<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
Current Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported) October 2, 1998
---------------
Sky Financial Group, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Ohio
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation)
33-21296 34-1372535
- ------------------------ ------------------------------------
(Commission File Number) (I.R.S. Employer Identification No.)
221 South Church Street, Bowling Green, Ohio 43402
- --------------------------------------------------------------------------------
(419) 327-6300
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Citizens Bancshares, Inc., 10 East Main Street, Salineville, Ohio 43945
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
Item 5. Other Events.
- ----------------------
On October 2, 1998, the merger of Mid Am, Inc. ("Mid Am") with and into
Citizens Bancshares, Inc. ("Bancshares") (the "Merger") was consummated pursuant
to the terms and conditions of an Agreement and Plan of Merger dated as of May
20, 1998 as amended and restated as of August 5, 1998 by and between Mid Am and
Bancshares. Upon consummation, Bancshares' name as the surviving corporation
changed to Sky Financial Group, Inc. ("Sky Financial"). The transaction was
accounted for as a pooling of interests for accounting and financial reporting
purposes.
Attached to this Current Report on Form 8-K as Exhibit 99 are the
Supplemental Financial Statements and Related Information of Sky Financial, and
the accompanying notes thereon, giving effect to the Merger.
Item 7. Financial Statements and Exhibits
- ------------------------------------------
Exhibit No. Exhibit
19.1 Report of Independent Auditors Crowe, Chizek and Company LLP
19.2 Report of Independent Accountants PricewaterhouseCoopers LLP
19.3 Report of Independent Auditors SR Snodgrass
23.1 Consent of Crowe, Chizek and Company LLP
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of SR Snodgrass
99 Supplemental Financial Statements and Related Information of Sky
Financial
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Sky Financial Group, Inc.
------------------------------
(Registrant)
Date: October 15, 1998 By:/s/ Marty E. Adams
------------------
Marty E. Adams, President
and Chief Operating Officer
<PAGE> 1
EXHIBIT 19.1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Sky Financial Group, Inc.
Bowling Green, Ohio
We have audited the accompanying supplemental consolidated balance sheets of Sky
Financial Group, Inc. (formerly known as Citizens Bancshares, Inc.) as of
December 31, 1997 and 1996 and the related supplemental consolidated statements
of income, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These supplemental financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental financial
statements based on our audits. We did not audit the financial statements of Mid
Am, Inc., which statements reflect total assets constituting 55% and 59% of the
related 1997 and 1996 totals and net income constituting 58%, 55% and 57% of the
related 1997, 1996 and 1995 totals. We also did not audit the financial
statements of Century Financial Corporation, which statements reflect total
assets constituting 12% and 11% of the related 1997 and 1996 totals and net
income constituting 8%, 10% and 10% of the related 1997, 1996 and 1995 totals.
The Mid Am, Inc. and Century Financial Corporation financial statements were
audited by other auditors, whose reports dated January 19, 1998 and January 16,
1998, respectively, thereon have been furnished to us and our opinion expressed
herein, insofar as it relates to the amounts included for Mid Am, Inc. and
Century Financial Corporation in the supplemental consolidated financial
statements, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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 and the report of the other auditors provide a
reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the mergers on October 2, 1998 with Mid Am, Inc., on May 12, 1998 with Century
Financial Corporation and on March 6, 1998 with UniBank, which have been
accounted for as poolings of interests as described in Note 2 to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling of interests method in financial statements that do
not include the date of consummation. These supplemental consolidated financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of Sky Financial Group,
Inc. after the consolidated financial statements covering the date of
consummation of the business combination are issued.
In our opinion, based on our audits and the reports of other auditors, the
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sky Financial
Group, Inc. as of December 31, 1997 and 1996 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles
applicable after financial statements are issued for a period which includes the
date of consummation of the business combination.
Crowe, Chizek and Company LLP
Columbus, Ohio
October 9, 1998
<PAGE> 1
Exhibit 19.2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Mid Am, Inc.
In our opinion, the consolidated statement of condition and the related
consolidated statements of earnings, of changes in shareholders' equity and of
cash flows (not presented separately herein) present fairly, in all material
respects, the financial position of Mid Am, Inc. and its subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
January 19, 1998
Toledo, Ohio
<PAGE> 1
[Snodgrass Letterhead]
Exhibit 19.3
REPORT OF INDEPENDENT AUDITORS
-----------------------------
[GRAPHIC]
Board of Directors and Shareholders
Century Financial Corporation
We have audited the accompanying consolidated balance sheet of Century Financial
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Century Financial
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
As explained in the notes to the consolidated financial statements, effective
January 1, 1995, the Corporation adopted a new method of accounting for
impairment of loans and related allowance for loan losses.
S.R. Snodgrass, A.C.
Wexford, PA
January 16, 1998
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (File No. 333-64127)
and in the Proxy Statement/Prospectus constituting part of the Registration
Statement on Form S-4 (File No. 333-63533) of Citizens Bancshares, Inc. (now
known as Sky Financial Group, Inc.) of our report dated October 9, 1998 on Sky
Financial Group, Inc.'s supplemental consolidated balance sheets as of December
31, 1997 and 1996, and the related supplemental consolidated statements of
income, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997, which report is included in this
Form 8-K.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Columbus, Ohio
October 14, 1998
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-64127) of
Sky Financial Group, Inc. (formerly Citizens Bancshares, Inc.) of our report
dated January 19, 1998 relating to the consolidated financial statements of Mid
Am, Inc., which appears in this Current Report on Form 8-K of Sky Financial
Group, Inc. dated October 15, 1998. We also consent to the reference to us
under the heading "Experts" in such Prospectus.
PricewaterhouseCooper LLP
Memphis, Tennessee
October 15, 1998
<PAGE> 1
Exhibit 23.3
[Snodgrass Letterhead]
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Prospectus which is part of
the Registration Statement on Form S-3 (File No. 333-64127) and in the Joint
Proxy Statement/Prospectus which is part of the Registration Statement on Form
S-4 (Registration No. 333-63533) of Sky Financial Group, Inc. (formerly
Citizens Bancshares, Inc.) which incorporates by reference our report dated
January 16, 1998 (relating to the consolidated financial statements of Century
Financial Corporation as of December 31, 1997 and 1996 and for each of the
three years in the period ended December 31, 1997) and appears in this current
report on Form 8-K of Sky Financial Group, Inc. dated October 15, 1998.
We also consent to the reference to us under the heading "Experts" in such
Joint Proxy Statement/Prospectus.
/s/ S.R. Snodgrass, A.C.
Wexford, PA
October 13, 1998
<PAGE> 1
EXHIBIT 99
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL STATEMENTS AND RELATED INFORMATION
Effective October 2, 1998, Mid Am Inc. ("Mid Am"), Bowling Green, Ohio, merged
into Citizens Bancshares, Inc. ("Bancshares"), Salineville, Ohio. In conjunction
with the merger, Bancshares changed its name to Sky Financial Group, Inc.
("Sky"). The transaction was affected through the exchange of .77 Bancshares
common shares for each of Mid Am's outstanding common shares, with cash paid in
lieu of fractional shares. The merger was accounted for as a pooling of
interests. Because the merged business is considered significant pursuant to
Rule 11-01(b) of Regulation S-X, the following information is presented, as
restated for that merger, as well as Bancshares' May 12, 1998 merger with
Century Financial Corporation ("Century"), Rochester, Pennsylvania, and March 6,
1998 merger with UniBank, Steubenville, Ohio. The Century and the UniBank
mergers were also accounted for as poolings of interests, and were affected
through the exchange of .7926 and 26.5 common shares of Bancshares common shares
for each of Century's and Unibank's outstanding common shares, respectively,
with cash paid in lieu of fractional shares. The Century merger was considered
significant pursuant to Rule 11-01(b) of Regulation S-X while the Unibank merger
was not considered significant under the same Rule.
The following supplemental financial statements and other information is
presented to reflect the mergers with Mid Am, Century and UniBank.
<TABLE>
<CAPTION>
SUPPLEMENTAL ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Supplemental Consolidated Balance Sheets............................................ 2
Supplemental Consolidated Statements of Income...................................... 3
Supplemental Consolidated Statements of Changes in Shareholders' Equity............. 4
Supplemental Consolidated Statements of Cash Flows.................................. 6
Notes to Supplemental Consolidated Financial Statements............................. 8
Report of Independent Auditors ..................................................... 39
SUPPLEMENTAL SELECTED CONSOLIDATED FINANCIAL DATA........................................ 40
SUPPLEMENTAL FINANCIAL REVIEW............................................................ 41
SUPPLEMENTAL INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Interim Condensed Consolidated Balance Sheets.......................... 63
Supplemental Interim Condensed Consolidated Statements of Income.................... 64
Supplemental Interim Condensed Consolidated Statements of Comprehensive Income...... 65
Supplemental Interim Condensed Consolidated Statements of Changes in
Shareholders' Equity.............................................................. 65
Supplemental Interim Condensed Consolidated Statements of Cash Flows............... 66
Notes to Supplemental Interim Consolidated Financial Statements..................... 67
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SUPPLEMENTAL INTERIM
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................... 75
</TABLE>
- -------------------------------------------------------------------------------
1.
<PAGE> 2
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks $ 138,105 $ 131,855
Federal funds sold 36,526 37,166
Interest-bearing deposits with financial institutions 6,389 3,835
Securities available for sale 818,267 766,815
Securities held to maturity (Estimated fair value $88,018 in
1997 and $88,627 in 1996) 87,207 88,371
Loans held for sale 17,711 15,118
Total loans 2,741,406 2,570,143
Less allowance for credit losses (35,901) (31,301)
------------- --------------
Net loans 2,705,505 2,538,842
Premises and equipment 84,697 78,209
Accrued interest receivable and other assets 88,491 63,792
------------- --------------
Total assets $ 3,982,898 $ 3,724,003
============= ==============
LIABILITIES
Deposits
Noninterest-bearing deposits $ 354,658 $ 330,114
Interest-bearing deposits 2,785,967 2,735,139
------------- --------------
Total deposits 3,140,625 3,065,253
Securities sold under repurchase agreements and federal funds
purchased 182,362 186,782
Debt and Federal Home Loan Bank advances 283,369 103,170
Accrued interest payable and other liabilities 39,115 36,133
------------- --------------
Total liabilities 3,645,471 3,391,338
------------- --------------
SHAREHOLDERS' EQUITY
Serial preferred stock, $10.00 par value; 10,000,000 shares
authorized; none issued
Preferred stock, no par value; 2,000,000 shares authorized;
1,203,725 shares issued in 1996 30,093
Common stock, no par value; 150,000,000 shares authorized;
36,572,758 and 35,404,723 shares issued in 1997 and 1996 207,314 187,471
Retained earnings 128,427 116,640
Treasury stock; 169,475 and 60,219 shares in 1997 and 1996 (4,096) (1,178)
ESOP obligations and unearned shares (325) (413)
Unrealized gain on securities available for sale 6,107 52
------------- --------------
Total shareholders' equity 337,427 332,665
------------- --------------
Total liabilities and shareholders' equity $ 3,982,898 $ 3,724,003
============= ==============
</TABLE>
- --------------------------------------------------------------------------------
See notes to supplemental consolidated financial statements.
2.
<PAGE> 3
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
For the years December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
INTEREST INCOME
<S> <C> <C> <C>
Loans, including fees $ 245,453 $ 225,377 $ 213,427
Securities
Taxable 50,726 48,753 49,407
Nontaxable 3,900 4,563 4,983
Federal funds sold and other 2,790 4,272 5,517
----------- ----------- -----------
Total interest income 302,869 282,965 273,334
----------- ----------- -----------
INTEREST EXPENSE
Deposits 120,554 118,286 114,940
Borrowed funds 24,331 13,200 13,999
----------- ----------- -----------
Total interest expense 144,885 131,486 128,939
----------- ----------- -----------
NET INTEREST INCOME 157,984 151,479 144,395
PROVISION FOR CREDIT LOSSES 9,862 6,816 5,506
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 148,122 144,663 138,889
----------- ----------- -----------
OTHER INCOME
Trust department income 3,024 2,391 2,010
Service charges and fees on deposit accounts 13,197 11,110 10,177
Mortgage banking income 14,488 11,152 8,565
Brokerage commissions 6,083 9,156 9,540
Collection agency fees 5,053 4,213 3,399
Net securities gains (losses) (122) 1,553 248
Net gains on sales of commercial financing loans 13,027 2,992 -
Other income 22,810 15,669 9,547
----------- ----------- -----------
Total other income 77,560 58,236 43,486
----------- ----------- -----------
OTHER EXPENSES
Salaries and employee benefits 77,423 63,076 54,218
Occupancy and equipment expense 21,362 19,586 18,478
Merger, integration, and restructuring expense 200 838 711
Other operating expense 48,295 49,656 45,181
----------- ----------- -----------
Total other expenses 147,280 133,156 118,588
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 78,402 69,743 63,787
INCOME TAXES 25,101 22,021 20,026
----------- ----------- -----------
NET INCOME $ 53,301 $ 47,722 $ 43,761
=========== =========== ===========
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 52,696 $ 45,315 $ 41,010
=========== =========== ===========
BASIC EARNINGS PER COMMON SHARE $ 1.46 $ 1.29 $ 1.15
=========== =========== ==========
DILUTED EARNINGS PER COMMON SHARE $ 1.43 $ 1.25 $ 1.13
=========== =========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See notes to supplemental consolidated financial statements.
3.
<PAGE> 4
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
For the years December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ESOP Unrealized
Obligation Gain (Loss)
and On Securities
Preferred Common Retained Treasury Unearned Available
Stock Stock Earnings Stock Shares For Sale Total
----- ----- -------- ----- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $ 40,200 $ 162,934 $ 100,845 $ (25) $ (150) $(11,661) $ 292,143
Net income 43,761 43,761
Preferred cash dividends (2,751) (2,751)
Common cash dividends
($.25 per share) (17,582) (17,582)
Common stock dividend
(1,313,436 shares) 18,000 (18,000)
Unrealized gains on securities
available for sale 14,937 14,937
Treasury shares acquired (9,213) (9,213)
Treasury shares issued 793 793
Preferred stock conversions (4,631) 4,631
Fractional shares and other
items 711 (355) (181) 175
--------- ---------- --------- --------- ------ -------- ----------
Balance, December 31, 1995 35,569 186,276 105,918 (8,445) (331) 3,276 322,263
Net income 47,722 47,722
Preferred cash dividends (2,407) (2,407)
Common cash dividends
($.42 per share) (19,948) (19,948)
Common stock dividend
(1,521,142 shares including
873,946 shares issued from
treasury) (3,271) (14,604) 17,875
Unrealized gains on securities
available for sale (3,224) (3,224)
Treasury shares acquired (11,020) (11,020)
Treasury shares issued 412 412
Preferred stock conversions (5,476) 5,476
Pre-merger acquisition of
pooled affiliate common
shares (1,127) (1,127)
Fractional shares and other
items 117 (41) (82) (6)
--------- ---------- --------- --------- ------ -------- ----------
Balance, December 31, 1996 $ 30,093 $ 187,471 $ 116,640 $ (1,178) $ (413) $ 52 $ 332,665
</TABLE>
- --------------------------------------------------------------------------------
See notes to supplemental consolidated financial statements.
4.
<PAGE> 5
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY (Continued)
For the years December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ESOP Unrealized
Obligation Gain (Loss)
and On Securities
Preferred Common Retained Treasury Unearned Available
Stock Stock Earnings Stock Shares For Sale Total
----- ----- -------- ----- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 30,093 $ 187,471 $ 116,640 $ (1,178) $ (413) $ 52 $ 332,665
Net income 53,301 53,301
Preferred cash dividends (605) (605)
Common cash dividends
($.56 per share) (23,816) (23,816)
Common stock dividend
(1,739,877 shares including
313,835 shares issued from
treasury) 10,608 (17,020) 6,412
Unrealized gains on securities
available for sale 6,055 6,055
Treasury shares acquired (10,217) (10,217)
Treasury shares issued 481 887 1,368
Preferred stock conversions (17,213) 17,213
Preferred stock retired (12,880) (8,921) (21,801)
Fractional shares and other
items 462 (73) 88 477
--------- ---------- --------- --------- ------ -------- ----------
Balance, December 31, 1997 $ - $ 207,314 $ 128,427 $ (4,096) $ (325) $ 6,107 $ 337,427
========= ========== ========= ========= ====== ======== ==========
</TABLE>
- --------------------------------------------------------------------------------
See notes to supplemental consolidated financial statements.
5.
<PAGE> 6
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years December 31, 1997, 1996 and 1995
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 53,301 $ 47,722 $ 43,761
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 14,428 12,163 13,002
Net gains on sales of assets (35,029) (17,602) (6,280)
Provision for credit losses 9,862 6,816 5,506
Net change in loans held for sale 16,096 9,447 3,200
Net change in other assets and liabilities (1,649) 7,568 (9,877)
------------ ----------- -----------
Net cash provided by operating activities 57,009 66,114 49,312
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase (decrease) in interest-bearing deposits
with financial institutions (2,554) 961 1,459
Net increase (decrease) in federal funds sold 640 69,302 (85,359)
Securities available for sale:
Proceeds from maturities and payments 190,373 224,430 82,749
Proceeds from sales 85,950 55,983 69,703
Purchases (313,848) (190,517) (146,614)
Securities held to maturity:
Proceeds from maturities and payments 59,723 49,888 106,038
Purchases (58,444) (57,565) (79,719)
Proceeds from sales of loans 32,309 42,383 53,633
Net increase in loans (170,782) (280,115) (177,145)
Purchases of premises and equipment (18,165) (14,029) (9,869)
Purchases of life insurance contracts (20,000) (500) (724)
Purchases of loans (11,989) (3,604) -
Proceeds from sales of premises and equipment 2,489 782 1,125
Proceeds from sales of other real estate 3,090 609 3,476
Cash acquired through acquisitions - 80 31
------------ ----------- -----------
Net cash used by investing activities (221,208) (101,912) (181,216)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash transferred in connection with sale of
branch deposits (84,927) - -
Net increase in deposit accounts 70,798 25,713 189,088
Net increase (decrease) in federal funds and repurchase
agreements (4,420) 74,773 (619)
Net increase (decrease) in short-term FHLB advances 92,710 (21,500) 8,730
Proceeds from issuance of debt and long-term FHLB
advances 137,175 21,350 23,601
Repayment of debt and long-term FHLB advances (49,686) (42,965) (42,886)
Cash dividends and fractional shares paid (24,041) (22,371) (19,231)
Pre-merger acquisition of pooled affiliate common stock - (1,127) -
Purchases of branch deposits, net 64,605 - -
</TABLE>
- --------------------------------------------------------------------------------
See notes to supplemental consolidated financial statements.
6.
<PAGE> 7
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued) For the years December 31, 1997, 1996 and 1995
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES (Continued)
Preferred stock retired (21,801) - -
Proceeds from issuance of common stock 1,311 696 1,027
Treasury stock purchases (10,690) (11,219) (9,322)
Other items (585) (6) 235
------------ ----------- -----------
Net cash provided by financing activities 170,449 23,344 150,623
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 6,250 (12,454) 18,719
Effect on cash of conforming the year ends of
pooled entities - - 145
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 131,855 144,309 125,445
------------ ----------- -----------
CASH AND DUE FROM BANKS AT END OF YEAR $ 138,105 $ 131,855 $ 144,309
============ =========== ===========
NONCASH TRANSACTIONS:
Securitization of loans held for sale $ 6,344 $ 73,527 $ 3,685
============ =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
See notes to supplemental consolidated financial statements.
7.
<PAGE> 8
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These supplemental consolidated financial statements give retroactive effect to
the merger transactions accounted for by the pooling of interests method as
discussed in Note 2 of these supplemental consolidated financial statements and,
as a result, the supplemental consolidated balance sheets, and statements of
income, changes in shareholders' equity and cash flows are presented as if the
Sky Financial Group, Inc. ("Company") -- formerly known as Citizens Bancshares,
Inc. ("Bancshares"), Mid Am Inc. ("Mid Am"), UniBank and Century Financial
Corporation ("CFC") had been consolidated for all periods presented. Generally
accepted accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation. However, they will
become the historical consolidated financial statements of the Company after
financial statements covering the date of consummation of the business
combination are issued. The supplemental consolidated financial statements,
including the notes thereto, should be read in conjunction with the historical
consolidated financial statements of Bancshares, Mid Am and CFC included in
their December 31, 1997 Annual Reports on Form 10-K, and UniBank's historical
financial statements included in its December 31, 1997 Annual Report furnished
to shareholders.
The accounting and reporting policies followed by the Company conform to
generally accepted accounting principles and to general practices within the
financial services industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Actual results could differ from those estimates.
The Company's business is primarily related to commercial banking and related
services. The Company also operates businesses relating to collection
activities, broker-dealer operations and commercial finance lending. However,
the revenues, operating profit and assets of the collection business,
broker-dealer business and finance company are not material to warrant separate
disclosure. The Company's predominant business continues to be banking.
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 131 "Disclosures about Segments of
an Enterprise and Related Information." SFAS 131 establishes new standards for
the way public companies report information about their operating segments in
annual and interim financial statements. The Company will be required to adopt
SFAS 131 no later than December 31, 1998. SFAS 131 adopts a management approach
to determine operating segments and then imposes quantitative criteria to
determine which operating segments, if any, must be reported. The Company is
currently evaluating SFAS 131 and has not determined what operating segments
will be reported under the new standards disclosure rules which, on an annual
basis, will include information regarding each reportable operating segments,
products and services, factors used to determine reportable segments, and
certain operating information such as interest revenue, interest expense, and
profit or loss of the operating segment.
- --------------------------------------------------------------------------------
(Continued)
8.
<PAGE> 9
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A summary of the significant accounting policies follows.
CONSOLIDATION - The consolidated financial statements of the Company include the
accounts of Citizens Banking Company ("Citizens"), Mid American National Bank
and Trust Company ("Mid Am Bank"), First National Bank Northwest Ohio ("First
National"), American Community Bank, N.A. ("AmeriCom"), AmeriFirst Bank, N.A.
("AmeriFirst"), Adrian State Bank ("Adrian"), Century National Bank ("Century"),
Mid Am Recovery Services, Inc. ("MARSI"), MFI Investments Corp. ("MFI"), Mid Am
Credit Corp. ("MACC"), Mid Am Financial Services, Inc. ("MAFSI"), Simplicity
Mortgage Consultants, Inc. ("Simplicity"), Mid Am Private Trust, N.A. ("MAPT")
Mid Am Information Services, Inc ("MAISI"), Mid Am Capital Trust I ("MACT"),
ValueNet (a wholly-owned subsidiary of Citizens), Freedom Financial Life
Insurance Company, Freedom Express, Inc. and various other insignificant
subsidiaries. All significant intercompany transactions and accounts have been
eliminated in consolidation.
CASH AND DUE FROM BANKS - The Company's subsidiary banks were required to have
approximately $40,910 of cash on hand or on deposit with the Federal Reserve
Bank to meet regulatory reserve requirements at December 31, 1997.
These balances do not earn interest.
