CHARTER ONE FINANCIAL INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


		[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934









				For the quarterly period ended March 31, 2003









				OR









		[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-15495

CHARTER ONE FINANCIAL, INC.
(Exact name of registrant as specified in its charter)


Delaware		34-1567092

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)









1215 Superior Avenue, Cleveland, Ohio		44114

(Address of principal executive offices)		(Zip Code)

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

NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes X No

The number of shares outstanding of the registrant’s sole class of common stock as of April 30, 2003 was 225,004,656.

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
	ITEM 1. Financial Statements
		CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
		CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
	ITEM 4. Controls and Procedures
PART II — OTHER INFORMATION
	ITEM 5. Other Information
	ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
SECTION 302 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
SECTION 302 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
INDEX TO EXHIBITS
EX-11 Computation of Per Share Earnings
EX-99.1 Section 906 Certifications

TABLE OF CONTENTS


Item
Number					Page

			PART I — FINANCIAL STATEMENTS





	1.	Financial Statements





		Consolidated Statements of Financial Condition — March 31, 2003 and December 31, 2002				1





		Consolidated Statements of Income — Three months ended March 31, 2003 and 2002				2





		Consolidated Statements of Cash Flows — Three months ended March 31, 2003 and 2002				3





		Notes to Consolidated Financial Statements				4





	2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations				6





	3.	Quantitative and Qualitative Disclosure About Market Risk				19





	4.	Controls and Procedures				19





				PART II – OTHER INFORMATION





	5.	Other Information				19





	6.	Exhibits and Reports on Form 8-K				19





Signatures						20





Certifications						21




Index to Exhibits						23

PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)


					3/31/03			12/31/02

					(Dollars in thousands,
					except per share data)
				ASSETS




Cash accounts					$	497,969		$	436,970




Interest-bearing deposits with banks						9,757			9,731




Federal funds sold and other						1,350,513			512

		Total cash and cash equivalents				1,858,239			447,213




Investment securities:




	Available for sale					227,137			210,095




	Held to maturity (fair value of $4,457 and $4,276)					4,157			3,973




Mortgage-backed securities:




	Available for sale					12,799,506			11,536,608




	Held to maturity (fair value of $466,183 and $565,072)					445,207			540,781




Loans and leases, net						24,685,258			25,852,846




Loans held for sale						291,729			351,892




Bank owned life insurance						837,660			829,043




Federal Home Loan Bank and Federal Reserve Bank stock						679,339			681,923




Premises and equipment						355,084			353,730




Accrued interest receivable						149,989			154,962




Real estate and other collateral owned						42,106			42,980




Loan servicing assets						139,085			128,564




Goodwill						386,372			386,372




Other assets						347,735			375,090

		Total assets			$	43,248,603		$	41,896,072

				LIABILITIES AND SHAREHOLDERS’ EQUITY




Deposits					$	27,383,615		$	27,527,843




Federal Home Loan Bank advances						10,446,630			9,037,925




Federal funds purchased and repurchase agreements						52,496			283,912




Other borrowings						707,591			708,853




Advance payments by borrowers for taxes and insurance						46,706			23,595




Accrued interest payable						72,017			38,372




Accrued expenses and other liabilities						1,307,416			1,191,747

		Total liabilities				40,016,471			38,812,247

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; 227,571,468 and 227,571,468 shares issued					2,276			2,276




	Additional paid-in capital					2,197,388			2,193,095




	Retained earnings					908,486			824,564




	Less 2,539,076 and 2,781,151 shares of common stock held in treasury at cost					(74,423	)		(82,610	)




	Accumulated other comprehensive income					198,405			146,500

			Total shareholders’ equity			3,232,132			3,083,825

			Total liabilities and shareholders’ equity		$	43,248,603		$	41,896,072

See Notes to Consolidated Financial Statements.

CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)


			Three Months Ended

			3/31/03			3/31/02

			(Dollars in thousands,
			except per share data)
Interest income:




	Loans and leases		$	377,724		$	427,838




	Mortgage-backed securities:




		Available for sale		149,311			111,128




		Held to maturity		8,269			14,800




	Investment securities:




		Available for sale		3,043			2,962




		Held to maturity		54			71




	Other interest-earning assets			7,385			7,912

		Total interest income		545,786			564,711

Interest expense:




	Deposits			133,743			170,401




	Federal Home Loan Bank advances			99,799			103,716




	Other borrowings			13,203			7,497

		Total interest expense		246,745			281,614

		Net interest income		299,041			283,097




Provision for loan and lease losses				61,471			28,717

		Net interest income after provision for loan and lease losses		237,570			254,380

Other income:




	Retail banking			84,100			73,756




	Mortgage banking			(27	)		11,290




	Leasing operations			(6,856	)		270




	Net gains			76,653			21,727




	Bank owned life insurance and other			7,956			9,508

		Total other income		161,826			116,551

Administrative expenses:




	Compensation and employee benefits			87,056			77,252




	Net occupancy and equipment			31,186			28,563




	Marketing expenses			13,647			8,829




	Federal deposit insurance premiums			1,142			1,211




	Other administrative expenses			50,261			46,307

		Total administrative expenses		183,292			162,162

Income before income taxes				216,104			208,769




Income taxes				68,613			66,284

		Net income	$	147,491		$	142,485

Basic earnings per share(1)			$	.66		$	.61

Diluted earnings per share(1)			$	.64		$	.60

Average common shares outstanding(1):




	Basic			224,997,398			231,684,629

	Diluted			230,460,847			238,221,934

Cash dividends declared per share(1)			$	.22		$	.19

(1)

Restated to reflect the 5% stock dividend issued September 30, 2002.

See Notes to Consolidated Financial Statements.

CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)


				Three Months Ended

				3/31/03			3/31/02

				(Dollars in thousands)
Cash flows from operating activities:




	Net income			$	147,491		$	142,485




	Adjustments to reconcile net income to net cash provided by operating activities:




		Provision for loan and lease losses			61,471			28,717




		Net gains			(76,653	)		(21,727	)




		Accretion of discounts, amortization of premiums, amortization of goodwill and depreciation, net			55,602			20,608




		Origination of loans held for sale			(763,051	)		(644,097	)




		Proceeds from sale of loans held for sale			762,027			642,876




		Increase in accrued interest payable			33,645			2,109




		Other			107,712			84,179

			Net cash provided by operating activities		328,244			255,150

Cash flows from investing activities:




	Net principal disbursed on loans and leases				(2,252,822	)		(1,552,891	)




	Proceeds from principal repayments and maturities of:




		Mortgage-backed securities held to maturity			96,981			155,391




		Mortgage-backed securities available for sale			974,423			465,805




		Investment securities held to maturity			75			1,490




		Investment securities available for sale			23,533			20,733




	Proceeds from sale of:




		Mortgage-backed securities available for sale			2,545,803			2,181,745




		Investment securities available for sale			1,029			177




		Federal Home Loan Bank and Federal Reserve Bank stock			14,629			6,944




	Purchase of:




		Mortgage-backed securities available for sale			(1,209,871	)		—




		Investment securities available for sale			(42,437	)		(24,363	)




		Federal Home Loan Bank and Federal Reserve Bank stock			(5,051	)		(1,035	)




		Loans			(3,765	)		(4,715	)




		Loan servicing assets, including those originated			(40,289	)		(32,067	)




	Other				(25,650	)		(15,377	)

			Net cash provided by investing activities		76,588			1,201,837

Cash flows from financing activities:




	Net increase (decrease) in short-term borrowings				178,584			(971,027	)




	Proceeds from long-term borrowings				1,004,160			25,647




	Repayments of long-term borrowings				(4,755	)		(4,628	)




	Increase in deposits				23,111			517,781




	Decrease in advance payments by borrowers for taxes and insurance				(143,816	)		(9,410	)




	Payment of dividends on common stock				(49,508	)		(44,034	)




	Proceeds from issuance of common stock				15,208			19,727




	Purchase of treasury stock				(16,790	)		(152,208	)

		Net cash provided by (used in) financing activities			1,006,194			(618,152	)

Net increase in cash and cash equivalents					1,411,026			838,835




Cash and cash equivalents, beginning of the period					447,213			516,520

Cash and cash equivalents, end of period				$	1,858,239		$	1,355,355

Supplemental disclosure of cash flow information:




	Cash paid for interest on deposits and borrowings			$	212,689		$	403,489




	Cash paid for income taxes				—			2,500




Supplemental schedule of noncash activities:




	Loans exchanged for mortgage-backed securities				3,419,116			2,717,271

See Notes to Consolidated Financial Statements

CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Charter One Financial, Inc. (the “Company” or “Charter One”) Annual Report on Form 10-K for the year ended December 31, 2002. The interim financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. Such adjustments are of a normal recurring nature. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year.

