CHARTER ONE FINANCIAL INC - 10-K Annual Report

Annual reports should tell the story of what has occurred, and this year’s Charter One Financial annual report is based squarely in reality and fact. Simply put: the numbers were good, the potential is extraordinary and the attitude is clearly unique.

Throughout this year’s annual report, we have summoned, referenced and invoked the powers of retail. To be sure, we’re a bank. But we’re also a great retailer. Our left brain is banking and our right brain retail. We are in this business to think for ourselves and are committed to being a bank apart.

We are energized by the experiences we share with our customers. We are constantly redefining our customer interactions. And we firmly believe that being customer driven is exactly the same as being financially motivated.

In the final analysis, it’s not about what we say. It’s not even about what we did. It’s about what we are doing.

Our invitation is to experience our vision, a vision that is limited only by our imagination.

Our customers rule. They rule how we think about the complete Charter One experience. To them, we must be positively memorable or we disappear into the crowd.

There’s no secret formula, no golden touch and no real mystery. We put our customers’ needs and goals first.

Back in 2000, Charter One was the first in cyber-space to launch free online banking. This adventurous move was dismissed until everyone followed suit.

Many banks discovered free checking in 2003. Free checking has been a core offering of ours since the mid-1980s. More important, last year we improved what was already a good thing. Like our online bank, charterone.com, our checking product, The Best FREE Checking, is now the industry standard.

Very few banks can say that the vast majority of their total business is with the consumer. At Charter One, nearly 100% of our deposits and deposit-related revenues are derived directly from consumer households and small businesses.

a place with a purpose, a place to look forward to, a place to get into and get more.

When we observed the way our customers used our traditional, free-standing banking centers, it became clear they wanted to complete a specific task and get on with their day. This led us to redesign our banking centers.

It also led to the development of partnerships with 19 different grocers, making our branches the most convenient location for customers who want to take care of two retail shopping needs at once.

Not only do grocery store relationships work for our customers, we’ve used them to enter new markets for less money than it would take to build free-standing banking centers. Better yet, our marketing programs are targeted specifically to the grocery store’s existing customers, lowering our household acquisition costs.

We’ve further stimulated accessibility by integrating Starbucks locations into Charter One banking centers, enhancing the experience with convenience, caffeine and banker’s hours that are unmatched.

And it’s not stopping there. By creating destinations where people need to go and where people want to go, we’re leveraging these and other opportunities to feed our growth plans.

an individual of substance, a master of his craft and a representative of us all.

It all depends on him and hundreds of uniquely talented and motivated individuals like him.

All of this chatter about the Charter One experience and the Charter One difference hinges on the next interaction between two people. Our ability to bring something beyond and better to the mix is ultimately about our people. An impressive experience can simply be a sincere greeting, a timely account observation, a creative financial idea or a well-placed comment about a new haircut.

We will always hire the finest professionals possible. But, first and foremost, we will always hire the finest people possible. We can teach the tasks and techniques of banking, we cannot teach personality or the skills of truly concerned, engaged people.

The people of Charter One are neither “workers” nor a “workforce.” The people of Charter One are individuals doing extraordinary things ... quite simply, Charter One.

Retail is not a metaphor, but rather a meter of the experiences and solutions we can provide in the morphing marketplace.

Charter One is taking the lead because we want the lead, because we know no other way to go forward. We remain accountable and responsible to our shareholders, to ourselves and most critically, to our customers.

By refreshing the staid banking terrain we have, and will redefine, an industry by redefining ourselves.

At Charter One, we’re leaning into the winds of change and pushing headlong into 2004 — a leap year that will see us bound forward in exciting new ways.

•		16% increase in deposit-related revenue

•		over 600 new retail employees, many from outside banking

•		600,000 gift cards in 2 months, best in the industry

•		16% increase in consumer checking households in 2003

•		1.5 million checking accounts, 45% enrolled in online banking

•		125 new banking centers planned for 2004

•		$1.6 billion, or 9%, growth in non single-family lending portfolio

•		49% growth in small business loans

•		21% growth in home equity lines of credit

•		single-family exposure down $1.1 billion, or 5%

•		net charge-offs only .38% of average loans and leases

•		allowance for loan/lease losses covers nearly 4 years of 2003 net charge-offs

Our 2003 annual report is dedicated to reinforcing Charter One’s retail roots. For years we have talked about the consumer-oriented focus of our strategy, and in 2003 we dramatically increased that commitment with truly groundbreaking results. That is an important stake in the ground for our shareholders, our customers, our employees, and our communities. It is important in terms of what we accomplished in 2003, but it is much more important in terms of where we are going.

At the beginning of 2003, we established very strategic objectives. We continued our push for non single-family portfolio growth combined with a reduction in single-family exposure to reduce overall interest rate risk. We shifted our deposit growth focus to noninterest-bearing deposits to increase the value of our core deposits. Finally, we applied our core competency in operating a strong retail network to an ambitious expansion plan. These objectives were not just important to the bottom line, they were important in the life cycle of Charter One. We made terrific progress in 2003 and have emerged with even more clarity and conviction as to the importance of those objectives and our strategy to meet them.

The numbers were strong where it counts. Our loan portfolio growth was very impressive. In a year where many banks struggled to increase their portfolios, we increased our overall portfolio by 8% and the non single-family portfolio by 9%. Most of that non single-family growth came from home equity loans, small business lending products, commercial real estate and indirect auto loans. All this growth helped us reduce our single-family loans and securities by over $1 billion during the year.

2003 will be remembered as a year the country worked through an historic wave of single-family refinance activity. Our focus on consumer products put us in a great position to benefit from that wave. As a result, we enjoyed abnormally high revenues coming out of our residential lending operation. Gains generated were easily more than four times what we would consider “normal.” We very deliberately invested much of that extra revenue back into the company while absorbing certain nonrecurring expenses. For example, we prudently increased our loss reserves in response to the challenging 2003 economic environment, and we absorbed adjustments related to the value of mortgage servicing rights carried as part of the mortgage operation. Additionally, we accelerated new marketing programs supporting strategic retail initiatives. Finally, we used this opportunity to increase our banking center network by 28%. That means we opened a new door every other business day.

Above all, 2003 was a year our retail banking operation broke through all barriers. During the year, we simultaneously negotiated agreements with several new retailers (including a truly innovative relationship with Starbucks), opened 121 new banking centers and assimilated another 13 locations from our merger with Advance Bancorp in Chicago. Also, for the first time in our history, we entered new markets on a purely de novo basis. We accomplished all this while successfully shifting the focus of our retail sales force toward noninterest-bearing checking. We turned our product set, incentive plans and marketing support completely upside down. Our sales force responded beautifully, with a nimbleness and flawless execution for which Charter One is known.

Nearly 80% of our new banking centers were “stores in stores,” taking full advantage of the inherently low-cost structure and the value of our retail partnerships. Even though we have historically viewed the in-store model as an ideal way of filling in our existing network, this year we explored the potential of using in-stores to enter a new market. Our biggest entry into a new market was in Indianapolis, where we have great relationships with the top two grocers in addition to Starbucks. We opened our first banking center in July, we ended 2003 with 16 locations, and project 50 by the end of 2004. Given the success of this strategy, look for us to add a couple of other new markets in a similar manner during the next year or so.

The bottom line result? We doubled our initial goal for retail noninterest-bearing deposit growth. Retail balances increased by $700 million, or 50%, and the number of accounts increased by 250,000, or 36%. Our small business effort was a major contributor to these results. We launched small business products in 2000, and in 2003 36% of our noninterest-bearing growth came from small businesses. These growth rates likely place us at or near the top of retail banks in the country. Furthermore, our deposit-related revenue was up 16% over 2002, in line with the goal we laid out at the beginning of the year. Much of this success is attributable not to new banking center rollouts but to very effective sales and marketing efforts. Our new locations haven’t been online long enough to make significant contributions, but we expect them to help us sustain these kinds of results for years to come.

The successes on the retail front combined with the strength of our consumer-oriented lending activities fueled our overall performance in 2003. We reported a 12% increase in earnings per share, a return on average assets of 1.45%, and a return on average equity of 19.45%. The efficiency ratio remained low at 42.3%, and our credit quality remained very high reflected by a net charge-off ratio of .38%. Furthermore, our progress in shifting the balance sheet during the year helped reduce our overall risk profile and gave us very healthy capital levels going into 2004.

With all that excitement behind us, where does that leave us in 2004? You should expect much more of the same. The success we saw in 2003 creates a compelling case to continue our strategy. We plan on opening over 100 new banking centers, have set aggressive new checking account growth goals and project deposit-related revenue and non single-family portfolio growth levels similar to what we posted in 2003. And at the same time, we will continue to reduce our single-family exposure even further. Effectively executing this business plan should put Charter One in the position to continue our long-standing record of consistent and high-quality performance for some time to come.

I would like to take this opportunity to thank the 8,000 people that make up Charter One. None of these terrific results or promises for the future would be possible without the incredible hard work and dedication of our employees. We are truly fortunate to have attracted such a strong group of talented people.

On behalf of the Charter One management team and our Board of Directors, thank you for your ongoing support.

Charles John “Bud” Koch
Chairman, President and Chief Executive Officer
February 23, 2004

The selected financial data presented below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as the audited Consolidated Financial Statements contained elsewhere in this Annual Report. The selected financial data presented below is not necessarily indicative of future results due to, among other things, the effect of acquisitions. For a discussion of the impact of recent business combinations and branch acquisitions, see Note 3 to the Notes to Consolidated Financial Statements.


	At and for the Year Ended December 31,
(Dollars in thousands, except per share data)	2003			2002			2001			2000			1999
Financial condition:
Cash, federal funds sold and other	$	528,166		$	447,213		$	516,520		$	531,257		$	693,532
Investment securities		276,765			214,068			135,586			449,215			542,081
Mortgage-backed securities		10,445,247			12,077,389			9,014,416			5,593,371			6,100,380
Loans and leases, net		28,250,448			26,204,738			25,728,700			24,008,174			22,312,850
Other assets		3,127,440			2,952,664			2,779,294			2,389,410			2,170,220

Total assets	$	42,628,066		$	41,896,072		$	38,174,516		$	32,971,427		$	31,819,063

Deposits	$	27,203,319		$	27,527,843		$	25,123,309		$	19,605,671		$	19,073,975
FHLB advances		9,847,293			9,037,925			8,657,238			9,636,277			9,226,150
Other borrowings		967,072			992,765			507,669			547,134			515,574
Other liabilities		1,334,513			1,253,714			957,800			726,141			605,664
Shareholders’ equity		3,275,869			3,083,825			2,928,500			2,456,204			2,397,700

Total liabilities and shareholders’ equity	$	42,628,066		$	41,896,072		$	38,174,516		$	32,971,427		$	31,819,063

Results of operations:
Interest income	$	2,112,029		$	2,286,461		$	2,378,246		$	2,247,088		$	2,128,455
Interest expense		943,142			1,116,631			1,387,830			1,344,053			1,194,351

Net interest income		1,168,887			1,169,830			990,416			903,035			934,104
Provision for loan and lease losses		152,272			192,003			100,766			54,205			35,237

Net interest income after provision for loan and lease losses	1,016,615				977,827			889,650			848,830			898,867
Other income		698,470			547,546			473,624			392,871			228,206
Administrative expenses		790,721			678,972			629,662			603,955			633,327

Income before income taxes		924,364			846,401			733,612			637,746			493,746
Income taxes		293,473			268,733			232,898			203,784			159,770

Net income	$	630,891		$	577,668		$	500,714		$	433,962		$	333,976

Basic earnings per share	$	2.82		$	2.52		$	2.15		$	1.84		$	1.35

Diluted earnings per share	$	2.74		$	2.45		$	2.10		$	1.81		$	1.32

Performance returns:
Return on average assets		1.45	%		1.47	%		1.41	%		1.36	%		1.08	%
Return on average equity		19.45			19.38			18.17			18.00			13.50
Efficiency ratio		42.34			39.54			41.91			45.68			50.69
Other data:
Loan servicing portfolio	$	16,877,169		$	16,893,609		$	13,846,807		$	10,379,644		$	10,798,563
Book value per share		14.68			13.72			12.43			10.70			9.90
Tangible book value per share		12.67			11.86			10.92			9.94			9.11
Dividend payout ratio		35.77	%		33.88	%		33.81	%		33.15	%		38.64	%
Net yield on average interest-earning assets		2.87			3.19			3.00			3.02			3.19
Average shareholders’ equity to average assets		7.45			7.59			7.76			7.58			7.99
Total shareholders’ equity to total assets		7.68			7.36			7.67			7.45			7.54
Total tangible shareholders’ equity to total assets		6.63			6.36			6.74			6.92			6.93
Number of offices:
Branches		592			461			456			419			417
Loan production offices		33			26			29			32			36
Number of employees (FTEs)		7,804			6,997			6,850			6,573			7,055

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

The following financial review presents an analysis of the asset and liability structure of Charter One Financial, Inc. and a discussion of the results of operations for each of the periods presented in the Annual Report. The data presented in the following pages should be read in conjunction with the audited Consolidated Financial Statements contained elsewhere in this Annual Report.

Headquartered in Cleveland, Ohio, Charter One Financial, Inc., hereafter referred to as "Charter One" or the "Company," is a financial holding company. Charter One is a Delaware corporation and owns all of the outstanding capital stock of Charter One Bank, N.A., which we sometimes refer to in this document as the "Bank." The Bank's primary business is providing consumer banking services to certain major markets in Ohio, Michigan, Illinois, New York, Vermont and in some markets of Massachusetts, Indiana, Connecticut and Pennsylvania. At the end of 2003, the Bank and its subsidiaries were doing business through 592 branches, 33 loan production offices and 969 ATMs.

On June 6, 2003, the Company completed its acquisition of Advance Bancorp (“Advance”), the holding company of Advance Bank, an Illinois state-chartered commercial bank headquartered in Lansing, Illinois. On July 11, 2003, Advance Bank was merged into the Bank. On June 6, 2003, Advance had assets of $667.5 million and deposits of $482.1 million in 14 branches located in Cook County, Illinois. The Company issued 2,389,795 common shares and recorded $29.3 million of goodwill based on a determination of the estimated fair values of the assets and liabilities acquired as a result of this transaction. The Company included the results of operations of Advance in its Consolidated Financial Statements from the effective date of the acquisition. Pro forma results of operations for this acquisition, had the acquisition occurred as of January 1, 2003, are not significant and, accordingly, are not provided.

For the year ended December 31, 2003, Charter One reported net income of $630.9 million, compared to $577.7 million and $500.7 million for the years ended December 31, 2002 and 2001, respectively. On a diluted per share basis, net income was $2.74, $2.45 and $2.10 in 2003, 2002 and 2001, respectively.