SECURITIES - The Company classifies its securities as held to maturity, trading
or available for sale. Securities classified as available for sale are carried
at estimated fair value. The unrealized appreciation or depreciation from the
securities' acquisition cost is recorded in a valuation account, net of the
applicable income tax effect, in the shareholders' equity section of the
statement of condition. Securities classified as available for sale are those
that management intends to sell or that could be sold for liquidity, investment
management or similar reasons, even if there is not a present intention to make
such a sale. Equity securities that have a readily determinable fair value are
also classified as available for sale. Securities classified as held to maturity
are stated at cost, adjusted for amortization of premiums and accretion of
discounts using the interest method. Securities classified as held to maturity
are those that management has the positive intent and ability to hold to
maturity. Trading securities are acquired for sale in the near term and are
carried at fair value, with unrealized holding gains and losses reflected in
earnings. The Company held no trading securities during any period presented.
Amortization of premiums and accretion of discounts are recorded in interest
income using the interest method over the period to maturity, which is sometimes
estimated. The amount of unrealized appreciation or depreciation relating to a
security which is available for sale is recognized in the income statement upon
sale of the security using the specific identification method to determine the
security's cost.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company's hedging policies permit the use
of interest rate swaps, caps and floors to manage interest rate risk or to hedge
specified assets and liabilities. Derivative financial instruments are not used
for trading purposes. Through December 31, 1997, the Company has not used any
derivative financial instruments for hedging purposes, but may do so in the
future.
PLEDGED SECURITIES - The carrying value of securities pledged to secure public
and trust deposits, securities sold under agreements to repurchase and for other
purposes as required by law amounted to $532,994 and $510,927 at December 31,
1997 and 1996, respectively.
- --------------------------------------------------------------------------------
(Continued)
9.
<PAGE> 10
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOANS HELD FOR SALE - Certain residential mortgage loans are originated for sale
in the secondary mortgage-loan market. Additionally, certain other loans and
leases are periodically identified to be sold. These loans and leases are
classified as loans held for sale and carried at the lower of cost or estimated
fair value taken together. Fair value is determined on the basis of rates quoted
in the respective secondary market for the type of loan or lease held for sale.
Loans and leases are generally sold at a premium or discount from the carrying
amount of the loans. Such premium or discount is recognized at the date of sale.
Fixed commitments may be used at the time loans are originated or identified for
sale to mitigate interest rate risk.
MORTGAGE SERVICING RIGHTS - The cost of mortgage loans which the Company
originates or purchases under a definitive plan to sell or securitize is
allocated between the mortgage servicing rights and the cost of the mortgage
based on the relative fair values at date of origination or purchase. The fair
value of the mortgage servicing rights is determined by discounting expected
servicing income cash flows, net of certain servicing costs, by a rate which is
comparable to the then current interest-only strip rate. The cost of those
mortgage loans which are originated or purchased without a definitive plan to
sell or securitize is not allocated between mortgage servicing rights and the
cost of the mortgage until the date of sale or securitization.
Mortgage servicing rights assets are amortized in proportion to and over the
period of estimated net servicing income. Management periodically evaluates
mortgage servicing assets for impairment by discounting the expected future cash
flows, taking into consideration the estimated level of prepayments based upon
current industry expectations.
INTEREST AND FEES ON LOANS - Interest income on loans is accrued over the term
of the loans using the simple-interest method based on the amount of principal
outstanding. The accrual of interest is discontinued on a loan when management
believes that the collection of interest is doubtful. Restructured loans are
those loans on which concessions in terms have been granted because of a
borrower's financial difficulty. Interest is generally accrued on such loans in
accordance with their original contractual rates. Loan origination and
commitment fees and certain direct loan origination costs are deferred and
amortized as an adjustment to the related loan's yield. The Company is
amortizing these amounts over the contractual life of the related loans.
ALLOWANCE FOR CREDIT LOSSES -- The allowance for credit losses is established
through a provision for credit losses charged to expense. Loans and leases are
charged against the allowance for credit losses when management believes the
full collectibility of the loan is unlikely. The allowance is an amount that
management believes will be adequate to absorb losses inherent in existing loans
and commitments to extend credit. The allowance and provision take into
consideration such factors as changes in the nature and volume of the portfolio,
overall portfolio quality, loan concentrations, specific problem loans, leases
and commitments, and current and anticipated economic conditions that may affect
the borrowers' ability to pay. Allowances established to provide for losses
under commitments to extend credit, or recourse provisions under loan and lease
sales agreements or servicing agreements are classified with other liabilities.
A loan is considered impaired when it is probable that not all principal and
interest amounts will be collected according to the loan contract. Residential
mortgage, installment and other consumer loans are collectively evaluated for
impairment. Individual commercial loans exceeding size thresholds established by
management are evaluated for impairment. Impaired loans are recorded at the
loan's fair value by the establishment of a specific allowance where necessary.
The fair value of collateral-dependent loans is determined by the fair value of
the underlying collateral. The fair value of noncollateral-dependent loans is
determined by discounting expected future interest and principal payments at the
loan's effective interest rate.
- --------------------------------------------------------------------------------
(Continued)
10.
<PAGE> 11
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
OTHER REAL ESTATE OWNED - Real estate acquired in settlement of a loan is
carried in other assets at the lower of the recorded investment in the property
or its fair value. Prior to foreclosure, the value of the underlying loan is
written down to the fair value of the real estate to be acquired by a charge to
the allowance for credit losses, if necessary. At the time of foreclosure, an
allowance is established for estimated selling costs. Any subsequent write-downs
required by changes in estimated fair value or disposal expenses are provided
through this allowance and the provision is charged to operating expense.
Carrying costs of such properties, net of related income, and gains and losses
on their disposition are charged or credited to operating expense as incurred.
At December 31, 1997 and 1996, other real estate owned totaled $529 and $2,759.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost, less
accumulated depreciation which is computed primarily using the straight-line
method. The adjusted cost of the specific assets sold or disposed of is used to
compute gains or losses on disposal. These assets are reviewed for impairment
when events indicate their carrying value may not be recoverable.
INTANGIBLE ASSETS - Goodwill is amortized using the straight-line method over
periods ranging from 15 to 25 years. Core deposit intangible assets acquired
before 1992 are amortized using the straight-line method over periods ranging
from 10 to 15 years. Core deposit intangible assets acquired on or after January
1, 1992 are amortized using an accelerated method over periods ranging from 10
to 15 years. Net intangible assets at December 31, 1997 and 1996 aggregated
$17,925 and $12,439 respectively.
MERGER, INTEGRATION AND RESTRUCTURING EXPENSE - Included in other operating
expense is a charge for merger, integration and restructuring expenses, which
primarily represents professional fees, early retirement, other personnel
related costs and the write-off of certain equipment in the elimination of
duplicate facilities in mergers and acquisitions.
INCOME TAXES - The Company utilizes an asset and liability approach for
financial accounting and reporting of income taxes. The provision for income
taxes is based on pre-tax income which differs in some respects from taxable
income. Deferred income taxes are provided using the current tax rate for
differences between the tax basis of assets and liabilities and their carrying
amounts for financial reporting purposes.
TRUST ACTIVITIES - Income from trust fiduciary activities has been recognized on
the accrual basis. Assets held by the Company in fiduciary or agency capacities
(other than cash on deposit at the Company's bank subsidiaries) for its
customers are not included in the consolidated statement of condition as such
items are not assets of the Company.
EARNINGS PER SHARE - Earnings per share amounts reflect the implementation of
SFAS No. 128, "Earnings per Share." SFAS 128 established new standards for
computing and presenting earnings per share and requires all prior period
earnings per share data be restated to conform with the provisions of the
statement. Basic earnings per share is computed by dividing net income available
to common shareholders by the weighted average number of shares outstanding
during the period, as restated for shares issued in business combinations
accounted for as poolings-of-interests (see Note 2), stock splits and stock
dividends. Diluted earnings per share is computed using the weighted average
number of shares determined for the basic computation plus the number of shares
of common stock that would be issued assuming all contingently issuable shares
having a dilutive effect on earnings per share were outstanding for the period.
- --------------------------------------------------------------------------------
(Continued)
11.
<PAGE> 12
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The weighted average number of common shares outstanding for basic and diluted
earnings per share computations were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
NUMERATOR
<S> <C> <C> <C>
Net income $ 53,301 $ 47,722 $ 43,761
Less: Preferred stock dividends (605) (2,407) (2,751)
------------ ----------- -----------
Net income available to common shareholders (Basic) 52,696 45,315 41,010
Effect of dilutive securities:
Convertible preferred stock 605 2,407 2,751
------------ ----------- -----------
Net income (Diluted) $ 53,301 $ 47,722 $ 43,761
============ =========== ===========
DENOMINATOR:
Weighted-average common shares outstanding (Basic) 36,025,000 35,213,000 35,547,000
Effect of stock options 322,000 230,000 98,000
Convertible preferred stock 856,000 2,772,000 3,137,000
------------ ----------- -----------
Weighted-average common shares outstanding (Diluted) 37,203,000 38,215,000 38,782,000
============ =========== ===========
EARNINGS PER SHARE:
Basic $ 1.46 $ 1.29 $ 1.15
============ =========== ==========
Diluted $ 1.43 $ 1.25 $ 1.13
============ =========== ==========
</TABLE>
The Company's Board of Directors declared a two-for-one stock split payable June
1, 1998 to shareholders of record May 12, 1998 and a three-for-two stock split
payable January 12, 1996 to shareholders of record December 31, 1995. In
addition, Mid Am declared 10% stock dividends in each year. All share and per
share data have been retroactively adjusted to reflect the mergers discussed in
Note 2, stock dividends and splits.
TRANSFERS OF FINANCIAL ASSETS - Effective January 1, 1997, the Company adopted
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS 125 established new accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. SFAS 125 focuses on the concept of control. Under
this approach, after a transfer of financial assets, the Company recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
and derecognizes financial assets when control has been surrendered, and
derecognize liabilities when extinguished.
The Company transfers certain residential mortgage loans originated by its bank
subsidiaries and MAFSI and loans and leases originated by MACC. The Company
accounts for these transfers as sales under the provisions of SFAS 125;
accordingly, the loans and leases transferred have been derecognized. The
Company had accounted for these transfers as sales prior to the issuance of SFAS
125; therefore, the impact of adopting SFAS 125 was not material to the 1997
results of operations.
TREASURY STOCK - Shares of the Company's stock are acquired for purposes of
issuance in connection with stock option plans and for future stock dividend
declarations. The treasury shares acquired are recorded at cost.
- --------------------------------------------------------------------------------
(Continued)
12.
<PAGE> 13
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION - Pro forma disclosures of compensation cost of
stock-based awards have been determined using the fair value method which
considers the time value of the option considering the volatility of the
Company's stock and the risk-free interest rate over the expected life of the
option using a Black-Scholes valuation model.
STATEMENT OF CASH FLOWS - The Company considers cash on hand, deposits
maintained with the Federal Reserve Bank and cash due from other banks, all of
which are included in the caption Cash and Due from Banks, as cash for purposes
of the Statement of Cash Flows. The Company reports net cash flows for federal
funds sold, interest-bearing deposits with other financial institutions,
customer loan transactions, deposit transactions, repurchase agreements, and
short-term borrowings. For the years ended December 31, 1997, 1996 and 1995, the
Company paid interest of $143,101, $132,459 and $125,981, and income taxes of
$29,623, $18,960 and $19,498.
COMPREHENSIVE INCOME - In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting of
comprehensive income and its components. This Statement will be effective for
the Company for the year ending December 31, 1998. This Statement requires that
entities classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and surplus in the equity section of a
statement of financial condition. Comprehensive income is composed of net income
and "other comprehensive income." Other comprehensive income includes charges or
credits to equity that are not the result of transactions with the entities'
shareholders. Currently, the only item of other comprehensive income from the
activities of the Company relate to the unrealized gains and losses of the
Company's portfolio of available for sale securities. The Company anticipates
reporting comprehensive income in the Statement of Changes in Shareholders'
Equity. Upon adoption, the financial statements of earlier periods will be
restated for comparative purposes.
RECLASSIFICATIONS - Certain amounts in the 1996 and 1995 consolidated financial
statements and pooled affiliates' financial statements have been reclassified to
conform to the Company's 1997 presentation.
NOTE 2 - MERGERS, ACQUISITIONS AND DIVESTITURES
Effective October 2, 1998, Bancshares and Mid Am affiliated in a
merger-of-equals transaction which was accounted for as a pooling of interests.
Shareholders of Mid Am received 0.77 shares of Bancshares common stock for each
share of Mid Am stock owned, with cash paid in lieu of fractional shares. In
conjunction with the merger, Bancshares changed its name to Sky Financial Group,
Inc. Mid Am had assets of approximately $2.3 billion, with 83 banking offices
located in western Ohio and southern Michigan. Mid Am also owned 7 financial
services subsidiaries, now subsidiaries of the Company, which engage in lines of
business closely related to banking.
Effective March 6, 1998, UniBank, Steubenville, Ohio, affiliated with the
Corporation by merging into Citizens. The transaction was affected through the
exchange of 26.5 common shares of the Bancshares for each of UniBank's
outstanding common shares, with cash paid in lieu of fractional shares. Unibank
had assets of approximately $216,000 with 12 offices in Jefferson and Columbiana
counties in Ohio, and is operated as part of Citizens' branch network.
- --------------------------------------------------------------------------------
(Continued)
13.
<PAGE> 14
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
NOTE 2 - MERGERS, ACQUISITIONS AND DIVESTITURES (Continued)
Effective May 12, 1998, Century Financial Corporation, Rochester, Pennsylvania,
merged into Bancshares. The transaction was affected through the exchange of
.7926 common shares of Bancshares for each of Century's outstanding common
shares, with cash paid in lieu of fractional shares. CFC had assets of
approximately $453,000 with 13 branches in Beaver and Butler counties in
Pennsylvania. Initially, Century will operate as a wholly-owned subsidiary of
the Company.
The transactions were accounted for as poolings of interests. As discussed in
Note 1, the supplemental consolidated financial statements give retroactive
effect to the transactions. The following is a summary of the separate results
of operations of the Company, UniBank and Century for the years ended December
31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Net interest income
<S> <C> <C> <C>
Company $ 42,625 $ 42,533 $ 39,640
Mid Am 89,526 84,914 82,227
UniBank 8,437 7,334 7,468
Century 17,396 16,698 15,060
----------- ----------- -----------
Combined $ 157,984 $ 151,479 $ 144,395
=========== =========== ===========
Net income
Company $ 16,756 $ 14,706 $ 12,563
Mid Am 30,881 25,992 24,967
UniBank 1,442 2,118 1,963
Century 4,222 4,906 4,268
----------- ----------- -----------
Combined $ 53,301 $ 47,722 $ 43,761
=========== =========== ===========
</TABLE>
On July 22, 1998, Bancshares entered into an agreement and plan of merger with
The Ohio Bank, Findlay, Ohio, whereby shareholders of the Ohio Bank will receive
63.25 Bancshares common shares for each share of The Ohio Bank owned. The Ohio
Bank had assets of $579,405 and $539,031 as of December 31, 1997 and 1996, and
net income of $6,019, $5,428 and $5,306 in 1997, 1996 and 1995. The merger is
subject to approval by regulatory agencies and The Ohio Bank's shareholders, and
is expected to be completed during the fourth quarter of 1998.
On November 21, 1997, Bancshares acquired the Martins Ferry, St. Clairsville and
Barnsville, Ohio branches of Metropolitan Savings Bank of Ohio, an affiliate of
FNB Corporation, Hermitage, Pennsylvania. In the transaction, Bancshares
acquired $25.2 million of loans and approximately $1 million of other assets,
assumed $64.2 million of deposit liabilities and received approximately $32.9
million of funds. Bancshares paid a premium of $5.8 million in the transaction,
which is reflected in other assets in the supplemental consolidated balance
sheet and is being amortized on an accelerated basis over 15 years.
On May 16, 1997, prior to its merger, UniBank assumed certain deposit
liabilities and purchased certain assets from National City Bank, Northeast. In
the transaction, UniBank received $31.2 million of funds and approximately $1
million of other assets, and assumed $34.1 million of deposit liabilities.
UniBank paid a premium of $1.9 million on the transaction, which is reflected in
other assets in the supplemental consolidated balance sheet and is being
amortized on an accelerated basis over 10 years.
Bancshares also entered merger transactions on October 11, 1996, with The
Navarre Deposit Bank Company, Navarre, Ohio, and on December 31, 1995, with The
Western Reserve Bank of Ohio, Lowellville, Ohio. Each transaction was accounted
for as a pooling of interests. Bancshares issued 1,014,000 shares in the Navarre
transaction and 840,000 shares in the Western Reserve transaction.
- --------------------------------------------------------------------------------
(Continued)
14.
<PAGE> 15
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
NOTE 3 - SECURITIES
The amortized costs, unrealized gains and losses and estimated fair values at
year-end are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
1997
- ----
SECURITIES AVAILABLE FOR SALE
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 83,850 $ 628 $ (139) $ 84,339
U.S. Government agencies and corporations 138,689 1,350 (362) 139,677
Obligations of states and political
subdivisions 55,830 1,488 (87) 57,231
Corporate and other securities 27,870 328 (108) 28,090
Mortgage-backed securities 449,161 3,121 (1,278) 451,004
------------ ----------- ----------- ------------
Total debt securities available for sale 755,400 6,915 (1,974) 760,341
Marketable equity securities 53,488 4,440 (2) 57,926
------------ ----------- ----------- ------------
Total securities available for sale $ 808,888 $ 11,355 $ (1,976) $ 818,267
============ =========== =========== ============
SECURITIES HELD TO MATURITY
U.S. Treasury securities $ 38,618 $ 158 $ (8) $ 38,768
U.S. Government agencies and corporations 22,981 51 (13) 23,019
Obligations of states and political
subdivisions 22,013 428 22,441
Corporate and other securities 1,496 (24) 1,472
Mortgage-backed securities 2,099 219 2,318
------------ ----------- ----------- ------------
Total securities held to maturity $ 87,207 $ 856 $ (45) $ 88,018
============ =========== =========== ============
<CAPTION>
1996
- ----
SECURITIES AVAILABLE FOR SALE
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 83,951 $ 324 $ (404) $ 83,871
U.S. Government agencies and corporations 96,280 553 (887) 95,946
Obligations of states and political
subdivisions 59,374 1,793 (128) 61,039
Corporate and other securities 16,584 84 (232) 16,436
Mortgage-backed securities 463,815 2,377 (4,305) 461,887
------------ ----------- ----------- ------------
Total debt securities available for sale 720,004 5,131 (5,956) 719,179
Marketable equity securities 46,739 1,300 (403) 47,636
------------ ----------- ----------- ------------
Total securities available for sale $ 766,743 $ 6,431 $ (6,359) $ 766,815
============ =========== ========== ============
SECURITIES HELD TO MATURITY
U.S. Treasury securities $ 47,339 $ 134 $ (30) $ 47,443
U.S. Government agencies and corporations 13,459 (129) 13,330
Obligations of states and political
subdivisions 23,623 200 (82) 23,741
Corporate and other securities 1,498 (45) 1,453
Mortgage-backed securities 2,452 208 2,660
------------ ----------- ----------- ------------
Total securities held to maturity $ 88,371 $ 542 $ (286) $ 88,627
============ =========== =========== ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
15.
<PAGE> 16
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
The amortized cost and estimated fair value of debt securities at December 31,
1997, by contractual maturity, are shown below. Expected maturities will likely
differ from contractual maturities because some issuers have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
---- ----------
DEBT SECURITIES AVAILABLE FOR SALE
<S> <C> <C>
Due in one year or less $ 50,813 $ 50,839
Due after one year through five years 152,821 154,051
Due after five years through ten years 84,614 86,030
Due after ten years 17,991 18,417
Mortgage-backed securities 449,161 451,004
------------ ------------
Total debt securities available for sale $ 755,400 $ 760,341
============ ============
Amortized Estimated
Cost Fair Value
DEBT SECURITIES HELD TO MATURITY
Due in one year or less $ 17,390 $ 17,402
Due after one year through five years 61,716 62,175
Due after five years through ten years 5,406 5,502
Due after ten years 596 621
Mortgage-backed securities 2,099 2,318
------------ ------------
Total debt securities held to maturity $ 87,207 $ 88,018
============ ============
Proceeds from the sales of securities and the gross realized gains and losses
are as follows:
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Proceeds from sales of securities available for sale $ 85,950 $ 55,983 $ 69,703
Gross realized gains on sales 882 1,806 748
Gross realized losses on sales 1,004 253 500
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
16.
<PAGE> 17
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 4 - LOANS AND ALLOWANCE FOR CREDIT LOSSES
The loan portfolio at year-end, was as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Real estate loans:
<S> <C> <C>
Construction $ 94,329 $ 88,162
Residential mortgage 943,003 943,137
Non-residential mortgage 683,112 550,984
Commercial, financial and agricultural 636,198 654,870
Installment and credit card loans 377,583 327,606
Other loans 7,181 5,384
------------- --------------
Total loans $ 2,741,406 $ 2,570,143
============= ==============
</TABLE>
Most of the Company's business activity is with customers located within the
respective local business areas of its subsidiary banks which encompasses parts
of eastern Ohio, western Ohio, southeastern Michigan, western Pennsylvania and
northern West Virginia. The Company's loan portfolio is diversified, consisting
of commercial, residential, agribusiness, consumer and small business loans. No
significant industry concentrations exist, and amounts related to highly
leveraged transactions are not significant. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained is based on management's evaluation of the customer. Collateral held
relating to commercial, financial, agricultural and commercial mortgages varies
but may include accounts receivable, inventory, property, plant and equipment
and income-producing commercial properties.
In the normal course of business, the Company has made loans to certain
directors, executive officers and their associates under terms consistent with
the Company's general lending policies. Loan activity relating to these
individuals for 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Aggregate balance - December 31, 1996 $ 39,520
New loans 24,469
Repayments (20,477)
Other changes (1,848)
-----------
Aggregate balance - December 31, 1997 $ 41,664
===========
</TABLE>
Other changes represent loans applicable to one reporting period that are
excludable from the other reporting period.
Activity in the allowance for credit losses was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 31,301 $ 29,715 $ 30,415
Provision for credit losses 9,862 6,816 5,506
Recoveries 2,617 3,340 2,915
Loans charged-off (7,879) (8,570) (9,121)
----------- ----------- -----------
Balance at end of year $ 35,901 $ 31,301 $ 29,715
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
17.