2. Charter One has one operating segment, consumer banking, which offers an array of products and services to its customers. Pursuant to its consumer banking strategy, emphasis is placed on building relationships and identifying cross-sell opportunities with its customers, as opposed to building specific lines of business. As a result, Charter One works as an integrated unit to customize solutions for its customers, with business line emphasis and product offerings changing over time as needs and demands change.

3. In November 2002, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 clarifies the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies,” relating to guarantees. In general, FIN 45 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability, or equity security of the guaranteed party. Certain guarantee contracts are excluded from both the disclosure and recognition requirements of FIN 45, including, among others, guarantees relating to employee compensation, residual value guarantees under capital lease arrangements, commercial letters of credit, loan commitments, subordinated interests in a special purpose entity, and guarantees of a company’s own future performance. Other guarantees are subject to the disclosure requirements of FIN 45 but not to the recognition provisions and include, among others, a guarantee accounted for as a derivative instrument under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, a parent’s guarantee of debt owed to a third party by its subsidiary or vice versa, and a guarantee which is based on performance, not price. The disclosure requirements of FIN 45 are effective for the Company as of December 31, 2002, and require disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor’s obligations under the guarantee. The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. Guarantees that have been entered into by the Company are disclosed in “Liquidity” under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The adoption of FIN 45 did not have a material impact on the Company’s consolidated financial condition or results of operations.

4. On December 31, 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation -Transition and Disclosure,” an amendment of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. Finally, SFAS No. 148 amends Accounting Principles Board (“APB”) Opinion No. 28, “Interim Financial Reporting,” to require disclosure about those effects in interim financial information. The Company has elected to continue application of APB Opinion No. 25 and related interpretations in accounting for its stock-based employee compensation plans. Accordingly, no stock-based employee compensation cost is, or is expected to be, reflected in net income, as all options granted under the Company’s stock-based employee compensation plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Had stock-based employee compensation costs of the Company’s stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, as amended by SFAS No. 148, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below (per share data has been restated to reflect all stock dividends as of March 31, 2003):


		Three Months Ended

		3/31/03		3/31/02

		(Dollars in thousands,
		except per share data)
Net income:




	As reported	$	147,491	$	142,485




	Less: Total stock-based employee compensation expense determined under the fair value method for all awards, net of tax		7,570		7,099

	Pro forma	$	139,921	$	135,386

Basic earnings per share:




	As reported	$	.66	$	.61




	Pro forma		.62		.59




Diluted earnings per share:




	As reported		.64		.60




	Pro forma		.61		.57

The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in the three months ended March 31, 2003 and 2002, respectively:


	Three Months Ended

	3/31/03			3/31/02

Dividend yield		3.00	%		3.00	%




Volatility		47.24-47.26	%		35.94-36.12	%




Risk-free interest rate		3.35-3.36	%		4.54-4.98	%




Life of grant	6 years			6 years

The estimated weighted-average date of grant fair value (based on the above option-pricing model and assumptions) for stock options granted in the three months ended March 31, 2003 and 2002 was $10.99 and $8.84, respectively.

5. In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities.” FIN 46 provides guidance on how to identify a variable interest entity (“VIE”) and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE need to be included in a company’s consolidated financial statements. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. The provisions of the interpretation became effective upon issuance. The adoption of FIN 46 did not have a material impact on the Company’s consolidated financial condition or results of operations.

6. On April 30, 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends SFAS No. 133 for certain decisions made by the FASB as part of the Derivatives Implementation Group (“DIG”) process. For those amendments that relate to SFAS No. 133 implementation guidance, the specific SFAS No. 133 Implementation Issue necessitating the amendment is identified. If the amendment relates to a cleared issue, the clearance date also is noted. SFAS No. 149 also amends SFAS No. 133 to incorporate clarifications of the definition of a derivative. SFAS No. 149 contains amendments relating to FASB Concepts Statement No. 7, “Using Cash Flow Information and Present Value in Accounting Measurements,” SFAS No. 65, “Accounting for Certain Mortgage Banking Activities,” SFAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases,” SFAS No. 95, “Statement of Cash Flows,” and SFAS No. 126, “Exemption from Certain Required Disclosures about Financial Instruments for Certain Nonpublic Entities.”

SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. In addition, except as stated below, all provisions of SFAS No. 149 should be applied prospectively. The provisions of SFAS No. 149 that relate to SFAS No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, guidance related to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to both existing contracts and new contracts entered into after June 30, 2003. Management has not completed the process of evaluating SFAS No. 149 and therefore has not determined the impact that adopting this statement will have on the consolidated financial condition or results of operations

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

HOLDING COMPANY BUSINESS

The following financial review presents an analysis of the asset and liability structure of Charter One Financial, Inc. and a discussion of the results of operations for each of the periods presented.

General

Headquartered in Cleveland, Ohio, Charter One Financial, Inc., hereafter referred to as “Charter One” or the “Company,” is a financial holding company. Charter One is a Delaware corporation and owns all of the outstanding capital stock of Charter One Bank, N.A., which we sometimes refer to in this document as the “Bank.” The Bank’s primary business is providing consumer banking services to certain major markets in Ohio, Michigan, Illinois, New York, Vermont and in some markets of Massachusetts. As of March 31, 2003, the Bank and its subsidiaries were doing business through 477 full-service branches, 26 loan production offices and 918 ATMs.

Pending Acquisition

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 is expected to close in the second quarter of 2003. The transaction has been approved by Advance Bancorp shareholders and is subject to required bank regulatory approvals.

Discussion of Forward-Looking Statements

This document, including information incorporated by reference, contains, and future filings by Charter One on Form 10-K, Form 10-Q and Form 8-K and future oral and written statements and press releases by Charter One and its management may contain, forward-looking statements about Charter One which we believe are within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements with respect to anticipated future operating and financial performance, including revenue creation, lending origination, operating efficiencies, loan sales, charge-offs and loan loss provisions, deposits and refinancing of liabilities, growth opportunities, interest rates, acquisition and divestiture opportunities, and synergies, efficiencies, cost savings and funding advantages expected to be realized from prior acquisitions. These forward-looking statements are based on currently available competitive, financial and economic data and management’s views and assumptions regarding future events. These forward-looking statements are inherently uncertain, and investors must recognize that actual results may differ from those expressed or implied in the forward-looking statements. Accordingly, Charter One cautions readers not to place undue reliance on any forward-looking statements.

