CHARTER ONE FINANCIAL INC - 10-Q - 20040810 - NOTES_TO_FINANCIAL_STATEMENT
CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Charter One Financial, Inc. (the “Company” or “Charter
One”) Annual Report on Form 10-K for the year ended December 31, 2003.
The interim financial statements reflect all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results
for the periods presented. Such adjustments are of a normal recurring
nature. The results of operations for the interim periods disclosed
herein are not necessarily indicative of the results that may be expected
for a full year.
2.
Charter One has one operating segment, consumer banking, which offers an
array of products and services to its customers. Pursuant to its consumer
banking strategy, emphasis is placed on building relationships and
identifying cross-sell opportunities with its customers, as opposed to
building specific lines of business. As a result, Charter One works as an
integrated unit to customize solutions for its customers, with business
line emphasis and product offerings changing over time as needs and
demands change.
3.
On December 31, 2002, the Financial Accounting Standards Board (“FASB”)
issued Statement of Financial Accounting Standards (“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, or is expected to be, reflected in net income, as all options
granted under the Company’s stock-based employee compensation plans had an
exercise price equal to the market value of the underlying common stock on
the date of grant. Had stock-based employee compensation costs of the
Company’s stock option plans been determined based on the fair value at
the grant dates for awards under those plans consistent with the method of
SFAS No. 123, as amended by SFAS No. 148, the Company’s net income and
earnings per share would have been reduced to the pro forma amounts
indicated below:
Three Months Ended
Six Months Ended
6/30/04
6/30/03
6/30/04
6/30/03
(Dollars in thousands, except per share data)
Net income:
As reported
$
166,346
$
166,037
$
216,602
$
313,528
Less: Total stock-based employee compensation
expense determined under the fair value
method
for all awards, net of tax
7,845
7,448
15,741
15,018
Pro forma
$
158,501
$
158,589
$
200,861
$
298,510
Basic earnings per share:
As reported
$
.74
$
.74
$
.96
$
1.40
Pro forma
.71
.70
.90
1.33
Diluted earnings per share:
As reported
.72
.72
.94
1.36
Pro forma
.68
.69
.86
1.29
The fair value of each stock option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
used for grants in the three and six months ended June 30, 2004 and 2003:
The estimated weighted-average date of grant fair value (based on the above
option-pricing model and assumptions) was $12.47 and $10.76 for stock
options granted in the three months ended June 30, 2004 and 2003,
respectively, and $12.44 and $10.98 for stock options granted in the six
months ended June 30, 2004 and 2003, respectively.
4.
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 was required for periods ending after March 15,
2004, unless previously applied. The adoption of FIN 46 did not have a
material impact on the Company’s consolidated financial condition or
results of operations.
5.
On May 4, 2004, Citizens Financial Group, Inc. (“Citizens”), a subsidiary
of The Royal Bank of Scotland Group plc, announced it reached an agreement
to acquire Charter One in a cash transaction. The cash purchase price is
$44.50 per share or approximately $10.5 billion. The transaction is
expected to close by the fourth quarter of 2004, subject to regulatory
approval and approval by Charter One shareholders. A special shareholder meeting to vote on the transaction is scheduled for August 23, 2004.
As part of this
transaction, Charter One’s national bank charter will remain.
Citizens is a $78 billion commercial bank holding company. It is
headquartered in Providence, Rhode Island, and has more than 880 offices,
approximately 1,650 ATMs and more than 15,500 employees in seven states. It
operates as Citizens Bank in Connecticut, Delaware, Massachusetts, New
Hampshire, New Jersey, Pennsylvania and Rhode Island. Citizens is one of the
20 largest commercial bank holding companies in the United States. Citizens
is owned by The Royal Bank of Scotland Group plc.
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