<PAGE> 18
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 4 - LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Year-end impaired loans with no allowance for loan losses is allocated $ 799 $ 1,712
Year-end impaired loans with allowance for loan losses allocated 5,668 8,645
Average investment in impaired loans during the year 7,807 12,248
Cash-basis interest income recognized during the year 224 771
</TABLE>
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment as of year-end are summarized as follows:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Land, buildings and improvements $ 86,860 $ 81,440
Equipment, furniture and fixtures 67,680 57,642
Construction in process 1,670 2,758
----------- -----------
Total premises and equipment 156,210 141,840
Less accumulated depreciation and amortization (71,513) (63,631)
----------- -----------
Premises and equipment, net $ 84,697 $ 78,209
=========== ===========
</TABLE>
Included in the above are buildings, land and land improvements which secure a
capitalized lease with a cost of $5,386, less accumulated amortization and
depreciation of $3,549 and $3,288 at December 31, 1997 and 1996. Substantially
all of the property recorded under capital leases relates to transactions with
Bancsites, Inc., a former subsidiary, which the Company continues to
significantly influence through common shareholders and management. The capital
lease premises represent thirteen branch bank facilities owned by Bancsites and
leased to the Company under long-term lease agreements entered into in the
normal course of business and under terms no more favorable than those
prevailing in the marketplace. Lease payments to Bancsites, Inc. under capital
leases amounted to $496 in 1997, $537 in 1996, and $551 in 1995. Rental payments
for land are treated as operating lease expense. Rent expense amounted to $1,889
in 1997, $1,891 in 1996 and $1,666 in 1995.
- --------------------------------------------------------------------------------
(Continued)
18.
<PAGE> 19
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 6 - INTEREST-BEARING DEPOSITS
Total interest-bearing deposits as presented on the balance sheet are comprised
of the following classifications at year-end:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest-bearing demand $ 329,129 $ 391,845
Savings 754,142 730,764
Time
In denominations under $100,000 1,353,467 1,305,606
In denominations of $100,000 or more 349,229 306,924
------------ ------------
Total interest-bearing deposits $ 2,785,967 $ 2,735,139
============ ============
</TABLE>
At December 31, 1997, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 1,122,619
1999 415,929
2000 105,269
2001 33,179
2002 and thereafter 25,700
------------
$ 1,702,696
============
</TABLE>
NOTE 7 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
AND FEDERAL FUNDS PURCHASED
The Company has retail repurchase agreements with customers within the local
market areas, as well as federal funds purchased from other banks. These
borrowings are collateralized with securities owned by the banks and held in
their safekeeping accounts at independent correspondent banks. The Company also
has repurchase agreements with brokerage firms which are in possession of the
underlying securities. The exact same securities are returned to the Company at
the maturity of the agreements. The following table summarizes certain
information relative to these borrowings at year-end:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Outstanding at year-end $ 182,362 $ 186,782
Weighted average interest rate at period-end 4.95% 5.19%
Maximum amount outstanding as of any month-end $ 268,320 $ 210,294
Average amount outstanding 211,228 147,050
Approximate weighted average interest rate during the year 4.95% 4.60%
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
19.
<PAGE> 20
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 8 - DEBT AND FEDERAL HOME LOAN BANK ADVANCES
The Company's debt and Federal Home Loan Bank ("FHLB") advances are comprised of
the following at year-end:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C>
Short-term borrowings under bank line of credit $ 15,000
Borrowings under FHLB lines of credit at weighted interest
rate of 5.98% in 1997 238,355 $ 100,326
Capital lease obligations 2,481 2,814
Mid Am, Inc. obligated mandatorily redeemable capital securities
of subsidiary trust, interest at 10.20%, due June 2027 27,500
Other items 33 30
------------ -----------
Total $ 283,369 $ 103,170
============ ===========
</TABLE>
FHLB advances are collateralized by all shares of FHLB stock owned by subsidiary
banks and by 100% of subsidiary banks' qualified mortgage loan. Based on the
carrying amount of FHLB stock owned by subsidiary banks, total FHLB advances are
limited to approximately $482,440, subject to the availability to pledge
qualified residential mortgage loans. At December 31, 1997, required annual
principal payments on FHLB advances were as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 145,030
1999 47,770
2000 10,302
2001 5,416
2002 20,959
Thereafter 8,878
---------------
$ 238,355
===============
</TABLE>
On December 31, 1996, the Company entered into short-term bank line of credit
with a financial institution which enabled the Company to borrow up to $20,000
through December 31, 1997. The agreement was renewed in December, 1997 and
permits the Company to borrow up to $25,000 through December 31, 1998. Interest
on advances taken on the facility is accrued at either the financial
institution's prime rate, a formula based on the London Interbank Offering Rate,
or a formula based on the Federal Funds Rate. The Company may elect the interest
rate method to be applied to amounts outstanding in $100 increments. The
agreement provides for an annual fee of .1875% on the average unused portion of
the credit facility. The agreement also contains covenants which require the
Company, among other things, to maintain mimimum tangible net worth, as defined,
of $165,000, maintain specified minimum capital ratios, and not permit
non-performing assets to total loans and non-performing assets to total capital
ratios to exceed specified maximums. The weighted-average amount outstanding
under the agreement was $9,444 during 1997 with an average interest rate was
6.40%.
- --------------------------------------------------------------------------------
(Continued)
20.
<PAGE> 21
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
NOTE 8 - DEBT AND FEDERAL HOME LOAN BANK ADVANCES (Continued)
During 1997, MACT, in a private placement, issued $27,500 of 10.20% capital
securities through a wholly-owned special purpose subsidiary. The Company's
obligated mandatorily redeemable capital securities may be redeemed by the
Company prior to their mandatory June 1, 2027 redemption date commencing June 1,
2007 at a redemption price of 105.10% of the face value of the capital
securities and thereafter at a premium which declines annually. On or after June
1, 2017, the capital securities may be redeemed at face value. The Company's
mandatorily redeemable capital securities are considered to be Tier I capital.
On January 16, 1998, Mid Am issued $50,000 of 7.08% subordinated debt in a
private placement transaction. The subordinated debt matures in 2008. For
regulatory capital purposes, the subordinated debt will be considered Tier II
capital.
NOTE 9 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Current:
<S> <C> <C> <C>
Federal $ 27,510 $ 23,362 $ 17,601
State and local 220
----------- ----------- -----------
27,730 23,362 17,601
Deferred:
Federal (2,556) (1,341) 2,425
State and local (73)
----------- ----------- -----------
(2,629) (1,341) 2,425
----------- ----------- -----------
Total provision for income taxes $ 25,101 $ 22,021 $ 20,026
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
21.
<PAGE> 22
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
The sources of gross deferred tax assets and liabilities at December 31, were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Items giving rise to deferred tax assets:
<S> <C> <C> <C>
Allowance for loan losses in excess of tax reserve $ 8,917 $ 7,187 $ 6,557
Unrealized losses on securities available for sale 9
Deferred compensation 1,373 1,064 1,008
Other 3,149 2,272 1,688
----------- ----------- -----------
13,439 10,532 9,253
----------- ----------- -----------
Items giving rise to deferred tax liabilities:
Depreciation (2,525) (2,835) (2,715)
FHLB stock dividends (2,208) (1,690) (1,288)
Mortgage servicing rights (2,041) (1,376) (515)
Unrealized gain on securities available for sale (3,269) (1,688)
Other (1,353) (1,943) (3,476)
----------- ----------- -----------
(11,396) (7,844) (9,682)
----------- ----------- -----------
Net deferred tax asset (liability) $ 2,043 $ 2,688 $ (429)
=========== =========== ===========
</TABLE>
The Company has sufficient taxes paid in current and prior years to warrant
recording the full-deferred tax asset without a valuation allowance.
Total federal income tax expense differs from the expected amounts computed by
applying the statutory federal tax rate of 35% to income before taxes. The
reasons for this difference are as follows:
<TABLE>
<CAPTION>
Tax Tax Tax
1997 Rate 1996 Rate 1995 Rate
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Income tax expense based
upon the federal statutory
rate on income before
income taxes $ 27,441 35.0 % $ 24,411 35.0 % $ 22,325 35.0 %
Tax exempt income (2,667) (3.4) (2,562) (3.7) (2,469) (3.9)
Other 327 .4 172 .3 170 .3
----------- ------ ----------- ------- ----------- ------
$ 25,101 32.0% $ 22,021 31.6% $ 20,026 31.4%
=========== ====== =========== ======= =========== ======
Tax expense (benefit) attributable to securities gains and losses totaled $(43), $544 and $87 in 1997, 1996 and 1995.
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
22.
<PAGE> 23
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
NOTE 10 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows carrying values and the related estimated fair values
of financial instruments at year-end. Items that are not financial instruments
are not included.
<TABLE>
<CAPTION>
1997 1996
------------------------------ -----------------
Carrying Estimated Carrying Estimated
Amounts Fair Value Amounts Fair Value
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Cash and due from banks $ 138,105 $ 138,105 $ 131,855 $ 131,855
Federal funds sold 36,526 36,526 37,166 37,166
Interest-bearing deposits with other
financial institutions 6,389 6,389 3,835 3,835
Securities available for sale 818,267 818,267 766,815 766,815
Securities held to maturity 87,207 88,018 88,371 88,627
Loans held for sale and loans, net of the
allowance for credit losses 2,723,216 2,708,918 2,553,960 2,512,000
Accrued interest receivable 25,678 25,678 24,053 24,053
Deposits (3,140,625) (3,149,654) (3,065,253) (3,072,495)
Securities sold under repurchase agreements
and federal funds purchased (182,362) (182,362) (186,782) (186,782)
Debt and FHLB advances (280,888) (287,242) (100,356) (99,766)
Accrued interest payable (9,604) (9,604) (7,821) (7,821)
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used: the carrying values for cash and due from banks, federal
funds sold, interest-bearing deposits in other financial institutions and
accrued interest was considered to approximate fair value; the estimated fair
value for securities was based on quoted market values for the individual
securities or for equivalent securities; carrying value is considered to
approximate fair value for loans that contractually reprice at intervals of less
than six months; the estimated fair value for other loans was based on estimates
of the rate the Company would charge for similar loans at December 31, 1997 and
1996, applied over estimated payment periods; the estimated fair value for
demand and savings deposits and securities sold under repurchase agreements was
based on their carrying value; the estimated fair value for certificates of
deposit and borrowings was based on estimates of the rate the Company would pay
on such obligations at December 31, 1997 and 1996, applied for the time period
until maturity. The capital lease obligations of $2,481 and $2,814 at December
31, 1997 and 1996 are not included in the fair value disclosures. The estimated
fair value of commitments was not material.
While these estimates of fair values are based on management's judgment of
appropriate factors, there is no assurance that, if the Company had disposed of
such items at December 31, 1997 or 1996, the estimated fair values would
necessarily have been achieved at that date, since market values may differ
depending on various circumstances. The estimated fair values at December 31,
1997 and 1996 should not necessarily be considered to apply at subsequent dates.
In addition, other assets and liabilities of the Company that are not defined as
financial instruments were not included in the above disclosures, such as
property and equipment. In addition, non-financial instruments typically not
recognized in financial statements (but which may have value) were not included
in the above disclosures. These include, among other items, the estimated
earning power of core deposit accounts, the value of a trained work force,
customer goodwill, and similar items.
NOTE 11 - OTHER INCOME AND OTHER OPERATING EXPENSE
- --------------------------------------------------------------------------------
(Continued)
23.
<PAGE> 24
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
The following is a summary of other income and other operating expense:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
OTHER INCOME
<S> <C> <C> <C>
Gain on sale of credit card accounts $ 4,568
Gain on sale of deposits and branch offices $ 8,703
International department fees 971 1,009 $ 762
Net gains on sales of other loans 953 375 352
Other 12,183 9,717 8,433
---------- ---------- ----------
Total other income $ 22,810 $ 15,669 $ 9,547
========== ========== ==========
OTHER OPERATING EXPENSE
Brokerage commissions $ 3,597 $ 5,604 $ 6,608
FDIC insurance 652 5,571 4,240
State franchise taxes 3,889 3,842 3,565
Printing and supplies 3,505 3,485 3,077
Legal and other professional fees 5,236 3,343 3,043
Amortization of intangible assets 2,363 1,942 2,110
Other 29,053 25,869 22,538
---------- ---------- ----------
Total other operating expense $ 48,295 $ 49,656 $ 45,181
========== ========== ==========
</TABLE>
The FDIC expense for the year ended December 31, 1996 includes $4,230 for a
special Savings Association Insurance Fund (SAIF) assessment on deposits of the
Company's subsidiaries which were acquired from thrifts.
NOTE 12 - EMPLOYEE BENEFITS
MID AM
Mid Am provides retirement benefits for substantially all of their employees
under several retirement plans. Mid Am does not provide post-retirement benefits
other than through its retirement plans and does not provide post-employment
benefits.
EMPLOYEE STOCK OWNERSHIP AND SAVINGS PLAN: Mid Am has an Employee Stock
Ownership and Savings Plan for the benefit of all eligible employees. Employees
may contribute to the plan upon employment; employer matching provisions
commence after the employees have completed twelve months of service. The plan
provides for annual contributions by Mid Am based upon income (as defined by the
plan) after providing for a specified return on shareholders' equity, and under
the 401(k) portion of the Plan employees may contribute a percentage of their
eligible compensation with a company-match of such contributions up to a maximum
match of three percent. Mid Am also sponsors an Employee Stock Ownership Pension
Plan which provides for an annual employer contribution equal to 6% of eligible
employees' annual compensation.
- --------------------------------------------------------------------------------
(Continued)
24.
<PAGE> 25
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
NOTE 12 - EMPLOYEE BENEFITS (Continued)
SUPPLEMENTAL RETIREMENT PLAN: This plan replaces retirement benefits eliminated
under the Mid Am's qualified retirement plans because of eligible compensation
limitations under current tax law. Mid Am contributes authorized shares of the
Company's common stock to a trust established to hold the shares on behalf of
participating employees. Mid Am's contribution under the plan is determined by
multiplying the excess of employees' compensation over the established
limitation by the contribution level established by the Board of Directors for
Mid Am's qualified plans (12%, 12% and 9% in 1997, 1996 and 1995). At December
31, 1997, the liability recorded for the participants in the plan was $290. The
funding of shares occurs in January of the succeeding year.
Expenses relating to these plans amounted to $3,593, $2,762 and $2,017 in 1997,
1996 and 1995, respectively.
BANCSHARES
PROFIT SHARING PLAN: Bancshares has a defined contribution profit sharing plan
in which Bancshares's employees, other than employees of Freedom Express, Inc.,
participate. Amounts to be contributed to the plan are annually determined by
the Board of Directors and totaled $1,376, $1,179 and $1,102 in 1997, 1996 and
1995.
PENSION PLANS: Citizens and Century maintain defined benefit pension plans.
Bancshares intends to merge the plans. The following discloses information for
each plan.
Citizens Pension Plan - Citizens maintains a defined benefit plan covering
substantially all employees. Employees are eligible for participation in the
plan after completing 1,000 hours of service and become fully vested in accrued
benefits after five years of service. Pension expense is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost benefits earned $ 287 $ 347 $ 229
Interest cost on projected benefit obligation 130 136 115
Return on plan assets (688) (257) (407)
Net amortization and deferral 426 66 261
-------- -------- ---------
Net pension expense $ 155 $ 292 $ 198
======== ======== =========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
25.
<PAGE> 26
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
NOTE 12 - EMPLOYEE BENEFITS (Continued)
The following table shows the funded status of the pension plan and the amount
included in the consolidated balance sheets at year-end.
<TABLE>
<CAPTION>
1997 1996
---- ----
Actuarial present value of benefit obligations
<S> <C> <C>
Vested benefits $ 2,007 $ 1,537
Non-vested benefits 108 46
-------- ---------
Accumulated benefit obligation 2,115 1,583
Effect of anticipated future service and salary levels 472 318
-------- ---------
Projected benefit obligation 2,587 1,901
Market value of assets 3,622 2,714
-------- ---------
Plan assets in excess of projected benefit obligation 1,035 813
Unrecognized prior service cost (443) (478)
Unrecognized net (gain) loss (519) (411)
Unrecognized net transition obligation 19 21
-------- ---------
Prepaid pension asset (accrued pension liability) $ 92 $ (55)
======== =========
Actuarial assumptions:
Discount rate 6.50 % 7.25%
Long term rate of return 7.00 7.00
Rate of increase in compensation levels 4.00 4.00
</TABLE>
At December 31, 1997, approximately 72% of the pension plan's assets are mutual
equity funds, common stocks, and limited partnerships; with 21% comprised of
U.S. Treasury and Agency securities and 7% cash and cash equivalents.
Century Pension Plan--Century sponsors a trusteed, noncontributory defined
benefit pension plan covering substantially all employees and officers of
Century. The plan calls for benefits to be paid to eligible employees at
retirement based primarily on years of service and compensation rates near
retirement. Contributions are intended to provide not only benefits attributed
to service to date but also for those expected to be earned in the future.
Pension expense is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost benefits earned $ 270 $ 247 $ 264
Interest cost on projected benefit obligation 375 341 298
Return on plan assets (1,219) (677) 78
Net amortization and deferral 708 228 (424)
-------- -------- ---------
Net pension expense $ 134 $ 139 $ 216
======== ======== =========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
26.
<PAGE> 27
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
NOTE 12 - EMPLOYEE BENEFITS (Continued)
The following table shows the funded status of the pension plan and the amount
included in the consolidated balance sheets at year-end.
<TABLE>
<CAPTION>
1997 1996
---- ----
Actuarial present value of benefit obligations
<S> <C> <C>
Vested benefits $ 4,177 $ 3,287
Non-vested benefits 47 40
-------- ---------
Accumulated benefit obligation 4,224 3,327
Effect of anticipated future service and salary levels 1,796 1,744
-------- ---------
Projected benefit obligation 6,020 5,071
Market value of assets 7,221 6,111
-------- ---------
Plan assets in excess of projected benefit obligation 1,201 1,040
Unrecognized transition amount (233) (291)
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions (569) (266)
-------- ---------
Prepaid pension asset $ 399 $ 483
======== =========
Actuarial assumptions:
Discount rate 7.50 % 7.50%
Long term rate of return 7.50 7.50
Rate of increase in compensation levels 4.50 4.00
</TABLE>
POSTRETIREMENT HEALTH INSURANCE BENEFITS: Bancshares continues to pay health
insurance premiums for certain employees after retirement. Bancshares accrues
the cost of retirees' health and other postretirement benefits during the
working career of active employees. The expense and liability under this plan
are not material in any period presented.
- --------------------------------------------------------------------------------
(Continued)
27.
<PAGE> 28
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
NOTE 13 - EMPLOYEE STOCK OWNERSHIP PLAN AND RELATED OBLIGATION
Bancshares sponsors an Employee Stock Ownership Plan (ESOP) for substantially
all employees. Employer contributions to the plan are discretionary and are
determined by the Board of Directors on an annual basis. Acquisitions of the
Company's common shares by the ESOP have been funded through borrowings with
unrelated financial institutions with the common shares purchased serving as
collateral for the related loans. Principal on each loan is payable in eight
annual installments and interest is payable quarterly. Each participant may
choose to receive distributions in stock or cash. Shares acquired after December
31, 1992 (new shares) are accounted for in accordance with Statement of Position
("SOP") 93-6, "Employer's Accounting for Employee Stock Ownership Plans." Under
SOP 93-6, shares pledged as collateral are reported as a reduction of
shareholders' equity (unearned ESOP shares) in the consolidated balance sheet.
As shares are committed to be released from collateral, the Company records
compensation expense equal to the fair value of the shares. Dividends on
allocated new shares are recorded as a reduction of retained earnings, while
dividends on unallocated new shares are recorded as a reduction of debt. Shares
acquired before January 1, 1993 (old shares) are considered outstanding for
computing earnings per share and dividends on those shares are recorded as a
reduction of retained earnings. The annual expense recorded for old shares
consists of the Company' s contribution and related expenses. Expense for all
ESOP shares totaled $160 in 1997, $150 in 1996 and $123 in 1995 and is included
in salaries and employee benefits. At December 31, 1997, there were 27,588
unreleased new shares with an estimated fair value of $1,010.
The ESOP shares at year end were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Old Shares
<S> <C> <C>
Allocated shares 63,220 55,622
Unallocated shares 2,276 9,874
----------- -----------
Total old shares 65,496 65,496
=========== ===========
New Shares
Shares allocated and committed to be released 4,860 276
Unreleased shares 27,588 32,172
----------- -----------
Total new shares 32,448 32,448
=========== ===========
</TABLE>
A summary of the shares purchased by the ESOP and related borrowings follows:
<TABLE>
<CAPTION>
Loan Balance Principal
Shares Price Per December 31, Reductions Interest
Year Purchased Share 1997 1996 Remaining Rate
---- --------- ----- ---- ---- --------- ----
<S> <C> <C> <C> <C> <C> <C>
1989 24,996 $ 4.00 $ 12 0 83% of prime
1990 22,500 4.50 $ 12 25 1 prime + .44%
1992 18,000 5.50 25 37 2 prime + .125%
1995 21,000 12.00 157 189 5 prime + .125%
1996 11,448 15.00 131 150 7 prime + .125%
--------- --------
$ 325 $ 413
========= ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
28.
<PAGE> 29
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
NOTE 14 - STOCK OPTIONS
Mid Am maintained two stock option plans approved in 1992 and 1997,
respectively, (collectively, the "Plans") which cover certain key employees and
all Directors of the Mid Am and its subsidiary companies. In 1994, the 1992 Plan
was amended to include additional employees and to allow certain individuals,
including Directors, the ability to elect to receive options, determined under a
formula, in lieu of a portion of their salary or director fees, as applicable.
Under the Plans, the maximum number of option shares which can be granted is
limited to 12% of the Company's issued and outstanding common shares. Options
granted under the plan expire 10 years after the date of grant and are issued at
an option price that is not less than the market price of the Company's stock on
the date of grant. Options granted to Directors are immediately exercisable.
Options granted to officers and other key employees are exercisable in annual
20% increments, except for options received in lieu of salary, which are
immediately exercisable. In the merger discussed in Note 2, each Mid Am stock
option converts to 0.77 Company stock options.
Bancshares maintained a non-statutory stock option and stock appreciation rights
plan that enables a committee of the Board of Directors to grant stock options
and/or stock appreciation rights ("SARS") to officers of the Company and its
subsidiaries. A total of 900,000 options on common shares and 1,350,000 stock
appreciation rights are available to be granted pursuant to the plan, after
giving effect to the stock split discussed in Note 1. Stock options and stock
appreciation rights may be granted at a price not less than the fair market
value of the Company's common shares at the date of grant for terms up to, but
not exceeding ten years from the date of grant. Vesting is established at the
time of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages the use of a
fair value-based method to account for stock-based compensation plans such as
the Company's stock option plan. As allowed by SFAS No. 123, however, the
Company has elected to continue to follow prior standards in accounting for its
employee stock options. Under these standards, because the exercise price of the
Company's stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized. If compensation expense is
not recorded, pro forma information regarding net income and earnings per share
is required by SFAS No. 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using an
option pricing model with the following assumptions for 1997, 1996 and 1995. For
Bancshares: risk-free interest rates of 6.21%, 5.57% and 7.00%; dividend yields
of 3.00%; volatility factors of the expected market price of the common stock of
26.2%, 16.4% and 11.2%; and a weighted average expected life of the options of 5
years in 1997 and 9 years for other periods. For Mid Am: risk-free interest
rates of 6.15%, 6.05% and 5.85%; dividend yields of 3.00%, 4.00% and 4.00%;
volatility factors of the expected market price of the common stock of .18%,
.24% and .21%; and a weighted average expected life of the options of 6.72 years
for 1997, 6.34 years for 1996 and 5.49 for 1995. Century also maintained a stock
option plan. Assumptions for Century were a risk-free interest rate of 6.25% for
all periods; dividend yields of 3.30% for all periods; volatility factors of the
expected market price of common stock of 7.0% in 1997 and 16.0% for other
periods; and a weighted average expected life of the options of 9 years for all
periods.