Many of these forward-looking statements appear throughout this document. Words such as may, could, should, would, believe, anticipate, estimate, expect, intend, plan and similar expressions are intended to identify these forward-looking statements. The important factors discussed below, as well as other factors discussed elsewhere in this document and factors identified in our filings with the Securities and Exchange Commission and those presented elsewhere by our management from time to time, could cause actual results to differ materially from those indicated by the forward-looking statements made in this document. Among the factors that could cause our actual results to differ from these forward-looking statements are:

• the strength of the United States economy in general and the strength of the local economies in which we conduct our operations; general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in the credit quality of our loans and leases and other assets;

• the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;

• financial markets, monetary and interest rate fluctuations, particularly the relative relationship of short-term interest rates to long-term interest rates;

• the timely development of and acceptance of new products and services of Charter One and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services;

• the impact of changes in financial services laws and regulations (including laws and regulations concerning taxes, accounting standards, banking, securities and insurance); legislative or regulatory changes may adversely affect the business in which we are engaged;

• the impact of technological changes;

• our ability to successfully integrate acquisitions into our existing operations, and the availability of new acquisitions, joint ventures and alliance opportunities that build shareholder value;

• changes in consumer spending and saving habits; and

• our success at managing the risks involved in the foregoing.

Charter One disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise.

RESULTS OF OPERATIONS

Performance Overview

Figure 1 sets forth financial results and annualized performance ratios for the three months ended March 31, 2003 and 2002. Per share data have been restated to reflect the 5% stock dividend issued September 30, 2002.

Selected Financial Results and Ratios (Figure 1)


	Three Months Ended

	3/31/03			3/31/02

	(Dollars in thousands,
	except per share data)
Net income	$	147,491		$	142,485




Diluted earnings per share		.64			.60




Return on average assets		1.38	%		1.52	%




Return on average equity		18.48			19.71




Return on average tangible equity(1)		21.29			22.50




Average equity to average assets		7.46			7.71




Net interest income to administrative expenses		1.63x			1.75x




Administrative expenses to average assets		1.71	%		1.73	%




Efficiency ratio(2)		39.77			40.58

(1)		Computed as the ratio of net income, excluding the amortization of other intangible assets, to average tangible equity.




(2)		Computed as the ratio of total administrative expenses to net interest income and total other income.

Net Interest Income

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

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

Average Balances, Interest Rates and Yields/Costs (Figure 2)


				Three Months Ended

				3/31/03								3/31/02

									Avg.								Avg.
				Average					Yield/			Average					Yield/
				Balance			Interest		Cost			Balance			Interest		Cost

				(Dollars in thousands)
Interest-earning assets:




	Loans and leases			$	25,851,471		$	377,724		5.86	%	$	25,530,842		$	427,838		6.73	%




	Mortgage-backed securities:




		Available for sale			12,656,663			149,311		4.72			7,377,573			111,128		6.03




		Held to maturity			480,882			8,269		6.88			879,440			14,800		6.73




	Investment securities:




		Available for sale			206,860			3,043		5.88			144,910			2,962		8.18




		Held to maturity			4,060			54		5.29			5,709			71		4.95




	Other interest-earning assets				762,760			7,385		3.87			846,552			7,912		3.74

			Total interest-earning assets		39,962,696			545,786		5.48			34,785,026			564,711		6.51

Allowance for loan and lease losses					(327,090	)							(255,109	)




Noninterest-earning assets					3,150,359								2,954,656

			Total assets	$	42,785,965							$	37,484,573

Interest-bearing liabilities:




	Deposits:




		Checking accounts		$	7,541,679			30,618		1.65		$	6,137,213			36,380		2.40




		Money market and savings accounts			7,929,274			30,327		1.55			6,780,737			37,230		2.23




		Certificates of deposit			9,562,013			72,798		3.09			10,448,328			96,791		3.76

			Total deposits		25,032,966			133,743		2.17			23,366,278			170,401		2.96

	Federal Home Loan Bank advances				10,410,188			99,799		3.88			8,071,957			103,716		5.21




	Other borrowings				866,495			13,203		6.10			460,700			7,497		6.51

			Total borrowings		11,276,683			113,002		4.05			8,532,657			111,213		5.28

			Total interest-bearing liabilities		36,309,649			246,745		2.75			31,898,935			281,614		3.58

Noninterest-bearing liabilities:




	Demand deposit accounts				2,017,036								1,695,741




	Other noninterest-bearing liabilities				1,266,385								997,966

		Total noninterest-bearing liabilities			3,283,421								2,693,707

			Total liabilities		39,593,070								34,592,642




Shareholders’ equity					3,192,895								2,891,931

			Total liabilities and shareholders’ equity	$	42,785,965							$	37,484,573

Net interest income							$	299,041							$	283,097

Interest rate spread										2.73								2.93
Net yield on average interest-earning assets										2.99								3.26




Average interest-earning assets to average interest-bearing liabilities										110.06	%							109.05	%

Figure 3 shows the approximate relative contribution of changes in average interest rates and volume to changes in net interest income for the periods indicated. Changes not solely attributable to volume or rate have been allocated in proportion to the changes due to volume and rate. Amortization of net deferred loan costs and automobile dealer reserves included as a reduction in interest income was $27.5 million and $23.5 million for the three months ended March 31, 2003 and 2002, respectively.

Rate/Volume Analysis (Figure 3)


				Three Months Ended March 31,

				2003 v. 2002

				Increase (decrease) due to

				Rate			Volume			Total

				(Dollars in thousands)
Interest income:




	Loans and leases			$	(55,985	)	$	5,871		$	(50,114	)




	Mortgage-backed securities:




		Available for sale			(28,104	)		66,287			38,183




		Held to maturity			315			(6,846	)		(6,531	)




	Investment securities:




		Available for sale			(971	)		1,052			81




		Held to maturity			5			(22	)		(17	)




	Other interest-earning assets				277			(804	)		(527	)

			Total		(84,463	)		65,538			(18,925	)

Interest expense:




	Checking accounts				(12,984	)		7,222			(5,762	)




	Money market and savings accounts				(13,615	)		6,712			(6,903	)




	Certificates of deposit				(16,254	)		(7,739	)		(23,993	)




	Federal Home Loan Bank advances				(26,641	)		22,724			(3,917	)




	Other borrowings				(1,486	)		7,192			5,706

			Total		(70,980	)		36,111			(34,869	)

Change in net interest income				$	(13,483	)	$	29,427		$	15,944

Net interest income was $299.0 million for the three months ended March 31, 2003, up $15.9 million, or 5.6%, from the first quarter of 2002. The increase in net interest income was driven by a $5.2 billion, or 14.9%, increase in average interest-earning assets. Net yield on average interest-earning assets during the first quarter of 2003 was 2.99%, down 27 basis points from the first quarter of 2002. The reduction in the net yield resulted from downward pressure on asset yields in the declining interest rate environment, offset in part by the benefits obtained from deposit repricings in 2002.

Provision for Loan and Lease Losses

The provision for loan and lease losses for the three months ended March 31, 2003 was $61.5 million, an increase of $32.8 million from the three months ended March 31, 2002. The increased provision during the first quarter of 2003 was necessary to cover higher charge-offs and maintain the allowance for loan and lease losses at a level considered adequate to absorb losses inherent in the loan and lease portfolio. Additionally, the provision for loan and lease losses was increased to reflect the continued weakening in the national economy in the first quarter of 2003, specifically in the airline industry. Net charge-offs totaled $33.6 million in the three months ended March 31, 2003, compared to $25.6 million in the three months ended March 31, 2002. The ratio of net charge-offs as a percent of average loans and leases increased 12 basis points to .52% in the first quarter of 2003 from .40% in the first quarter of 2002. The $33.6 million of net charge-offs for 2003 included a $6.1 million charge-off related to the sale of a $19.6 million airline lease. As previously disclosed, the Company also has a second aircraft lessee that has requested concessions on its $14.8 million leveraged lease. At March 31, 2003, we reported this leveraged lease as nonaccrual in our “Nonperforming and Underperforming Assets” table in Figure 9 below. All other aircraft lease contracts are paying as agreed.