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

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


	Year Ended December 31,
	2003								2002								2001
						Avg.								Avg.								Avg.
	Average					Yield/			Average					Yield/			Average					Yield/
(Dollars in thousands)	Balance			Interest		Cost			Balance			Interest		Cost			Balance			Interest		Cost
Interest-earning assets:
Loans and leases	$	26,964,344		$	1,491,019		5.52	%	$	25,647,597		$	1,671,843		6.52	%	$	25,463,666		$	1,872,270		7.35	%
Mortgage-backed securities:
Available for sale		12,411,675			552,399		4.45			9,194,477			519,821		5.65			5,574,832			366,475		6.57
Held to maturity		363,913			24,518		6.74			725,164			47,747		6.58			1,243,975			86,952		6.99
Investment securities:
Available for sale		254,635			13,493		5.30			172,674			11,495		6.66			138,811			11,180		8.05
Held to maturity		3,884			209		5.36			4,824			252		5.23			7,853			409		5.21
Other interest-earning assets		760,089			30,391		3.94			894,898			35,303		3.89			628,560			40,960		6.43

Total interest-earning assets		40,758,540			2,112,029		5.17			36,639,634			2,286,461		6.24			33,057,697			2,378,246		7.19

Allowance for loan and lease losses		(366,019	)							(268,654	)							(211,859	)
Noninterest-earning assets		3,137,119								2,877,215								2,651,957

Total assets	$	43,529,640							$	39,248,195							$	35,497,795

Interest-bearing liabilities:
Deposits:
Checking accounts	$	6,587,872			81,648		1.24	%	$	6,278,844			133,393		2.12	%	$	3,867,767			118,800		3.07	%
Money market and savings accounts		8,388,570			108,253		1.29			8,084,926			173,931		2.15			6,433,557			207,586		3.23
Certificates of deposit		10,180,355			297,184		2.92			10,054,727			347,492		3.46			10,230,112			528,897		5.17

Total deposits		25,156,797			487,085		1.94			24,418,497			654,816		2.68			20,531,436			855,283		4.17

FHLB advances		10,553,712			402,022		3.80			8,233,376			416,864		5.06			9,361,225			498,444		5.32
Other borrowings		884,670			54,035		6.10			732,466			44,951		6.12			515,345			34,103		6.58

Total borrowings		11,438,382			456,057		3.98			8,965,842			461,815		5.15			9,876,570			532,547		5.39

Total interest-bearing liabilities		36,595,179			943,142		2.58			33,384,339			1,116,631		3.34			30,408,006			1,387,830		4.56

Noninterest-bearing liabilities:
Demand deposit accounts		2,363,839								1,816,036								1,477,294
Other noninterest-bearing liabilities		1,326,714								1,066,934								856,906

Total noninterest-bearing liabilities		3,690,553								2,882,970								2,334,200

Total liabilities		40,285,732								36,267,309								32,742,206
Shareholders’ equity		3,243,908								2,980,886								2,755,589

Total liabilities and shareholders’ equity	$	43,529,640							$	39,248,195							$	35,497,795

Net interest income				$	1,168,887							$	1,169,830							$	990,416

Interest rate spread							2.59	%							2.90	%							2.63	%

Net yield on average interest-earning assets							2.87	%							3.19	%							3.00	%

Average interest-earning assets to average interest-bearing liabilities							111.38	%							109.75	%							108.71	%

The following rate/volume analysis shows the approximate relative contribution of changes in average interest rates and volume to changes in net interest income for the 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 $113.0 million, $101.2 million, and $81.0 million in 2003, 2002 and 2001, respectively.


	Year Ended December 31, 2003 v. 2002									Year Ended December 31, 2002 v. 2001
	Increase (Decrease) due to									Increase (Decrease) due to
(Dollars in thousands)	Rate			Volume			Total			Rate			Volume			Total
Interest income:
Loans and leases	$	(261,525	)	$	80,701		$	(180,824	)	$	(214,351	)	$	13,924		$	(200,427	)
Mortgage-backed securities:
Available for sale		(125,243	)		157,821			32,578			(57,201	)		210,547			153,346
Held to maturity		1,085			(24,314	)		(23,229	)		(4,788	)		(34,417	)		(39,205	)
Investment securities:
Available for sale		(2,680	)		4,678			1,998			(2,136	)		2,451			315
Held to maturity		8			(51	)		(43	)		—			(157	)		(157	)
Other interest-earning assets		472			(5,384	)		(4,912	)		(19,467	)		13,810			(5,657	)

Total		(387,883	)		213,451			(174,432	)		(297,943	)		206,158			(91,785	)

Interest expense:
Checking accounts		(58,021	)		6,276			(51,745	)		(44,187	)		58,780			14,593
Money market and savings accounts		(73,554	)		7,876			(65,678	)		(86,949	)		53,294			(33,655	)
Certificates of deposit		(54,599	)		4,291			(50,308	)		(172,486	)		(8,919	)		(181,405	)
FHLB advances		(78,928	)		64,086			(14,842	)		(22,515	)		(59,065	)		(81,580	)
Other borrowings		(1,340	)		10,424			9,084			(7,933	)		18,781			10,848

Total		(266,442	)		92,953			(173,489	)		(334,070	)		62,871			(271,199	)

Change in net interest income	$	(121,441	)	$	120,498		$	(943	)	$	36,127		$	143,287		$	179,414

Our net interest income was $1.2 billion for the year ended December 31, 2003, down $.9 million from 2002. Net yield on average interest-earning assets during 2003 was 2.87%, down 32 basis points from 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 downward deposits and borrowings repricing in the past year.

Our net interest income for the year ended December 31, 2002 was $1.2 billion, an increase of $179.4 million, or 18.1%, over the $990.4 million for 2001. The increase in net interest income was primarily attributed to the reduction in the cost of interest-bearing liabilities from 4.56% in 2001 to 3.34% in 2002. The reduction in the cost of average interest-bearing liabilities resulted primarily from the repricing of higher interest rate certificates of deposits during 2002, together with the downward repricing and increase in volume of certain core deposits.

Provision for Loan and Lease Losses—The provision for loan and lease losses for the year ended December 31, 2003 was $152.3 million, a decrease of $39.7 million from 2002. The ratio of the allowance for loan and lease losses to total loans and leases increased to 1.34% at December 31, 2003 from 1.24% at December 31, 2002. We believe that the allowance for loan and lease losses at December 31, 2003 was adequate to absorb losses occurring in any category of loans and leases.

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. These policy changes resulted in an additional $27.3 million of charge-offs recognized during the second quarter of 2002.

Excluding the charge-offs associated with the 2002 policy change discussed above, net charge-offs totaled $101.5 million and $95.3 million for the years ended December 31, 2003 and 2002, respectively. Excluding the charge-offs associated with the 2002 policy change discussed above, the ratio of net charge-offs to average loans and leases was .38% in 2003 compared to .37% in 2002.

The provision for loan and lease losses in 2002 was $192.0 million, an increase of $91.2 million from 2001. The increased provision during 2002 was necessary to cover higher charge-offs and maintain the allowance for loan and leases losses at a level considered adequate to absorb losses inherent in the loan and lease portfolio. Additionally, the provision for loan and lease losses was increased to reflect the continued weakening in the national economy during 2002 and continuing change in our loan mix. Net charge-offs totaled $122.6 million in 2002, compared to $68.7 million in 2001. As discussed above, the $122.6 million of net charge-offs for 2002 included $27.3 million in gross charge-offs recorded in the second quarter in conjunction with Charter One’s adoption of its new consumer loan charge-off policy.

The ratio of net charge-offs as a percent of average loans and leases increased 21 basis points to .48% in 2002 from .27% in 2001. Excluding the impact of the change in charge-off policy discussed above, net charge-offs as a percent of average loans and leases were .37% in 2002, as compared to .27% in 2001. The increase in net charge-offs, excluding the impact of the change in charge-off policy, was primarily attributed to a continued weakening in the national economy during 2002 and the continuing change in our loan mix.

See “Financial Condition–Loans and Leases” below and Note 6 to the Notes to Consolidated Financial Statements for further information regarding our allowance for loan and lease losses.

Other Income—Other income for 2003 was $698.5 million, compared to $547.5 million for 2002. The $150.9 million, or 27.6%, increase was primarily attributable to income from retail banking, mortgage banking and net gains, partially offset by a decline in income from leasing operations. Retail banking income increased $47.2 million, or 14.3%, over 2002. The biggest driver of the increase was deposit-related revenue, which totaled $329.4 million in 2003, up 16.1% over 2002. Deposit-related revenue reflected the benefits of our strategy to emphasize noninterest-bearing checking account growth. Excluding custodial accounts, noninterest-bearing checking accounts totaled $2.2 billion at December 31, 2003, up $709.4 million, or 48.3%, since December 31, 2002. The other components of retail banking revenue included fees from retail brokerage activities ($33.5 million, down .7% from a year ago) and other revenue related to retail operations ($15.1 million, up 14.2% from a year ago).

Net gains were $264.6 million in 2003, compared to $205.0 million in 2002. For the year ended 2003, we recognized $270.5 million of net gains on the sale of $10.7 billion of mortgage-backed securities. The mortgage-backed securities sold during the year included bank-originated, residential mortgage and consumer products, as we generated more residential mortgage and consumer loans than we needed to meet our balance sheet size and mix objectives. We did not utilize any special-purpose entities for the sale of any of our mortgage-backed securities. Transactions resulting in net gains and losses, such as asset sales, are primarily undertaken in an effort to mitigate interest rate risk while still achieving targeted net interest yields by managing the size and mix of the Bank’s interest sensitive asset and liability portfolios.

Mortgage banking income was $44.9 million in 2003, compared to a loss of $18.5 million in 2002. During the second half of 2003, we experienced continued slower prepayment rates in our loan servicing portfolio. As such, we recorded a $21.3 million net decrease in the valuation allowance on mortgage servicing rights during 2003, resulting in an ending valuation allowance of $82.7 million. However, earlier in 2003, due to low interest rates and higher levels of refinancings, we had experienced increased levels of prepayment rates resulting in $44.0 million of permanent impairment charges to our mortgage servicing assets. Total mortgage banking income, excluding the $44.0 million impairment charge and $21.3 million decrease to the valuation allowance, was $67.7 million in 2003. In 2002, mortgage banking income totaled $63.1 million, excluding the $4.5 million impairment charge and $77.1 million increase in the valuation allowance (discussed below). Excluding the impairment charges and changes to the valuation allowance in 2003 and 2002, mortgage banking income increased 7.3% year over year. The portfolio of loans serviced for others was $16.9 billion at December 31, 2003, and carried a weighted average coupon of 6.12%. At December 31, 2003, the related mortgage servicing rights were 1.05% of the loan servicing portfolio at $177.2 million. With an average servicing spread of 36 basis points, that translated into a mortgage servicing rights valuation of 2.92 times the servicing spread.

Leasing operations reflected a loss of $21.5 million in 2003, compared to a loss of $3.6 million in 2002. The decline in income resulted from $28.7 million in residual adjustments, of which $21.5 million related to our aircraft leasing portfolio.

Other income for 2002 was $547.5 million, compared to $473.6 million for 2001. This $73.9 million, or 15.6%, increase was primarily attributable to income from retail banking and net gains, partially offset by a decline in mortgage banking income. Retail banking income increased $38.8 million, or 13.3%, over 2001. The growth was attributed to successful integration of our recent mergers and branch acquisitions, together with ongoing franchise development initiatives. Additionally, we experienced increases in transaction-related revenues. Net gains were $205.0 million in 2002, compared to $114.3 million in 2001. The mortgage-backed securities sold during the year consisted primarily of bank-originated, residential mortgage and consumer products, as we generated more residential mortgage and consumer loans than we needed to meet our balance sheet size and mix objectives. We did not utilize any special-purpose entities for the sale of any of our mortgage-backed securities.

Mortgage banking income was a loss of $18.5 million in 2002, as compared to income of $24.9 million in 2001. With respect to the decline in mortgage banking income, we recorded an impairment charge of $4.5 million and increased the valuation allowance on mortgage servicing rights by $77.1 million in 2002 to an ending balance of $103.9 million, due to increased prepayment levels resulting from higher levels of refinancing. Total mortgage banking income, excluding the $4.5 million impairment charge and $77.1 million increase to the valuation allowance, was $63.1 million in 2002. In 2001, mortgage banking income totaled $49.5 million, excluding a $24.6 million increase in the valuation allowance. Excluding the impairment charge and increases to the valuation allowance in 2002 and 2001, mortgage banking income increased 27.4% year over year. As a result of continued strong loan origination and securitization activity in 2002, the portfolio of loans serviced for others increased to $16.9 billion, up 22.0% from 2001. The related mortgage servicing rights were .76% of the portfolio at $128.6 million.

Administrative Expenses—Administrative expenses were $790.7 million for 2003, an increase of $111.7 million from 2002. The increase in administrative expenses was primarily attributable to increased compensation and marketing costs associated with the Company’s significant retail expansion program, together with various franchise enhancement initiatives. During 2003, we initiated an aggressive de novo branch expansion plan. These efforts led to the net addition of 118 new banking centers since the end of 2002, excluding the net 13 branches acquired in the Advance acquisition. In-store banking centers represented 96 of the banking centers opened in 2003. Our in-store franchise now includes 146 banking centers, or 25% of our retail network. We expect additional expansion during 2004, as we anticipate opening approximately 125 additional banking centers, including 73 in-store locations. Compensation costs increased by $50.9 million and marketing expenses increased by $39.8 million as we provided ongoing support for these various franchise enhancing initiatives. Due to the increase in administrative expenses, our efficiency ratio increased to 42.34% for 2003 from 39.54% for 2002, and our ratio of administrative expenses to average assets increased to 1.82% in 2003 from 1.73% in 2002.

Administrative expenses were $679.0 million for 2002, an increase of $49.3 million from 2001. The increase in administrative expenses was primarily attributable to costs associated with the operational integration of acquisitions completed in 2002 and continued investments in our operations. Additionally, marketing expenses increased by $8.8 million as we implemented various programs geared to support sales efforts throughout the Bank. The increase in administrative expenses in 2002 was partially offset by the $16.2 million decline in amortization of goodwill over 2001, as a result of the Company’s adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” and SFAS No. 147, “Acquisitions of Certain Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9.” Despite the increase in administrative expenses, our efficiency ratio improved to 39.54% for 2002 from 41.91% in 2001, and our ratio of administrative expenses to average assets improved to 1.73% in 2002 from 1.77% in 2001.

Income Tax Expense—The provision for income taxes was $293.5 million, $268.7 million and $232.9 million for the years ended December 31, 2003, 2002, and 2001, respectively. The effective tax rates were 31.8%, 31.8% and 31.7% for the years ended December 31, 2003, 2002, and 2001, respectively. For a further analysis of our income taxes, see Note 13 to the Notes to Consolidated Financial Statements.