- --------------------------------------------------------------------------------
(Continued)
29.
<PAGE> 30
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
NOTE 14 - STOCK OPTIONS (Continued)
Compensation cost determined using the fair value method consistent with the
methodology prescribed by SFAS 123 for the Company's stock option plan would
have the following pro forma effect on net income and earnings per share (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income as reported $ 53,301 $ 47,722 $ 43,761
Pro forma net income 51,365 47,296 43,210
Pro forma earnings per share
Basic $ 1.41 $ 1.27 $ 1.14
Diluted 1.38 1.24 1.11
A summary of the Company's stock options activity and related information
follows:
<CAPTION>
1997 1996
----------------------------------------- ---------------------
Average Average
Exercise Exercise
Options Price SARS Options Price SARS
------- ----- ---- ------- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning
of year 1,442,259 $ 14.28 107,598 1,302,335 $ 13.64 101,212
Granted 433,996 23.17 8,338 193,291 18.00 6,482
Exercised (158,737) 11.87 (75,000) (34,700) 12.22
Forfeited (18,117) 16.89 (826) (18,667) 14.48 (96)
----------- ----------- ----------- -----------
Outstanding - end of year 1,699,401 16.73 40,110 1,442,259 14.28 107,598
=========== =========== =========== ===========
Exercisable at end
of year 1,118,962 None 1,040,861 None
</TABLE>
The weighted average fair value of options granted during 1997 and 1996 was
$5.47 and $4.20 per share under option, respectively. Compensation expense
related to stock appreciation rights was $1,793, $222, and $100 in 1997, 1996
and 1995.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
The Company's brokerage subsidiary was a co-defendant in several actions filed
by customers of a money manager not affiliated with the subsidiary who directed
business to that subsidiary. These suits were filed prior to the subsidiary's
merger with the Company. The suits sought recovery of losses of approximately
$2,700 plus punitive damages, attorneys' fees and costs of litigation. On August
26, 1997, the National Association of Securities Dealers Office of Dispute
Resolution denied with prejudice all claims and allegations against the
subsidiary in their entirety.
There are also various other lawsuits and claims pending against the Company,
which arise in the normal course of business. In the opinion of management, any
liabilities that may result from these lawsuits and claims will not materially
affect the financial position or results of operations of the Company.
NOTE 16 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
- --------------------------------------------------------------------------------
(Continued)
30.
<PAGE> 31
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers
located primarily within the local business area. These instruments include
commitments to extend credit, standby letters of credit and international
commercial letters of credit. In addition, MACC retains a portion of the credit
risk on loans and leases it sells in the secondary market.
The Company's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit and letters of credit is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Financial instruments whose contract amounts represent credit risk at December
31 are presented below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commitments to extend credit $ 594,203 $ 513,252
Standby letters of credit 52,269 43,510
Letters of credit 1,734 5,602
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates ranging from one to five years, variable
interest rates tied to the prime rate and Treasury bill rates and may require
payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
bond financing and similar transactions. The expiration date of substantially
all standby letters of credit extend for a period ranging from thirty days to
seven years. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Company holds marketable securities, certificates of deposits, real estate,
inventory and equipment as collateral supporting those commitments for which
collateral is deemed necessary.
Letters of credit are instruments used to facilitate trade, most commonly
international trade, by substituting the Company's credit for that of a
commercial importing company. The terms are generally one to three months. The
letters of credit are primarily unsecured.
- --------------------------------------------------------------------------------
(Continued)
31.
<PAGE> 32
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
NOTE 16 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued)
Most of the Company's business activity is with customers located within the
respective local business areas of its bank subsidiaries. However, MACC retains
a portion of the credit risk of loans and leases it sells through stipulated
recourse provisions. MACC's loan and lease activities are with customers in
medical and dental related fields located within the continental United States.
Substantially all loans and leases originated by MACC are sold in the secondary
market. In connection with sales of the loans and leases, MACC retains limited
servicing and limited recourse liability. The servicing is limited to
responsibility to collect delinquent accounts based on information provided by
the purchaser of the loans and leases. A liability is established at the time
each loan or lease is sold based on the fair value of the servicing liability.
In addition, MACC records a liability for the estimated recourse for credit
losses which is limited to an aggregate of 10% of the purchase price of the
loans and leases sold. The fair value of the servicing liability and the
estimated recourse liability reduce the amount of gain or increase the loss of
the loans and leases sold. At December 31, 1997, the outstanding balance of
loans and leases sold was $176,242. A portion of the purchase price is deferred
and paid to MACC on a delayed basis. At December 31, 1997 and 1996, MACC
recorded receivables of $4,339 and $825, respectively, for deferred sales
proceeds. Changes in the liability for recourse provisions relating to sold
loans and leases is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of year $ 618
Additions (reductions):
Provision for recourse liability 2,924 $ 618
Recourse claims paid (696)
Recoveries of claims paid 204
------------ -----------
Balance at end of year $ 3,050 $ 618
============ ===========
</TABLE>
NOTE 17 - MORTGAGE BANKING ACTIVITIES
The Company conducts mortgage banking operations through its banking
subsidiaries. The primary activity relates to the origination and sale of fixed
and variable rate residential mortgages in the secondary market. The Company
usually retains the servicing of the loans it sells. Loans are primarily
originated in the western Ohio, eastern Ohio, western Pennsylvania and
southeastern Michigan market areas; however, the Company also has employees and
agents in Kentucky, Indiana, and Colorado who also originate loans for sale in
the secondary market.
The following table summarizes information relating to the Company's mortgage
banking activity as of December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Amounts held in agency accounts $ 11,814 $ 7,660
Amounts held in escrow accounts 9,120 8,824
Mortgage banking receivables for advanced funds 488 497
Unpaid mortgage loan principal for loans serviced for investors 1,624,694 1,520,273
Mortgage servicing rights, net of accumulated amortization 6,173 4,007
Allowance for impairment of capitalized mortgage servicing rights 341 76
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
32.
<PAGE> 33
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
NOTE 17 - MORTGAGE BANKING ACTIVITIES (Continued)
In 1997, 1996 and 1995, the Company sold certain servicing rights on mortgages
which had an outstanding principal balance of $96,691, $41,038 and $31,471,
respectively, and realized gains of $446, $351 and $245, respectively. At
December 31, 1997 the Company had firm commitments for the sale of approximately
$13,841 of loans held for sale. No provision for loss on the carrying amount on
loans held for sale is considered necessary at December 31, 1997.
NOTE 18 - REGULATORY MATTERS
CAPITAL MAINTENANCE REQUIREMENTS
The Company and its bank subsidiaries must observe capital guidelines
established by Federal and state regulatory authorities. Failure to meet
specified minimum capital requirements can result in certain mandatory actions
by the Company's and banks' primary regulators that could have a material effect
on the Company's financial condition or results of operations. Under capital
adequacy guidelines, the Company and its bank subsidiaries must meet specific
quantitative measures of their assets, liabilities and certain off balance sheet
items as determined under regulatory accounting practices. The Company's and
banks' capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Management believes, as of December 31, 1997, that the Company and its banks
meet all capital adequacy requirements to which they are subject.
As of December 31, 1997, the Company and its banks have been notified by their
respective regulators that, based on the most recent regulatory examinations,
each is regarded as well capitalized under the regulatory framework for prompt
corrective action. Such determinations have been made evaluating the Company and
its banks under Tier I, total capital, and leverage ratios. There are no
conditions or events since these notifications that management believes have
changed any of the Company's or banks' well capitalized categorizations.
- --------------------------------------------------------------------------------
(Continued)
33.
<PAGE> 34
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
NOTE 18 - REGULATORY MATTERS (Continued)
The Company's and its significant banks' capital ratios are presented in the
following table:
<TABLE>
<CAPTION>
Required to be
Minimum Required Well Capitalized
for Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1997
TOTAL CAPITAL TO
RISK-WEIGHTED ASSETS
<S> <C> <C> <C> <C> <C> <C>
Company $ 378,254 12.5% $ 241,527 8.0% $ 301,909 10.0%
Mid Am Bank 80,841 10.6 60,832 8.0 76,041 10.0
Citizens 67,512 10.3 49,647 8.0 62,059 10.0
First National 44,269 11.0 32,271 8.0 40,338 10.0
Century 40,296 11.6 27,656 8.0 34,570 10.0
AmeriCom 29,507 10.5 22,467 8.0 28,084 10.0
TIER 1 CAPITAL TO
RISK-WEIGHTED ASSETS
Company $ 343,599 11.4% $ 120,764 4.0% $ 181,145 6.0%
Mid Am Bank 72,738 9.6 30,416 4.0 45,624 6.0
Citizens 59,701 9.6 24,824 4.0 37,236 6.0
First National 41,308 10.2 16,135 4.0 24,203 6.0
Century 35,970 10.3 13,828 4.0 20,742 6.0
AmeriCom 26,138 9.3 11,233 4.0 16,850 6.0
TIER 1 CAPITAL TO
AVERAGE ASSETS
Company $ 343,599 8.9% $ 155,234 4.0% $ 194,042 5.0%
Mid Am Bank 72,738 8.0 36,259 4.0 45,324 5.0
Citizens 59,701 5.9 40,613 4.0 50,766 5.0
First National 41,308 7.7 21,437 4.0 26,796 5.0
Century 35,970 7.7 18,440 4.0 23,050 5.0
AmeriCom 26,138 7.0 14,961 4.0 18,701 5.0
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
34.
<PAGE> 35
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOTE 18 - REGULATORY MATTERS (Continued)
Required to be
Minimum Required Well Capitalized
for Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1996
- -----------------
TOTAL CAPITAL TO
RISK-WEIGHTED ASSETS
<S> <C> <C> <C> <C> <C> <C>
Company $ 350,077 13.2% $ 211,527 8.0% $ 264,408 10.0%
Mid Am Bank 72,029 10.3 55,942 8.0 69,928 10.0
Citizens 77,809 14.7 42,289 8.0 52,862 10.0
First National 41,884 10.4 32,237 8.0 40,296 10.0
Century 36,643 11.9 24,462 8.0 30,578 10.0
AmeriCom 30,629 12.3 19,964 8.0 24,956 10.0
TIER 1 CAPITAL TO
RISK-WEIGHTED ASSETS
Company $ 322,616 12.2% $ 105,763 4.0% $ 158,645 6.0%
Mid Am Bank 64,437 9.2 27,971 4.0 41,957 6.0
Citizens 71,145 13.5 21,145 4.0 31,717 6.0
First National 39,962 9.9 16,118 4.0 24,177 6.0
Century 33,409 10.9 12,231 4.0 18,347 6.0
AmeriCom 27,875 11.2 9,982 4.0 14,973 6.0
TIER 1 CAPITAL TO
AVERAGE ASSETS
Company $ 322,616 8.8% $ 146,474 4.0% $ 183,092 5.0%
Mid Am Bank 64,437 7.6 33,869 4.0 42,336 5.0
Citizens 71,145 7.9 35,887 4.0 44,858 5.0
First National 39,962 7.7 20,792 4.0 25,990 5.0
Century 33,409 8.2 16,197 4.0 20,246 5.0
AmeriCom 27,875 7.3 15,324 4.0 19,155 5.0
</TABLE>
Restrictions on Subsidiary Dividends
- ------------------------------------
Dividends paid by the Company are mainly provided by dividends from its
subsidiaries. However, certain restrictions exist regarding the ability of its
banking subsidiaries to transfer funds to the Company in the form of cash
dividends, loans or advances. For national banks, the approval of the Office of
the Comptroller of the Currency is required in order to pay dividends in excess
of the subsidiaries' earnings retained for the current year plus retained net
profits since January 1, 1995. As of December 31, 1997, $24,034 was available
for distribution to the Company as dividends without prior regulatory approval.
- --------------------------------------------------------------------------------
(Continued)
35.
<PAGE> 36
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
NOTE 19 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
CONDENSED PARENT COMPANY BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks $ 9,598 $ 2,378
Securities available for sale 12,931 3,445
Investment in bank subsidiaries 303,802 293,343
Investment in nonbank subsidiaries 26,763 20,855
Loan to subsidiary 22,800 10,000
Bank premises and equipment 8,729 3,321
Other assets 4,247 5,888
-------------- ------------
Total assets $ 388,870 $ 339,230
============== ============
LIABILITIES
Debt $ 43,351
Other liabilities 8,092 $ 6,565
-------------- ------------
Total liabilities 51,443 6,565
SHAREHOLDERS' EQUITY 337,427 332,665
-------------- ------------
Total liabilities and shareholders' equity $ 388,870 $ 339,230
============== ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
36.
<PAGE> 37
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
NOTE 19 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED PARENT COMPANY STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
INCOME
<S> <C> <C> <C>
Dividends from bank subsidiaries $ 55,166 $ 36,231 $ 43,393
Dividends from nonbank subsidiaries 2,685
Management fees 8,782 7,190 5,996
Other interest and dividend income 1,182 613 763
----------- ----------- -----------
Total income 67,815 44,034 50,152
----------- ----------- -----------
EXPENSES
Interest expense 2,419 14
Salaries and employee benefits 9,190 6,226 4,871
Net occupancy expense 300 172 195
Equipment expense 709 511 415
Other expense 4,024 3,588 2,967
----------- ----------- -----------
Total expenses 16,642 10,511 8,448
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
NET INCOME OF SUBSIDIARIES 51,173 33,523 41,704
INCOME TAX BENEFIT 2,384 826 525
----------- ----------- -----------
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME OF
SUBSIDIARIES 53,557 34,349 42,229
EQUITY IN UNDISTRIBUTED NET INCOME OF BANK SUBSIDIARIES 820 12,746 1,016
EQUITY IN UNDISTRIBUTED NET INCOME OF NONBANK SUBSIDIARIES (1,076) 627 516
----------- ----------- -----------
NET INCOME $ 53,301 $ 47,722 $ 43,761
=========== =========== ===========
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 52,696 $ 45,315 $ 41,010
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
37.
<PAGE> 38
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
NOTE 19 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 53,301 $ 47,722 $ 43,761
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of bank
subsidiaries (820) (12,746) (1,016)
Equity in undistributed net income of nonbank
Subsidiaries 1,076 (627) (516)
Depreciation and amortization 486 269 211
Change in other assets and liabilities 1,865 (435) 2,070
------------ ----------- -----------
Net cash provided by operating activities 55,908 34,183 44,510
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital contributions to bank subsidiaries (2,100)
Capital contributions to nonbank subsidiaries (9,503) (1,707) (1,896)
Loan to subsidiary (12,800) (10,000)
Net loan payments 7 282 13
Proceeds from sale of securities available for sale 34
Purchases of securities available for sale (6,576) (851) (1,361)
Proceeds from maturities of securities held to maturity 1,531 1,355 1,400
Purchase of securities held to maturity (1,541) (1,493)
Proceeds from sales of bank premises and equipment 39 30 50
Purchases of bank premises and equipment (5,851) (2,581) (732)
------------ ----------- -----------
Net cash used by investing activities (36,794) (14,931) (2,526)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt 62,851
Repayment of debt (19,500)
Preferred stock retired (21,801)
Pre-merger acquisition of pooled affiliate
common stock (1,127)
Proceeds from issuance of common stock 1,311 696 1,027
Cash dividends and fractional shares paid (24,041) (22,371) (19,231)
Treasury stock purchases (10,690) (11,219) (9,322)
Other items (24) 19 260
------------ ----------- -----------
Net cash used by financing activities (11,894) (34,002) (27,266)
------------ ----------- -----------
NET CHANGE IN CASH AND DUE FROM BANKS 7,220 (14,750) 14,718
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 2,378 17,128 2,410
------------ ----------- -----------
CASH AND DUE FROM BANKS AT END OF YEAR $ 9,598 $ 2,378 $ 17,128
============ =========== ===========
</TABLE>
<PAGE> 39
REPORT OF INDEPENDENT AUDITORS
EXHIBIT 19.1
Board of Directors and Shareholders
Sky Financial Group, Inc.
Bowling Green, Ohio
We have audited the accompanying supplemental consolidated balance sheets of Sky
Financial Group, Inc. (formerly known as Citizens Bancshares, Inc.) as of
December 31, 1997 and 1996 and the related supplemental consolidated statements
of income, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These supplemental financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental financial
statements based on our audits. We did not audit the financial statements of Mid
Am, Inc., which statements reflect total assets constituting 55% and 59% of the
related 1997 and 1996 totals and net income constituting 58%, 55% and 57% of the
related 1997, 1996 and 1995 totals. We also did not audit the financial
statements of Century Financial Corporation, which statements reflect total
assets constituting 12% and 11% of the related 1997 and 1996 totals and net
income constituting 8%, 10% and 10% of the related 1997, 1996 and 1995 totals.
The Mid Am, Inc. and Century Financial Corporation financial statements were
audited by other auditors, whose reports dated January 19, 1998 and January 16,
1998, respectively, thereon have been furnished to us and our opinion expressed
herein, insofar as it relates to the amounts included for Mid Am, Inc. and
Century Financial Corporation in the supplemental consolidated financial
statements, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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 and the report of the other auditors provide a
reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the mergers on October 2, 1998 with Mid Am, Inc., on May 12, 1998 with Century
Financial Corporation and on March 6, 1998 with UniBank, which have been
accounted for as poolings of interests as described in Note 2 to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling of interests method in financial statements that do
not include the date of consummation. These supplemental consolidated financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of Sky Financial Group,
Inc. after the consolidated financial statements covering the date of
consummation of the business combination are issued.
In our opinion, based on our audits and the reports of other auditors, the
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sky Financial
Group, Inc. as of December 31, 1997 and 1996 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles
applicable after financial statements are issued for a period which includes the
date of consummation of the business combination.
Crowe, Chizek and Company LLP
Columbus, Ohio
October 9, 1998
<PAGE> 40
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUPPLEMENTAL CONSOLIDATED SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
FOR THE YEAR:
<S> <C> <C> <C> <C> <C>
Interest income $ 302,869 $ 282,965 $ 273,334 $ 239,519 $ 234,280
Interest expense 144,885 131,486 128,939 99,549 101,220
------------ ------------- ------------ ------------ ------------
Net interest income 157,984 151,479 144,395 139,970 133,060
Provision for credit losses 9,862 6,816 5,506 4,119 9,409
------------ ------------- ------------ ------------ ------------
Net interest income after provision for
credit losses 148,122 144,663 138,889 135,851 123,651
Other income 77,560 58,236 43,486 39,738 41,958
Other expenses 147,280 133,156 118,588 119,139 113,246
------------ ------------- ------------ ------------ ------------
Income before income taxes 78,402 69,743 63,787 56,450 52,363
Income taxes 25,101 22,021 20,026 17,251 15,140
------------ ------------- ------------ ------------ ------------
Net income $ 53,301 $ 47,722 $ 43,761 $ 39,199 $ 37,223
============ ============= ============ ============ ============
Net income available to common
shareholders $ 52,696 $ 45,315 $ 41,010 $ 36,282 $ 34,305
============ ============= ============ ============ ============
PER SHARE DATA: (1)
Basic net income $ 1.46 $ 1.29 $ 1.15 $ 1.02 $ .97
Diluted net income 1.43 1.25 1.13 1.01 .97
Cash dividends declared .56 .42 .25 .15 .09
Book value at year-end 9.27 8.56 8.08 7.09 6.99
Weighted average shares outstanding
basic 36,025,000 35,213,000 35,547,000 35,500,000 35,193,000
Weighted average shares outstanding
diluted 37,203,000 38,215,000 38,782,000 38,852,000 38,546,000
BALANCE SHEET DATA AT YEAR-END:
Total assets $ 3,982,898 $ 3,724,003 $ 3,646,446 $ 3,438,791 $ 3,384,739
Securities available for sale 818,267 766,815 793,502 372,861 380,170
Securities held to maturity 87,207 88,371 74,851 508,382 561,874
Loans held for sale 17,711 15,118 16,550 13,547 97,285
Loans, net of unearned income 2,741,406 2,570,143 2,398,757 2,288,390 2,041,401
Allowance for credit losses 35,901 31,301 29,715 30,415 29,872
Deposits 3,140,625 3,065,253 3,039,541 2,850,451 2,881,913
Total shareholders' equity 337,427 332,665 322,263 292,143 284,548
SELECTED FINANCIAL RATIOS:
Return on average assets 1.38% 1.31% 1.24% 1.16% 1.14%
Return on average shareholders' equity 16.50 15.67 15.12 14.45 15.02
Dividend pay-out ratio 45.20 44.02 42.87 39.39 34.00
Net interest margin, fully taxable equivalent 4.49 4.56 4.46 4.53 4.46
Average loans to average deposits 88.06 81.43 79.26 75.36 70.50
Average shareholders' equity to average
assets 8.56 8.89 8.74 8.63 8.23
Allowance for credit losses to period end
loans 1.31 1.22 1.24 1.33 1.46
Allowance for loan losses to total
nonperforming loans 360.46 341.01 226.47 217.59 199.51
Nonperforming loans to period end loans .36 .36 .55 .61 .73
Net charge-offs to average loans .20 .21 .26 .17 .35
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
40.
<PAGE> 41
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
(1) Per share data has been restated to reflect the two-for-one stock split
declared on May 12, 1998 and the three-for-two stock split declared in 1995
and all acquisitions accounted for as poolings of interests (see Note 2 of
the financial statements.)
The following discussion and analysis represents a review of the Company's
consolidated financial condition, results of operations, liquidity and capital
resources. This review should be read in conjunction with the consolidated
financial statements.
RESULTS OF OPERATIONS
Net income in 1997 increased $5,579 or 12% to $53,301, as compared to net income
in 1996 of $47,722 and $43,761 in 1995. Diluted earnings per common share were
$1.43, up from $1.25 in 1996 and $1.13 in 1995. In 1997, return on average
common shareholders' equity was 16.50% and return on average assets was 1.38% as
compared to 15.67% and 1.31% in 1996, and 15.12% and 1.24% in 1995. The increase
in 1997 earnings was primarily due to a net pre-tax gain of $8,700 on the sale
of $95,000 of deposits and seven branch offices of AmeriFirst Bank, N.A., an
increase in gain on sale of loans at the commercial financing affiliate of
$10,035, the result of increased loan volume, an increase in mortgage banking
revenues of $3,336 caused by increased volume and profit margins in mortgage
loan sales, and an increase in other fee-based revenue. These increases were
partially offset by certain costs and other charges related to the deposit and
branch sale, which in the aggregate were approximately $2,000 on a pre-tax
basis, higher employee expense caused by the growth of MACC, the formation of
MAFSI, and the growth in other fee-based financial services businesses. The
increase in 1996 earnings compared to 1995 was primarily attributable to a net
pre-tax gain on the sale of the Company's credit card portfolio of $4,568, an
improved net interest margin, and an increase in mortgage banking revenues,
offset partially by a one-time Savings Association Insurance Fund ("SAIF")
assessment of $4,230 and increased employee expenses from the acquisition of
various Florida collection agencies and the formation of MACC.