The Company’s aircraft leasing portfolio totaled $379.5 million at March 31, 2003, or 1.5% of its total loans and leases. The aircraft leasing portfolio includes $274.3 million to domestic air carriers, with the remainder on corporate jets and cargo planes leased to corporations. The Company has no direct exposure to US Air, United Airlines, American Airlines or Air Canada.

As part of the Bank’s conversion in May 2002 to a national bank subject to regulation by the Office of the Comptroller of the Currency (“OCC”), the Company conformed various policies and reporting practices associated with asset quality to more closely compare to those of its commercial bank peers. These changes neither increased nor decreased ultimate net loan and lease charge-offs. They only affected the timing of recognizing net consumer asset charge-offs through the allowance for loan and lease losses and the disclosure of underperforming consumer assets. Consumer assets include single-family, retail consumer, automobile and consumer finance loan portfolios. These changes had no impact on Charter One’s non-consumer loan portfolios, which include commercial real estate and corporate loans and its lease portfolio, as these portfolios already conformed with OCC-regulated banking practices.

The most significant effect of the change in charge-off policy was in the automobile and consumer finance portfolios. Prior to the second quarter of 2002, automobile loans were charged off at the point of repossessed collateral disposition. Beginning with the second quarter of 2002, consistent with OCC-regulated banking practices, automobile loans going through repossession or bankruptcies were written down to the net realizable value of the collateral at the time of the repossession or bankruptcy discharge. Any automobile loan that reached the 120-day delinquency point was charged off completely. Charge-offs in the consumer finance portfolio were previously recognized at the point of foreclosure. Beginning with the second quarter of 2002, consistent with OCC-regulated banking practices, consumer finance loans, along with other loans backed by single-family residential real estate collateral, were reflected at the lower of cost or net realizable value at the earliest point of six payments past due or foreclosure.

See “Financial Condition – Asset Quality” for further information regarding our allowance for loan and lease losses.

Other Income

Other income for the three months ended March 31, 2003 was $161.8 million, an increase of $45.3 million, or 38.8%, over the $116.6 million for the three months ended March 31, 2002. The increase was primarily attributable to income from retail banking and net gains on sales. Retail banking income increased $10.3 million, or 14.0%, over the comparable period in 2002. Growth in income from retail banking was primarily attributable to ongoing franchise development initiatives and increased marketing efforts. With respect to franchise development activities, we plan aggressive de novo expansion during 2003 and 2004, including 18 in-store locations in Indiana. The expansion is expected to include 125 new banking centers, with 97 in-store and 28 traditional locations. The 2003 goal is to open approximately 85 new banking centers, with 69 in-store and 16 traditional locations. The Company opened 16 banking centers during the first quarter of 2003, the majority of which were in-store locations. Net gains totaled $76.7 million for the first quarter of 2003, an increase of $54.9 million over the first quarter of 2002. The $2.5 billion of mortgage-backed securities sold during the first quarter 2003 were comprised primarily of bank-originated residential mortgage and consumer products, as we generated significantly more residential mortgage and consumer loans than we needed to meet our balance sheet and mix objectives. We did not utilize any special-purpose entities for the sale of any of our mortgage-backed securities.

With respect to the decline in mortgage banking income, we increased the valuation allowance on loan servicing assets by $20.7 million in the first quarter of 2003 to $123.4 million due to increasing prepayment speeds. Total mortgage banking income, excluding the $20.7 million increase in the valuation allowance, was $20.6 million in the first quarter of 2003. In the year ago quarter, mortgage banking income totaled $11.3 million. As a result of the strong loan origination and securitization activity in the past 12 months, the portfolio of loans serviced for others increased to $18.7 billion, up 18.0% since March 31, 2002. The related loan servicing asset was reduced to .74% of the portfolio at $139.1 million at March 31, 2003. With an average servicing spread of 36 basis points, that translates into a servicing asset valuation of 2.06 times the servicing spread.

Leasing operations reflected a loss of $6.9 million in the first quarter of 2003, compared to income of $270,000 for the first quarter of 2002. The decline in income resulted from $8.7 million in residual adjustments, which were primarily related to the Company’s aircraft leasing portfolio. See “Provision for Loan and Lease Losses” above and “Financial Condition — Asset Quality” below for further discussion regarding the Company’s aircraft leasing portfolio.

On April 27, 2003, MasterCard International, Inc. agreed to settle a class action lawsuit with Wal-Mart Stores, Inc. and other retailers regarding, among other things, the acceptance of debit cards and the processing of debit transactions. We issue MasterCard debit cards to the majority of our checking account customers. Over the past few years, revenue generated by debit point-of-sale transactions has been one of our fastest growing sources of revenue. The revenue generated from a specific transaction depends on whether it is processed off line (signature based) or on line (PIN based). Off-line transactions tend to generate a higher level of revenue than on-line transactions. During the three months ended March 31, 2003, gross revenue from signature-based debit transactions totaled $11.1 million. Preliminary information on the settlement includes a reduction in the signature-based fee collected from merchants

of at least 33% beginning on August 1, 2003. Assuming no increase in debit card volume over first-quarter levels, the lower fee would translate into a reduction in net income of approximately $4.0 million for the five-month period from August 1, 2003 to December 31, 2003.

Administrative Expenses

Administrative expenses were $183.3 million for the three months ended March 31, 2003, an increase of $21.1 million, or 13.0%, as compared to the first quarter of 2002. The increase in administrative expenses was primarily attributable to increased health care and marketing costs, as well as expenses related to the addition of 27 new banking centers in the past 12 months. Despite the increase in administrative expenses, our efficiency ratio improved to 39.77% for the three months ended March 31, 2003, compared to 40.58% for the three months ended March 31, 2002. See the above discussion in “Other Income” regarding factors that contributed to the improvement in our efficiency ratio.

Federal Income Tax

Federal income tax expense for the three months ended March 31, 2003 was $68.6 million, compared to $66.3 million for the same period in 2002. The primary reason for this increase in the provision for federal income taxes was an increase in pre-tax income. The effective tax rate was 31.7% for both the 2003 and 2002 period.

FINANCIAL CONDITION

Overview

At March 31, 2003, total assets were $43.2 billion, compared to total assets of $41.9 billion at December 31, 2002.

Loans and Leases

Composition of Loans and Leases (Figure 4)


					3/31/03			12/31/02

					(Dollars in thousands)
	One-to-four family:




		Permanent:




			Fixed rate		$	5,506,314		$	5,869,554




			Adjustable rate			2,546,426			2,437,166




		Construction				412,973			427,729

						8,465,713			8,734,449

	Commercial real estate:




		Multifamily				920,295			953,688




		Commercial				1,340,272			1,307,593

						2,260,567			2,261,281

	Consumer:




		Retail				4,173,080			5,494,453




		Automobile				5,934,502			5,606,329




		Consumer finance				1,005,077			984,772

						11,112,659			12,085,554

	Business:




		Leasing				2,125,905			2,133,468




		Corporate banking				1,368,069			1,318,003

						3,493,974			3,451,471

	Loans and leases before allowance for loan and lease losses					25,332,913			26,532,755




	Allowance for loan and lease losses					(355,926	)		(328,017	)

				Loans and leases, net(1)	$	24,976,987		$	26,204,738

Portfolio of loans serviced for others					$	18,713,649		$	16,893,609

(1)

Includes loans held for sale.