At December 31, 2003, total assets were $42.6 billion, an increase of $732.0 million, or 1.7% from $41.9 billion at December 31, 2002.

Loans and Leases—Total loans and leases at December 31, 2003 were $28.3 billion, compared to $26.2 billion at December 31, 2002. As illustrated below, loan and lease originations totaled a record $24.8 billion in 2003, compared to $21.4 billion in 2002. Non one-to-four family loan originations during 2003 totaled $12.2 billion, or 49.3% of the total. The non one-to-four family activity was led by $4.9 billion in consumer loans and $3.6 billion in automobile loans.

Offsetting the originations in 2003 were $7.2 billion of residential mortgage and consumer loan securitizations, as we generated more residential mortgage and consumer loans than we needed to meet our balance sheet size and mix objectives. These residential mortgage and consumer loans were exchanged for government agency mortgage-backed securities. We did not retain any credit enhancing residual interests, nor are we subject to any significant recourse obligations. At the time of such exchange, we did not recognize a gain or loss in our Consolidated Statements of Income. Rather, the government agency mortgage-backed securities were classified as available for sale on the Consolidated Statements of Financial Condition and carried at estimated fair value with the unrealized holding gain or loss reflected as a component of shareholders’ equity. Net gains are realized in the Consolidated Statements of Income at the time of sale of these government agency mortgage-backed securities.


	Year Ended December 31,
(Dollars in thousands)	2003		2002		2001
Originations:
Real estate mortgage:
Permanent:
One-to-four family	$	12,397,014	$	10,554,142	$	8,814,430
Multifamily		268,546		157,166		42,453
Commercial		367,628		237,710		155,604

Total permanent loans		13,033,188		10,949,018		9,012,487

Construction:
One-to-four family		196,577		172,081		349,510
Multifamily		142,082		79,346		138,861
Commercial		87,653		164,577		195,896

Total construction loans		426,312		416,004		684,267

Total real estate mortgage loans originated		13,459,500		11,365,022		9,696,754

Retail consumer		4,887,422		4,091,298		3,536,687
Automobile		3,636,574		3,395,273		2,715,921
Consumer finance		445,642		285,920		259,458
Leases		454,944		521,096		502,073
Corporate banking		1,948,567		1,717,328		1,138,496

Total loans and leases originated		24,832,649		21,375,937		17,849,389

Acquired through business combinations and purchases		412,884		218,308		1,425,549

Sales and principal reductions:
Loans sold		3,385,769		2,394,524		1,635,903
Loans exchanged for mortgage-backed securities		7,198,869		6,667,082		6,708,253
Principal reductions		12,478,447		11,954,076		9,111,479

Total sales and principal reductions		23,063,085		21,015,682		17,455,635

Increase before net items	$	2,182,448	$	578,563	$	1,819,303

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

The following table sets forth certain information concerning 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. See Note 1 to the Notes to Consolidated Financial Statements for further discussion regarding our nonperforming and underperforming assets.


	December 31,
(Dollars in thousands)	2003			2002			2001			2000			1999
Nonperforming assets (1):
Nonaccrual loans and leases:
Real estate mortgage loans:
One-to-four family (2)	$	23,301		$	27,904		$	79,394		$	71,269		$	75,682
Multifamily and commercial		33,692			5,369			13,552			8,132			3,369
Construction and land		25,161			9,885			10,276			8,806			1,095

Total real estate mortgage loans		82,154			43,158			103,222			88,207			80,146
Retail consumer (2)		9,818			13,937			16,592			11,120			16,607
Automobile (3)		—			—			—			130			482
Consumer finance (2)		42,843			40,227			68,485			48,673			23,031
Leases		6,360			6,211			904			—			—
Corporate banking		28,408			39,098			10,551			18,707			6,037

Total nonaccrual loans and leases		169,583			142,631			199,754			166,837			126,303
Less government guaranteed loans (1)		—			—			19,630			19,225			18,841

Total nonaccrual loans net of government guaranteed loans		169,583			142,631			180,124			147,612			107,462
Restructured real estate mortgage loans		474			501			653			666			1,009

Total nonperforming loans and leases		170,057			143,132			180,777			148,278			108,471
Real estate and other collateral owned (3)		35,654			40,776			50,265			27,523			24,453

Total nonperforming assets	$	205,711		$	183,908		$	231,042		$	175,801		$	132,924

Ratio of (excluding government guaranteed loans):
Nonperforming loans and leases to total loans and leases		.60	%		.55	%		.70	%		.62	%		.49	%
Nonperforming assets to total assets		.48			.44			.61			.53			.42
Nonperforming assets to total loans, leases and real estate and other collateral owned		.73			.70			.90			.73			.60
Allowance for loan and lease losses to:
Nonperforming loans and leases		225.65			229.17			141.32			127.88			171.84
Total loans and leases before allowance		1.34			1.24			.98			.78			.83
Accruing loans and leases delinquent more than 90 days (1):
Real estate mortgage loans:
One-to-four family (2)	$	21,549		$	25,643		$	—		$	—		$	—
Multifamily and commercial		—			—			—			—			—
Construction and land		—			—			—			—			—

Total real estate mortgage loans		21,549			25,643			—			—			—

Retail consumer (2)		2,722			4,758			4,519			2,586			2,562
Automobile (3)		2,771			3,621			6,000			6,911			4,973
Consumer finance (2)		17,839			26,739			—			—			—
Leases		52			19			—			2,956			—
Corporate banking		522			1,536			4,691			2,086			2,463

Total accruing loans and leases delinquent more than 90 days		45,455			62,316			15,210			14,539			9,998
Less government guaranteed loans (1)		—			—			1,876			—			—

Total accruing loans and leases delinquent more than 90 days net of government guaranteed loans	$	45,455		$	62,316		$	13,334		$	14,539		$	9,998

Total underperforming assets	$	251,166		$	246,224		$	244,376		$	190,340		$	142,922

Ratio of (excluding government guaranteed loans):
Underperforming assets to total assets		.59	%		.59	%		.64	%		.58	%		.45	%
Underperforming assets to total loans, leases and real estate and other collateral owned		.89			.94			.95			.79			.64

(1)

Effective June 30, 2002, amounts exclude loans guaranteed by the Federal Housing Administration or Veterans’ Administration. Prior periods have not been restated.

(2)

Effective June 30, 2002, Charter One adopted a new accrual policy in which consumer loans secured by residential real estate are placed on nonaccrual at six payments past due as long as the loan is well secured and in the process of collection. This new policy was implemented prospectively and as such, prior periods have not been restated. The change in the accrual policy did not have a material impact on interest income. Management believes the changes to this policy conform Charter One’s accrual methodology to that of its commercial banking peers.

(3)

Effective for the period ended June 30, 2002, Charter One adopted a new loan charge-off policy in which automobile loans are charged off based upon repossession and in certain cases, at the point of bankruptcy discharge. Any automobile loans reaching 120 days delinquent are charged off completely. Previously, Charter One’s policy was to record charge-offs of loans secured by automobiles at the point of repossessed collateral disposition. This new policy was implemented prospectively and as such, prior periods have not been restated. Management believes the changes to this policy conforms Charter One’s charge-off methodology to that of its commercial banking peers.

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 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 $32.7 million at December 31, 2003 and $14.8 million at December 31, 2002. The vast majority of these loans and leases, as well as our underperforming assets, are collateralized.

Although loans may be classified as nonaccruing, many continue to pay interest on an irregular basis or at levels less than the contractual amounts due. Income recorded on nonaccruing and restructured loans amounted to $6.1 million and $4.3 million and the potential income based upon full contractual yields was $12.1 million and $12.9 million for the years ended December 31, 2003 and 2002, respectively.

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

The following table details certain information relating to the allowance for loan and lease losses for the five years ended December 31, 2003.


	Year Ended December 31,
(Dollars in thousands)	2003			2002			2001			2000			1999
Balance, beginning of year	$	328,017		$	255,478		$	189,616		$	186,400		$	184,989
Provision for loan and lease losses		152,272			192,003			100,766			54,205			35,237
Acquired through business combination		4,969			3,184			33,782			—			3,603
Charge-offs:
One-to-four family		(3,047	)		(5,802	)		(3,196	)		(5,723	)		(6,869	)
Multifamily and commercial		(1,646	)		(1,352	)		(1,139	)		(341	)		(1,171	)
Retail consumer		(11,127	)		(13,100	)		(7,613	)		(12,508	)		(3,952	)
Automobile		(62,741	)		(78,965	)		(40,097	)		(27,827	)		(28,012	)
Consumer finance		(16,719	)		(26,395	)		(11,246	)		(4,994	)		(1,340	)
Leases		(8,156	)		(2,868	)		(7,496	)		—			(900	)
Corporate banking		(21,525	)		(16,612	)		(7,672	)		(8,938	)		(3,240	)

Total charge-offs (1)		(124,961	)		(145,094	)		(78,459	)		(60,331	)		(45,484	)

Recoveries:
One-to-four family		113			957			132			1,155			523
Multifamily and commercial		406			659			75			241			345
Retail consumer		2,405			1,834			1,972			1,610			789
Automobile		16,965			12,687			6,603			5,810			6,172
Consumer finance		933			524			227			17			19
Leases		1,480			2,327			220			—			—
Corporate banking		1,134			3,458			544			509			207

Total recoveries		23,436			22,446			9,773			9,342			8,055

Net loan and lease charge-offs (1)		(101,525	)		(122,648	)		(68,686	)		(50,989	)		(37,429	)

Balance, end of year	$	383,733		$	328,017		$	255,478		$	189,616		$	186,400

Net charge-offs to average loans and leases (1)		.38	%		.48	%		.27	%		.21	%		.17	%

(1)

Includes $27.3 million in charge-offs recorded in the second quarter of 2002 in conjunction with Charter One’s adoption of the new consumer loan charge-off policy discussed above. This new policy was implemented prospectively and as such, prior periods have not been restated. Excluding the impact of the change in charge-off policy, net charge-offs as a percent of average loans and leases were .37% in 2002.

In determining the adequacy of the allowance for loan and lease losses, management reviews and evaluates on a quarterly basis the potential credit risk in the loan and lease portfolio. This evaluation process is documented by senior management and approved by the Company’s Board of Directors. Management evaluates homogeneous consumer-oriented loans, such as one-to-four family mortgage loans and retail consumer loans, based upon all or a combination of delinquencies, credit scores, loss migration analysis and charge-off experience. Management supplements this analysis by reviewing the geographical lending areas involved and their local economic and political trends, the nature and volume of the portfolio, regulatory examination findings, specific grading systems applied and any other known factors which may impact future credit losses. Nonhomogeneous loans, generally defined as commercial real estate loans, corporate banking loans and leases, are underwritten, approved and risk rated individually at inception. On a monthly basis, management re-evaluates the risk ratings on these nonhomogeneous loans if loan relationships exceed certain dollar thresholds established for the respective portfolios. The Company’s risk rating methodology uses nine grade levels to stratify each portfolio. Many factors are considered when these grades are assigned to individual loans and leases such as current and past delinquency, financial statements of the borrower, current net realizable value of collateral, the general economic environment and the specific economic trends affecting the individual loan or lease. During this evaluation process, individual loans are identified and evaluated for impairment as prescribed under SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” Impairment losses are recognized when, based upon current information, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impairment is measured either by a loan’s observable market value, fair value of the collateral or the present value of future cash flows discounted at the loan’s effective interest rate. These impairment losses, combined with other probable losses as determined in the loan and lease portfolio evaluation process, are considered in determining the allowance for loan and lease losses. This data is then presented to the Company’s Reserve Adequacy Committee, comprised of senior members of management and independent directors. The Reserve Adequacy Committee determines the level of allowance for loan and lease losses necessary to maintain the allowance for loan and lease losses at an amount considered adequate to absorb probable loan and lease losses inherent in the portfolio. Although management believes that it uses the best information available to determine the adequacy of the allowance for loan and lease losses, future adjustments to the allowance may be necessary and results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations. See Notes 1 and 6 to the Notes to Consolidated Financial Statements for additional information concerning the Company’s allowance for loan and lease losses.

The following table sets forth the allocation of the allowance for loan and lease losses to the respective loan and lease classifications, in dollar and percentage terms. The allocation of the allowance for loan and lease losses is based on a consideration of all of the factors discussed above that are used to determine the allowance for loans and leases as a whole. Since all of those factors are subject to change, the allocation of the allowance for loan and leases losses shown below is not necessarily indicative of future losses or future allocations. Management believes that the allowance for loan and lease losses at December 31, 2003 was adequate to absorb losses occurring in any category of loans and leases.

Investments and Mortgage-Backed Securities—The securities portfolio is comprised primarily of mortgage-backed securities, including government agency and AAA and AA rated private issues. We held no investments or mortgage-backed securities of any single non-governmental issuer which were in excess of 10% of shareholders’ equity at December 31, 2003. See Notes 4 and 5 to the Notes to Consolidated Financial Statements for additional discussion regarding our investments and mortgage-backed securities.

Deposits, Borrowings and Other Sources of Funds—Deposits are generally the most important source of our funds for use in lending and for general business purposes. Deposit inflows and outflows are significantly influenced by general interest rates and competitive factors. Consumer and commercial deposits are attracted principally within our primary market areas. Deposits totaled $27.2 billion and $27.5 billion at December 31, 2003 and 2002, respectively. Checking amounts decreased $1.5 billion, or 15.0%, since December 31, 2002. The decrease in checking account balances was significantly impacted by custodial accounts associated with mortgage loan servicing activities. Those custodial balances decreased $366.7 million during 2003, ending the year with a balance of $354.6 million. Excluding custodial accounts, noninterest-bearing checking accounts totaled $2.2 billion at December 31, 2003, up $709.4 million, or 48.3%, since December 31, 2002. See Note 8 to the Notes to Consolidated Financial Statements for further discussion regarding our deposits.

In addition to deposits, we obtain funds from different borrowing sources. The primary source of these borrowings is the FHLB system. Those borrowings totaled $9.8 billion and $9.0 billion at December 31, 2003 and 2002, respectively. The FHLB functions as a central bank providing credit for member financial institutions. As a member of the FHLB of Cincinnati, the Bank is required to own capital stock in the FHLB. It is authorized to apply for advances on the security of this stock, certain home mortgages and other assets, provided certain standards related to creditworthiness have been met. Advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities.

On January 27, 2004, the Company prepaid $2.3 billion in fixed rate FHLB advances with a weighted average cost of 6.27%, and incurred a prepayment penalty of $164.5 million before tax. These FHLB advances were due to mature between June 2005 and January 2006. We believe that this prepayment will result in an improved operating earnings stream for 2004 and 2005 and will also aid in accelerating the reduction of one-to-four family loan and security exposure and related interest rate risk.

See Note 9 to the Notes to Consolidated Financial Statements for further information as to the composition, maturities and cost associated with our FHLB advances.