The provision for credit losses increased $3,046 or 45% in 1997 to $9,862. The
1996 provision for credit losses compared to 1995 was $1,310 higher, an increase
of 24%. The increases in the 1997 and 1996 provisions were due primarily to
increased loan volume occurring in each year.
ACQUISITIONS AND BUSINESS FORMATIONS
Effective October 2, 1998, Bancshares and Mid Am affiliated in a
merger-of-equals transaction which was accounted for as a pooling of interests.
Shareholders of Mid Am received 0.77 shares of Bancshares common stock for each
share of Mid Am stock owned, with cash paid in lieu of fractional shares. In
conjunction with the merger, Bancshares changed its name to Sky Financial Group,
Inc. Mid Am had assets of approximately $2.3 billion, with 83 banking offices
located in western Ohio and southern Michigan. Mid Am also owned 7 financial
services subsidiaries, now subsidiaries of the Company, which engage in lines of
business closely related to banking.
On July 22, 1998, Bancshares entered into an agreement and plan of merger with
The Ohio Bank, Findlay, Ohio, whereby shareholders of the Ohio Bank will receive
63.25 Bancshares common shares for each share of The Ohio Bank owned. The Ohio
Bank had assets of $579,405 and $539,031 as of December 31, 1997 and 1996, and
net income of $6,019, $5,428 and $5,306 in 1997, 1996 and 1995. The merger is
subject to approval by regulatory agencies and The Ohio Bank's shareholders, and
is expected to be completed during the fourth quarter of 1998.
Effective May 12, 1998, Century Financial Corporation, Rochester, Pennsylvania,
merged into Bancshares. The transaction was affected through the exchange of
.7926 common shares of Bancshares for each of Century's outstanding common
shares, with cash paid in lieu of fractional shares. CFC had assets of
approximately $453,000 with 13 branches in Beaver and Butler counties in
Pennsylvania. Initially, Century will operate as a wholly-owned subsidiary of
the Company.
- --------------------------------------------------------------------------------
(Continued)
41.
<PAGE> 42
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Effective March 6, 1998, UniBank, Steubenville, Ohio, affiliated with the
Corporation by merging into Citizens. The transaction was affected through the
exchange of 26.5 common shares of the Bancshares for each of UniBank's
outstanding common shares, with cash paid in lieu of fractional shares. Unibank
had assets of approximately $216,000 with 12 offices in Jefferson and Columbiana
counties in Ohio, and is operated as part of Citizens' branch network.
On November 21, 1997, Bancshares acquired the Martins Ferry, St. Clairsville and
Barnsville, Ohio branches of Metropolitan Savings Bank of Ohio, an affiliate of
FNB Corporation, Hermitage, Pennsylvania. In the transaction, Bancshares
acquired $25.2 million of loans and approximately $1 million of other assets,
assumed $64.2 million of deposit liabilities and received approximately $32.9
million of funds. Bancshares paid a premium of $5.8 million in the transaction,
which is reflected in other assets in the supplemental consolidated balance
sheet and is being amortized on an accelerated basis over 15 years.
On May 16, 1997, prior to its merger, UniBank assumed certain deposit
liabilities and purchased certain assets from National City Bank, Northeast. In
the transaction, UniBank received $31.2 million of funds and approximately $1
million of other assets, and assumed $34.1 million of deposit liabilities.
UniBank paid a premium of $1.9 million on the transaction, which is reflected in
other assets in the supplemental consolidated balance sheet and is being
amortized on an accelerated basis over 10 years.
Bancshares also entered merger transactions on October 11, 1996, with The
Navarre Deposit Bank Company, Navarre, Ohio, and on December 31, 1995, with The
Western Reserve Bank of Ohio, Lowellville, Ohio. Each transaction was accounted
for as a pooling of interests. Bancshares issued 1,014,000 shares in the Navarre
transaction and 840,000 shares in the Western Reserve transaction.
NET INTEREST INCOME
Net interest income, the difference between interest income earned on
interest-earning assets and interest expense incurred on interest-bearing
liabilities, is the most significant component of the Company's earnings. Net
interest income is affected by changes in the volumes and rates of
interest-earning assets and interest-bearing liabilities and the type and mix of
interest-earning assets and interest-bearing liabilities.
The following table, presented on a tax equivalent basis, summarizes net
interest income and net interest margin for each of the three years in the
period ended December 31, 1997.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net interest income $ 157,984 $ 151,479 $ 144,395
Taxable equivalent adjustments to net interest income 4,184 4,128 4,047
----------- ----------- -----------
Net interest income, fully-taxable equivalent $ 162,168 $ 155,607 $ 148,442
=========== =========== ===========
Net interest margin 4.37% 4.44% 4.34%
Taxable equivalent adjustment .12 .12 .12
----------- ----------- -----------
Net interest margin, fully taxable equivalent 4.49% 4.56% 4.46%
=========== =========== ==========
</TABLE>
AVERAGE INTEREST-EARNINGS ASSET MIX
Average interest-earning assets in 1997 totaled $3,612,016 as compared with
$3,412,123 in 1996 and $3,327,642 in 1995. In 1997, average loans (including
loans held for sale) and securities, the two largest components of
interest-earning assets, comprised 75% and 24% of average interest-earning
assets as compared to 72% and 25% in 1996 and 71% and 27% in 1995.
- --------------------------------------------------------------------------------
(Continued)
42.
<PAGE> 43
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
AVERAGE INTEREST-BEARING LIABILITY MIX
Average interest-bearing liabilities in 1997 totaled $3,153,807 as compared with
$2,966,737 in 1996 and $2,906,895 in 1995. In 1997, average time deposits and
savings deposits, the two largest components of interest-bearing liabilities,
comprised 52% and 24% of average interest-bearing liabilities as compared to 54%
and 25% in 1996, and 53% and 26% in 1995. Average saving deposits decreased
during 1997 due in part to the sale of $95,000 of deposits in the first quarter
as well as a shift to wholesale funding. There was only a slight decrease in the
percentage of time deposits and savings deposits to total interest-bearing
liabilities from 1995 to 1996.
AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES
The following table reflects the components of the Company's net interest income
for each of the three years ended December 31, 1997, setting forth: (i) average
assets, liabilities, and shareholders' equity, (ii) interest income earned on
interest-earning assets and interest expense incurred on interest-bearing
liabilities, (iii) average yields earned on interest-earning assets and average
rates incurred on interest-bearing liabilities, (iv) the net interest rate
spread (i.e., the average yield earned on interest-earning assets less the
average rate incurred on interest-bearing liabilities), and (v) the net interest
margin (i.e., net interest income divided by average interest-earning assets).
Rates are computed on a tax equivalent basis. Non-accrual loans have been
included in the average balances.
- --------------------------------------------------------------------------------
(Continued)
43.
<PAGE> 44
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------- -------------------------------- ---------------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Interest-earning
deposits $ 5,586 $ 292 5.23% $ 4,974 $ 284 5.71% $ 5,649 $ 319 5.65%
Federal funds
sold and other 45,249 2,498 5.52 74,465 3,988 5.36 89,471 5,198 5.81
Securities 869,109 57,235 6.58 863,863 56,079 6.48 886,099 57,354 6.44
Loans 2,692,072 247,028 9.18 2,468,821 226,742 9.18 2,346,423 214,510 9.14
---------- -------- ---------- -------- --------- ---------
Total interest-
earning
assets 3,612,016 307,053 8.50 3,412,123 287,093 8.41 3,327,642 277,381 8.32
Nonearning assets 239,482 219,111 209,454
---------- ---------- ----------
Total assets $3,851,498 $3,631,234 $3,537,096
========== ========== ==========
Interest-bearing liabilities
Demand deposits $ 343,429 7,341 2.14 $ 368,852 7,215 1.96 $ 356,856 7,410 2.08
Savings deposits 748,672 21,514 2.87 755,544 21,889 2.90 763,943 22,916 3.00
Time deposits 1,627,770 91,699 5.63 1,587,455 89,182 5.62 1,532,265 84,614 5.52
--------- -------- ---------- -------- ---------- ---------
Total interest-
bearing
deposits 2,719,871 120,554 4.43 2,711,851 118,286 4.36 2,653,064 114,940 4.33
Short-term
borrowings 211,228 10,460 4.95 147,050 6,768 4.60 121,866 5,843 4.79
Debt and FHLB
advances 222,708 13,871 6.23 107,836 6,432 5.96 131,965 8,156 6.18
---------- -------- ---------- -------- ---------- ---------
Total interest-
bearing
liabilities 3,153,807 144,885 4.59 2,966,737 131,486 4.43 2,906,895 128,939 4.44
-------- -------- ---------
Noninterest-bearing
liabilities 368,076 341,761 321,055
Shareholders'
equity 329,615 322,736 309,146
---------- ---------- ----------
Total liabilities
and equity $3,851,498 $3,631,234 $3,537,096
========== ========== ==========
NET INTEREST INCOME,
FULLY TAXABLE
EQUIVALENT; NET
INTEREST SPREAD $162,168 3.91% $155,607 3.98% $ 148,442 3.88%
======== ===== ======== ===== ========= =====
NET INTEREST INCOME,
FULLY TAXABLE
EQUIVALENT TO
EARNING ASSETS 4.49% 4.56% 4.46%
===== ===== =====
</TABLE>
- - For purposes of this schedule, nonaccrual loans are included in loans.
- - Fees collected on loans are included in interest on loans.
- --------------------------------------------------------------------------------
(Continued)
44.
<PAGE> 45
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
The net interest margin decreased 7 basis points to 4.49% in 1997 and increased
10 basis points to 4.6% in 1996. The decrease in the Company's net interest
margin in 1997 was due primarily to increases in the cost of average borrowings
and debt, offset by higher-yielding earning assets resulting from increased
average loan levels and the sale of certain low-yielding securities during the
first quarter of 1997. Average total loans in 1997 were $2,692,072 an increase
of $223,251 or 9.4% over 1996 average total loans of $2,468,821. The increase in
the Company's net interest margin in 1996 was due primarily to changes in the
Company's earning asset mix.
Net interest income may also be analyzed by segregating the volume and rate
components of interest income and interest expense. The following table presents
an analysis of increases and decreases in interest income and expense in terms
of changes in volume and interest rates during the three years ended December
31, 1997. Changes not due solely to either a change in volume or a change in
rate have been allocated based on the respective percentage changes in average
balances and average rates. The table is presented on a tax equivalent basis.
<TABLE>
<CAPTION>
1997 1996
------------------------------------ ------------------------------------
Change from 1996 in interest Change from 1995 in interest
Income or expense due to Income or expense due to
------------------------------------ ------------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-bearing deposits $ 35 $ (27) $ 8 $ (38) $ 3 $ (35)
Federal funds sold (1,565) 75 (1,490) (872) (338) (1,210)
Securities 297 859 1,156 (1,609) 334 (1,275)
Loans, net 20,504 (218) 20,286 11,190 1,042 12,232
-------- -------- -------- -------- -------- --------
Total interest income 19,271 689 19,960 8,671 1,041 9,712
-------- -------- -------- -------- -------- --------
Interest expense attributable to:
Deposits:
Interest-bearing demand (497) 623 126 249 (444) (195)
Savings (199) (176) (375) (252) (775) (1,027)
Time 2,265 252 2,517 3,048 1,520 4,568
-------- -------- -------- -------- -------- --------
Total deposits 1,569 699 2,268 3,045 301 3,346
Short-term borrowings 2,954 738 3,692 1,207 (282) 925
Debt and FHLB advances 6,852 587 7,439 (1,491) (233) (1,724)
-------- -------- -------- -------- -------- --------
Total interest expense 11,375 2,024 13,399 2,761 (214) 2,547
-------- -------- -------- -------- -------- --------
Net interest income $ 7,896 $ (1,335) $ 6,561 $ 5,910 $ 1,255 $ 7,165
======== ======== ======== ======== ======== ========
</TABLE>
PROVISION FOR CREDIT LOSSES
The provision for loan losses represents the charge to income necessary to
adjust the allowance for loan losses to an amount that represents management's
assessment of the losses inherent in the Company's loan portfolio. All lending
activity contains associated risks of loan losses, and the Company recognizes
these credit risks as a necessary element of its business activity. To assist in
identifying and managing potential loan losses, the Company maintains a loan
review function that continuously evaluates individual credit relationships as
well as overall loan-portfolio conditions. One of the primary objectives of this
loan review function is to make recommendations to management as to both
specific loss reserves and overall portfolio-loss reserves.
- --------------------------------------------------------------------------------
(Continued)
45.
<PAGE> 46
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
The provision for credit losses increased $3,046 or 45% to $9,862 in 1997. The
increase in 1997 was primarily due to additional provisions in response to
increased loan levels, particularly construction and nonresidential real estate
loans. The Company's allowance for credit losses as a percentage of loans at
December 31, 1997 was 1.31% as compared to 1.22% and 1.24% at December 31, 1996
and 1995. At December 31, 1997, the Company's allowance for credit losses
represented 360% of nonperforming loans as compared to 341% and 226% at December
31, 1996 and 1995.
NONINTEREST INCOME
The table below summarizes the sources of the Company's noninterest income.
<TABLE>
<CAPTION>
1997 1996
Vs. Vs.
1997 1996 1995 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Trust department income $ 3,024 $ 2,391 $ 2,010 26% 19%
Service charges and fees on deposit accounts 13,197 11,110 10,177 19 9
Mortgage banking income 14,488 11,152 8,565 30 30
Brokerage commissions 6,083 9,156 9,540 (34) (4)
Collection agency fees 5,053 4,213 3,399 20 24
Net gains (losses) on sales of securities (122) 1,553 248 (108) 526
Net gains on sales of commercial financing loans 13,027 2,992 - 335 -
Gain on sale of credit card accounts - 4,568 - - -
Gain on sale of deposits and branch offices 8,703 - - - -
International department fees 971 1,009 762 (4) 32
Net gains on sales of other loans 953 375 352 154 7
Other 12,183 9,717 8,433 25 15
---------- ---------- ---------
$ 77,560 $ 58,236 $ 43,486 33% 34%
========== ========== ========= === ====
</TABLE>
As seen from the above table, noninterest income is an increasingly important
source of revenue to the Company as it continues to expand its offerings of
nonbank related financial services. Noninterest income has increased by $34,074
since 1995, of which $19,324 occurred between 1996 and 1997. Mortgage banking
remains the largest component of noninterest income and consists of net gains on
sales of mortgage loans and mortgage loan servicing fees. The increase in 1997
compared to 1996 was the result of an increase in the volume of mortgages sold
and higher profit margins on sales. The increase in mortgage banking revenue in
1996 compared to 1995 was primarily attributable to an increase in the volume of
mortgage loans sold.
In February 1997, AmeriFirst sold seven of its branch offices located in the
metropolitan Cincinnati, Ohio area. The branch sale included the transfer of
$95,000 of deposits. The Company believes that the sale of the branches will
enable AmeriFirst to focus on its Greene County market area.
The gain on sale of credit cards which was realized in 1996 was the result of
management's decision to exit the credit card business as a stand alone card
issuer. In connection with this decision, substantially all of the Company's
credit card relationships and outstanding balances were sold to a national
credit card issuer. The Company continues to earn fee income and incur costs
from its credit card merchant activities.
- --------------------------------------------------------------------------------
(Continued)
46.
<PAGE> 47
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
MACC increased its gain on sale of loans to $13,027 in 1997 from $2,992 in 1996.
The significant increase in gains was primarily due to an increase in volume of
loans sold ($98,193 in 1997 compared to $28,466 in 1996) and to higher profit
margins. The unit commenced operations in April of 1996.
The decrease in brokerage commission fees in 1997 compared to 1996, and a slight
decrease in 1996 compared to 1995, were caused by a reduction in the number of
independent registered representatives (brokers) which occurred in the middle of
1996 after a change in the clearinghouse used by the Company's broker/dealer
subsidiary. The Company increased the number of registered representatives in
1997 through advertising and recruiting efforts; however, not to the level prior
to the clearinghouse change. Through continuing efforts to recruit new
registered representatives, the Company expects 1998 revenues to increase to the
levels achieved in 1995.
Collection agency fee income increased $840 in 1997 compared with an increase of
$814 in 1996. The increases in 1997 and 1996 were due to increased volume of
collections, which was the result of several acquisitions in 1996 and the
acquisition of a small ambulance and medical billing agency in 1997.
Citizens purchased Bank Owned Life Insurance ("BOLI") during the second quarter
of 1997 to offset costs of selected employee benefits. The income from BOLI
totaled $801 for 1997.
NONINTEREST EXPENSE
Noninterest expense includes costs, other than interest, that are incurred in
the operations of the Company. The table below summarizes the components of the
Company's noninterest expense.
<TABLE>
<CAPTION>
1997 1996
Vs. Vs.
1997 1996 1995 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 77,423 $ 63,076 $ 54,218 23% 16%
Occupancy and equipment expense 21,362 19,586 18,478 9 6
Merger, integration and restructuring expense 200 838 711 (76) 18
Brokerage commissions 3,597 5,604 6,608 (36) (15)
FDIC expense 652 5,571 4,240 (88) 31
Franchise taxes 3,889 3,842 3,565 1 8
Printing and supplies 3,505 3,485 3,077 1 13
Legal and other professional fees 5,236 3,343 3,043 57 10
Amortization of intangible assets 2,363 1,942 2,110 22 (8)
Other 29,053 25,869 22,538 12 15
---------- ---------- ---------
$ 147,280 $ 133,156 $ 118,588 11% 12%
========== ========== ========= === ====
</TABLE>
Salaries and employee benefits comprise the largest component of noninterest
expense and were 53%, 47% and 46% of noninterest expense in 1997, 1996, and
1995. Salary and wages increased in 1997 due to increases in salary rates and in
full-time equivalent employees, primarily at the Company's financial service
affiliates. Commissions paid to employees increased primarily due to growth in
revenues from its fee-based financial services affiliates and higher mortgage
loan originations. Salaries, wages and commissions increased in 1996 compared to
1995 due to the formation of MACC, the acquisition of three credit agencies in
Florida, increased employee commission expense related to higher mortgage loan
origination and salary increases. Employee benefits and retirement benefit
expenses increased in 1997 and 1996 because of improved earnings performance by
the Company. Certain portions of employees' incentive and retirement
compensation are tied to levels of the Company's financial performance. The
- --------------------------------------------------------------------------------
(Continued)
47.
<PAGE> 48
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Company does not offer any post-employment benefits other than through its
retirement plans.
Net occupancy and equipment expense increased 9% in 1997 compared to 1996 due to
increases in building rent and other related expenses primarily from the
Company's newly formed fee-based financial services affiliates. Increases in
1997 and 1996 occurred in equipment expense relating to added depreciation
expense due to the purchase of state-of-the-art computer equipment and software.
The Company believes that technology plays an important role in providing
excellent service to its customers.
FDIC expense decreased in 1997 due to lower premium rates necessary to fund
servicing of FICO bonds. FDIC expense increased in 1996 due to the special
assessment of $.67 per $100 of deposits insured through the SAIF which
aggregated $4,230.
During 1997, 1996 and 1995, the Company incurred $200, $838 and $711 in merger,
integration and restructuring expenses related to various mergers and
acquisitions discussed in Note 2 of the Supplemental Consolidated Financial
Statements.
INCOME TAXES
The provision for income taxes increased to $25,101 in 1997 from $22,021 in 1996
due to an increase in pre-tax income. The effective income tax rates for 1997,
1996 and 1995 were 32.0%, 31.6% and 31.4%. Tax exempt investment and loan income
are the primary reason that the effective tax rate is less than the statutory
tax rate of 35%. The Company became subject to state income taxes in 1997
because of expansion of its fee-based financial services businesses into new
states.
LIQUIDITY
The liquidity of a financial institution reflects its ability to provide funds
to meet loan requests, to accommodate possible outflows in deposits and to take
advantage of interest rate market opportunities. Funding of loan requests,
providing for liability outflows, and management of interest rate fluctuations
require continuous analysis in order to match the maturities of specific
categories of short-term loans and investments with specific types of deposits
and borrowings. Financial institution liquidity is thus normally considered in
terms of the nature and mix of the institution's sources and uses of funds.
Since the Company is a holding company and does not conduct operations, its
primary sources of liquidity are borrowings from outside sources and dividends
paid to it by its subsidiaries. For national banks, the approval of the Office
of the Comptroller of the Currency is required in order to pay dividends in
excess of the subsidiaries' earnings retained for the current year plus retained
net profits for the prior two years. As a result of these restrictions,
dividends which could be paid to the Company by its bank subsidiaries were
limited to $24,034 at December 31, 1997.
The Company's liquidity position increased in 1997. It is management's belief
that the Company's liquidity position is adequate. The Company continues to
emphasize loan originations primarily in commercial real estate loans and
installment loans because of attractive yields. The funding of loans in 1997 and
the Company's emphasis of investing in securities available for sale was
responsible for the 1997 increase in cash used by investing activities which was
offset by an increase in the funds provided by financing activities primarily
due to an increase in ("FHLB") advances. The Company's bank subsidiaries have
lines of credit with the FHLB and can borrow up to $482,440, of which $238,355
is currently outstanding. In December, 1996, the Company entered into an
agreement with an unrelated financial institution which enabled the Company to
borrow up to $20,000 for a period of one year. The agreement was renewed in
December, 1997 and permits the Company to borrow up to $25,000 through December
30, 1998. At December 31, 1997, $15,000 was borrowed against the available
credit facility.
- --------------------------------------------------------------------------------
(Continued)
48.
<PAGE> 49
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
During the second quarter of 1997, the Company issued, through a special purpose
subsidiary, $27,500 of 10.20% Trust Preferred Securities. The mandatory
redemption date of the securities is June 1, 2027. However, the Company may
redeem the securities commencing June 1, 2007 at a redemption price of 105.10%
of the face value of the capital securities and thereafter at a premium which
declines annually. On or after June 1, 2017, the capital securities may be
redeemed at face value. The capital securities are reflected as long-term debt
in the Company's financial statements; however, for regulatory purposes the
capital securities are considered Tier I capital.
On January 16, 1998, the Company issued $50,000 of 7.08% subordinated ten-year
debt in a private placement transaction. The proceeds from this debt will be
used for general corporate purposes, including funding of consumer finance
subsidiary loans, reduction of borrowings under the Company's line of credit,
investment securities and the buyback of the Company's common stock under a
systematic plan for funding future stock dividends and issuance of shares under
its stock option plan. The subordinated debt is considered Tier II capital for
regulatory purposes.
As shown in the consolidated statement of cash flows presented elsewhere herein,
cash and due from banks increased $6,250 during 1997 to $138,105 at December 31,
1997. The increase in 1997 is composed of $221,208 used for investing activities
offset by $170,449 provided by financing activities and $57,009 provided by
operating activities.
<TABLE>
<CAPTION>
1997 1996
Vs. Vs.