Loan and Lease Activity (Figure 5)


					Three Months Ended

					3/31/03			3/31/02

					(Dollars in thousands)
Originations:




Real estate:




	Permanent:




		One-to-four family			$	3,095,718		$	2,657,994




		Multifamily				51,440			35,719




		Commercial				90,213			92,088

			Total permanent loans			3,237,371			2,785,801

	Construction:




		One-to-four family				3,499			14,031




		Multifamily				19,283			24,988




		Commercial				10,830			66,234

			Total construction loans			33,612			105,253

				Total real estate loans originated		3,270,983			2,891,054

Retail consumer						1,079,290			998,727




Automobile						981,114			684,045




Consumer finance						101,927			56,083




Leases						101,571			93,041




Corporate banking						448,326			353,640

			Total loans and leases originated			5,983,211			5,076,590

Acquired through business combinations and purchases						3,765			4,715

Sales and principal reductions:




	Loans sold					763,051			644,097




	Loans exchanged for mortgage backed securities					3,419,116			2,717,271




	Principal reductions					2,993,773			2,921,080

				Total sales and principal reductions		7,175,940			6,282,448

				Decrease before net items	$	(1,188,964	)	$	(1,201,143	)

Investment and Mortgage-Backed Securities

Figures 6 and 7 summarize our investment and mortgage-backed securities portfolios at March 31, 2003 and December 31, 2002. The amounts reflected represent the fair value of securities available for sale and the amortized cost of securities held to maturity.

Investment Securities (Figure 6)


				3/31/03			12/31/02

				(Dollars in thousands)
Available for Sale




	U.S. Treasury and agency securities			$	108,660		$	91,462




	Securities of U.S. states and political subdivisions				1,895			1,898




	Corporate and other securities				116,582			116,735

		Total investment securities available for sale			227,137			210,095

Held to Maturity




	U.S. Treasury and agency securities				261			3,943




	Securities of U.S. states and political subdivisions				3,866			—




	Corporate and other securities				30			30

		Total investment securities held to maturity			4,157			3,973

			Total	$	231,294		$	214,068

	Weighted average rate				5.43	%		5.64	%

Mortgage-Backed Securities (Figure 7)


					3/31/03			12/31/02

					(Dollars in thousands)
Available for Sale




	Participation certificates:




		U.S. government and agency issues			$	11,375,333		$	10,051,046




	Collateralized mortgage obligations:




		U.S. government and agency issues				1,085,381			1,068,518




		Private issues				338,792			417,044

			Total mortgage-backed securities available for sale			12,799,506			11,536,608

Held to Maturity




	Participation certificates:




		U.S. government and agency issues				277,945			311,398




		Private issues				42,546			51,717




	Collateralized mortgage obligations:




		U.S. government and agency issues				71,665			96,130




		Private issues				53,051			81,536

			Total mortgage-backed securities held to maturity			445,207			540,781

				Total	$	13,244,713		$	12,077,389

		Weighted average rate				4.97	%		4.95	%

Asset Quality

Being mindful of an economy that continues to exhibit weakness, particularly in the non-consumer sectors, Charter One continued to strengthen its level of loan loss reserves as shown in Figure 8 below. See also “Provision for Loan and Lease Losses” for further discussion.

Analysis of the Allowance for Loan and Lease Losses (Figure 8)


					Three Months Ended

					3/31/03			3/31/02

					(Dollars in thousands)
Allowance for loan and lease losses:




	Balance, beginning of period				$	328,017		$	255,478




	Provision for loan and lease losses					61,471			28,717




	Loans and leases charged off:




		One-to-four family				(670	)		(976	)




		Commercial real estate				(500	)		(801	)




		Retail consumer				(3,478	)		(2,258	)




		Automobile				(16,450	)		(16,920	)




		Consumer finance				(4,537	)		(3,822	)




		Leases				(6,061	)		(460	)




		Corporate banking				(7,245	)		(4,023	)

			Total charge-offs			(38,941	)		(29,260	)

	Recoveries:




		One-to-four family				17			2




		Commercial real estate				148			121




		Retail consumer				433			403




		Automobile				4,115			2,408




		Consumer finance				105			63




		Leases				393			—




		Corporate banking				168			673

			Total recoveries			5,379			3,670

				Net loan and lease charge-offs		(33,562	)		(25,590	)

	Balance, end of period				$	355,926		$	258,605

	Net charge-offs to average loans and leases (annualized)					.52	%		.40	%

In terms of nonperforming asset disclosures, Charter One’s policy, prior to the second quarter of 2002, was to place all consumer assets backed by residential real estate on nonaccrual status (disclosed as nonperforming) at 90 days delinquent. Beginning in the second quarter of 2002, consistent with OCC-regulated banking practices, loans backed by residential real estate are being placed on nonaccrual status (nonperforming) at six payments past due as long as the loan is well secured and in the process of collection.

Figure 9 sets forth information concerning nonperforming and underperforming assets for the periods reported. Underperforming assets consist of (1) nonperforming assets (nonaccrual loans and leases, restructured real estate mortgage loans, and real estate acquired through foreclosure and other collateral owned) and (2) accruing loans and leases delinquent more than 90 days.

Nonperforming and Underperforming Assets (Figure 9)


					3/31/03			12/31/02

					(Dollars in thousands)
Nonperforming assets:




	Nonaccrual loans and leases:




		Real estate mortgage loans:




			One-to-four family		$	27,867		$	27,904




			Multifamily and commercial			5,591			5,369




			Construction and land			8,015			9,885

				Total real estate mortgage loans		41,473			43,158




		Retail consumer				12,046			13,937




		Automobile				—			—




		Consumer finance				42,562			40,227




		Leases				15,264			6,211




		Corporate banking				42,068			39,098

				Total nonaccrual loans and leases		153,413			142,631




	Restructured real estate mortgage loans					494			501

				Total nonperforming loans and leases		153,907			143,132




	Real estate and other collateral owned					40,020			40,776

				Total nonperforming assets	$	193,927		$	183,908

Ratio of:




	Nonperforming loans and leases to total loans and leases					.62	%		.55	%




	Nonperforming assets to total assets					.45			.44




	Nonperforming assets to total loans, leases and real estate and other collateral owned					.78			.70




	Allowance for loan and lease losses to:




		Nonperforming loans and leases				231.26			229.17




		Total loans and leases before allowance				1.40			1.24




Accruing loans and leases delinquent more than 90 days:




	Real estate mortgage loans:




		One-to-four family			$	23,507		$	25,643




		Multifamily and commercial				—			—




		Construction and land				—			—

			Total real estate mortgage loans			23,507			25,643




	Retail consumer					3,229			4,758




	Automobile					3,579			3,621




	Consumer finance					27,395			26,739




	Leases					181			19




	Corporate banking					471			1,536





			Total accruing loans and leases delinquent more than 90 days		$	58,362		$	62,316

Total underperforming assets					$	252,289		$	246,224

Ratio of:




	Underperforming assets to total assets					.58	%		.59	%




	Underperforming assets to total loans, leases and real estate and other collateral owned					1.01			.94

Loans and leases not reflected in the table above, but where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of the borrower to comply with present repayment terms and that may result in disclosure of such loans and leases as underperforming assets in the future, are commonly referred to as “potential problem loans and leases.” The amount included in potential problem loans and leases results from an evaluation, on a loan-by-loan basis, of loans and leases classified as “substandard.” The amount of potential problem loans and leases was $61.9 million as of the date of this report. This total included a $26.4 million commercial airline leveraged lease in which the lessee has experienced financial difficulties in the

present economic environment. This lease relationship was current as of March 31, 2003. The $61.9 million of potential problem loans and leases also included a $15.4 million commercial real estate loan that is well-collateralized by developmental properties. At the present time, we expect no material losses on this loan. The vast majority of our potential problem loans and leases, as well as our underperforming assets, are collateralized.

SOURCES OF FUNDS

Management considers our interest-sensitivity profile when deciding on sources of funds. At March 31, 2003, our one-year gap was 3.01% of total interest-earning assets. See Part I, Item 3 “Quantitative and Qualitative Disclosure About Market Risk,” of this Form 10-Q regarding further information on our interest rate risk profile.