In addition to FHLB advances, we use federal funds purchased and repurchase agreements and other borrowings to fund operations. Federal funds purchased and repurchase agreements totaled $269.3 million and $283.9 million at December 31, 2003 and 2002, respectively. Other borrowings totaled $697.8 million and $708.9 million at December 31, 2003 and 2002, respectively. See Notes 10 and 11 to the Notes to Consolidated Financial Statements for further information concerning these borrowings.

The following table summarizes short-term borrowings, based upon original issue date, at the end of and during the periods indicated. For purposes of the table below, our short-term borrowings consisted of FHLB advances. Interest rates shown do not include the annualized effect of interest rate risk management instruments.

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

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.

Contractual Obligations—The following table presents, as of December 31, 2003, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced Note to Consolidated Financial Statements.

We also enter into interest rate swap contracts under which we are required to either receive cash from or pay cash to counterparties depending on changes in interest rates. Interest rate swaps are carried at fair value on the Consolidated Statement of Financial Condition with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date. Our interest rate swaps involve monthly, quarterly or semiannual cash settlements. Because the interest rate swaps recorded on the Consolidated Statement of Financial Condition at December 31, 2003 do not represent the amounts that may ultimately be paid under these contracts, these liabilities are not included in the table of contractual obligations presented above. See Notes 1 and 12 to the Notes to Consolidated Financial Statements for further discussion of the Company’s interest rate swaps.

Off-Balance Sheet Arrangements—In the ordinary course of business, we enter into off-balance-sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, standby letters of credit and commitments to purchase or sell assets. These 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. We do not utilize any special-purpose entities in connection with off-balance-sheet financial instruments. See Notes 1, 6 and 17 to the Notes to Consolidated Financial Statements for further information concerning our commitments.

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

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

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

Using this internal simulation model, net interest income projections as of December 31, 2003 are referenced below. Our base case shows our present estimated net interest income sensitivity profile and assumes no changes in the operating environment or operating strategies, but assumes interest rates increase or decrease gradually, in parallel fashion,

over the next year and then remain unchanged. The table indicates the estimated impact on net interest income under the various interest rate scenarios as a percentage of base case net interest income projections.

(1)

In general, short and long-term rates are assumed to increase or decrease, in parallel fashion, across all four quarters and then remain unchanged. However, the rates paid on core deposits are assumed to reprice at only half the increment.

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

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

The following table presents an analysis of our interest-sensitivity gap position at December 31, 2003. All interest-earning assets and interest-bearing liabilities are shown based on the earlier of their contractual maturity or repricing date adjusted by forecasted prepayment and decay rates. Asset prepayment and liability decay rates are selected after considering the current rate environment, industry prepayment and decay rates, our historical experience, and the repricing and prepayment characteristics of portfolios acquired through merger.


	December 31, 2003
																Over
	0-6			7-12			1-3			3-5			5-10			10
(Dollars in thousands)	Months			Months			Years			Years			Years			Years			Total
Interest-earning assets:
Real estate mortgage loans and mortgage-backed securities:
Adjustable rate	$	3,167,800		$	653,734		$	966,576		$	737,785		$	1,957		$	—		$	5,527,852
Fixed rate		1,660,620			1,388,898			4,463,408			3,015,238			3,970,681			2,193,164			16,692,009
Retail consumer loans		3,668,818			278,543			754,481			419,831			337,884			32,366			5,491,923
Automobile loans		1,528,970			1,300,406			3,506,172			16,785			12,370			—			6,364,703
Consumer finance loans		199,965			127,568			345,356			183,509			172,893			63,242			1,092,533
Leases		130,888			126,206			418,204			293,431			324,659			902,030			2,195,418
Corporate banking loans		832,287			94,229			310,530			204,275			226,428			12,544			1,680,293
Investment securities, federal funds sold, interest-bearing deposits and other interest-earning assets		775,754			5,982			22,205			53,861			68,290			52,349			978,441

Total		11,965,102			3,975,566			10,786,932			4,924,715			5,115,162			3,255,695		$	40,023,172

Interest-bearing liabilities:
Deposits:
Checking, money market and savings accounts and escrow accounts		297,250			6,875,302			8,159,357			1,556,319			—			—		$	16,888,228
Certificates of deposit		3,527,145			3,434,776			2,565,267			737,220			30,242			23,351			10,318,001
FHLB advances		4,101,932			33,929			2,535,071			2,872,691			300,179			3,491			9,847,293
Federal funds purchased and repurchase agreements		269,319			—			—			—			—			—			269,319
Other borrowings		103,000			14,818			160,578			4,996			410,418			3,943			697,753

Total		8,298,646			10,358,825			13,420,273			5,171,226			740,839			30,785		$	38,020,594

Excess (deficiency) of interest-earning assets over interest-bearing liabilities		3,666,456			(6,383,259	)		(2,633,341	)		(246,511	)		4,374,323			3,224,910
Impact on hedging		129,605			—			(1,134,605	)		605,000			400,000			—
Impact on forward swaps		1,500,000			1,000,000			—			(2,500,000	)		—			—

Adjusted interest-sensitivity gap	$	5,296,061		$	(5,383,259	)	$	(3,767,946	)	$	(2,141,511	)	$	4,774,323		$	3,224,910

Cumulative excess (deficiency) of interest- earning assets over interest-bearing liabilities	$	5,296,061		$	(87,198	)	$	(3,855,144	)	$	(5,996,655	)	$	(1,222,332	)		$2,002,578

Cumulative interest-sensitivity gap as a percentage of total assets at December 31, 2003		12.42	%		(0.20	)%		(9.04	)%		(14.07	)%		(2.87	)%		4.70	%

Charter One and the Bank are each subject to certain regulatory capital requirements. We believe that as of December 31, 2003, Charter One and the Bank each individually exceeded all capital requirements to which they were subject. See Note 14 to the Notes to Consolidated Financial Statements for an analysis of our regulatory capital.

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. As of February 23, 2004, we had repurchased 17.3 million shares under this authorization at an average cost of $31.47 per share.

We continually review the amount of our cash dividend and our policy of paying quarterly dividends. This payment will depend upon a number of factors, including capital requirements, regulatory limitations, our financial condition, results of operations and the Bank’s ability to upstream funds. Charter One depends significantly upon dividends originating from the Bank to accumulate earnings for payment of cash dividends to our shareholders. See Note 14 to the Notes to Consolidated Financial Statements for a discussion of restrictions on the Bank’s ability to pay cash dividends.

Quarterly high and low sales prices, closing prices and cash dividends declared for our common stock are shown in the following table. Our common stock is traded on the New York Stock Exchange under the symbol CF. As of February 23, 2004, there were approximately 19,000 shareholders of record.

On January 20, 2004, Charter One declared a regular quarterly cash dividend of $.26 per share. The cash dividend was paid on February 20, 2004 to shareholders of record on February 6, 2004.


	First		Second		Third		Fourth		Total
(Dollars in thousands, except per share data)	Quarter		Quarter		Quarter		Quarter		Year
2003
Total interest income	$	545,786	$	540,159	$	515,118	$	510,966	$	2,112,029
Net interest income		299,041		295,431		285,258		289,157		1,168,887
Provision for loan and lease losses		61,471		35,360		37,663		17,778		152,272
Net gains		76,653		108,549		16,112		63,274		264,588
Net income		147,491		166,037		159,149		158,214		630,891
Basic earnings per share		.66		.74		.71		.71		2.82
Diluted earnings per share		.64		.72		.69		.69		2.74
2002
Total interest income	$	564,711	$	581,254	$	568,760	$	571,736	$	2,286,461
Net interest income		283,097		297,867		290,267		298,599		1,169,830
Provision for loan and lease losses		28,717		55,277		47,695		60,314		192,003
Net gains		21,727		37,840		83,881		61,585		205,033
Net income		142,485		145,895		143,562		145,726		577,668
Basic earnings per share		.61		.63		.63		.65		2.52
Diluted earnings per share		.60		.61		.61		.63		2.45

Critical Accounting Policies
Charter One’s Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements. These estimates, assumptions and judgments are based on information available as of the date of the Consolidated Financial Statements; accordingly, as this information changes, the Consolidated Financial Statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the Consolidated Financial Statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management including the use of internal cash flow modeling techniques.

The most significant accounting policies followed by the Company are presented in Note 1 to the Notes to Consolidated Financial Statements. These policies, along with the disclosures presented in the other Notes to the Consolidated Financial Statements and in this Financial Review, provide information on how significant assets and liabilities are valued in the Consolidated Financial Statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan and lease losses, the valuation of mortgage servicing rights, the valuation of lease residuals, the valuation of derivatives and the valuation of income taxes to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

The allowance for loan and lease losses represents management’s estimate of probable losses inherent in the loan and lease portfolio. Determining the amount of the allowance for loan and lease losses is considered a critical accounting estimate because it requires significant judgment and assumptions and the use of estimates related to the amount and timing of expected future cash flows on impaired nonhomogeneous loans, estimated losses on pools of homogeneous loans based upon all or a combination of delinquencies, credit scores, loss migration analysis, and historical charge-off experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan and lease portfolio also represents the largest asset category on the Consolidated Statement of Financial Condition. See Notes 1 and 6 to the Notes to Consolidated Financial Statements and Analysis of Allowance for Loan and Lease Losses in this Financial Review for further discussion regarding the methodology used to determine the allowance for loan and lease losses and a discussion of the factors evaluated by management to determine the adequacy of the allowance for loan and lease losses.

Mortgage servicing rights are established and accounted for based on discounted cash flow modeling techniques which require management to make estimates regarding the amount and timing of expected future cash flows, including assumptions about loan repayment rates, credit loss experience, and costs to service, as well as discount rates that consider the risk involved. Because the values of these assets are sensitive to changes in assumptions, the valuation of mortgage servicing rights is considered a critical accounting estimate. Notes 1 and 7 to the Notes to Consolidated Financial Statements include further discussion on the accounting for mortgage servicing rights.

Lease financing receivables include a residual value component, which represents the estimated value of the leased asset upon the expiration of the lease. The Company leases various types of equipment under commercial lease financing arrangements. The valuation of residual assets is considered critical due to the forecasted residual values by secondary market research companies, independent appraisals of residual values, the probability of the lessee purchasing or re-leasing the equipment at the end of the lease term, the Company’s past experience with realizing residual values of similar equipment, the pace and effects of technological changes, the financial condition of the lessee, the estimated useful life of the equipment, the contractually required condition of the equipment upon lease termination, and the availability of a secondary market for the used equipment. Notes 1 and 6 to the Notes to Consolidated Financial Statements provide further discussion of the Company’s lease financing arrangements.

We use derivatives as a means of managing our interest rate risk profile (defined as the sensitivity of our earnings and net portfolio value to changes in interest rates). Interest rate swaps are the derivative instruments that Charter One uses as part of its interest rate risk management strategy. All interest rate swaps are carried at fair value on the balance sheet. The valuation of interest rate swaps is considered critical because they are valued using discounted cash flow modeling. Management makes estimates regarding future cash flows which are susceptible to significant changes in future periods based on changes in interest rates.

The cash flow assumptions used by management are based on yield curves, forward yield curves and implied volatilities observed in the cash and derivatives markets. Because the majority of our interest rate swaps are used to protect the value of other liabilities on the Consolidated Statement of Financial Condition, changes in the value of the interest rate swaps are typically offset by changes in the value of the liabilities being hedged, although income statement volatility can occur if the interest rate swaps are not effective in hedging changes in the value of those assets and liabilities. See Notes 1 and 12 to the Notes to Consolidated Financial Statements for further discussion of the Company’s interest rate swaps.

The calculation of our provision for income taxes and tax-related assets and liabilities requires judgment and interpretation of complex income tax laws and regulations, as well as accounting principles generally accepted in the United States of America related to income taxes. We must consider how the tax laws and regulations apply to transactions and events specific to Charter One. Accounting principles generally accepted in the United States of America require application of the accrual method of accounting for income taxes as governed by SFAS No. 109, “Accounting for Income Taxes.” The objective of SFAS No. 109 is to match all income tax consequences to a given period’s transactions. These calculations can be complex as they involve the identification of permanent and temporary differences between reported book income and taxable income. For temporary timing differences, we must frequently use judgment and estimates to determine the timing of the realization of income tax liabilities or benefits. The major risks in accounting for income taxes are assessing the need for a valuation allowance and challenges by federal and state taxing authorities. Notes 1 and 13 to the Notes to Consolidated Financial Statements provide further discussion on the Company’s income taxes.

New Accounting Standards
See Note 2 to the Notes to Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.

Discussion of Forward-Looking Statements
This document, including information incorporated by reference, contains, and future filings by Charter One on Form 10-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;

•

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;

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.