1997 1996 1995 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income $ 53,301 $ 47,722 $ 43,761 $ 5,579 $ 3,961
Provisions for credit losses, depreciation
and amortization 24,290 18,979 18,508 5,311 471
Net cash provided by secondary market
activity 16,096 9,447 3,200 6,649 6,247
Net gains on sales of assets (35,029) (17,602) (6,280) (17,427) (11,322)
Other items (1,649) 7,568 (9,877) (9,217) 17,445
---------- ---------- --------- -------- ----------
$ 57,009 $ 66,114 $ 49,312 $ (9,105) $ 16,802
========== ========== ========= ======== ==========
</TABLE>
Net cash provided by operating activities decreased in 1997 compared to 1996
primarily from increased net gains on the sale of assets, including the gain
from the sale of branch offices ($225) and the premium from deposits sale
($8,703) where proceeds from these sales are reflected in investing and
financing activities. Cash flows from both sales of mortgages and other loans
and originations of these loans increased substantially in 1997 and 1996.. The
increase in cash provided by operating activities in 1996 compared to 1995 was
due primarily to the increase in cash generated in mortgage banking activities
and a decrease in interest receivable and other assets.
- --------------------------------------------------------------------------------
(Continued)
49.
<PAGE> 50
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
Vs. Vs.
1997 1996 1995 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Investing Activities:
Net increase in loans $ (170,782) $ (280,115) $(177,145) $ 109,333 $ (102,970)
Loans purchased (11,989) (3,604) - (8,385) (3,604)
Proceeds from sales of portfolio loans 32,309 42,383 53,633 (10,074) (11,250)
---------- ---------- --------- --------- ----------
Net loan activities (150,462) (241,336) (123,512) 90,874 (117,824)
Proceeds from securities activities 336,046 330,301 258,490 5,745 71,811
Purchases of securities (372,292) (248,082) (226,333) (124,210) (21,749)
---------- ---------- --------- --------- ----------
Net securities activities (36,246) 82,219 32,157 (118,465) 50,062
Purchases of bank premises and equipment (18,165) (14,029) (9,869) (4,136) (4,160)
Net change in federal funds sold position 640 69,302 (85,359) (68,662) 154,661
Purchase of life insurance contracts (20,000) (500) (724) (19,500) 224
Other items 3,025 2,432 6,091 593 (3,659)
---------- ---------- --------- --------- ----------
$ (221,208) $ (101,912) $(181,216) $(119,296) $ 79,304
========== ========== ========= ========== ==========
</TABLE>
Comparing 1997 to 1996, net cash used for investing activities increased
slightly. The rate of growth in loans slowed in 1997 compared to 1996. The
increase in securities available for sale in 1997 was also lower than the
decrease experienced in 1996, as the need for funding loans was lower. For 1996,
loan balances increased significantly, which was partially funded by the sale of
securities and federal funds sold. Net cash used for investing activities
decreased $79,304 from 1995 to 1996 primarily due to the decrease in federal
funds sold and increases in net loan activities offset by a decrease in net
securities activities.
<TABLE>
<CAPTION>
1997 1996
Vs. Vs.
1997 1996 1995 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Financing Activities:
Net change in deposit activities $ 50,476 $ 25,713 $ 189,088 $ 24,763 $ (163,375)
Proceeds from long-term and short-term
borrowings 225,465 74,623 31,712 150,842 42,911
Repayments of debt and long-term FHLB
advances (49,686) (42,965) (42,886) (6,721) (79)
Cash dividends and fractional shares paid (24,041) (22,371) (19,231) (1,670) (3,140)
Preferred stock retired, treasury stock
acquisitions and other items (31,765) (11,656) (8,060) (20,109) (3,596)
---------- ---------- --------- -------- ---------
$ 170,449 $ 23,344 $ 150,623 $147,105 $ (127,279)
========== ========== ========= ======== ==========
</TABLE>
Comparing 1997 with 1996, the increase in net cash provided for financing
activities was primarily due to the increase in borrowings in 1997 offset
partially by the increase in buyback of stock. Net cash provided by financing
activities decreased $127,279 from 1995 to 1996, primarily due to a net decrease
in the deposit growth for 1995 compared to 1996. The decrease in bank deposits
in 1996 was primarily attributable to the Company using alternative lower cost
funds instead of higher rate deposits, primarily certificates of deposit.
- --------------------------------------------------------------------------------
(Continued)
50.
<PAGE> 51
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT
Closely related to liquidity management is the management of interest-earning
assets and interest-bearing liabilities. The Company manages its rate
sensitivity position to avoid wide swings in net interest margins and to
minimize risk due to changes in interest rates.
The difference between a financial institution's interest rate sensitive assets
(i.e., assets which will mature or reprice within a specific time period) and
interest rate sensitive liabilities (i.e., liabilities which will mature or
reprice within the same time period) is commonly referred to as its "interest
rate sensitivity gap" or "gap." An institution having more interest rate
sensitive assets than interest rate sensitive liabilities within a given time
period is said to have a "positive gap," which generally means that if interest
rates increase, a company's net interest income will increase and if interest
rates decrease, its net interest income will decrease. An institution having
more interest rate sensitive liabilities than interest rate sensitive assets
within a given time period is said to have a "negative gap," which generally
means that if interest rates increase, a company's net interest income will
decrease and if interest rates decrease, its net interest income will increase.
The following table sets forth the cumulative maturity distributions as of
December 31, 1997 of the Company's interest-earning assets and interest-bearing
liabilities, its interest rate sensitivity gap, cumulative interest rate
sensitivity gap for such assets and liabilities, and cumulative interest rate
sensitivity gap as a percentage of total interest-earning assets. This table
indicates the time periods in which certain interest-earning assets and certain
interest-bearing liabilities will mature or may reprice in accordance with their
contractual terms.
While most assets and liabilities reprice either at maturity or in accordance
with their contractual terms, several balance sheet components demonstrate
characteristics that require adjustments to more accurately reflect their
repricing behavior. When using simulation modeling, assumptions based on
historical pricing relationships and anticipated market reactions are made to
certain core deposits to reflect the elasticity of the changes in their interest
rates relative to the changes in market interest rates. In addition, estimates
are made regarding early loan and security repayments. These adjustments provide
a more accurate picture of the Corporation's interest rate risk profile than the
repricing schedule.
Total interest-earning assets exceeded interest-bearing liabilities by $455,808
at December 31, 1997. This difference was funded through noninterest-bearing
liabilities and shareholders' equity. The data presented above is based on
contractual maturities and repricing only and does not include assumptions
regarding early loan and security repayments. The table below shows that the
total liabilities maturing or repricing within one year exceed assets maturing
or repricing within one year by $433,507. However, repricing of certain
categories of assets and liabilities is subject to competitive and other
influences that are beyond the Corporation's control. Therefore, certain assets
and liabilities indicated as maturing or repricing within a stated period may,
in fact, mature or reprice in other periods or at different volumes.
- --------------------------------------------------------------------------------
(Continued)
51.
<PAGE> 52
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Maturity or Next Rate Adjustment Date
------------------------------------------------------------------
0-3 3-12 1-5 Over 5
Months Months Years Years Total
------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS (RSA)
Loans and loans held
for sale (a) $ 859,126 $ 559,838 $ 951,240 $ 388,913 $ 2,759,117
Securities (b) 102,291 163,987 332,497 306,699 905,474
Federal funds sold 36,526 36,526
Interest-bearing deposits 6,389 6,389
----------- ----------- ----------- ----------- -----------
Rate sensitive assets $ 1,004,332 $ 723,825 $ 1,283,737 $ 695,612 $ 3,707,506
=========== =========== =========== =========== ===========
RATE SENSITIVE LIABILITIES (RSL)
Interest-bearing deposits $ 1,148,151 $ 685,304 $ 926,875 $ 25,637 $ 2,785,967
Short-term borrowings,
debt and FHLB
advances 274,369 53,840 100,808 36,714 465,731
----------- ----------- ----------- ----------- -----------
Rate sensitive liabilities $ 1,422,520 $ 739,144 $ 1,027,683 $ 62,351 $ 3,251,698
=========== =========== =========== =========== ===========
Gap (c) $ (418,188) $ (15,319) $ 256,054 $ 633,261 $ 455,808
Cumulative gap (418,188) (433,507) (177,453) 455,808
Cumulative gap/ Total
RSA (11.28)% (11.69)% (4.79)% 12.29%
</TABLE>
(a) Expected maturities will likely differ from contractual maturities
because some borrowers and issuers have the right to call or prepay
obligations with or without call or prepayment penalties.
(b) Includes securities available for sale and held to maturity.
(c) Gap is defined as rate sensitive assets less rate sensitive liabilities
and may be expressed in dollars or as a percentage.
CAPITAL RESOURCES
The Federal Reserve Board ("FRB") has established risk-based capital guidelines
that must be observed by bank holding companies and banks. Under these
guidelines, total qualifying capital is categorized into two components -- Tier
I and Tier II capital. Tier I capital generally consists of common shareholders'
equity, perpetual preferred stock (subject to limitations) and minority
interests in subsidiaries. Subject to limitations, Tier II capital includes
certain other preferred stock and debentures, and a portion of the reserve for
credit losses. These ratios are expressed as a percentage of risk-adjusted
assets, which include various risk-weighted percentages of off-balance-sheet
exposures, as well as assets on the balance sheet. The FRB regulations governing
the various capital ratios do not recognize the effects of SFAS 115 "Accounting
for Certain Investments in Debt and Equity Securities" on capital relating to
changes in market value of securities available for sale.
At December 31, 1997, a minimum Tier I capital ratio of 4.00% and a total
capital ratio of 8.00% were required. The Company's qualifying capital at
December 31, 1997 exceeded both the Tier I and Tier II risk-based capital
guidelines. In addition, a capital leverage ratio is used in connection with the
risk-based capital standards which is defined as Tier I capital divided by total
assets adjusted for certain items. Included in Tier I capital are $27,500 of
10.20% capital securities issued by the Company through a special purpose trust
subsidiary in 1997. The following table presents the various capital and
leverage ratios of the Company.
- --------------------------------------------------------------------------------
(Continued)
52.
<PAGE> 53
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Total adjusted average assets for leverage ratio $ 3,880,849 $ 3,661,843
Risk-weighted assets and off-balance-sheet financial
instruments for capital ratio 3,019,090 2,644,083
Tier I capital 343,599 322,616
Total risk-based capital 378,254 350,077
Leverage ratio 8.9% 8.8%
Tier I capital ratio 11.4 12.2
Total capital ratio 12.5 13.2
</TABLE>
Capital ratios applicable to the Company's main banking subsidiaries at December
31, 1997 were as follows:
<TABLE>
<CAPTION>
Total
Tier I Risk-based
Leverage Capital Capital
-------- ------- -------
<S> <C> <C> <C>
Regulatory capital requirements:
Minimum 4.0% 4.0% 8.0%
Well-capitalized 5.0 6.0 10.0
Bank Subsidiaries:
Mid Am Bank 8.0 9.6 10.6
Citizens 5.9 9.6 10.3
First National 7.7 10.2 11.0
Century 7.7 10.3 11.6
AmeriCom 7.0 9.3 10.5
</TABLE>
SECURITIES
The following tables set forth the carrying value at market at the respective
year end for each of the last three years and the aggregate amortized cost of
the Company's securities at December 31, 1997.
<TABLE>
<CAPTION>
Estimated Fair Value
Amortized -------------------------------------------
Cost 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities $ 83,850 $ 84,339 $ 83,871 $ 94,168
U.S. Government agencies and corporations 138,689 139,677 95,946 136,789
Obligations of states and political
subdivisions 55,830 57,231 61,039 86,549
Corporate and other securities 27,870 28,090 16,436 20,004
Mortgage-backed securities 449,161 451,004 461,887 416,213
------------ ----------- ----------- ------------
Total debt securities available for
sale 755,400 760,341 719,179 753,723
Marketable equity securities 53,488 57,926 47,636 39,779
------------ ----------- ----------- ------------
Total securities available for sale $ 808,888 $ 818,267 $ 766,815 $ 793,502
============ =========== =========== ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
53.
<PAGE> 54
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Estimated Fair Value
Amortized ------------------------------------------
Cost 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY
U.S. Treasury securities $ 38,618 $ 38,768 $ 47,443 $ 37,723
U.S. Government agencies and corporations 22,981 23,019 13,330 14,367
Obligations of states and political
subdivisions 22,013 22,441 23,741 18,216
Corporate and other securities 1,496 1,472 1,453 2,011
Mortgage-backed securities 2,099 2,318 2,660 3,161
------------ ----------- ----------- ------------
Total securities held to maturity $ 87,207 $ 88,018 $ 88,627 $ 75,478
============ =========== =========== ============
</TABLE>
The portfolio contains mortgage-backed securities and to a limited extent, other
securities, which have unknown cash flow characteristics. The variable cash
flows present additional risk to the bondholders in the form of prepayment or
extension risk primarily caused by market interest rate changes. This additional
risk is generally rewarded in the form of higher yields to the investor.
The Company utilizes tools to minimize and monitor this risk, requiring the
security to pass a stress test at the time of purchase. This testing measures
prepayment and extension risk under severe changes in interest rates.
Additionally, the corporate investment policy defines certain types of high risk
securities as ineligible for purchase, including securities which may not return
full principal to the Company. It is also the practice of the Company to
minimize premiums paid on mortgage securities to avoid yield reduction if
prepayments increase. These policies help insure that there will be no material
impact from these investments to the financial statements due to changing
interest rates.
The internal accounting systems and controls are in place to account for
amortization and accretion of premiums and discounts. As prepayments of
principal are received, the system automatically adjusts premiums and discounts
to reflect the proper book values.
There are no securities of any single issuer where the aggregate carrying value
of such securities exceeded 10% of shareholders' equity, except those of the
U.S. Treasury, U.S. Government agencies and substantially all mortgage-backed
securities issued by Federal Home Loan Mortgage Corporation ("FHLMC"), Federal
National Mortgage Association ("FNMA") and Government National Mortgage
Association.
The following tables show the contractual maturities and weighted average yields
of the Company's securities as of December 31, 1997. Expected maturities will
differ from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties. Mortgage-backed
securities are presented in the table based on current assumptions as to
prepayments. The weighted average yields on income from tax exempt obligations
of state and political subdivisions have been adjusted to a tax equivalent
basis.
- --------------------------------------------------------------------------------
(Continued)
54.
<PAGE> 55
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Within 1 Yr 1-5 Yrs 5-10 Yrs Over 10 Yrs
----------- ------- -------- -----------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury $ 28,457 5.55% $ 48,652 6.01% 7,230 6.17%
U.S. Government
agencies and
corporations 9,003 5.29 63,350 6.39% 62,716 7.19 $ 4,608 6.77%
Obligations of
states and
political
subdivisions 6,774 6.90 29,679 7.49 14,128 6.87 6,650 7.15
Corporate and
other securities 6,605 6.33 12,370 6.52 1,956 5.64 7,159 9.03
Mortgage-backed
securities 79,496 7.00 53,550 6.58 91,812 6.58 226,146 6.85
---------- ---------- --------- ---------
Total debt
securities
available for
sale $ 130,335 6.52% $ 207,601 6.51% $ 177,842 6.79% $ 244,563 6.92%
========== ===== ========== ===== ========= ==== ========= ====
</TABLE>
<TABLE>
<CAPTION>
Within 1 Yr 1-5 Yrs 5-10 Yrs Over 10 Yrs
----------- ------- -------- -----------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY
U.S. Treasury $ 8,133 6.15% $ 30,485 6.00%
U.S. Government
agencies and
corporations 6,879 4.87 16,102 6.48
Obligations of
states and
political
subdivisions 1,898 9.26 15,124 7.36 $ 4,395 7.77% $ 596 8.16%
Corporate and
other securities 480 5.44 5 5.50 1,011 5.46
Mortgage-backed
securities 2,099 9.11
---------- ---------- --------- ----------
Total securities
held to maturity $ 17,390 6.00% $ 61,716 6.50% $ 5,406 7.34% $ 2,695 8.90%
========== ==== ========== ==== ========= ==== ========== ====
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
55.
<PAGE> 56
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
LOAN PORTFOLIO
The amount of loans outstanding and the percent of the total represented by each
type on the dates indicated were as follows.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real estate loans
Construction $ 94,329 $ 88,162 $ 82,206 $ 84,393 $ 52,866
Residential mortgage 943,003 943,137 984,481 1,006,401 927,113
Non-residential mortgage 683,112 550,984 419,333 366,537 330,733
Commercial, financial and
agricultural loans 636,198 654,870 594,141 523,444 463,825
Installment and credit card loans 377,583 327,606 312,261 297,575 255,174
Other loans 7,181 5,384 6,335 10,040 11,690
------------ ------------ ------------ ------------ ------------
Total Loans $ 2,741,406 $ 2,570,143 $ 2,398,757 $ 2,288,390 $ 2,041,401
============ ============ ============ ============ ============
Real estate loans
Construction 3.5 3.4 3.4 3.7 2.6
Residential mortgage 34.4 36.7 41.0 44.0 45.4
Non-residential mortgage 24.9 21.5 17.5 16.0 16.2
Commercial, financial and
agricultural loans 23.2 25.5 24.8 22.9 22.7
Installment and credit card loans 13.8 12.7 13.0 13.0 12.5
Other loans .2 .2 .3 .4 .6
------------ ------------ ------------ ------------ -----------
Total Loans 100.0% 100.0% 100.0% 100.0% 100.0%
============ ============ ============ ============ ===========
</TABLE>
Real estate loans, including construction and mortgage loans, approximated 63%
of total loans at December 31, 1997. Collateral evaluations and the historical
data of the Company's mortgage loan losses are used to determine the amount
necessary for the allowance for credit losses. The Company's general collateral
policy for residential real estate mortgages is to follow FNMA and FHLMC
guidelines, which generally require a loan-to-value ratio of 80% or private
mortgage insurance for loan-to-value ratios in excess of 80%.
A significant portion (23%) of the loan portfolio is composed of commercial
loans. Personal and business financial status, credit standing, and available
collateral of commercial borrowers, plus management's judgment as to prevailing
and anticipated economic conditions and the historical data of the Company's
commercial loan losses, are taken into consideration when determining the amount
of the allowance for credit losses needed for commercial loans. The amount of
collateral required on commercial loans is generally determined based on a
loan-by-loan assessment. Average loan-to-value ratios for commercial loans
typically range from 50% to 80%. Factors which are considered include, among
other things, the purpose of the loan, the current financial status of the
borrower and the borrower's prior credit history.
The remaining portion (14%) of the Company's loan portfolio are installment,
credit card loans and other loans and leases. A thorough credit examination is
done at the time of the extension of credit. The Company sold substantially all
of its credit card loans in the fourth quarter of 1996. The Company makes
consumer loans on both a secured and unsecured basis depending, in part, on the
nature, purpose and term of the loan. Loan-to-value ratios for secured consumer
loans range from 70% to 90% as a general rule. The historical data of the
Company's consumer loan losses and the Company's credit evaluations are used to
determine the necessary amount for its allowance for credit losses.
- --------------------------------------------------------------------------------
(Continued)
56.
<PAGE> 57
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
The following table shows the amount of commercial, financial and agricultural
loans and real estate construction loans outstanding as of December 31, 1997
which, based on remaining scheduled repayments of principal, are due in the
periods indicated. Also, the amounts due after one year are classified according
to their sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
Due In Due In Due After
1 Year 1 Yr - 5 Yrs 5 Years Total
------ ------------ ------- -----
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 222,089 $ 208,827 $ 205,282 $ 636,198
Construction 69,707 4,524 20,098 94,329
----------- ------------ ------------ ------------
Total $ 291,796 $ 213,351 $ 225,380 $ 730,527
=========== ============ ============ ============
Total due after one year
- ------------------------
Fixed rate commercial, financial,
agricultural and construction $ 61,608 $ 76,947 $ 138,555
Variable rate commercial, financial,
agricultural and construction 153,693 146,483 300,176
------------ ------------ ------------
Total $ 215,301 $ 223,430 $ 438,731
============ ============ ============
</TABLE>
Actual maturities of loans will differ from the contractual maturities presented
in the table above because of prepayments, rollovers and renegotiation of
payment terms, among other factors.
The following table presents the aggregate amounts of non-performing assets and
respective ratios on the dates indicated.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 9,485 $ 8,688 $ 12,217 $ 13,649 $ 14,435
Restructured loans 475 491 904 329 538
----------- ----------- ----------- ----------- -----------
Total nonperforming loans 9,960 9,179 13,121 13,978 14,973
Other real estate owned 529 2,759 2,697 3,031 5,999
----------- ----------- ----------- ----------- -----------
Total nonperforming assets $ 10,489 $ 11,938 $ 15,818 $ 17,009 $ 20,972
=========== =========== =========== =========== ===========
Loans 90 days or more past due
and not on nonaccrual $ 4,280 $ 7,027 $ 2,091 $ 4,031 $ 2,289
=========== =========== =========== =========== ===========
Nonperforming loans to total loans .36% .36% .55% .61% .73%
Nonperforming assets to total loans
plus other real estate owned .38 .46 .66 .74 1.02
Allowance for credit losses to total
nonperforming loans 360.46 341.01 226.47 217.59 199.51
Allowance for credit losses to total
nonperforming assets 342.27 262.20 187.86 178.82 142.44
Loans 90 days or more past due and
not on nonaccrual to total loans .16 .27 .09 .18 .11
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
57.
<PAGE> 58
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
SFAS 114 "Accounting by Creditors for Impairment of a Loan," and SFAS 118
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures," were adopted effective January 1, 1995. Residential mortgage,
installment and other consumer loans are collectively evaluated for impairment.
Individual commercial loans exceeding size thresholds established by management
are evaluated for impairment. Impaired loans are recorded at the loan's fair
value by the establishment of a specific allowance where necessary. The fair
value of the underlying collateral-dependent loans is determined by the fair
value of the underlying collateral. The fair value of noncollateral-dependent
loans is determined by discounting expected future interest and principal
payments at the loan's effective interest rate.
At December 31, 1997, the recorded investment on impaired loans measured in
accordance with SFAS 114 amounted to $6,467, of which $5,668 or 88% of impaired
loans have a specific allowance of $1,008. The average recorded investment in
impaired loans for the year ended December 31, 1997 was $7,807. Interest income
recognized in 1997 related to impaired loans was $334, of which $224 was
recognized on a cash basis. At December 31, 1996, the recorded investment in
impaired loans measured in accordance with SFAS 114 amounted to $10,357, of
which $8,645 of impaired loans had a specific allowance of $2,622 and the
remaining $1,712 of impaired loans had no specific allowance because the fair
value of the collateral securing the loan exceeded the investment in the loan.
The decrease in impaired loans from 1996 to 1997 was the result of certain 1996
impaired loans paying off in 1997, and no new significant loans becoming
impaired during 1997.