Deposits

Composition of Deposits (Figure 10)


				3/31/03					12/31/02

						Weighted					Weighted
						Average					Average
				Amount		Rate			Amount		Rate

				(Dollars in thousands)
Checking accounts:




	Interest-bearing			$	7,267,602		1.50	%	$	7,460,530		1.80	%




	Noninterest-bearing				2,385,243		—			2,189,903		—

		Total checking accounts			9,652,845		1.13			9,650,433		1.39




Money market and savings accounts					8,207,576		1.62			8,157,534		1.51

		Total transactions accounts			17,860,421		1.35			17,807,967		1.45




Certificates of deposit					9,523,194		3.43			9,719,876		3.61

			Total deposits, net	$	27,383,615		2.08		$	27,527,843		2.21

Including the effect of interest rate swaps							1.96	%				2.06	%

Investment securities and mortgage-backed securities with a par value of $467.6 million at March 31, 2003 and $489.0 million at December 31, 2002, were pledged to secure public deposits and for other purposes required or permitted by law.

Borrowings

At March 31, 2003, borrowings consisted primarily of Federal Home Loan Bank (“FHLB”) advances. These positions were secured by our investment in the stock of the FHLB, as well as $9.6 billion in certain real estate loans and $6.1 billion in mortgage-backed securities.

FHLB Advances (Figure 11)


			3/31/03					12/31/02

					Weighted					Weighted
					Average					Average
			Amount		Rate			Amount		Rate

					(Dollars in thousands)
Short-term			$	3,105,000		1.46	%	$	2,595,000		1.34	%




Long-term:




	Fixed-rate advances			5,924,548		5.68			6,024,560		5.68




	Variable-rate advances			1,409,605		1.33			409,605		1.23

Total advances				10,439,153		3.84			9,029,165		4.23




Plus unamortized premium on advances				7,477					8,760		—





		Total advances, net	$	10,446,630		3.80		$	9,037,925		4.18

Including the effect of interest rate swaps						3.89	%				4.26	%

Interest Rate Swaps

We use interest rate swaps as one of the tools to manage our interest rate risk profile (defined as the sensitivity of our earnings and economic value to changes in interest rates). We utilize fixed receipt callable interest rate swaps to convert certain longer-term callable certificates of deposit into short-term and medium-term variable instruments. Under certain of these agreements totaling $465.0 million in notional principal amount, we have agreed to receive interest from the counterparty on a notional amount at a fixed rate defined in the agreement and to pay interest at a floating rate indexed to LIBOR during the entire term of the interest rate swap. In other agreements totaling $1.4 billion in notional principal amount, we have agreed to receive interest from the counterparty on a notional amount at a fixed rate defined in the agreement, and to pay interest at a fixed rate, converting to floating rate indexed to LIBOR after the first two years of the interest rate swap term. Such interest rate swaps are designated and qualify as fair value hedges under SFAS No. 133. We have assumed no ineffectiveness in the respective hedging

relationships. Any gain or loss on the interest rate swap was offset by a gain or loss on the certificates of deposit during the period of change in fair values.

We utilize fixed payment interest rate swaps to convert certain floating-rate FHLB advances into fixed-rate instruments. Under these agreements totaling $409.6 million in notional principal amount, we have agreed to pay interest to the counterparty on a notional principal amount at a fixed rate defined in the agreement and receive interest at a floating rate indexed to LIBOR. The amounts of interest exchanged are calculated on the basis of notional principal amounts. Such interest rate swaps are designated and qualify as cash flow hedges under SFAS No. 133. We have assumed no ineffectiveness in the respective hedging relationships. Any gain or loss on the interest rate swaps was offset by the expected future cash flows on the FHLB advances during the period of change in fair values.

We utilized a fixed receipt interest rate swap to convert our $400.0 million of subordinated notes into a variable instrument. Under this agreement, we have agreed to receive interest from the counterparty on a notional amount at a fixed rate defined in the agreement and to pay interest at a floating rate indexed to LIBOR. Such interest rate swap is designated and qualifies as a fair value hedge under SFAS No. 133. We have assumed no ineffectiveness in the hedging relationship. Any gain or loss on the interest rate swap was offset by a gain or loss on the subordinated notes during the period of change in fair values.

In May 2002, we entered into $575.0 million of fixed payment and variable receipt interest rate swaps related to the issuance of the Bank’s subordinated notes. However, these interest rate swaps did not qualify for hedge accounting under SFAS No. 133. For the three months ended March 31, 2003, the net unrealized loss attributed to these interest rate swaps increased $5.5 million to an ending balance of $31.4 million. The corresponding interest rate swap liabilities were recognized in our Consolidated Statements of Financial Condition at March 31, 2003 under the caption “Accrued expenses and other liabilities.”

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

Interest Rate Swaps (Figure 12)


				3/31/03								12/31/02

				Notional		Receiving			Paying			Notional		Receiving			Paying
				Principal		Interest			Interest			Principal		Interest			Interest
				Amount		Rate			Rate			Amount		Rate			Rate

				(Dollars in thousands)
Fixed Payment and Fixed




	Receipt(1)




		2007		$	1,005,000		4.31	%		2.75	%	$	1,005,000		4.31	%		2.75	%




		2008			375,000		3.64			2.04			—		—			—

			Total	$	1,380,000		4.13	%		2.56	%	$	1,005,000		4.31	%		2.75	%

Fixed Payment and Variable




	Receipt




		2003		$	409,605		1.29	%		3.55	%	$	409,605		1.42	%		3.55	%




		2004			375,000		1.40			3.66			375,000		1.40			3.66




		2006			200,000		1.40			4.69			200,000		1.40			4.69

			Total	$	984,605		1.35	%(2)		3.82	%	$	984,605		1.41	%(2)		3.82	%

Variable Payment and Fixed




	Receipt




		2004		$	145,000		2.56	%		1.34	%	$	315,000		2.80	%		1.57	%




		2005			165,000		2.16			1.33			—		—			—




		2007			155,000		5.35			1.35			555,000		5.51			1.55




		2012			400,000		5.76			1.34			400,000		5.76			1.75

			Total	$	865,000		4.47	%		1.34	%(2)	$	1,270,000		4.92	%		1.62	%(2)

(1)		Converts to variable payment indexed to LIBOR after the first two years of the interest rate swap agreement.




(2)		Rates are based upon LIBOR.

Additionally, we have entered into forward fixed payment and variable receipt interest rate swaps totaling $1.4 billion in notional principal amount that are not reflected in Figure 12 above. These forward interest rate swaps are scheduled to begin in September 2003 and mature in January 2006. The weighted average fixed payment rate on these forward interest rate swaps is 2.91%. The forward interest rate swaps will convert certain floating-rate FHLB advances into fixed-rate instruments. Such interest rate swaps will be designated and qualify as cash flow hedges under SFAS No. 133 at time of commencement.

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:

Fair Value of Interest Rate Swaps (Figure 13)


			March 31,

			2003			2002

			(Dollars in thousands)
Unrealized gain (loss):




	Fair value hedges		$	85,658		$	10,658




	Cash flow hedges			(5,217	)		(1,074	)




	Unhedged interest rate swaps			(31,418	)		—

		Total fair value	$	49,023		$	9,584

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

Net Benefit of Interest Risk Management (Figure 14)


			Three Months Ended

			3/31/03			3/31/02

			(Dollars in thousands)
Interest expense (income):




	Deposits		$	(9,782	)	$	(11,412	)




	FHLB advances			2,244			1,736




	Subordinated notes			(4,391	)		—




	Unhedged interest rate swaps			3,798			—

		Total net benefit	$	(8,131	)	$	(9,676	)

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 to supplement deposits with longer term and/or lower cost alternative sources of funds such as FHLB advances and federal funds purchased and repurchase agreements. We may, from time to time, decide to price deposits aggressively for strategic reasons which may result in significant deposit inflows.