	December 31,
(Dollars in thousands, except per share data)	2003			2002
Assets
Cash accounts	$	518,976		$	436,970
Interest-bearing deposits with banks		8,673			9,731
Federal funds sold and other		517			512

Total cash and cash equivalents		528,166			447,213
Investment securities:
Available for sale (amortized cost of $260,501 and $207,507)		273,260			210,095
Held to maturity (fair value of $3,741 and $4,276)		3,505			3,973
Mortgage-backed securities:
Available for sale (amortized cost of $10,159,102 and $11,313,875)		10,193,798			11,536,608
Held to maturity (fair value of $262,155 and $565,072)		251,449			540,781
Loans and leases, net		28,130,017			25,852,846
Loans held for sale		120,431			351,892
Bank owned life insurance		828,678			829,043
Federal Home Loan Bank and Federal Reserve Bank stock		705,244			681,923
Premises and equipment, net		404,086			353,730
Accrued interest receivable		140,857			154,962
Real estate and other collateral owned		36,643			42,980
Mortgage servicing rights, net		177,244			128,564
Goodwill		415,696			386,372
Other assets		418,992			375,090

Total assets	$	42,628,066		$	41,896,072

Liabilities
Deposits	$	27,203,319		$	27,527,843
Federal Home Loan Bank advances		9,847,293			9,037,925
Federal funds purchased and repurchase agreements		269,319			283,912
Other borrowings		697,753			708,853
Advance payments by borrowers for taxes and insurance		61,054			23,595
Accrued interest payable		35,944			38,372
Accrued expenses and other liabilities		1,237,515			1,191,747

Total liabilities		39,352,197			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; 229,940,729 and 227,571,468 shares issued		2,299			2,276
Additional paid-in capital		2,280,335			2,193,095
Retained earnings		1,178,803			824,564
Less 6,767,285 and 2,781,151 shares of common stock held in treasury at cost		(209,653	)		(82,610	)
Accumulated other comprehensive income		24,085			146,500

Total shareholders’ equity		3,275,869			3,083,825

Total liabilities and shareholders’ equity	$	42,628,066		$	41,896,072


	Year Ended December 31,
(Dollars in thousands, except per share data)	2003			2002			2001
Interest income:
Loans and leases	$	1,491,019		$	1,671,843		$	1,872,270
Mortgage-backed securities:
Available for sale		552,399			519,821			366,475
Held to maturity		24,518			47,747			86,952
Investment securities:
Available for sale		13,493			11,495			11,180
Held to maturity		209			252			409
Other interest-earning assets		30,391			35,303			40,960

Total interest income		2,112,029			2,286,461			2,378,246

Interest expense:
Deposits		487,085			654,816			855,283
Federal Home Loan Bank advances		402,022			416,864			498,444
Other borrowings		54,035			44,951			34,103

Total interest expense		943,142			1,116,631			1,387,830

Net interest income		1,168,887			1,169,830			990,416
Provision for loan and lease losses		152,272			192,003			100,766

Net interest income after provision for loan and lease losses		1,016,615			977,827			889,650

Other income:
Retail banking		377,963			330,735			291,892
Mortgage banking		44,922			(18,495	)		24,878
Leasing operations		(21,536	)		(3,575	)		4,020
Net gains		264,588			205,033			114,312
Bank owned life insurance and other		32,533			33,848			38,522

Total other income		698,470			547,546			473,624

Administrative expenses:
Compensation and employee benefits		372,040			321,167			279,900
Net occupancy and equipment		127,761			116,845			109,388
Marketing expenses		80,273			40,472			31,708
Federal deposit insurance premiums		4,451			4,563			3,918
Amortization of goodwill		—			—			16,156
Other administrative expenses		206,196			195,925			188,592

Total administrative expenses		790,721			678,972			629,662

Income before income taxes		924,364			846,401			733,612
Income taxes		293,473			268,733			232,898

Net income	$	630,891		$	577,668		$	500,714

Basic earnings per share	$	2.82		$	2.52		$	2.15

Diluted earnings per share	$	2.74		$	2.45		$	2.10

Weighted average common shares outstanding		224,404,772			229,302,385			232,547,418
Weighted average common and common equivalent shares outstanding		230,257,035			236,115,843			238,383,474


															Borrowings
															of
															Employee
												Accumulated			Investment
				Additional								Other			and Stock
	Common			Paid-In		Retained			Treasury			Comprehensive			Ownership
(Dollars in thousands, except per share data)	Stock			Capital		Earnings			Stock			Income (Loss)			Plan			Total
Balance, January 1, 2001	$	2,127		$	1,745,232	$	786,793		$	(100,545	)	$	23,853		$	(1,256	)	$	2,456,204
Comprehensive income:
Net income		—			—		500,714			—			—			—			500,714
Change in net unrealized gain (loss) on securities, net of tax and reclassification adjustment		—			—		—			—			14,124			—			14,124

Comprehensive income		—			—		500,714			—			14,124			—			514,838
5% stock dividend		49			130,002		(279,968	)		149,461			—			—			(456	)
Purchase of 4,322,010 shares of treasury stock		—			—		—			(122,597	)		—			—			(122,597	)
EISOP loan repayment		—			—		—			—			—			1,256			1,256
Dividends paid ($.71 per share)		—			—		(166,596	)		—			—			—			(166,596	)
Issuance of common shares:
Acquisition, 6,887,246 shares		69			196,339		—			—			—			—			196,408
Stock option plans, 2,874,746 shares		4			20,194		(29,850	)		59,095			—			—			49,443

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

Comprehensive income:
Net income		—			—		577,668			—			—			—			577,668
Change in net unrealized gain (loss) on securities, net of tax and reclassification adjustment		—			—		—			—			108,523			—			108,523

Comprehensive income		—			—		577,668			—			108,523			—			686,191
5% stock dividend		26			84,259		(329,627	)		244,523			—			—			(819	)
Purchase of 13,347,900 shares of treasury stock		—			—		—			(398,365	)		—			—			(398,365	)
Dividends paid ($.83 per share)		—			—		(190,251	)		—			—			—			(190,251	)
Issuance of common shares in connection with stock option plans, 2,986,808 shares		1			17,069		(44,319	)		85,818			—			—			58,569

Balance, December 31, 2002		2,276			2,193,095		824,564			(82,610	)		146,500			—			3,083,825

Comprehensive income:
Net income		—			—		630,891			—			—			—			630,891
Change in net unrealized gain (loss) on securities, net of tax and reclassification adjustment		—			—		—			—			(115,593	)		—			(115,593	)
Change in net unrealized gain (loss) on derivatives classified as cash flow hedges		—			—		—			—			(6,822	)		—			(6,822	)

Comprehensive income		—			—		630,891			—			(122,415	)		—			508,476
Purchase of 7,633,100 shares of treasury stock		—			—		—			(236,817	)		—			—			(236,817	)
Dividends paid ($.98 per share)		—			—		(219,916	)		—			—			—			(219,916	)
Issuance of common shares:
Acquisition, 2,389,795 shares		24			69,519		—			—			—			—			69,543
Stock option plans, 3,626,432 shares		(1	)		17,721		(56,736	)		109,774			—			—			70,758

Balance, December 31, 2003	$	2,299		$	2,280,335	$	1,178,803		$	(209,653	)	$	24,085		$	—		$	3,275,869


	Year Ended December 31,
(Dollars in thousands)	2003			2002			2001
Cash Flows from Operating Activities
Net income	$	630,891		$	577,668		$	500,714
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		152,272			192,003			100,766
Provision for deferred income taxes		148,349			156,923			186,502
Net gains		(264,588	)		(205,033	)		(113,270	)
Accretion of discounts and amortization of premiums, goodwill, intangibles and depreciation, net		187,923			188,192			129,008
Origination of loans held for sale		(3,385,769	)		(2,394,524	)		(1,635,903	)
Proceeds from sale of loans held for sale		3,270,301			2,288,092			1,572,563
Other		(54,961	)		43,146			138,273

Net cash provided by operating activities		684,418			846,467			878,653

Cash Flows from Investing Activities
Net principal disbursed on loans and leases		(9,044,273	)		(7,131,131	)		(7,156,533	)
Proceeds from principal repayments and maturities of:
Mortgage-backed securities held to maturity		292,817			447,594			524,010
Mortgage-backed securities available for sale		5,981,063			2,114,601			1,172,379
Investment securities held to maturity		984			2,719			16,960
Investment securities available for sale		60,003			29,326			360,104
Proceeds from sale of:
Mortgage-backed securities available for sale		10,989,888			12,363,341			3,998,182
Investment securities available for sale		44,815			1,755			9,656
Federal Home Loan Bank and Federal Reserve Bank stock		19,345			10,305			20,547
Purchases of:
Mortgage-backed securities available for sale		(8,362,347	)		(10,906,956	)		(2,065,543	)
Investment securities available for sale		(57,235	)		(77,232	)		(4,398	)
Loans		(50,669	)		(17,043	)		(58,723	)
Federal Home Loan Bank and Federal Reserve Bank stock		(10,344	)		(42,657	)		–
Net cash and cash equivalents received (paid) in connection with business combinations		77,944			(90,425	)		866,742
Other		(90,518	)		(80,540	)		63,640

Net cash used in investing activities		(148,527	)		(3,376,343	)		(2,252,977	)

Cash Flows from Financing Activities
Net increase (decrease) in short-term borrowings		(1,024,594	)		1,580,780			(1,334,067	)
Proceeds from long-term borrowings		2,014,783			429,334			1,137,184
Repayments of long-term borrowings		(275,715	)		(1,154,101	)		(1,329,166	)
Increase (decrease) in, net of business combinations:
Deposits		(820,896	)		2,165,930			3,142,587
Advance payments by borrowers for taxes and insurance		37,459			(30,508	)		(16,745	)
Payment of dividends on common stock		(219,916	)		(191,070	)		(167,052	)
Proceeds from issuance of common stock		70,758			58,569			49,443
Purchase of treasury stock		(236,817	)		(398,365	)		(122,597	)

Net cash used in (provided by) financing activities		(454,938	)		2,460,569			1,359,587

Net increase (decrease) in cash and cash equivalents		80,953			(69,307	)		(14,737	)
Cash and cash equivalents, beginning of year		447,213			516,520			531,257

Cash and cash equivalents, end of year	$	528,166		$	447,213		$	516,520

Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest on deposits and borrowings	$	943,142		$	1,124,274		$	1,380,560
Income taxes		165,000			95,000			31,500
Supplemental Schedule of Noncash Activities
Loans exchanged for mortgage-backed securities		7,198,869			6,667,082			6,708,253

NOTE 1. Summary of Significant Accounting Policies
The accounting policies of Charter One Financial, Inc. (“Charter One” or the “Company”), a financial holding company, and Charter One Bank, N.A. (the “Bank”), conform to accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. A summary of the more significant accounting policies follows:

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

Basis of Presentation—The Consolidated Financial Statements include the accounts of the Company, the Bank and its subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain items in the Consolidated Financial Statements for 2002 and 2001 have been reclassified to conform to the 2003 presentation.

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

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

Loans—Loans intended for sale are recorded at the lower of aggregate cost or fair value. Net unrealized losses are recognized through a valuation allowance by a charge to income. Gains or losses on the sale of loans are determined under the specific identification method.

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

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

Underperforming assets consist of (1) nonperforming loans (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. A loan or lease, including an impaired loan, is classified as nonaccrual when collectibility is in doubt. This is generally when the borrower is 90 days past due on contractual principal or interest payments on commercial real estate loans, corporate banking loans and leases. With respect to automobile loans, interest continues to accrue until the automobile loan reaches 120-day delinquency. At that point, the automobile loan is charged off completely. Consumer finance loans, along with other loans backed by single-family residential real estate collateral, continue to accrue interest until the loan is six payments past due, at which point the loan is placed on nonaccrual. A loan may be considered impaired but remain on accrual status when the borrower demonstrates (by continuing to make payments) a willingness to keep the loan current. When a loan is placed on nonaccrual status, unpaid interest is reversed and an allowance is established by a charge to interest income equal to all accrued interest. Income is subsequently recognized only to the extent that cash payments are received. Loans are returned to accrual status when, in management’s judgment, the borrower has the ability and intent to make periodic principal and interest payments (this generally requires that the loan be brought current in accordance with its original contractual terms). Loans and leases are classified as accruing loans or leases delinquent more than 90 days when the loan or lease is more than 90 days past due and, in management’s judgment, the borrower has the ability and intent to make periodic interest and principal payments. Loans are classified as restructured when concessions are made to borrowers with respect to the principal balance, interest rate or other terms due to the inability of the borrower to meet the obligation under the original terms.

The Bank charges off principal at the earlier of (1) when a loss of principal has been deemed to have occurred as a result of the book value exceeding the fair value or net realizable value, or (2) when collection efforts have ceased. Specifically with respect to automobile loans, if such loans experience repossession or bankruptcies prior to reaching the 120-day delinquency point, they are written down to the net realizable value of the collateral at the time of the repossession or bankruptcy discharge. Any automobile loan that reaches the 120-day delinquency point is charged off completely. Consumer finance loans, along with other loans backed by single-family residential real estate collateral, are reflected at the lower of cost or net realizable value at the earliest point of six payments past due or foreclosure.

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

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

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

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

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

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

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

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

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

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

Off-Balance-Sheet Financial Instruments–In the ordinary course of business, the Company enters into off-balance-sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, standby letters of credit and commitments to purchase or sell assets. Such financial instruments are recorded in the financial statements when they are funded or the related fees are incurred or received. The Company does not utilize any special-purpose entities in connection with off-balance-sheet financial instruments.

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

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

Goodwill–Goodwill represents the purchase price of acquired operations in excess of the fair value of their net identifiable assets at the date of acquisition. For business combinations and branch acquisitions initiated prior to June 30, 2001, goodwill was being amortized using the straight-line method over 15 years or less. Amortization of goodwill for past business combinations ceased upon adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” on January 1, 2002. For business combinations initiated after June 30, 2001, goodwill is not subject to amortization in accordance with SFAS No. 142. Goodwill is tested for impairment on an annual basis as of the beginning of each fiscal year or when events and circumstances indicate that the value of goodwill has been diminished or impaired. The Company completed the initial and the annual goodwill impairment test required by SFAS No. 142 and has determined that no impairment exists. See Note 3 to the Notes to the Consolidated Financial Statements for certain pro forma financial disclosures related to SFAS No. 142.

Income Taxes–The Company files a consolidated Federal income tax return. The provision for income taxes is based upon income in the Consolidated Financial Statements, rather than amounts reported on the Company’s income tax return.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.

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

Stock-Based Compensation–In December 2002, the Financial Accounting Standards Board (“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, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock-based employee compensation plans. Accordingly, no stock-based employee compensation cost is 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:

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2003, 2002 and 2001:

The estimated weighted-average grant-date fair value (based on the above option-pricing model and assumptions) for options granted in 2003, 2002 and 2001 was $11.89, $8.90 and $10.68, respectively.

Stock Dividends–On July 17, 2002, the Board of Directors of the Company approved a 5% stock dividend which was distributed on September 30, 2002 to shareholders of record on September 13, 2002. On July 18, 2001, the Board of Directors of the Company approved a 5% stock dividend which was distributed on September 28, 2001 to shareholders of record on September 14, 2001. No stock dividends were approved or distributed in 2003.

Earnings Per Share–Basic earnings per share (“EPS”) is based on the weighted average number of common shares outstanding during the year.

Diluted EPS is based on the weighted average number of common shares and common share equivalents outstanding during the year.

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

Segments–Charter One has one operating segment, consumer banking, which offers an array of products and services to its customers. Pursuant to its consumer banking strategy, emphasis is placed on building relationships and identifying cross-sell opportunities with its customers, as opposed to building specific lines of business. As a result, Charter One 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.

In January 2003, the FASB issued Interpretation No. (“FIN”) 46, which provides guidance on how to identify a variable interest entity (“VIE”) and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE are to be included in a company’s consolidated financial statements. A VIE exists when either the total equity investment at risk is not sufficient to permit the entity to finance its activities by itself, or the equity investors lack one of three characteristics associated with owning a controlling financial interest. Those characteristics include the direct or indirect ability to make decisions about an entity’s activities through voting rights or similar rights, the obligation to absorb the expected losses of an entity if they occur, or the right to receive the expected residual returns of the entity if they occur. In December 2003, the FASB reissued FIN 46 with certain modifications and clarifications. Application of this guidance was effective for interests in certain VIEs commonly referred to as special-purpose entities as of December 31, 2003. Application for all other types of entities is required for periods ending after March 15, 2004, unless previously applied. The Company believes the adoption of this interpretation will not have a material impact on its consolidated financial condition or results of operations.