Nonaccrual loans are comprised principally of loans 90 days past due, as well as
certain loans which are current but where serious doubts exist as to the ability
of the borrower to comply with the repayment terms. Interest previously accrued
and not yet paid on nonaccrual loans is reversed or charged against the
allowance for credit losses during the period in which the loan is placed in a
nonaccrual status, except where the Company has determined that such loans are
adequately secured as to principal and interest. Interest earned thereafter is
included in income only to the extent that it is received in cash. In certain
cases, interest received may be credited against principal outstanding under the
cost recovery method.
AmeriCom and First National have purchased certain lease receivables and
extended loans with an aggregate outstanding balance at December 31, 1997 of
$4,985 to The Bennett Funding Group, Inc. and related entities (Bennett) which
remain subject to the Bennett bankruptcy proceeding commenced in March, 1996. On
December 29, 1997 and January 7, 1998, the bankruptcy judge ruled that AmeriCom
and First National, respectively, are secured creditors with respect to $1,484
and $1,831, respectively, of their outstanding Bennett portfolios. In early
1998, AmeriCom and First National received $1,247 and $1,421, respectively from
the Trustee in bankruptcy pursuant to the judge's order. These decisions have
been appealed by the bankruptcy trustee and the appeals are pending. No decision
has been rendered with respect to $1,671 in loans from AmeriCom and First
National which present different issues from the issues decided by the
bankruptcy judge. Due to the complexity of the remaining legal issues,
management and the Company's legal counsel are currently unable to form an
opinion as to the likely outcome of the Banks' position with respect to the
remaining Bennett portfolio. The aggregate outstanding balance of the Bennett
portfolio after receipt of payout was $2,317 including $250 on non-accrual and
$2,067 ninety days past due and still accruing.
Other real estate owned amounted to $529 and $2,759 at December 31, 1997 and
1996, respectively. The Company has been able to reduce other real estate owned
balances since 1993, through improved asset quality, improved controls, and
timely sales of foreclosed properties.
As of December 31, 1997, the Company did not have any loan concentrations which
exceeded 10% of total loans.
- --------------------------------------------------------------------------------
(Continued)
58.
<PAGE> 59
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
SUMMARY OF CREDIT LOSS EXPERIENCE The following
table presents a summary of credit loss experience for the periods indicated.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of
the period $ 31,301 $ 29,715 $ 30,415 $ 29,872 $ 26,930
Loans charged-off:
Real estate (842) (1,410) (770) (807) (758)
Commercial and
agricultural loans (3,391) (2,705) (5,528) (3,785) (7,051)
Installment and credit card (3,578) (4,441) (2,823) (2,017) (2,574)
Other loans (68) (14) (14) (82)
------------ ------------ ------------ ------------ ------------
Total charge-offs (7,879) (8,570) (9,121) (6,623) (10,465)
------------ ------------ ------------ ------------ ------------
Recoveries:
Real estate 296 384 526 228 283
Commercial and
agricultural loans 1,268 1,813 1,539 1,913 2,036
Installment and credit card 1,007 1,086 814 906 1,147
Other loans 46 57 36 28
------------ ------------ ------------ ------------ ------------
Total recoveries 2,617 3,340 2,915 3,047 3,494
------------ ------------ ------------ ------------ ------------
Net loans charged-off (5,262) (5,230) (6,206) (3,576) (6,971)
Provision charged to
operating expense 9,862 6,816 5,506 4,119 9,409
Effect of conforming year ends
of pooled entities 504
------------ ------------ ------------ ------------ ------------
Balance at the end of the
period $ 35,901 $ 31,301 $ 29,715 $ 30,415 $ 29,872
============ ============ ============ ============ ============
Ratio of net charge-offs to
average loans outstanding .20% .21% .26% .17% .35%
Allowance for credit losses to
total loans 1.31 1.22 1.24 1.33 1.46
Allowance for loan losses to
total nonperforming loans 360.46 341.01 226.47 217.59 199.51
</TABLE>
The provision for credit losses reflects the amount necessary in management's
opinion to maintain an adequate reserve, based upon its analysis of the loan
portfolio (including the loan growth rate and change in the mix of the loan
portfolio) and general economic conditions and the necessity to state certain
individual loans at their estimated fair value.
The Company's banking subsidiaries monitor the adequacy of their allowances for
credit losses on a monthly basis. The banking subsidiaries formally document
their evaluations of the adequacy of their allowances for credit losses on a
quarterly basis and the evaluations are reviewed and discussed with each bank's
respective Board of Directors. The Company's Asset Quality Department presents a
quarterly consolidated evaluation of the adequacy of the allowance for credit
losses to the Company's Board of Directors. These evaluations of potential
losses include, without limitation, a review of the current financial status and
credit standing of commercial borrowers and their prior history, an evaluation
of
- --------------------------------------------------------------------------------
(Continued)
59.
<PAGE> 60
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
available collateral, a review of loss experience in relation to outstanding
loans, and management's judgment as to prevailing and anticipated economic
conditions. Such factors include, among others, changes in the credit grade
assigned to the loan by either the assigned officer or by the Company's Asset
Quality Department from its periodic reviews of segments of the loan portfolios,
and increases or decreases in specific reserves assigned to individual loans.
Residential mortgage and consumer portfolios are collectively evaluated giving
consideration to the trend of delinquencies and charge-offs and current and
anticipated economic conditions.
The following table sets forth the allocation of the allowance for credit losses
for the periods indicated.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real estate $ 1,850 $ 2,063 $ 1,633 $ 3,607 $ 3,528
Commercial, financial and
agricultural 11,158 8,825 9,693 11,383 11,878
Installment and credit card 4,228 3,491 2,841 2,942 3,293
Other loans 355 1,106 474 422 579
Unallocated 18,310 15,816 15,074 12,061 10,594
------------ ------------ ------------ ------------ ------------
Total $ 35,901 $ 31,301 $ 29,715 $ 30,415 $ 29,872
============ ============ ============ ============ ============
</TABLE>
DEPOSITS
The following is a schedule of average deposit amounts and average rates paid on
each category for the period indicated (in thousands of dollars):
<TABLE>
<CAPTION>
Average Amounts Outstanding Average Rate Paid
Year Ended December 31, Year Ended December 31,
--------------------------------------------- ----------------------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
Noninterest-bearing
<S> <C> <C> <C> <C> <C> <C>
demand deposits $ 327,682 $ 307,161 $ 291,520
Interest-bearing
demand deposits 343,429 368,852 356,856 2.14% 1.96% 2.08%
Savings deposits 748,672 755,544 763,943 2.87 2.90 3.00
Time deposits 1,627,770 1,587,455 1,532,265 5.63 5.62 5.52
------------ ------------ ------------
Total $ 3,047,553 $ 3,019,012 $ 2,944,584
============ ============ ============
</TABLE>
The following is a schedule of maturities of time deposits in amounts of
$100,000 or more as of December 31, 1997:
<TABLE>
<S> <C>
Three months or less $ 115,308
Three through six months 62,724
Six through twelve months 78,329
Over twelve months 92,868
-----------
Total $ 349,229
===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
60.
<PAGE> 61
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
SHORT-TERM BORROWINGS
The following table sets forth certain information relative to the securities
sold under agreements to repurchase and Federal funds purchased. Generally,
repurchase agreements are sold to local government entities and businesses and
have maturity terms of overnight to 30 days. Federal funds purchased generally
have overnight terms.
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Total securities sold under agreement to repurchase and
Federal funds purchased at period-end $ 182,362 $ 186,782 $ 112,608
Weighted average interest rate at period-end 4.95% 5.19% 4.54%
Maximum outstanding at any month-end during the year $ 268,320 $ 210,294 $ 138,276
Average amount outstanding 211,228 147,050 121,866
Weighted average rates during the year 4.95% 4.60% 4.79%
</TABLE>
YEAR 2000 SOFTWARE INITIATIVES
Management has initiated a company-wide assessment, remediation and conversion
program to address the effect of the year 2000 on the Company's information
systems and application software. The Company's Year 2000 Readiness Project
contains assessment, renovation, validation and implementation phases. A
substantial majority of the significant application software utilized by the
Company is licensed from a third-party vendor and management is working with the
vendor to ensure that the software will operate properly in the year 2000. At
this time, the estimated cost to remediate the Company's year 2000 issues is not
expected to be material.
FORWARD LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements relating
to such matters as anticipated operating results, prospects for new lines of
business, technological developments, economic trends (including interest
rates), reorganization transactions and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements, and the purpose of this paragraph is to secure the use of the safe
harbor provisions. While the Company believes that the assumptions underlying
the forward-looking statements contained herein and in other public documents
are reasonable, any of the assumptions could prove to be inaccurate, and
accordingly, actual results and experience could differ materially from the
anticipated results or other expectations expressed by the Company in its
forward-looking statements. Factors that could cause actual results or
experience to differ from results discussed in the forward-looking statements
include, but are not limited to: economic conditions; volatility and direction
of market interest rates; capital investment in and operating results of
non-banking business ventures of the Company; the ability of the Company's
broker/dealer subsidiary to recruit registered representatives; governmental
legislation and regulation; material unforeseen changes in the financial
condition or results of operations of the Company's customers; customer reaction
to and unforeseen complications with respect to the Company's product redesign
initiative; the effect of the year 2000 on the Company's computer systems; and
other risks identified, from time-to-time in the Company's other public
documents on file with the Securities and Exchange Commission.
- --------------------------------------------------------------------------------
(Continued)
61.
<PAGE> 62
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk to which the Company is exposed is interest rate risk.
The primary business of the Company and the composition of its balance sheet
consists of investments in interest-earning assets, which are funded by
interest-bearing liabilities. These financial instruments have varying levels of
sensitivity to changes in the market rates of interest, resulting in market
risk. None of the Company's financial instruments are held for trading purposes.
One method the Company uses to manage its interest rate risk is a rate
sensitivity gap analysis, (see "Asset/Liability Management.") The Company also
monitors its interest rate risk through a sensitivity analysis, whereby it
measures potential changes in its future earnings and the fair values of its
financial instruments that may result from one or more hypothetical changes in
interest rates. This analysis is performed by estimating the expected cash flows
of the Company's financial instruments using interest rates in effect at
year-end 1997. For the fair value estimates, the cash flows are then discounted
to year-end to arrive at an estimated present value of the Company's financial
instruments. Hypothetical changes in interest rates are then applied to the
financial instruments, and the cash flows and fair values are again estimated
using these hypothetical rates. For the net interest income estimates, the
hypothetical rates are applied to the financial instruments based on the assumed
cash flows. The Company applies these interest rate shocks to its financial
instruments up and down 200 basis points. The following table presents an
analysis of the potential sensitivity of the Company's 1998 net interest income
to sudden and sustained 100 basis-point changes in market interest rates:
<TABLE>
<CAPTION>
Change in Rates $ Amount $ Change % Change
--------------- -------- -------- --------
<S> <C> <C> <C>
1998
+200 Basis points $ 162,558 $ 1,575 1.0%
FLAT 160,983
- -200 Basis points 154,071 (6,912) (4.3)%
</TABLE>
The above analysis is based on numerous assumptions, including relative levels
of market interest rates, loan prepayments and reactions of depositors to
changes in interest rates, and should not be relied upon as being indicative of
actual results. Further, the analysis does not necessarily contemplate all
actions the Company may undertake in response to changes in interest rates.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 129, "Disclosures of Information about Capital Structure," become
effective for the Company in 1997. SFAS No. 129 consolidated existing accounting
guidance relating to disclosure about a company's capital structure. SFAS No.
129 did not affect the Company's disclosures.
Two additional pronouncements become effective for the Company in 1998. SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," each require selected
disclosures in the Company's 1998 financial statements.
EFFECTS OF INFLATION
The assets and liabilities of the Company are primarily monetary in nature and
are more directly affected by the fluctuation in interest rates than inflation.
Movement in interest rates is a result of the perceived changes in inflation as
well as monetary and fiscal policies. Interest rates and inflation do not
necessarily move with the same velocity or within the same period; therefore, a
direct relationship to the inflation rate cannot be shown. The financial
information presented in this report has been prepared in accordance with
generally accepted accounting principles, which require that the Company measure
financial position and operating results primarily in terms of historical
dollars.
- --------------------------------------------------------------------------------
62.
<PAGE> 63
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 156,753 $ 138,105
Federal funds sold 35,200 36,526
Interest-bearing deposits with financial institutions 13,266 6,389
Securities available for sale at fair value 944,128 818,267
Securities held to maturity (Estimated fair value $88,018 in 1997) - 87,207
Loans held for sale 18,003 17,711
Total loans 2,777,796 2,741,406
Less allowance for credit losses (39,278) (35,901)
------------- --------------
Net loans 2,738,518 2,705,505
Premises and equipment, net 83,117 84,697
Accrued interest receivable and other assets 97,475 88,491
------------- --------------
Total assets $ 4,086,460 $ 3,982,898
============= ==============
LIABILITIES
Deposits
Noninterest-bearing deposits $ 399,645 $ 354,658
Interest-bearing deposits 2,812,276 2,785,967
------------- --------------
Total deposits 3,211,921 3,140,625
Securities sold under repurchase agreements and federal funds
purchased 186,281 182,362
Debt and Federal Home Loan Bank advances 331,268 283,369
Accrued interest payable and other liabilities 34,769 39,115
------------- --------------
Total liabilities 3,764,239 3,645,471
------------- --------------
SHAREHOLDERS' EQUITY
Serial preferred stock, $10.00 par value; 10,000,000 shares
authorized; none issued
Preferred stock, no par value; 2,000,000 shares authorized;
none issued
Common stock, no par value; 150,000,000 shares authorized;
36,582,511 and 36,572,758 shares issued in 1998 and 1997 204,736 207,314
Retained earnings 140,211 128,427
Treasury stock, at cost; 861,310 and 169,475 shares in 1998 and 1997 (29,281) (4,096)
ESOP obligations and unearned shares (262) (325)
Unrealized gain on securities available for sale 6,817 6,107
------------- --------------
Total shareholders' equity 322,221 337,427
------------- --------------
Total liabilities and shareholders' equity $ 4,086,460 $ 3,982,898
============= ==============
</TABLE>
- --------------------------------------------------------------------------------
See notes to supplemental consolidated financial statements.
63.
<PAGE> 64
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the six months
ended June 30,
1998 1997
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 127,229 $ 118,961
Securities
Taxable 26,112 24,892
Nontaxable 1,833 1,957
Federal funds sold and other 1,891 1,513
----------- -----------
Total interest income 157,065 147,323
----------- -----------
INTEREST EXPENSE
Deposits 61,813 58,692
Borrowed funds 14,264 10,653
----------- -----------
Total interest expense 76,077 69,345
----------- -----------
NET INTEREST INCOME 80,988 77,978
PROVISION FOR CREDIT LOSSES 5,859 3,974
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 75,129 74,004
----------- -----------
OTHER INCOME
Trust department income 1,949 1,370
Service charges and fees on deposit accounts 6,515 6,196
Mortgage banking income 11,525 5,924
Brokerage commissions 4,841 3,141
Collection agency fees 2,581 2,564
Net, securities gains (losses) 458 (652)
Net gains on sales of commercial financing loans 8,865 4,716
Other income 8,610 15,576
----------- -----------
Total other income 45,344 38,835
----------- -----------
OTHER EXPENSES
Salaries and employee benefits 41,246 37,314
Occupancy and equipment expense 11,285 10,259
Merger, integration, and restructuring expense 4,904 -
Other operating expense 26,887 22,427
----------- -----------
Total other expenses 84,322 70,000
----------- -----------
INCOME BEFORE INCOME TAXES 36,151 42,839
INCOME TAXES 11,083 13,977
----------- -----------
NET INCOME $ 25,068 $ 28,862
=========== ===========
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 25,068 $ 28,257
=========== ===========
BASIC EARNINGS PER COMMON SHARE $ .70 $ .79
=========== ==========
DILUTED EARNINGS PER COMMON SHARE $ .69 $ .77
=========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See notes to supplemental consolidated financial statements.
64.
<PAGE> 65
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands of dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the six months
ended June 30,
1998 1997
---- ----
<S> <C> <C>
NET INCOME $ 25,068 $ 28,862
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Reclassification adjustment for amounts realized on securities
sales included in net income (298) 424
Unrealized gain/(loss) on available for sale securities arising
during the period 1,008 (302)
------------ ------------
COMPREHENSIVE INCOME $ 25,778 $ 28,984
============ ============
</TABLE>
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands of dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the six months
ended June 30,
1998 1997
---- ----
<S> <C> <C>
Balances at beginning of period 337,427 332,665
Net income 25,068 28,862
Preferred cash dividends - (605)
Common cash dividends ($.31 per share in 1998 and $.25 per share in 1997) (13,028) (11,294)
Unrealized gain (loss) on securities available for sale 710 122
Treasury shares acquired (27,139) (7,264)
Treasury shares issued 1,000 423
Preferred stock retired - (21,801)
Fractional shares and other items (1,817) 265
------------ ------------
Balances at end of period $ 322,221 $ 321,373
============ ============
</TABLE>
- --------------------------------------------------------------------------------
See notes to supplemental interim consolidated financial statements.
65.
<PAGE> 66
SKY FINANCIAL GROUP, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the six months
Ended June 30,
1998 1997
---- ----
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 22,361 $ 14,693
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest-bearing deposits with financial institutions (6,877) (1,926)
Net increase in federal funds sold 1,326 (1,861)
Securities available for sale:
Proceeds from maturities and payments 155,122 80,247
Proceeds from sales 15,058 57,830
Purchases (227,948) (157,382)
Securities held to maturity:
Proceeds from maturities and payments 20,260 55,900
Purchases (395) (45,893)
Proceeds from sales of loans 6,093 2,000
Net increase in loans (44,519) (118,409)
Purchases of premises and equipment (5,533) (12,510)
Purchases of life insurance contracts (1,200) (20,000)
Purchase of loans - (3,250)
Proceeds from sales of premises and equipment 95 1,889
Proceeds from sales of other real estate 439 683
----------- -----------
Net cash used by investing activities (88,079) (162,682)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash transferred in connection with sale of branch deposits (84,927)
Net increase in deposit accounts 71,296 84,788
Net increase in federal funds and repurchase agreements 3,919 68,530
Net increase (decrease) in short-term FHLB advances (84,210) 55,000
Proceeds from issuance of debt and long-term FHLB advances 171,500 74,400
Repayment of debt and long-term FHLB advances (39,391) (10,767)
Cash dividends and fractional shares paid (12,018) (11,728)
Preferred stock retired - (21,801)
Proceeds from issuance of common stock 1,410 652
Treasury stock purchases (27,481) (7,259)
Other items (659) (592)
----------- -----------
Net cash provided by financing activities 84,366 146,296
----------- -----------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 18,648 (1,693)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 138,105 131,855
----------- -----------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 156,753 $ 130,162
=========== ===========
NONCASH TRANSACTIONS:
Securitization of loans held for sale $ 241 $ 6,344
</TABLE>
- --------------------------------------------------------------------------------
See notes to supplemental interim consolidated financial statements.
66.
<PAGE> 67
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These supplemental interim consolidated financial statements give retroactive
effect to the merger and acquisition transactions discussed in Note 2 of the
notes to supplemental interim consolidated financial statements and, as a
result, the supplemental interim consolidated balance sheets, statements of
income and statements of cash flows are presented as if the Sky Financial Group,
Inc. ("Company"), Citizens Bancshares, Inc. ("Bancshares"), Mid Am Inc. ("Mid
Am"), UniBank and Century Financial Corporation ("Centrury") had been
consolidated for all periods presented. The supplemental consolidated statements
of changes in shareholders' equity reflect the accounts of the Company as if the
common stock issued in the merger and acquisitions had been outstanding during
all periods presented. Generally accepted accounting principles proscribe giving
effect to a consummated business combination accounted for by the pooling of
interests method in financial statements that do not include the date of
consummation. These financial statements do not extend through the date of
consummation of the merger with Mid Am. However, they will become the historical
consolidated financial statements of the Company after financial statements
covering the date of consummation of the business combination are issued. The
supplemental interim consolidated financial statements, including the notes
thereto, should be read in conjunction with the historical consolidated
financial statements of Bancshares and Mid Am included in their December 31,
1997 Annual Reports on Form 10-K.
The supplemental interim consolidated financial statements of the Company
include the accounts of Mid American National Bank and Trust Company ("Mid Am
Bank"), First National Bank Northwest Ohio ("First National"), American
Community Bank, N.A. ("AmeriCom"), AmeriFirst Bank, N.A. ("AmeriFirst"), Adrian
State Bank ("Adrian"), Mid Am Recovery Services, Inc. ("MARSI"), MFI Investments
Corp. ("MFI"), Mid Am Credit Corp. ("MACC"), Mid Am Financial Services, Inc.
("MAFSI"), Simplicity Mortgage Consultants, Inc. ("Simplicity"), Mid Am Private
Trust, N.A. ("MAPT") Mid Am Information Services, Inc ("MAISI"), Mid Am Capital
Trust I ("MACT")Citizens and its subsidiaries, ValueNet, Century, Freedom
Financial Life Insurance Company, Freedom Express, Inc. and First National Bank
of Chester ("FNB"). All significant intercompany transactions and accounts have
been eliminated in consolidation.
These supplemental interim consolidated financial statements are prepared
without audit and reflect all adjustments which, in the opinion of management,
are necessary to present fairly the consolidated financial position of the
Company at June 30, 1998, and its results of operations and cash flows for the
periods presented. All such adjustments are of a normal, recurring nature. The
supplemental consolidated financial statements do not purport to contain all the
necessary financial disclosures required by generally accepted accounting
principles that might otherwise be necessary under the circumstances.
The accounting and reporting policies followed by the Company conform to
generally accepted accounting principles and to general practices within the
financial services industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Actual results could differ from those estimates.
The Company's business is primarily related to commercial banking and related
services. The Company also operates businesses relating to collection
activities, broker-dealer operations and commercial finance lending. However,
the revenues, operating profit and assets of the collection business,
broker-dealer business and finance company are not material for separate
disclosure. The Company's predominant business continues to be banking.
- --------------------------------------------------------------------------------
(Continued)
67.
<PAGE> 68
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The provision for income taxes is based upon the effective tax rate expected to
be applicable for the entire year. For the six months ended June 30, 1998 and
1997, the Company paid interest in the amount of $77,022 and $68,206 and paid
taxes in the amount of $12,523 and $15,841.
All earnings per share amounts are calculated in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings per share is computed by dividing net
income available to common shareholders by the weighted average number of shares
outstanding during the period, as restated for shares issued in business
combinations accounted for as poolings-of-interests and stock dividends and
splits. Diluted earnings per share is computed using the weighted average number
of shares determined for the basic computation plus the number of shares of
common stock that would be issued assuming all contingently issuable shares
having a dilutive effect on earnings per share were outstanding for the period.
