bank, the principal subsidiary of Advance Bancorp, is a state-chartered commercial bank headquartered in Lansing, Illinois with approximately $632 million in assets, $491 million in deposits, and 14 branch offices located in Cook County, Illinois. The merger, which will be accounted for as a purchase, is expected to close in the second or third quarter of 2003. The transaction is subject to required bank regulatory approvals and approval by Advance Bancorp shareholders.

RESULTS OF OPERATIONS

For the year ended December 31, 2002, Charter One reported net income of $577.7 million, compared to $500.7 million and $434.0 million for the years ended December 31, 2001 and 2000, respectively. On a diluted per share basis, net income was $2.45, $2.10 and $1.81 in 2002, 2001 and 2000, respectively.

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THE CHARTER ONE FINANCIAL, INC. ANNUAL REPORT       19

NET INTEREST INCOME

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

The following table shows average balances, interest earned or paid, and average interest rates for the periods indicated. Nonaccrual loans 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. Noninterest-bearing demand deposit accounts are included in noninterest-bearing liabilities. The cost of liabilities includes the annualized effect of interest rate risk management instruments.

[Additional columns below]

[Continued from above table, first column(s) repeated]

					Year Ended December 31,
					2000
													Avg.
					Average								Yield/
(Dollars in thousands)					Balance				Interest				Cost
Interest-earning assets:
	Loans and leases				$	23,830,266			$	1,810,608				7.60	%
	Mortgage-backed securities:
		Available for sale				3,342,744				241,369				7.22
		Held to maturity				1,690,002				120,812				7.15
	Investment securities:
		Trading				183				38				20.67
		Available for sale				458,299				33,412				7.29
		Held to maturity				29,008				1,594				5.49
	Other interest-earning assets					543,450				39,255				7.10
			Total interest-earning assets			29,893,952				2,247,088				7.51
Allowance for loan and lease losses						(185,623	)
Noninterest-earning assets						2,097,990
			Total assets		$	31,806,319
Interest-bearing liabilities:
	Deposits:
		Checking accounts			$	2,394,554				57,229				2.39	%
		Money market and savings accounts				5,401,048				168,379				3.12
		Certificates of deposit				9,821,168				540,501				5.50
			Total deposits			17,616,770				766,109				4.35
FHLB advances						9,309,296				532,583				5.71
Other borrowings						613,875				45,361				7.32
			Total borrowings			9,923,171				577,944				5.81
			Total interest-bearing liabilities			27,539,941				1,344,053				4.88
Noninterest-bearing liabilities:
	Demand deposit accounts					1,238,086
	Other noninterest-bearing liabilities					616,804
			Total noninterest-bearing liabilities			1,854,890
			Total liabilities			29,394,831
Shareholders’ equity						2,411,488
			Total liabilities and shareholders’ equity		$	31,806,319
Net interest income									$	903,035
Interest rate spread														2.63	%
Net yield on average interest-earning assets														3.02	%
Average interest-earning assets to average interest-bearing liabilities														108.55	%