In April 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 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 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. The adoption of SFAS No. 149 did not have a material impact on the Company’s consolidated financial condition or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards on how to classify and measure certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires an issuer to classify certain freestanding financial instruments as liabilities, which may have been previously classified as equity, because those instruments embody obligations of the issuer. SFAS No. 150 also requires disclosure of the nature and terms of the financial instruments and the rights and obligations embodied in those instruments. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective as of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company’s consolidated financial condition or results of operations.

In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes such loans acquired in purchase business combinations. SOP 03-3 does not apply to loans originated by the entity. SOP 03-3 limits the yield that may be accreted to the excess of the investor’s estimate of undiscounted expected principal, interest, and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the loan. SOP 03-3 requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield, loss accrual, or valuation allowance. SOP 03-3 prohibits investors from displaying accretable yield and nonaccretable difference in the balance sheet. Subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected to be collected should be recognized as impairment. SOP 03-3 prohibits “carrying over” or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of SOP 03-3. The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination.

SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004. Early application of SOP 03-3 is encouraged, but not required, for transfers of loans subsequent to the issuance of SOP 03-3 but prior to the effective date.

For loans acquired in fiscal years beginning on or before December 15, 2004, and within the scope of Practice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans,” paragraphs 7 and 8 of SOP 03-3, as they apply to decreases in cash flows expected to be collected, should be applied prospectively for fiscal years beginning after December 15, 2004.

Management has not completed the process of evaluating SOP 03-3 and therefore has not determined the impact that adopting SOP 03-3 will have on the Company’s consolidated financial condition and results of operations.

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

(1)		The results of this acquisition have been included in the Consolidated Financial Statements since June 6, 2003. Pro forma results of operations for this acquisition, had the acquisition occurred as of January 1, 2003, January 1 2002 and January 1, 2001, are not significant and, accordingly, are not provided.

(2)		The results of this acquisition have been included in the Consolidated Financial Statements since May 24, 2002. Pro forma results of operations for this acquisition, had the acquisition occurred as of January 1, 2002 and January 1, 2001, are not significant and, accordingly, are not provided.

(3)		The Company recorded $25.0 million as an indefinite-lived trademark name intangible in addition to the $34.8 million recorded as goodwill.

(4)		The results of this acquisition have been included in the Consolidated Financial Statements since July 2, 2001. Pro forma results of operations for this acquisition, had the acquisition occurred as of January 1, 2001, are not significant and, accordingly, are not rovided.

Upon the adoption of SFAS No. 142 on January 1, 2002, the Company ceased its amortization of goodwill. The following table shows the pro forma effects of applying SFAS No. 142 to the 2001 period:

The weighted average interest rate on investment securities was 5.48%, 5.64% and 8.21% at December 31, 2003, 2002 and 2001, respectively.

Investment securities by contractual maturity and their weighted average yield as of December 31, 2003 are shown below:

The following table presents, as of December 31, 2003, investment securities that have been in an unrealized loss position for less than 12 months and investment securities that have been in an unrealized loss position for 12 months or more. No investment securities classified as held to maturity were in an unrealized loss position as of December 31, 2003.

Management does not believe any individual unrealized loss as of December 31, 2003 represents an other-than-temporary impairment. The unrealized losses reported relate primarily to changes in interest rates. The Company has both the intent and ability to hold such investment securities for a time necessary to recover the amortized cost.

Gains on sales were $3.6 million, $.4 million and $3.2 million for the years ended December 31, 2003, 2002 and 2001, respectively. No losses on sales were realized during the years ended December 31, 2003 and 2001. Losses on sales were $29,000 for the year ended December 31, 2002.

The following table presents, as of December 31, 2003, mortgage-backed securities that have been in an unrealized loss position for less than 12 months and mortgage-backed securities that have been in an unrealized loss position for 12 months or more.


	December 31, 2003
	Less Than 12 Months						12 Months or More						Total
	Amortized		Fair		Unrealized		Amortized		Fair		Unrealized		Amortized		Fair		Unrealized
(Dollars in thousands)	Cost		Value		Loss		Cost		Value		Loss		Cost		Value		Loss
Available for Sale
Participation certificates:
U.S. government and agency issues	$	2,670,294	$	2,640,699	$	29,595	$	–	$	–	$	–	$	2,670,294	$	2,640,699	$	29,595
Collateralized mortgage obligations:
U.S. government and agency issues		220,614		218,915		1,699		8,330		8,325		5		228,944		227,240		1,704
Private issues		448		439		9		–		–		–		448		439		9

Total mortgage-backed securities available for sale		2,891,356		2,860,053		31,303		8,330		8,325		5		2,899,686		2,868,378		31,308

Held to Maturity
Participation certificates:
U.S. government and agency issues		11,797		11,753		44		534		531		3		12,331		12,284		47
Private issues		4,053		4,020		33		228		228		–		4,281		4,248		33
Collateralized mortgage obligations:
Private issues		964		959		5		1,414		1,408		6		2,378		2,367		11

Total mortgage-backed securities held to maturity		16,814		16,732		82		2,176		2,167		9		18,990		18,899		91

Total	$	2,908,170	$	2,876,785	$	31,385	$	10,506	$	10,492	$	14	$	2,918,676	$	2,887,277	$	31,399

Management does not believe any individual unrealized loss as of December 31, 2003 represents an other-than-temporary impairment. The unrealized losses reported relate primarily to changes in interest rates. The Company has both the intent and ability to hold such mortgage-backed securities for a time necessary to recover the amortized cost.

Sales of mortgage-backed securities resulted in gains of $282.0 million in 2003, $260.0 million in 2002 and $109.6 million in 2001. Losses on sales were $11.5 million in 2003 and $1.0 million in 2002. No losses on sales were realized in 2001.


	December 31,
	2003						2002						2001						2000						1999
				% of						% of						% of						% of						% of
(Dollars in thousands)	Amount			Total			Amount			Total			Amount			Total			Amount			Total			Amount			Total
Real estate mortgage loans:
Permanent:
One-to-four family	$	8,671,635			30.8	%	$	7,905,585			30.6	%	$	9,317,810			36.7	%	$	10,413,005			43.5	%	$	11,365,545			51.1	%
Multifamily		791,574			2.8			737,517			2.8			989,169			3.9			1,064,796			4.4			1,224,348			5.5
Commercial		1,196,672			4.3			1,027,681			4.0			1,076,493			4.2			769,589			3.2			624,517			2.8

Total permanent		10,659,881			37.9			9,670,783			37.4			11,383,472			44.8			12,247,390			51.1			13,214,410			59.4
Construction:
One-to-four family		869,345			3.1			719,062			2.8			666,982			2.6			611,317			2.6			486,512			2.2
Multifamily		372,385			1.3			377,489			1.4			359,848			1.4			90,129			.4			75,171			.3
Commercial		361,653			1.3			378,466			1.5			313,725			1.3			163,544			.6			92,993			.4

Total construction		1,603,383			5.7			1,475,017			5.7			1,340,555			5.3			864,990			3.6			654,676			2.9

Total real estate mortgage loans		12,263,264			43.6			11,145,800			43.1			12,724,027			50.1			13,112,380			54.7			13,869,086			62.3
Retail consumer loans		5,435,855			19.3			5,441,269			21.0			4,808,390			18.9			4,583,770			19.1			3,745,633			16.8
Automobile loans		6,161,638			21.9			5,394,764			20.9			4,244,070			16.7			3,046,038			12.7			2,413,531			10.8
Consumer finance loans		1,079,487			3.8			971,335			3.8			1,027,392			4.0			974,852			4.1			700,259			3.2
Leases		2,195,418			7.8			2,133,468			8.2			1,994,524			7.9			1,778,021			7.4			1,137,895			5.1
Corporate banking loans		1,679,664			6.0			1,314,781			5.1			1,043,714			4.1			802,379			3.4			679,397			3.0

Total loans and leases held for investment		28,815,326			102.4			26,401,417			102.1			25,842,117			101.7			24,297,440			101.4			22,545,801			101.2

Less:
Loans in process		582,134			2.1			469,484			1.8			387,264			1.5			345,341			1.4			259,680			1.2
Unamortized net discounts (premiums)		516			–			2,646			–			20,527			–			(6,763	)		–			(7,430	)		–
Allowance for loan and lease losses		383,733			1.3			328,017			1.2			255,478			1.0			189,616			.8			186,400			.8
Net deferred loan costs		(100,147	)		(.4	)		(84,285	)		(.3	)		(86,007	)		(.3	)		(83,388	)		(.4	)		(91,133	)		(.4	)
Automobile dealer reserve		(180,927	)		(.6	)		(167,291	)		(.6	)		(131,216	)		(.5	)		(97,538	)		(.4	)		(78,578	)		(.4	)

Total net items		685,309			2.4			548,571			2.1			446,046			1.7			347,268			1.4			268,939			1.2

Loans and leases held for investment, net	$	28,130,017			100.0	%	$	25,852,846			100.0	%	$	25,396,071			100.0	%	$	23,950,172			100.0	%	$	22,276,862			100.0	%

Loans held for sale	$	120,431					$	351,892					$	332,629					$	58,002					$	35,988

Loan servicing portfolio	$	16,877,169					$	16,893,609					$	13,846,807					$	10,379,644					$	10,798,563

As of December 31, 2003, there was no concentration of loans or leases in any type of industry which exceeded 10% of the Bank’s total loans and leases that is not included as a loan or lease category in the table above.

The following table reflects the principal payments contractually due (assuming no prepayments) on the Bank’s construction portfolio, net of loans in process, and corporate banking loan portfolio at December 31, 2003. Management expects prepayments will cause actual maturities to be shorter.

(1)

Of the $1.5 billion of loans due after December 31, 2004, $514.2 million are fixed rate and $1.0 billion are adjustable rate.

The Company normally has outstanding a number of commitments to extend credit. At December 31, 2003, there were outstanding commitments to originate $1.3 billion of mortgage loans and other loans and leases, all at market rates. Terms of the commitments extend up to nine months, but are generally less than two months.

At December 31, 2003, there were also outstanding unfunded consumer lines of credit of $5.4 billion and corporate banking lines of credit of $410.2 million. Substantially all of the consumer loans, including consumer lines of credit, are secured by equity in the borrowers’ residences. The Company does not expect all of these lines to be used by the borrowers. Outstanding letters of credit totaled $129.6 million as of December 31, 2003.

The Bank is engaged in equipment leasing through a subsidiary, ICX Corporation (“ICX”). The equipment leased by ICX is for commercial and industrial use only, with primary lease concentrations to Fortune 1000 companies for large capital equipment acquisitions. A lessee is evaluated

from a credit perspective using the same underwriting standards and procedures as for a borrower. A lessee is expected to be able to make the rental payments based on its business’ cash flow and the strength of its balance sheet. Leases are usually not evaluated as collateral-based transactions and, therefore, the lessee’s overall financial strength is the most important credit evaluation factor.

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

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

At December 31, 2003, future minimum lease rentals on direct financing, sales-type and leveraged leases are as follows: $286.4 million in 2004; $249.6 million in 2005; $193.9 million in 2006; $148.5 million in 2007; $114.9 million in 2008; and $515.2 million thereafter.

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

The total investment in impaired loans was $12.0 million and $20.3 million at December 31, 2003 and 2002, respectively. These loans were subject to allowances for loan and lease losses of $.3 million and $3.8 million at December 31, 2003 and 2002, respectively.

The average recorded investment in impaired loans was $19.9 million, $25.1 million and $10.9 million for the years ended December 31, 2003, 2002 and 2001, respectively. Interest income recognized was $1.3 million, $1.0 million and $.7 million for the years ended December 31, 2003, 2002 and 2001, respectively. The interest income potential based upon the original terms of the contracts for these impaired loans was $2.1 million, $2.3 million and $1.0 million for 2003, 2002 and 2001, respectively.

The key economic assumptions used to estimate the value of the mortgage servicing rights at December 31, 2003 and 2002, respectively, are presented in the table that follows. A sensitivity analysis, as of December 31, 2003, of the current fair value to an immediate 50 basis point and 100 basis point adverse change in interest rates, which has a corresponding adverse change in the prepayment speed assumptions, is also presented. These sensitivities are hypothetical. The effect of a variation in a particular assumption on the fair value of the mortgage servicing rights is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in interest rates, which drive changes in prepayment speeds, could result in changes in the discount rates), which might magnify or counteract the sensitivities.

The key economic assumptions used in determining the fair value of mortgage servicing rights capitalized in 2003 were as follows:

Loans serviced for others were $16.9 billion at both December 31, 2003 and 2002. The Bank securitized residential mortgage and consumer loans of $7.2 billion and $6.7 billion in 2003 and 2002, respectively, in which the Bank retained servicing. The residential mortgage and consumer loans were exchanged for government agency mortgage-backed securities. The Bank did not retain any credit enhancing residual interests, nor is the Bank subject to any significant recourse obligations. The Company does not hold any interests in or sponsor any special-purpose entities.

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

Investment securities and mortgage-backed securities with a par value of $637.9 million, $489.0 million and $573.0 million at December 31, 2003, 2002 and 2001, respectively, are pledged to secure public deposits and for other purposes required or permitted by law.

Federal Home Loan Bank (“FHLB”) advances at December 31, 2003 are secured by the Company’s investment in the stock of the FHLB, as well as $11.5 billion in certain real estate loans and $2.9 billion in mortgage-backed securities. FHLB advances are comprised of the following:

At December 31, 2003, certain fixed rate agreements are convertible to LIBOR at the counterparty’s option. If the counterparty exercises its option, the Company can prepay the advance in full or part on the effective conversion date or on the quarterly repricing date.

The zero coupon bonds are collateralized by mortgage-backed securities with a par value of $187.1 million and $229.2 million at December 31, 2003 and 2002, respectively.

The Company uses interest rate swaps as one of the tools to manage its interest rate risk profile (defined as the sensitivity of its earnings and economic value to changes in interest rates). The Company utilizes fixed receipt callable interest rate swaps to convert certain longer-term callable certificates of deposit into short-term and medium-term variable instruments. Under certain of these agreements totaling $230.0 million, Charter One has agreed to receive interest from the counterparty on a notional amount at a fixed rate defined in the agreement and to pay interest at a floating rate indexed to LIBOR during the entire term of the interest rate swap. In other agreements totaling $1.9 billion, Charter One has agreed to receive interest from the counterparty on a notional amount at a fixed rate defined in the agreement, and to pay interest at a 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. The Company has assumed no ineffectiveness in the respective hedging relationships. Any gain or loss on the interest rate swap was offset by a gain or loss on the certificates of deposit during the period of change in fair values.

The Company utilizes fixed payment interest rate swaps to convert certain floating rate FHLB advances into fixed rate instruments. Under these agreements totaling $409.6 million, Charter One has agreed to pay interest to the counterparty on a notional principal amount at a fixed rate defined in the agreement and receive interest at a floating rate indexed to LIBOR. The amounts of interest exchanged are calculated on the basis of notional principal amounts. Such interest rate swaps are designated and qualify as cash flow hedges under SFAS No. 133. The Company has 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.