The weighted average number of common shares outstanding for basic and diluted
earnings per share computations were as follows:
<TABLE>
<CAPTION>
For the six months
ended June 30,
1998 1997
---- ----
<S> <C> <C>
NUMERATOR
Net income $ 25,068 $ 28,862
Less: Preferred stock dividends (605)
----------- -----------
Net income available to common shareholders (Basic) 25,068 28,257
Effect of dilutive securities:
Convertible preferred stock 605
----------- -----------
Net income (Diluted) $ 25,068 $ 28,862
=========== ===========
DENOMINATOR:
Weighted-average common shares outstanding (Basic) 35,848,000 35,602,000
Exercise of options 543,000 243,000
Convertible preferred stock 1,713,000
----------- -----------
Weighted-average common shares outstanding (Diluted) 36,391,000 37,558,000
=========== ===========
EARNINGS PER SHARE:
Basic $ .70 $ .79
=========== ==========
Diluted $ .69 $ .77
=========== ==========
</TABLE>
The Company entered into three merger transactions in 1998 and one merger
transaction in 1996 and 1995, all of which were accounted for as poolings of
interests (see Note 2). The Company's Board of Directors declared a two-for-one
stock split payable June 1, 1998 to shareholders of record May 12, 1998 and a
three-for-two stock split payable January 12, 1996 to shareholders of record
December 31, 1995. All share and per share data have been retroactively adjusted
to reflect the mergers and the stock split.
Under a new accounting standard, comprehensive income is now reported for all
periods. Comprehensive income includes both net income and other comprehensive
income. Other comprehensive income includes the change in unrealized gains and
losses on securities available for sale.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- --------------------------------------------------------------------------------
(Continued)
68.
<PAGE> 69
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 131 "Disclosures about Segments of
an Enterprise and Related Information." SFAS 131 establishes new standards for
the way public companies report information about their operating segments in
annual and interim financial statements. The Company will be required to adopt
SFAS 131 no later than December 31, 1998. SFAS 131 adopts a management approach
to determine operating segments and then imposes quantitative criteria to
determine which operating segments, if any, must be reported. The Company is
currently evaluating SFAS 131 and has not determined what operating segments
will be reported under the new standards disclosure rules which, on an annual
basis, will include information regarding each reportable operating segments,
products and services, factors used to determine reportable segments, and
certain operating information such as interest revenue, interest expense, and
profit or loss of the operating segment.
NOTE 2 - MERGERS, ACQUISITIONS AND DIVESTITURES
Effective October 2, 1998, Bancshares and Mid Am affiliated in a
merger-of-equals transaction which was accounted for as a pooling of interests.
Shareholders of Mid Am received 0.77 shares of Bancshares common stock for each
share of Mid Am stock owned. Subsequent to but in conjunction with the merger,
Bancshares changed its name to Sky Financial Group, Inc. (the "Company"). Mid Am
had assets of approximately $2.3 billion with 83 banking offices located in
Western Ohio and Southern Michigan. Mid Am also owns 7 financial services
subsidiaries which engage in lines of business which are closely related to
banking.
Effective March 6, 1998, Unibank, Steubenville, Ohio, affiliated with Bancshares
by merging into Citizens Banking Company ("Citizens"), a wholly owned subsidiary
of Bancshares. The transaction was affected through the exchange of 26.5 common
shares of the Company (as restated for the stock split discussed in Note 1) for
each of Unibank's outstanding common shares, with cash paid in lieu of
fractional shares. Unibank had assets of approximately $216,000 with 12 offices
in Jefferson and Columbiana counties, and will be operated as branches of
Citizens.
Effective May 12, 1998, Century Financial Corporation, Rochester, Pennsylvania,
merged into Bancshares. The transaction was affected through the exchange of
.7926 common shares of Bancshares (as restated for the stock split discussed in
Note 1) for each of Century's outstanding common shares, with cash paid in lieu
of fractional shares. Century had assets of approximately $453,000 with 13
branches in Beaver and Butler counties in Pennsylvania. Initially, Century will
operate as a wholly-owned subsidiary of the Company.
The transactions were accounted for as poolings of interests. The following is a
summary of the separate results of operations of the Company and Mid Am for the
six months ended June 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
Net Interest Net Interest
Income Net Income Income Net Income
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Company $ 35,958 $ 9,179 $ 33,697 $ 12,132
Mid Am 45,030 15,889 44,281 16,730
----------- ---------- ----------- ----------
Combined $ 80,988 $ 25,068 $ 77,978 $ 28,862
=========== ========== =========== ==========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
69.
<PAGE> 70
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 2 - MERGERS, ACQUISITIONS AND DIVESTITURES (Continued)
On July 22, 1998, Bancshares entered into an agreement and plan of merger with
The Ohio Bank, Findlay, Ohio, whereby shareholders of the Ohio Bank will receive
63.25 Bancshares common shares for each share of The Ohio Bank owned. The Ohio
Bank had assets of $579,405 and $539,031 as of December 31, 1997 and 1996, and
net income of $6,019, $5,428 and $5,306 in 1997, 1996 and 1995. The merger is
subject to approval by regulatory agencies and The Ohio Bank's shareholders, and
is expected to be completed during the fourth quarter of 1998.
NOTE 3 - SECURITIES
The amortized costs, unrealized gains and losses and estimated fair values are
as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
JUNE 30, 1998 Cost Gains Losses Value
- ------------- ---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities $ 121,243 $ 889 $ (98) $ 122,034
U.S. Government agencies and corporations 156,912 1,511 (307) 158,116
Obligations of states and political subdivisions 77,435 1,793 (71) 79,157
Corporate and other securities 23,371 794 24,165
Mortgage-backed securities 477,112 2,777 (1,104) 478,785
------------ ---------- ---------- ------------
Total debt securities available for sale 856,073 7,764 (1,580) 862,257
Marketable equity securities 77,579 4,720 (428) 81,871
------------ ---------- ---------- ------------
Total securities available for sale $ 933,652 $ 12,484 $ (2,008) $ 944,128
============ ========== ========== ============
DECEMBER 31, 1997
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities $ 83,850 $ 628 $ (139) $ 84,339
U.S. Government agencies and corporations 138,689 1,350 (362) 139,677
Obligations of states and political
subdivisions 55,830 1,488 (87) 57,231
Corporate and other securities 27,870 328 (108) 28,090
Mortgage-backed securities 449,161 3,121 (1,278) 451,004
------------ ----------- ----------- ------------
Total debt securities available for sale 755,400 6,915 (1,974) 760,341
Marketable equity securities 53,488 4,440 (2) 57,926
------------ ----------- ----------- ------------
Total securities available for sale $ 808,888 $ 11,355 $ (1,976) $ 818,267
============ =========== =========== ============
SECURITIES HELD TO MATURITY
U.S. Treasury securities $ 38,618 $ 158 $ (8) $ 38,768
U.S. Government agencies and corporations 22,981 51 (13) 23,019
Obligations of states and political
subdivisions 22,013 428 22,441
Corporate and other securities 1,496 (24) 1,472
Mortgage-backed securities 2,099 219 2,318
------------ ----------- ----------- ------------
Total securities held to maturity $ 87,207 $ 856 $ (45) $ 88,018
============ =========== =========== ============
</TABLE>
In connection with the acquisition of Century discussed in Note 2, Citizens
transferred approximately $60,000 of securities classified as held to maturity
to available for sale during the second quarter of 1998 as allowed by the
applicable provisions of SFAS No. 115.
- --------------------------------------------------------------------------------
(Continued)
70.
<PAGE> 71
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
The amortized cost and estimated market value of debt securities at June 30,
1998, by contractual maturity are shown below. Expected maturities will likely
differ from contractual maturities because some issuers have the right to call
or prepay obligations at any time with or without penalty.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
---- ----------
<S> <C> <C>
DEBT SECURITIES AVAILABLE FOR SALE
Due in one year or less $ 69,495 $ 69,715
Due after one year through five years 187,126 188,766
Due after five years through ten years 99,548 101,309
Due after ten years 22,792 23,682
Mortgage-backed securities 477,112 478,785
------------ ------------
Total debt securities available for sale $ 856,073 $ 862,257
============ ============
</TABLE>
Proceeds from the sales of securities and the gross realized gains and losses
are as follows:
<TABLE>
<CAPTION>
For the six months
ended June 30,
1998 1997
---- ----
<S> <C> <C>
Proceeds from sales of securities available for sale $ 15,058 $ 57,830
Gross realized gains on sales 468 198
Gross realized losses on sales 10 850
</TABLE>
NOTE 4 - LOANS AND ALLOWANCE FOR CREDIT LOSSES
The loan portfolio is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Real estate loans:
Construction $ 97,746 $ 94,329
Residential mortgage 970,915 943,003
Non-residential mortgage 707,618 683,112
Commercial, financial and agricultural 627,844 636,198
Installment and credit card loans 367,915 377,583
Other loans 5,758 7,181
------------- --------------
Total loans $ 2,777,796 $ 2,741,406
============= ==============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
71.
<PAGE> 72
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 4 - LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Following is a summary of the activity in the allowance for loan losses for the
six months ended June 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance at beginning of period $ 35,901 $ 31,301
Provision for loan losses 5,859 3,974
Recoveries 2,371 1,234
Loans charged-off (4,853) (3,686)
----------- -----------
Balance at end of period $ 39,278 $ 32,823
=========== ===========
</TABLE>
Information regarding impaired loans at June 30, 1998 and 1997 did not
significantly differ from amounts disclosed in the Supplemental Consolidated
Financial Statements as of December 31, 1997 and 1996.
NOTE 5 - DEBT AND FEDERAL HOME LOAN BANK ADVANCES
The Company's debt and Federal Home Loan Bank ("FHLB") advances are comprised of
the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
Short-term borrowings under bank line of credit $ 5,000 $ 15,000
Borrowings under FHLB lines of credit at weighted interest
rate of 5.44% at June 30, 1998 246,404 238,355
Capital lease obligations 2,344 2,481
Subordinated debt, interest rate of 7.08%, due January 2008 50,000
Mid Am, Inc. obligated mandatorily redeemable capital securities
of subsidiary trust, interest at 10.20%, due June 2027 27,500 27,500
Other items 20 33
------------ -----------
Total $ 331,268 $ 283,369
============ ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
72.
<PAGE> 73
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 5 - DEBT AND FEDERAL HOME LOAN BANK ADVANCES (Continued)
FHLB advances are collateralized by all shares of FHLB stock owned by subsidiary
banks and by 100% of subsidiary banks' qualified mortgage loan. Based on the
carrying amount of FHLB stock owned by subsidiary banks, total FHLB advances are
limited to approximately $509,920.
On December 31, 1996, Mid Am entered into an agreement with a financial
institution which enabled the Company to borrow up to $20,000 through December
31, 1997. The agreement was renewed in December, 1997 and permits the Company to
borrow up to $25,000 through December 31, 1998. Interest on advances taken on
the facility is accrued at either the financial institution's prime rate, a
formula based on the London Interbank Offering Rate, or a formula based on the
Federal Funds Rate. The Company may elect the interest rate method to be applied
to amounts outstanding in $100 increments. The agreement provides for an annual
fee of .1875% on the average unused portion of the credit facility. The
agreement also contains covenants which require the Company, among other things,
to maintain mimimum tangible net worth, as defined, of $165,000, maintain
specified minimum capital ratios, and not permit non-performing assets to total
loans and non-performing assets to total capital ratios to exceed specified
maximums. The weighted-average amount outstanding under the agreement was $9,444
during 1997 with an average interest rate was 6.40%.
During 1997, MCAT, in a private placement, issued $27,500 of 10.20% capital
securities through a wholly-owned special purpose subsidiary. The Company's
obligated mandatorily redeemable capital securities may be redeemed by the
Company prior to their mandatory June 1, 2027 redemption date commencing June 1,
2007 at a redemption price of 105.10% of the face value the capital securities
and thereafter at a premium which declines annually. On or after June 1, 2017,
the capital securities may be redeemed at face value. The Company's mandatorily
redeemable capital securities are considered to be Tier I capital.
On January 16, 1998, Mid Am issued $50,000 of 7.08% subordinated debt in a
private placement transaction. The subordinated debt matures in 2008. For
regulatory capital purposes, the subordinated debt is considered Tier II
capital.
NOTE 6 - OTHER INCOME AND OTHER OPERATING EXPENSE
The following is a summary of other income and other operating expense:
<TABLE>
<CAPTION>
For the six months
ended June 30,
1998 1997
---- ----
OTHER INCOME
<S> <C> <C>
Gain on sale of deposits and branch offices $ 8,703
Legal settlement $ 1,475
International department fees 548 531
Net gains on sales of other loans 327 472
Other 6,260 5,870
---------- ----------
Total other income $ 8,610 $ 15,576
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
73.
<PAGE> 74
SKY FINANCIAL GROUP, INC.
NOTES TO SUPPLEMENTAL INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 6 - OTHER INCOME AND OTHER OPERATING EXPENSE (Continued)
<TABLE>
<CAPTION>
For the six months
ended June 30,
1998 1997
---- ----
<S> <C> <C>
OTHER OPERATING EXPENSE
Brokerage commissions $ 3,198 $ 1,856
State franchise taxes 2,050 1,833
Printing and supplies 1,573 1,558
Legal and other professional fees 3,236 2,091
Amortization of intangible assets 1,220 1,338
Other 15,610 13,751
---------- ----------
Total other operating expense $ 26,887 $ 22,427
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
74.
<PAGE> 75
SKY FINANCIAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
June 30, 1998 and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
The following discussion and analysis represents a review of the Company's
consolidated financial condition, results of operations, liquidity and capital
resources. This review should be read in conjunction with the consolidated
financial statements.
RESULTS OF OPERATIONS
Core earnings, which excludes the after tax financial impact of merger,
integration, and other nonrecurring charges and income were $28,511 in the first
half of 1998 compared with $25,414 in the first half of 1997. Diluted earnings
per share before nonrecurring items were $.78 for the first six months of 1998
up from $.68 for the same period in 1997. Before nonrecurring items, return on
average shareholder' equity was 17.82% and return on average assets was 1.42%.
Net income, as a result of the after tax financial impact of the nonrecurring
items was $25,068 , a decrease of $3,794 (13%) for the first half of 1998 , as
compared to net income for the same period in 1997 of $28,862. Diluted earnings
per share were $.69 for the first six months of 1998 down form .77 for the same
period in 1997. The return on average shareholder's equity was 15.67% and the
return on average assets was 1.25%. The first half of 1998 results included
nonrecurring items of income and expense, including a $4,904 merger, integration
and restructuring charge related to acquisitions ,a special provision for loan
loss of $2,000 and a gain due to a legal settlement of $1,475. The merger,
integration and restructuring charge was for severance pay, service contracts,
transaction fees and cost related to branch closures in the elimination of
duplicate facilities.
The provision for loan loss of $5,859 for the six months ended June 30, 1998
increased $1,885 or 47% from the comparable period in 1997. The increase in
provision for loan loss was mostly attributable to a $2,000 additional provision
related to the Century acquisition to increase Century's loan loss allowance as
a percent of loans outstandings to Bancshares' level.
Non-interest income increased $6,509 or 16.8% for the six months ended June 30,
1998 from the comparable period in 1997. This increase was primarily the result
higher mortgage banking revenue due to higher volumes of loans sold , higher
gains on the sale of commercial financing loans due to higher volumes of loans
sold as well as higher margins and a nonrecurring legal settlement gain of
$1,475 offset by a decrease in the other income. Other income in 1997 included a
pre-tax gain of $8,703 on the sale of $95 million of deposits and seven branch
offices of AmeriFirst Bank N.A. Income from bank owned life insurance was $666
for the six months ended June 30, 1998 compared to $161 for the six months ended
June 30,1997. Citizens implemented the single premium BOLI to offset the cost of
employee benefits .
Non-Interest expense increased $14,322 or 20% for the six months ended June 30,
1998 from the comparable period in 1997. This increase was primarily due to the
pretax merger, integration and restructure expenses of $4,904, increased Salary
and benefits expense from an increase in full-time equivalent employees, mainly
at the Company's financial service affiliates. Commission paid to employees
increased due to higher mortgage loan originations.
ACQUISITIONS AND BUSINESS FORMATIONS
Effective October 2, 1998, Bancshares and Mid Am affiliated in a
merger-of-equals transaction which was accounted for as a pooling of interests.
Shareholders of Mid Am received 0.77 shares of Bancshares common stock for each
share of Mid Am stock owned, with cash paid in lieu of fractional shares. In
conjunction with the merger, Bancshares changed its name to Sky Financial Group,
Inc. Mid Am had assets of approximately $2.3 billion, with 83 banking offices
located in western Ohio and southern Michigan. Mid Am also owned 7 financial
services subsidiaries, now subsidiaries of the Company, which engage in lines of
business closely related to banking.
- --------------------------------------------------------------------------------
75.
<PAGE> 76
SKY FINANCIAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
June 30, 1998 and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
On July 22, 1998, Bancshares entered into an agreement and plan of merger with
The Ohio Bank, Findlay, Ohio, whereby shareholders of the Ohio Bank will receive
63.25 Bancshares common shares for each share of The Ohio Bank owned. The Ohio
Bank had assets of $579,405 and $539,031 as of December 31, 1997 and 1996, and
net income of $6,019, $5,428 and $5,306 in 1997, 1996 and 1995. The merger is
subject to approval by regulatory agencies and The Ohio Bank's shareholders, and
is expected to be completed during the fourth quarter of 1998.
Effective May 12, 1998, Century Financial Corporation, Rochester, Pennsylvania,
merged into Bancshares. The transaction was affected through the exchange of
.7926 common shares of Bancshares for each of Century's outstanding common
shares, with cash paid in lieu of fractional shares. CFC had assets of
approximately $453,000 with 13 branches in Beaver and Butler counties in
Pennsylvania. Initially, Century will operate as a wholly-owned subsidiary of
the Company.
NET INTEREST INCOME
The net interest margin decreased 4 basis points to 4.45% at June 30, 1998
compared to 4.49% at December 31, 1997 and decreased 10 basis points compared to
4.55% at June 30, 1997.
The following table, presented on a tax equivalent basis, summarizes net
interest income and net interest margin for the six-month periods ended June 30,
1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net interest income $ 80,988 $ 77,978
Taxable equivalent adjustments to net interest income 2,265 2,136
----------- -----------
Net interest income, fully-taxable equivalent $ 83,253 $ 80,114
=========== ===========
Net interest margin 4.33% 4.43%
Taxable equivalent adjustment .12 .12
----------- -----------
Net interest margin, fully taxable equivalent 4.45% 4.55%
=========== ==========
</TABLE>
CHANGES IN FINANCIAL CONDITION
Total assets of $4,086,460 at June 30, 1998, increased $103,562 compared to
year-end 1997. Total deposits at June 30, 1998, of $3,211,921 increased $71,296
from December 31, 1997. These lower cost sources of funds were used to purchase
investment and mortgage-backed securities available for sale and to fund loan
growth. Net loans totaled $2,738,518 at June 30 1998, representing an increase
of $33,013 or 1.2% since year-end 1997.
LIQUIDITY
On January 16, 1998, the Company issued $50,000 of 7.08% subordinated ten-year
debt in a private placement transaction. The proceeds from this debt will be
used for general corporate purposes, including funding of consumer finance
subsidiary loans, reduction of borrowings under the Company's line of credit,
investment securities and the buyback of the Company's common stock under a
systematic plan for funding future stock dividends and issuance of shares under
its stock option plan. The subordinated debt is considered Tier II capital for
regulatory purposes.
All held to maturity securities at Bancshares were reclassified to available for
sale in order to provide additional liquidity following the acquisitions in
1998. Approximately $60 million of securities were reclassified. The market
value of the securities transferred were not materially different than their
book value.
- --------------------------------------------------------------------------------
76.
<PAGE> 77
SKY FINANCIAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
June 30, 1998 and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Management believes that the Company's liquidity position is strong based on its
high level of cash, cash equivalents, core deposits, the stability of its
funding sources and its strong capital base.
CAPITAL RESOURCES
The following table presents the various capital and leverage ratios of the
Company as of June 30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Total adjusted average assets for leverage ratio $ 4,038,033 $ 3,880,849
Risk-weighted assets and off-balance-sheet financial
instruments for capital ratio 3,126,768 3,019,090
Tier I capital 325,239 343,599
Total risk-based capital 412,924 378,254
Leverage ratio 8.1% 8.9%
Tier I capital ratio 10.4 11.4
Total capital ratio 13.2 12.5
</TABLE>
The unrealized gain on securities available for sale, net of tax effect, was
$6,817 at June 30, 1998, compared to an unrealized gain of $6,107 at December
31, 1997.
DEPOSITS
Total non-interest bearing demand deposits increased $44,987 or 12.7% in the
first half of 1998 when compared to December 31,1997 and resulted in total
deposits increasing $71,296 or 22.7% during the same period.
NONPERFORMING ASSETS
Nonperforming loans as a percentage of total loans were .39% at June 30, 1998,
as compared to .36% at December 31, 1997. The allowance for loan losses as a
percentage of total loans at June 30, 1998, was 1.41% compared to 1.31% at
December 31, 1997. Allowance for credit losses as a percentage of total
non-perfoming loans at June 30, 1998, were 401.66% compared with 360.36% at
December 31, 1997.
The Corporation continues to analyze the adequacy of its allowance for loan
losses as a percentage of total loans on a quarterly basis. Annualized net
charge-offs constituted .18% of average loans for the six months ended June 30,
1998, as compared to .20% for the year ended December 31, 1997.
Other real estate owned totaled $305 at June 30, 1998 and $529 at December 31,
1997.
YEAR 2000 SOFTWARE INITIATIVES
Management has initiated a company-wide assessment, remediation and conversion
program to address the effect of the year 2000 on the Company's information
systems and application software. The Company's Year 2000 Readiness Project
contains assessment, renovation, validation and implementation phases. A
substantial majority of the significant application software utilized by the
Company is licensed from a third-party vendor and management is working with the
vendor to ensure that the software will operate properly in the year 2000. At
this time, the estimated cost to remediate the Company's year 2000 issues is not
expected to be material.
- --------------------------------------------------------------------------------
77.
<PAGE> 78
SKY FINANCIAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
June 30, 1998 and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements relating
to such matters as anticipated operating results, prospects for new lines of
business, technological developments, economic trends (including interest
rates), reorganization transactions and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements, and the purpose of this paragraph is to secure the use of the safe
harbor provisions. While the Company believes that the assumptions underlying
the forward-looking statements contained herein and in other public documents
are reasonable, any of the assumptions could prove to be inaccurate, and
accordingly, actual results and experience could differ materially from the
anticipated results or other expectations expressed by the Company in its
forward-looking statements. Factors that could cause actual results or
experience to differ from results discussed in the forward-looking statements
include, but are not limited to: economic conditions; volatility and direction
of market interest rates; capital investment in and operating results of
non-banking business ventures of the Company; the ability of the Company's
broker/dealer subsidiary to recruit registered representatives; governmental
legislation and regulation; material unforeseen changes in the financial
condition or results of operations of the Company's customers; customer reaction
to and unforeseen complications with respect to the Company's product redesign
initiative; the effect of the year 2000 on the Company's computer systems; and
other risks identified, from time-to-time in the Company's other public
documents on file with the Securities and Exchange Commission.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the quantitative and qualitative
disclosures about market risks as of June 30, 1998 from that presented in the
Company's Supplemental Financial Review presented elsewhere herein for the year
ended December 31, 1997.
- --------------------------------------------------------------------------------
78.