In the ordinary course of business, we enter into off-balance-sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, standby letters of credit and commitments to purchase or sell assets. Such financial instruments are recorded in the financial statements when they are funded or the related fees are incurred or received. We anticipate that we will have sufficient funds available to meet our commitments. As of March 31, 2003, there were outstanding commitments to originate $2.4 billion of mortgage loans and other loans and leases, all at market rates. Terms of the commitments extend up to nine months, but are generally less than two months. Additionally, there were outstanding unfunded consumer lines of credit of $4.7 billion and corporate banking lines of credit of $408.8 million as of March 31, 2003. 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 $97.8 million as of March 31, 2003.

Capital and Dividends

On April 23, 2002, the Company’s Board of Directors authorized management to repurchase up to 10% of the Company’s outstanding common stock, or approximately 22 million shares, under a program of open market purchases or privately negotiated transactions. This program replaced the repurchase program that had been in effect since July 18, 2000 and under which the Company repurchased approximately 15.0 million shares for a total cost of $394.8 million. The Company repurchased 602,600 shares under the new authorization during the first quarter of 2003 at an average cost of $27.86 per share. This brought the total number of shares repurchased under this program to 8.5 million shares at an average cost of $30.76 per share. Shares and per share data discussed in this paragraph have not been restated to reflect the 5% stock dividend issued September 30, 2002.

Charter One, a financial holding company, is subject to regulation by the Federal Reserve Board (“FRB”) under the Bank Holding Company Act of 1956 as amended, and the regulations of the FRB, including various capital requirements. The Bank is subject to various regulatory capital requirements administered by the OCC. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by each regulator that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines, specific capital guidelines must be met that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The institution’s capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require Charter One and the Bank to individually maintain minimum amounts and ratios (set forth in the table below) of total and tier 1 capital to risk-weighted assets, and of tier 1 capital to average assets. The actual regulatory capital ratios calculated for Charter One and the Bank, along with the capital amounts and ratios for capital adequacy purposes and the amounts required to be categorized as “well capitalized,” are as follows:

Regulatory Capital (Figure 15)


		3/31/03

							For Capital
		Actual					Adequacy Purposes					To Be "Well Capitalized"

		Amount		Ratio			Amount		Ratio			Amount		Ratio

		(Dollars in thousands)
Charter One:




	Total capital to risk-weighted assets	$	3,351,195		11.97	%	$	2,240,273		>8.00	%	$	2,800,341	>	10.00	%




	Tier 1 capital to risk-weighted assets		2,601,533		9.29			1,120,136		>4.00			1,680,205	>	6.00




	Tier 1 capital to average assets		2,601,533		6.16			1,689,243		>4.00			N/A		N/A




Charter One Bank:




	Total capital to risk-weighted assets		3,390,837		12.12			2,238,151		>8.00			2,797,689	>	10.00




	Tier 1 capital to risk-weighted assets		2,308,430		8.25			1,119,075		>4.00			1,678,613	>	6.00




	Tier 1 capital to average assets		2,308,430		5.48			1,686,119		>4.00			2,107,649	>	5.00


		12/31/02

							For Capital
		Actual					Adequacy Purposes					To Be "Well Capitalized"

		Amount		Ratio			Amount		Ratio			Amount		Ratio

		(Dollars in thousands)
Charter One:




	Total capital to risk-weighted assets	$	3,239,604		11.67	%	$	2,220,734		>8.00	%	$	2,775,917	>	10.00	%




	Tier 1 capital to risk-weighted assets		2,513,577		9.05			1,110,367		>4.00			1,665,550	>	6.00




	Tier 1 capital to average assets		2,513,577		6.10			1,648,861		>4.00			N/A		N/A




Charter One Bank:




	Total capital to risk-weighted assets		3,150,686		11.36			2,219,719		>8.00			2,774,649	>	10.00




	Tier 1 capital to risk-weighted assets		2,091,615		7.54			1,109,860		>4.00			1,664,789	>	6.00




	Tier 1 capital to average assets		2,091,615		5.11			1,636,187		>4.00			2,045,234	>	5.00

Management believes that, as of March 31, 2003, Charter One and the Bank individually met the capital adequacy requirements to which they were subject. Events beyond management’s control, such as fluctuations in interest rates or a downturn in the economy in areas in which the institution’s loans and securities are concentrated could adversely affect future earnings and, consequently, the institution’s ability to meet its future capital requirements.

Quarterly Stock Prices and Dividends (Figure 16)


		Three Months Ended

		3/31/03		12/31/02		9/30/02		6/30/02		3/31/02

Market price of common stock (NYSE: CF)(1):




	High	$	30.74	$	31.48	$	33.42	$	34.77	$	30.95




	Low		27.05		23.89		25.81		29.30		25.19




	Close		27.66		28.73		29.72		32.74		29.73




Dividends declared and paid(1)			.22		.22		.21		.21		.19

(1)

Restated to reflect the 5% stock dividend issued September 30, 2002.

ITEM 3. Quantitative and Qualitative Disclosure About Market Risk

A comprehensive qualitative and quantitative analysis regarding market risk was disclosed in our December 31, 2002 Form 10-K. The assumptions used in our model have been updated as of March 31, 2003. The table below indicates the estimated impact on net interest income under the various interest rate scenarios as a percentage of base case net interest income projections.


Changes in	Estimated Percentage Change
Interest Rates	in Future Net Interest Income
(basis points)	12 Months

+200 over one year		(6.17	)%




+100 over one year		(3.02	)




- 100 over one year		3.64

Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and management strategies.

ITEM 4. Controls and Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Section 13(a)-14(c) of the Securities Exchange Act of 1934 (the “Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management within the 90-day period preceding the filing date of this quarterly report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Since the date of this evaluation there have been no significant changes in, or corrective actions taken regarding, the Company’s internal controls or in other factors that could significantly affect these controls.

The Company intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Company’s business. While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures.

PART II – OTHER INFORMATION

ITEM 5. Other Information

Cash Dividend – On April 22, 2003, the Company’s Board of Directors declared a regular quarterly cash dividend of $.24 per share, up 9% from $.22 last quarter. The cash dividend is payable May 20, 2003 to shareholders of record on May 6, 2003.

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits: See Index to Exhibits.

(b) Reports on Form 8-K: On January 17, 2003, the Company filed a report on Form 8-K containing its earnings release dated January 17, 2003.

On March 18, 2003, the Company filed a report on Form 8-K containing a press release announcing earnings expectations for the first quarter of 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		CHARTER ONE FINANCIAL, INC.

Date:	May 9, 2003	/s/ Charles John Koch Charles John Koch Chairman of the Board, President and Chief Executive Officer (Duly Authorized Officer and Principal Executive Officer)

Date:	May 9, 2003	/s/ Richard W. Neu Richard W. Neu Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Charles John Koch, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Charter One Financial, Inc. (the “Registrant”);

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects the consolidated financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

     a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

     b) evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

     c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and the Audit Committee of Registrant’s Board of Directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls; and

6. The Registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: May 9, 2003		/s/ Charles John Koch Charles John Koch Chairman of the Board, President and Chief Executive Officer

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Richard W. Neu, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Charter One Financial, Inc. (the “Registrant”);


Date: May 9, 2003		/s/ Richard W. Neu
		Richard W. Neu Executive Vice President and Chief Financial Officer

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 30, 1999 (File No. 001-15495), is incorporated herein by reference.









4.3		The Registrant hereby agrees to furnish to the Securities and Exchange Commission, upon request, with copies of all instruments defining rights of holders of long-term debt of Charter One and its consolidated subsidiaries.