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

Additionally, the Company entered into $575.0 million of fixed payment and variable receipt interest rate swaps related to the issuance of the subordinated notes discussed above. However, these interest rate swaps did not qualify for hedge accounting under SFAS No. 133. For the year ended December 31, 2003, the net unrealized loss attributed to these interest rate swaps decreased $11.8 million to an ending balance of $14.2 million. The corresponding interest rate swap liabilities were recognized in the Company’s Consolidated Statement of Financial Condition at December 31, 2003 under the caption “Accrued expenses and other liabilities.”

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

(2)		Rates are based on LIBOR.

Additionally, the Company has entered into forward fixed payment and variable receipt interest rate swaps totaling $3.5 billion in notional principal amount that are not reflected in the table above. Under these

agreements, the Company has agreed to pay interest to the counterparty on a notional principal amount at a fixed rate defined in the agreement and receive interest at a floating rate indexed to LIBOR. Settlements under these forward interest rate swaps begin between January 2004 and August 2004. The forward interest rate swaps mature between January 2006 and August 2007. The weighted average fixed payment rate on these forward interest rate swaps is 2.83%. The forward interest rate swaps will convert certain floating rate FHLB advances into fixed rate instruments. Such interest rate swaps are designated and qualify as cash flow hedges under SFAS No. 133.

Information on these forward interest rate swaps, by effective date, is as follows:

In January 2004, the Company terminated $1.0 billion of its forward interest rate swaps included in the table above. A deferred after-tax loss of $8.4 million was included in other comprehensive income and will be amortized over the next 24 months as the related interest expense on FHLB advances is recognized.

The fair value of 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:

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

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

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

In 2003 and 2002, Charter One recaptured excess bad debt reserves of $2.7 million and $4.0 million, respectively, resulting in payments of $.9 million and $1.4 million which were previously accrued. The pre-1988 reserve provisions are subject only to recapture requirements in the case of certain excess distributions to, and redemptions of, shareholders or if the Bank no longer qualifies as a “bank.” Tax bad debt deductions accumulated prior to 1988 by the Bank are approximately $321.3 million. No deferred income taxes have been provided on these bad debt deductions and no recapture of these amounts is anticipated.

Federal Reserve Board (“FRB”) regulations require depository institutions to maintain certain minimum reserve balances. These reserves, which consisted of vault cash and deposits at the Federal Reserve Bank, totaled $64.9 million and $56.1 million at December 31, 2003 and 2002, respectively.

The Company may not declare or pay cash dividends on its shares of common stock if the payment would cause shareholders’ equity to be reduced below applicable regulatory capital maintenance requirements, or if such declaration and payment would otherwise violate regulatory requirements. At December 31, 2003, approximately $513.2 million of the Company’s retained earnings was available to pay dividends to shareholders or to be used for other corporate purposes.

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

Quantitative measures established by regulation to ensure capital adequacy require Charter One and 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 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 under the regulatory framework for prompt corrective action, are as follows:

Management believes that, as of December 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.

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

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

At December 31, 2003, the Company has a stock option plan under which 4.5 million shares of common stock are reserved for grant to officers, key employees and directors. The Company’s plan has been approved by the Company’s shareholders. The date on which the options are first exercisable is determined by the Compensation Committee of the Board of Directors. The options expire no later than 10 years from the grant date.

The following is an analysis of the stock option activity for each of the years in the three-year period ended December 31, 2003 and the stock options outstanding at the end of the respective periods.

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

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

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

Loans and Leases–The fair value of loans and leases, other than one-to-four family loans, is estimated by discounting the future cash flows using the LIBOR swap curve. The fair value of one-to-four family loans is estimated by discounting the future cash flows using current market rates for loans of similar maturities, along with the LIBOR swap curve.

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

Deposits–The fair value of demand deposits, savings accounts and money market deposit accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the LIBOR swap curve.

FHLB Advances, Federal Funds Purchased and Repurchase Agreements and Other Borrowings–The fair value of FHLB advances, federal funds purchased and repurchase agreements and other borrowings is estimated by discounting the future cash flows using the LIBOR swap curve.

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

The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2003 and 2002. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.


	December 31, 2003				December 31, 2002
	Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Value		Value		Value		Value
Assets:
Cash and cash equivalents	$	528,166	$	528,166	$	447,213	$	447,213
Investment securities		276,765		277,001		214,068		214,371
Mortgage-backed securities		10,445,247		10,455,953		12,077,389		12,101,680
Loans and leases, net		28,250,448		29,197,294		26,204,738		27,587,274
FHLB and Federal Reserve Bank stock		705,244		705,244		681,923		681,923
Accrued interest receivable		140,857		140,857		154,962		154,962
Liabilities:
Deposits:
Checking, money market and savings accounts		16,885,318		16,885,318		17,807,967		17,807,967
Certificates of deposit		10,318,001		10,434,890		9,719,876		9,907,256
FHLB advances		9,847,293		10,277,077		9,037,925		9,658,562
Federal funds purchased and repurchase agreements		269,319		269,319		283,912		283,912
Other borrowings		697,753		781,012		708,853		826,665
Advance payments by borrowers for taxes and insurance		61,054		61,054		23,595		23,595
Accrued interest payable		35,944		35,944		38,372		38,372
Off-Balance-Sheet Items:
Forward commitments to purchase/sell/ originate loans or mortgage-backed securities				5,529				2,855

The summarized financial statements of Charter One (parent company only) as of December 31, 2003 and 2002 and for each of the three years ended December 31, 2003 are as follows:


	Year Ended December 31,
(Dollars in thousands)	2003			2002			2001
Cash Flows from Operating Activities:
Net income	$	630,891		$	577,668		$	500,714
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed (earnings) losses of subsidiaries		(83,416	)		55,345			(66,549	)
Other		(574,488	)		(701,989	)		(470,851	)

Net cash used in operating activities		(27,013	)		(68,976	)		(36,686	)

Cash Flows from Investing Activities:
Payments for investments in and advances to subsidiaries		(95,496	)		(332,732	)		(116,713	)
Repayment of investments in and advances to subsidiaries		564,134			916,805			368,000
Purchase of securities		–			(5,633	)		(1,000	)
Sale of securities		852			–			–

Net cash provided by investing activities		469,490			578,440			250,287

Cash Flows from Financing Activities:
Proceeds from issuance of common stock		70,758			58,569			49,443
Payment of dividends on common stock		(219,916	)		(191,070	)		(167,052	)
Net purchases of treasury stock		(236,817	)		(398,365	)		(122,597	)

Net cash used in financing activities		(385,975	)		(530,866	)		(240,206	)

Increase (decrease) in deposits with subsidiaries and cash equivalents	$	56,502		$	(21,402	)	$	(26,605	)

We have audited the accompanying consolidated statements of financial condition of Charter One Financial, Inc. and its subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Charter One Financial, Inc. and its subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

This Annual Report includes the information required in our Form 10-K filed with the Securities and Exchange Commission (“SEC”). The integration of the two documents gives our shareholders and other interested parties timely, efficient and comprehensive information on our financial condition and results of operations for the year ended December 31, 2003. Portions of this Annual Report are not required by the Form 10-K report and are not filed as part of the Company’s Form 10-K filed with the SEC. Only those portions of this Annual Report referenced in the cross reference index are incorporated in the Form 10-K filed with the SEC. The report has not been approved or disapproved by the SEC, nor has the SEC passed upon its accuracy or adequacy.

(Registrant’s telephone number, including area code): (216) 566-5300
Securities Registered Pursuant to Section 12(b) of the Act:

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 þ No o

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o

As of June 30, 2003, the aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the closing sale price of $31.18 per common share as of that date, was $7,049,645,280.

The number of shares outstanding of the Registrant’s sole class of common stock as of February 23, 2004 was 223,118,318.

Portions of the Registrant’s proxy statement for the April 21, 2004 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.


Item
Number		Pages
	PART I
1.	Business		54-55
2.	Properties		56
3.	Legal Proceedings		56
4.	Submission of Matters to a Vote of Security Holders–Not Applicable

	PART II
5.	Market for Registrant’s Common Equity and Related Shareholder Matters–Note (1)		27
6.	Selected Financial Data		14
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15-29
7A.	Quantitative and Qualitative Disclosure About Market Risk		25-26
8.	Financial Statements and Supplementary Data		30-52
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure–Not Applicable
9A.	Controls and Procedures		56

	PART III
10.	Directors and Executive Officers of the Registrant–Note (1)
11.	Executive Compensation–Note (1)
12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters–Note (1)(2)
13.	Certain Relationships and Related Transactions–Note (1)
14.	Principal Accountant Fees and Services–Note (1)

	PART IV
15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		30-54
Signatures			56

Exhibits–The index of exhibits has been filed as separate pages of the 2003 Form 10-K and is available to shareholders on request from the Registrant’s Investor Relations Department. Copies of the exhibits may be obtained at a cost of 30 cents per page.

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

Note (1): Incorporated by reference from the Registrant’s Proxy Statement for the April 21, 2004 Annual Meeting of Shareholders. None of the foregoing incorporation by reference shall include the information referred to in Item 306 or Item 402(a)(8) of Regulation S-K.

Note (2): See Note 16 to the Notes to Consolidated Financial Statements for information relating to the Company’s equity compensation plans.

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

Charter One has a long history of completing mergers and acquisitions, which have had a significant effect on its business. See Note 3 to the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K for a discussion of the impact of recent business combinations and branch acquisitions.

Our reports, proxy statements and other information we file with the SEC, as well our news releases, Corporate Governance Guidelines, Corporate Code of Business Conduct and Ethics, Audit Committee Charter, Corporate Governance/Nominating Committee Charter and Compensation Committee Charter, are available free of charge through our Internet site at http://www.charterone.com. This information can be found on the Investor Relations page of our Internet site. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act are available on our Internet site at the address set forth above as soon as reasonably practicable after they have been filed with the SEC. In addition, we will provide, at no cost, paper (or electronic) copies of the foregoing documents upon request. Requests should be directed to our Investor Relations Department at telephone number (800) 262-6301.

Reference to our Internet address is not intended to incorporate any of the information contained on our Internet site into this document.

As of December 31, 2003, Charter One was ranked the 22nd largest bank holding company in the country and operated through numerous banking offices: 138 in Ohio, 107 in Michigan, 180 in New York, 105 in Illinois, 27 in Vermont, 13 in Massachusetts, 16 in Indiana, 3 in Connecticut and 3 in Pennsylvania. The branch locations operate under the Charter One Bank name in all areas.

Based on 2003 data from SNL Datasource, the counties served by Charter One Bank include approximately 40% of the population of Ohio, 54% of Michigan, 56% of New York (excluding New York City), 66% of Illinois, 80% of Vermont, 9% of Massachusetts, 14% of Indiana, 24% of Connecticut, and 2% of Pennsylvania.

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

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

As a national bank, Charter One Bank is subject to supervision, regulation and examination by its primary regulator, the Office of the Comptroller of the Currency, as well as the Federal Deposit Insurance Corporation.

See Management’s Discussion and Analysis–“Capital and Dividends” under Part II, Item 7 of this Form 10-K, and Note 14 to the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K, for a discussion of the regulatory capital calculations and compliance with regulatory capital requirements as well as regulatory restrictions on cash dividends.

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

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

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

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

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

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

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

As of December 31, 2003, in addition to Charter One Bank’s 592 banking locations, Charter One Bank and its subsidiaries operated 33 loan production offices in 11 states. At December 31, 2003, Charter One Bank owned 274 of these banking locations and leased the remainder. Charter One Bank operates 969 ATMs at various banking offices and is a member of Star Systems (“STAR”), which provides Charter One Bank’s customers access to ATMs nationwide. The lease terms for branch offices are not individually material. Lease terms range from monthly to 30 years.

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

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Act”)) as of December 31, 2003 was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended December 31, 2003, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cleveland, State of Ohio, as of March 12, 2004.

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

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

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

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

Directors and
Executive Officers
as of December 31, 2003

Charles John Koch
Chairman, President and
Chief Executive Officer,
Charter One Financial, Inc.
and Charter One Bank, N.A.

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

Herbert G. Chorbajian
Former Chairman, President
and Chief Executive Officer,
ALBANK Financial Corporation
Albany, New York

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

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

Mark D. Grossi
Executive Vice President,
Charter One Financial, Inc.
and Charter One Bank, N.A.

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

John D. Koch
Executive Vice President,
Charter One Financial, Inc.
and Charter One Bank, N.A.

Barbara J. Mahone
Executive Director, Human
Resources, General Motors
Product Development,
Detroit, Michigan

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

Richard W. Neu
Executive Vice President
and Chief Financial
Officer, Charter One
Financial, Inc. and Charter
One Bank, N.A.

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

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

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

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

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

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

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

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

Shareholder
Information

Annual Meeting
The Annual Meeting of Shareholders
of Charter One Financial, Inc. will
be held at 11 a.m. local time,
Wednesday, April 21, 2004 at The
Forum Conference Center in
Cleveland, Ohio.

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

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

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

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

Directors Emeriti
Eugene B. Carroll, Sr.
Charles M. Heidel
George M. Jones
Henry R. Nolte, Jr.
Fred C. Reynolds
Charles A. Shirk
Eresteen R. Williams

Corporate
Information

Corporate Website
www.charterone.com

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

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

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

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

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

Legal Counsel: External
(Corporate, Securities,
Bank Regulatory Counsel)
Silver, Freedman & Taff L.L.P.
1700 Wisconsin Avenue, N.W.
Washington, DC 20007

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

www.charterone.com Charter One Financial, Inc. 1215 Superior Avenue Cleveland, Ohio 44114


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		Amendment 1, dated May 3, 1996, to Forms of Supplemental Retirement Agreements, dated October 31, 1995, between Charter One and Charles John Koch, Richard W. Neu, John David Koch, Mark D. Grossi, and Robert J. Vana filed as Exhibit 10.7 to the Registrant’s Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 000-16311), is incorporated herein by reference. The Agreements, originally filed on July 25, 1995 as Exhibits 10.4 and 10.5 to Registrant’s Registration Statement on Form S-4 (File No. 33-61273), are incorporated herein by reference.

10.6		Amended and Restated Employment Agreements, effective August 1, 1999, between Charter One Financial, Inc. and Charles John Koch, Richard W. Neu, John D. Koch, Mark D. Grossi, and Robert J. Vana filed as Exhibit 10.8 to Registrant’s Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-16311), is incorporated herein by reference.

10.7		Alliance Bancorp 1997 Long-Term Incentive Stock Benefit Plan, filed as an attachment to the proxy statement for the annual meeting of stockholders of Alliance held on May 28, 1997 (File No. 000-20082), is incorporated herein by reference.

10.8		Hinsdale Financial Corporation 1994 Incentive Stock Option Plan, filed as an attachment to the proxy statement for the annual meeting of stockholders of Alliance held on February 8, 1995 (File No. 000-20082), is incorporated herein by reference.

10.9		Hinsdale Financial Corporation 1992 Stock Option Plan for Outside Directors and the Hinsdale Financial Corporation 1992 Incentive Stock Option Plan, filed as attachments to the proxy statement


EXHIBIT
NUMBER		DESCRIPTION
		for the annual meeting of stockholders of Alliance held on February 10, 1993 (File No. 000-20082) is incorporated herein by reference.

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

10.11		1992 Stock-Based Compensation Plan of RCSB Financial, Inc., filed on October 8, 1997, as an exhibit to Post-Effective Amendment Number One on Form S-8 to Form S-4 (File No. 333-33259), is incorporated herein by reference.

10.12		Home Federal Savings Bank Stock Compensation Program, filed on September 29, 1997 as an exhibit to Post-Effective Amendment Number One on Form S-8 to Form S-4 (File No. 333-33169), is incorporated herein by reference.

10.13		The RCSB Financial, Inc. Non-Employee Director Deferred Compensation Plan, as amended and restated on December 1, 1998, filed as Exhibit 10.16 to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 000-16311), is incorporated herein by reference.

10.14		ALBANK Financial Corporation 1992 Stock Incentive Plan for Key Employees, as amended and restated as of December 18, 1995, filed as Exhibit 10.11 to ALBANK’s Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 000-19843), is incorporated herein by reference.

10.15		ALBANK Financial Corporation 1995 Stock Incentive Plan for Outside Directors, filed as Exhibit 10.12.1 to ALBANK’s Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 000-19843), is incorporated herein by reference.

10.16		ALBANK Financial Corporation 1992 Stock Incentive Plan for Outside Directors, filed as an appendix to the Proxy Statement for the 1992 Annual Meeting of the Stockholders of ALBANK held on October 26, 1992 (File No. 001-19843), is incorporated herein by reference.

10.17		Employment Agreement, dated November 30, 1998, between Charter One Financial, Inc. and Herbert G. Chorbajian, filed as Exhibit 10.20 to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 000-16311), is incorporated herein by reference.

10.18		Charter One Financial, Inc. Top Executive Incentive Goal Achievement Plan, filed as Appendix A to the Registrant’s Proxy Statement for the 2003 Annual Meeting of Shareholders held on April 22, 2003 (File No. 001-15495), is incorporated herein by reference.

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

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

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

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

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

10.24		Charter One Financial, Inc. 2004 Senior Executive Stock Unit Deferred Compensation Plan and Charter One Financial, Inc. 2004 Senior Executive Cash Deferred Compensation Plan, effective February 1, 2004.

10.25		Charter One Financial, Inc. 2004 Senior Executive Stock Unit Deferred Compensation Plan Agreements, effective February 1, 2004, between Charter One Financial, Inc. and Charles John Koch, Richard W. Neu, John D. Koch, Mark D. Grossi, and Robert J. Vana.

10.26		Amendment 2, dated July 31, 2002 (but effective March 20, 2001), to Forms of Supplemental Retirement Agreements between Charter One Financial, Inc. and Charles John Koch, Richard W. Neu, John D. Koch, Mark D. Grossi, and Robert J. Vana.

10.27		Amendment 3, dated February 1, 2004, to Forms of Supplemental Retirement Agreements between Charter One Financial, Inc. and Charles John Koch, Richard W. Neu, John D. Koch, Mark D. Grossi, and Robert J. Vana.

11		Statement Regarding Computation of Per Share Earnings

21		Subsidiaries of the Registrant


	Year Ended December 31,
(Dollars in thousands)	2003			2002			2001
Short-term borrowings outstanding at end of period	$	1,719,800		$	2,595,000		$	1,114,873
Weighted average rate at end of period		1.43	%		1.34	%		3.03	%
Maximum month-end balance of short-term borrowings during the period	$	5,005,000		$	3,900,000		$	3,530,248
Approximate average short-term borrowings outstanding during the period	$	2,669,354		$	985,497		$	2,291,246
Approximate weighted average rate during the period		1.40	%		2.96	%		4.84	%


Changes in	Estimated Percentage Change
Interest Rates	in Future Net Interest Income
(basis points)(1)	12 Months
+200 over one year		(6.67	)%
+100 over one year		(3.41	)
-100 over one year		2.75


	First		Second		Third		Fourth		Total
	Quarter		Quarter		Quarter		Quarter		Year
2003
High	$	30.74	$	32.59	$	33.20	$	34.87	$	34.87
Low		27.05		27.24		30.10		30.31		27.05
Close		27.66		31.18		30.60		34.55		34.55
Dividends declared and paid		.22		.24		.26		.26		.98
2002
High	$	30.95	$	34.77	$	33.42	$	31.48	$	34.77
Low		25.19		29.30		25.81		23.89		23.89
Close		29.73		32.74		29.72		28.73		28.73
Dividends declared and paid		.19		.21		.21		.22		.83


	Year Ended December 31,
	2003			2002			2001
Dividend yield		3.00	%		3.00	%		2.00	%
Volatility		37.65-47.26	%		35.94-38.13	%		34.40-43.66	%
Risk-free interest rate		2.68-3.79	%		3.37-4.98	%		4.42-5.55	%
Life of grant	6 years			6 years			7 years


	Year Ended December 31,
(Dollars in thousands)	2003			2002			2001
Other comprehensive income, before tax:
Net unrealized holding gain on securities	$	96,288		$	425,839		$	134,689
Net unrealized loss on derivatives classified as cash flow hedges		(10,495	)		–			–
Reclassification adjustment for net gains on securities included in net income		(274,124	)		(259,374	)		(112,804	)

Other comprehensive income, before tax		(188,331	)		166,465			21,885
Income tax expense (benefit) related to items of other comprehensive income		(65,916	)		57,942			7,761

Other comprehensive income, net of tax	$	(122,415	)	$	108,523		$	14,124


financial highlights

(dollars in thousands, except per share data)	2003			2002			2001

Net interest income	$	1,168,887		$	1,169,830		$	990,416
Other income		698,470			547,546			473,624
Administrative expenses		790,721			678,972			629,662
Net income		630,891			577,668			500,714
Diluted earnings per share	$	2.74		$	2.45		$	2.10

Return on average assets		1.45	%		1.47	%		1.41	%
Return on average equity		19.45	%		19.38	%		18.17	%
Efficiency ratio		42.34	%		39.54	%		41.91	%

Total assets	$	42,628,066		$	41,896,072		$	38,174,516
Loans and leases, net		28,250,448			26,204,738			25,728,700
Total deposits		27,203,319			27,527,843			25,123,309
Shareholders’ equity		3,275,869			3,083,825			2,928,500

Shareholders’ equity to assets		7.68	%		7.36	%		7.67	%

Book value per share	$	14.68		$	13.72		$	12.43


	December 31, 2003
	Payments due by period
					Less						More
	Note				Than 1		1-3		3-5		Than 5
(Dollars in thousands)	Reference		Total		Year		Years		Years		Years
Deposits without a stated maturity		8	$	16,885,318	$	16,885,318	$	—	$	—	$	—
Certificates of deposit		8		10,318,001		5,722,381		2,260,489		2,282,920		52,211
FHLB advances		9		9,847,293		1,719,917		4,531,009		3,155,362		441,005
Federal funds purchased and repurchase agreements		10		269,319		269,319		—		—		—
Other borrowings		11		697,753		111,608		154,169		5,920		426,056
Operating leases		—		129,626		17,180		34,932		28,470		49,044

Total			$	38,147,310	$	24,725,723	$	6,980,599	$	5,472,672	$	968,316


	December 31,2003
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
Available for Sale
U.S. Treasury and agency securities	$	99,032	$	3,538	$	1,164	$	101,406
Securities of U.S. states and political subdivisions		41,382		49		1,251		40,180
Corporate capital trust		106,194		12,192		2,478		115,908
Other securities		13,893		1,875		2		15,766

Total investment securities available for sale		260,501		17,654		4,895		273,260

Held to Maturity
Securities of U.S. states and political subdivisions		3,480		236		–		3,716
Corporate capital trust and other securities		25		–		–		25

Total investment securities held to maturity		3,505		236		–		3,741

Total	$	264,006	$	17,890	$	4,895	$	277,001


	December 31, 2001
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
Available for Sale
U.S. Treasury and agency securities	$	30,344	$	586	$	1	$	30,929
Securities of U.S. states and political subdivisions		8		–		–		8
Corporate capital trust		98,230		630		4,232		94,628
Other securities		3,669		200		122		3,747

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

Held to Maturity
Securities of U.S. states and political subdivisions		5,839		194		2		6,031
Corporate capital trust and other securities		435		1		–		436

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

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


								Due After One But
	Due Within One Year							Within Five Years
	Amortized		Fair					Amortized		Fair
(Dollars in thousands)	Cost		Value		Yield			Cost		Value		Yield
U.S. Treasury and agencies securities	$	9,530	$	9,602		2.38	%	$	35,306	$	35,880		3.56	%
Securities of U.S. states and political subdivisions		913		924		3.08			5,198		5,449		4.53
Corporate capital trust		–		–		–			–		–		–
Other securities		3,915		3,960		4.40			4,306		4,468		4.29

Total	$	14,358	$	14,486		2.98	%	$	44,810	$	45,797		3.75	%


	Due After Five But
	Within Ten Years							Due After Ten Years
	Amortized		Fair					Amortized		Fair
(Dollars in thousands)	Cost		Value		Yield			Cost		Value		Yield
U.S. Treasury and agency securities	$	7,970	$	7,911		3.63	%	$	46,226	$	48,013		1.58	%
Securities of U.S. states and political subdivisions		12,344		12,048		3.72			26,407		25,475		4.25
Corporate capital trust		–		–		–			106,194		115,908		9.16
Other securities		–		–		–			5,697		7,363		.53

Total	$	20,314	$	19,959		3.68	%	$	184,524	$	196,759		6.29	%


	Principal Payments Contractually Due in the
	Year(s) Ended December 31,
			2005-		2009 and
(Dollars in thousands)	2004		2008		Thereafter		Total
Construction loans	$	759,905	$	233,513	$	9,886	$	1,003,304
Corporate banking loans		380,856		630,747		660,351		1,671,954

Total(1)	$	1,140,761	$	864,260	$	670,237	$	2,675,258


Weighted-average life (in years)	4.6
Weighted-average constant prepayment rate	25.8	%
Weighted-average discount rate	9.0


(Dollars in thousands)	December 31, 2003
Within 12 months	$	5,722,381
Over 12 months to 36 months		2,260,489
Over 36 months		2,335,131

Total	$	10,318,001


(Dollars in thousands)	December 31, 2003
Three months or less	$	308,503
Over three months to six months		391,751
Over six months to twelve months		556,294
Over twelve months		1,049,380

Total	$	2,305,928


	December 31, 2003
	Fixed Rate Advances					Variable Rate Advances
			Weighted					Weighted
			Average					Average
(Dollars in thousands)	Amount		Rate			Amount		Rate
Maturing in:
2004	$	1,719,800		1.43	%	$	–		–	%
2005		2,271,300		6.23			–		–
2006		252,964		4.97			2,000,000		1.23
2007		2,015,992		5.49			173,743		.96
2008		862,959		5.13			99,987		.95
Thereafter		303,399		5.30			135,874		.99

Total advances, net	$	7,426,414		4.71	%	$	2,409,604		1.19	%


			Paying
	Notional		Interest
(Dollars in thousands)	Amount		Rate
Fixed Payment and Variable
Receipt Forward Interest Rate
Swaps Effective Date:
First quarter 2004	$	1,000,000		2.87	%
Second quarter 2004		1,500,000		2.84
Third quarter 2004		1,000,000		2.79

Total	$	3,500,000		2.83	%


	December 31, 2003
											To Be "Well Capitalized"
						For Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Charter One:
Total capital to risk-weighted assets	$	3,573,655		11.68	%	$	2,448,394		>8.00	%	$	3,060,493		>10.00	%
Tier 1 capital to risk-weighted assets		2,790,462		9.12			1,224,197		>4.00			1,836,296		>6.00
Tier 1 capital to average assets		2,790,462		6.50			1,716,047		>4.00			N/A		N/A
Charter One Bank:
Total capital to risk-weighted assets		3,525,567		11.52			2,447,262		>8.00			3,059,077		>10.00
Tier 1 capital to risk-weighted assets		2,409,716		7.88			1,223,631		>4.00			1,835,446		>6.00
Tier 1 capital to average assets		2,409,716		5.65			1,706,068		>4.00			2,132,585		>5.00


				Weighted Average
	Number of			Exercise Price of
	Option Shares			Option Shares
Outstanding at January 1, 2001		21,940,754		$	15.84
Granted		8,182,394			24.71
Acquired through acquisition		1,086,212			16.70
Exercised		(3,082,959	)		11.29
Forfeited		(634,713	)		19.39

Outstanding at December 31, 2001		27,491,688			18.94
Granted		4,643,260			28.72
Exercised		(3,206,736	)		13.27
Forfeited		(357,655	)		22.61

Outstanding at December 31, 2002		28,570,557			21.12
Granted		5,071,172			32.34
Exercised		(3,651,815	)		14.69
Forfeited		(977,758	)		24.48

Outstanding at December 31, 2003		29,012,156		$	23.78

Available for future issuance at December 31, 2003		4,500,300


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the fiscal year ended December 31, 2003.

		OR

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


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)


Common Stock ($0.01 par value), including related preferred stock purchase rights		New York Stock Exchange

(Title of Each Class)		(Name of Each Exchange on which Registered)


	Age at			Officer
Name	December 31, 2003		Position	Since
Charles John Koch		57	Chairman of the Board, President and Chief Executive Officer		1987
Mark D. Grossi		50	Executive Vice President		1992

John David Koch		51	Executive Vice President		1987

Richard W. Neu		47	Executive Vice President and Chief Financial Officer		1995
Robert J. Vana		54	Senior Vice President, Chief Corporate Counsel and Corporate Secretary		1987


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


selected financial data
financial review
consolidated statements of financial condition
consolidated statements of income
consolidated statements of shareholders’ equity
consolidated statements of cash flows
notes to consolidated financial statements
independent auditors’ report
form 10-k
form 10-k cross reference index
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 9A. CONTROLS AND PROCEDURES
SIGNATURES
INDEX TO EXHIBITS
EX-10.24 Deferred Compensation Plan
EX-10.25 Stock Unit Defer'd Compensation Plan Agmt
EX-10.26 Amend 2: Supplemental Retirement Agrmnts
EX-10.27 Amend 3: Supplemental Retirement Agrmnts
EX-11 Computation of Per Share Earnings
EX-21 Subsidiaries
EX-23 Consent of Deloitte & Touche LLP
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32 Section 906 Certifications