10.1		Registrant’s Long-Term Stock Incentive Plan, filed on January 22, 1988 as Exhibit 10.1 to Registrant’s Registration Statement on Form S-1 (File No. 33-16207), is incorporated herein by reference.









10.2		Registrant’s Directors’ Stock Option Plan, filed on January 22, 1988 as Exhibit 10.2 to Registrant’s Registration Statement on Form S-1 (File No. 33-16207), is incorporated herein by reference.









10.3		Charter One Bank, F.S.B. Executive Incentive Goal Achievement Plan, filed as Exhibit 10.8 to Registrant’s Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 000-16311) is incorporated herein by reference.









10.4		First American Savings Bank, F.S.B. Nonqualified Retirement Plan and First Amendment thereto, filed as Exhibit 10.17 to Registrant’s Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 000-16311), are incorporated herein by reference.









10.5		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.









10.6		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.









10.7		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.









10.8		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.





10.9		Hinsdale Financial Corporation 1994 Incentive Stock Option Plan, filed as an attachment to the proxy


EXHIBIT
NUMBER		DESCRIPTION




		statement for the annual meeting of stockholders of Alliance held on February 8, 1995 (File No. 000-20082), is incorporated herein by reference.









10.10		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.









10.11		Charter One Financial, Inc. 1997 Stock Option and Incentive Plan, as amended and restated, filed as Exhibit 10.13 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (File No. 001-15495), is incorporated herein by reference.









10.12		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.









10.13		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.









10.14		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.









10.15		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.









10.16		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.









10.17		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.









10.18		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.









10.19		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.









10.20		Charter One Bank, N.A.’s Director Non-Stock Deferred Compensation Plan, filed as Exhibit 10.20 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 001-15495), is incorporated herein by reference.









10.21		Charter One Bank, N.A.’s Non-Stock Deferred Compensation Plan, filed as Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 001-15495), is incorporated herein by reference.









10.22		Charter One Bank, N.A.’s Stock Deferred Compensation Plan, filed as Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 001-15495), is incorporated herein by reference.









10.23		Master Trust Agreement for Charter One Financial, Inc. Deferred Compensation Plans, filed as Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 001-15495), is incorporated herein by reference.









10.24		Amendment No. 1 to the amended and restated Charter One Financial, Inc. 1997 Stock Option and Incentive Plan, filed as Exhibit 10.24 to the Registrant’’ Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 001-15495), is incorporated herein by reference.


EXHIBIT
NUMBER		DESCRIPTION




11		Statement Regarding Computation of Per Share Earnings









99.1		Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to Item 906 of the Sarbanes-Oxley Act of 2002

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1.		These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Charter One Financial, Inc. (the “Company” or “Charter One”) Annual Report on Form 10-K for the year ended December 31, 2002. The interim financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. Such adjustments are of a normal recurring nature. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year.

2.		Charter One has one operating segment, consumer banking, which offers an array of products and services to its customers. Pursuant to its consumer banking strategy, emphasis is placed on building relationships and identifying cross-sell opportunities with its customers, as opposed to building specific lines of business. As a result, Charter One works as an integrated unit to customize solutions for its customers, with business line emphasis and product offerings changing over time as needs and demands change.

3.		In November 2002, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 clarifies the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies,” relating to guarantees. In general, FIN 45 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability, or equity security of the guaranteed party. Certain guarantee contracts are excluded from both the disclosure and recognition requirements of FIN 45, including, among others, guarantees relating to employee compensation, residual value guarantees under capital lease arrangements, commercial letters of credit, loan commitments, subordinated interests in a special purpose entity, and guarantees of a company’s own future performance. Other guarantees are subject to the disclosure requirements of FIN 45 but not to the recognition provisions and include, among others, a guarantee accounted for as a derivative instrument under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, a parent’s guarantee of debt owed to a third party by its subsidiary or vice versa, and a guarantee which is based on performance, not price. The disclosure requirements of FIN 45 are effective for the Company as of December 31, 2002, and require disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor’s obligations under the guarantee. The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. Guarantees that have been entered into by the Company are disclosed in “Liquidity” under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The adoption of FIN 45 did not have a material impact on the Company’s consolidated financial condition or results of operations.

4.		On December 31, 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation -Transition and Disclosure,” an amendment of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. Finally, SFAS No. 148 amends Accounting Principles Board (“APB”) Opinion No. 28, “Interim Financial Reporting,” to require disclosure about those effects in interim financial information. The Company has elected to continue application of APB Opinion No. 25 and related interpretations in accounting for its stock-based employee compensation plans. Accordingly, no stock-based employee compensation cost is, or is expected to be, reflected in net income, as all options granted under the Company’s stock-based employee compensation plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Had stock-based employee compensation costs of the Company’s stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, as amended by SFAS No. 148, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below (per share data has been restated to reflect all stock dividends as of March 31, 2003):

		The estimated weighted-average date of grant fair value (based on the above option-pricing model and assumptions) for stock options granted in the three months ended March 31, 2003 and 2002 was $10.99 and $8.84, respectively.

5.		In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities.” FIN 46 provides guidance on how to identify a variable interest entity (“VIE”) and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE need to be included in a company’s consolidated financial statements. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. The provisions of the interpretation became effective upon issuance. The adoption of FIN 46 did not have a material impact on the Company’s consolidated financial condition or results of operations.

6.		On April 30, 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends SFAS No. 133 for certain decisions made by the FASB as part of the Derivatives Implementation Group (“DIG”) process. For those amendments that relate to SFAS No. 133 implementation guidance, the specific SFAS No. 133 Implementation Issue necessitating the amendment is identified. If the amendment relates to a cleared issue, the clearance date also is noted. SFAS No. 149 also amends SFAS No. 133 to incorporate clarifications of the definition of a derivative. SFAS No. 149 contains amendments relating to FASB Concepts Statement No. 7, “Using Cash Flow Information and Present Value in Accounting Measurements,” SFAS No. 65, “Accounting for Certain Mortgage Banking Activities,” SFAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases,” SFAS No. 95, “Statement of Cash Flows,” and SFAS No. 126, “Exemption from Certain Required Disclosures about Financial Instruments for Certain Nonpublic Entities.”

		SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. In addition, except as stated below, all provisions of SFAS No. 149 should be applied prospectively. The provisions of SFAS No. 149 that relate to SFAS No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, guidance related to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to both existing contracts and new contracts entered into after June 30, 2003. Management has not completed the process of evaluating SFAS No. 149 and therefore has not determined the impact that adopting this statement will have on the consolidated financial condition or results of operations

•		the strength of the United States economy in general and the strength of the local economies in which we conduct our operations; general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in the credit quality of our loans and leases and other assets;

•		the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;

•		financial markets, monetary and interest rate fluctuations, particularly the relative relationship of short-term interest rates to long-term interest rates;

•		the timely development of and acceptance of new products and services of Charter One and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services;

•		the impact of changes in financial services laws and regulations (including laws and regulations concerning taxes, accounting standards, banking, securities and insurance); legislative or regulatory changes may adversely affect the business in which we are engaged;

•		the impact of technological changes;

•		our ability to successfully integrate acquisitions into our existing operations, and the availability of new acquisitions, joint ventures and alliance opportunities that build shareholder value;

•		changes in consumer spending and saving habits; and

•		our success at managing the risks involved in the foregoing.

(a)		Exhibits: See Index to Exhibits.

(b)		Reports on Form 8-K: On January 17, 2003, the Company filed a report on Form 8-K containing its earnings release dated January 17, 2003.

		On March 18, 2003, the Company filed a report on Form 8-K containing a press release announcing earnings expectations for the first quarter of 2003.


	a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b) evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls; and