<PAGE 1>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission File No. 1-14473
Sky Financial Group, Inc.
(Exact Name of Registrant as Specified in its Charter)
Ohio 34-1372535
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
221 South Church Street, Bowling Green, Ohio 43402
(Address of Principal Executive Offices) (Zip Code)
(419) 327-6300
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
The number of shares outstanding of the Registrant's common stock, without
par value was 60,779,250 at August 9, 1999.
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SKY FINANCIAL GROUP, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Income
Three months ended June 30, 1999 and 1998
Six months ended June 30, 1999 and 1998 4
Consolidated Statement of Changes in Shareholders' Equity
Six months ended June 30, 1999 5
Consolidated Statements of Comprehensive Income
Three months ended June 30, 1999 and 1998
Six months ended June 30, 1999 and 1998 5
Consolidated Statements of Cash Flows
Six months ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis and
Statistical Information 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
EXHIBIT INDEX 29
<PAGE 3>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SKY FINANCIAL GROUP, INC.
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands) June 30, December 31,
1999 1998
ASSETS
Cash and due from banks $ 156,127 $ 165,946
Interest-bearing deposits
with financial institutions 13,743 9,851
Federal funds sold 9,000 26,024
Loans held for sale 10,071 77,471
Securities available for sale 974,419 996,426
Total loans 3,434,838 3,355,881
Less allowance for credit losses (55,193) (54,008)
Net loans 3,379,645 3,301,873
Premises and equipment 87,764 85,966
Accrued interest receivable
and other assets 154,923 151,564
TOTAL ASSETS $4,785,692 $4,815,121
LIABILITIES
Deposits
Non-interest-bearing deposits $ 428,499 $ 483,487
Interest-bearing deposits 3,289,781 3,349,175
Total deposits 3,718,280 3,832,662
Securities sold under repurchase
agreements and federal funds purchased 246,338 207,458
Debt and FHLB advances 406,323 357,771
Accrued interest payable
and other liabilities 63,589 73,388
TOTAL LIABILITIES 4,434,530 4,471,279
SHAREHOLDERS' EQUITY
Serial preferred stock,
$10.00 par value;
10,000,000 shares authorized;
none issued -- --
Common stock, no par value;
150,000,000 shares authorized;
45,368,131 and 45,082,890 shares
issued in 1999 and 1998 310,083 311,360
Retained earnings 49,859 27,816
Treasury stock; 170,439 and
57,063 shares in 1999 and 1998 (4,673) (1,500)
Accumulated other comprehensive income (4,107) 6,166
TOTAL SHAREHOLDERS' EQUITY 351,162 343,842
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,785,692 $4,815,121
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SKY FINANCIAL GROUP, INC.
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, Three Months Ended Six Months Ended
except per share data) June 30, June 30,
1999 1998 1999 1998
Interest Income
Loans, including fees $73,625 $73,842 $146,863 $145,903
Securities
Taxable 12,880 15,169 25,888 30,484
Nontaxable 1,136 912 2,302 1,833
Federal funds sold and other 407 1,054 694 1,999
Total interest income 88,048 90,977 175,747 180,219
Interest Expense
Deposits 32,802 36,521 66,505 73,145
Borrowed funds 7,686 7,409 15,298 14,358
Total interest expense 40,488 43,930 81,803 87,503
Net Interest Income 47,560 47,047 93,944 92,716
Provision for Credit Losses 2,722 4,411 5,082 6,387
Net Interest Income After
Provision Credit Losses 44,838 42,636 88,862 86,329
Other Income
Trust department income 1,406 1,425 2,716 2,650
Service charges and fees on
deposit accounts 4,089 3,695 8,253 7,240
Mortgage banking income 5,408 5,963 11,404 12,209
Brokerage and insurance
commissions 4,454 2,618 7,343 4,841
Collection agency fees 666 1,184 1,265 2,581
Net securities gains 293 331 371 464
Net gains on sales of
commercial financing loans 3,878 4,715 8,784 8,865
Other income 5,969 5,302 10,536 9,415
Total other income 26,163 25,233 50,672 48,265
Other Expense
Salaries and employee benefits 21,856 23,048 42,794 45,953
Occupancy and equipment expense 6,729 6,555 13,206 12,916
Merger, integration, and
restructuring expense -- 972 -- 4,904
Other operating expense 12,846 15,129 24,372 29,492
Total other expenses 41,431 45,704 80,372 93,265
Income Before Income Taxes 29,570 22,165 59,162 41,329
Income taxes 9,225 6,761 18,653 12,708
Net Income $20,345 $15,404 $ 40,509 $ 28,621
Earnings per Common Share:
Basic $ 0.45 $ 0.34 $ 0.90 $ 0.63
Diluted $ 0.45 $ 0.34 $ 0.89 $ 0.62
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SKY FINANCIAL GROUP, INC.
Consolidated Statement of Changes in Shareholders' Equity
(Dollars in thousands)
Accumulated
Other
Common Retained Treasury Comprehensive
Stock Earnings Stock Income Total
Balance
December 31, 1998 $311,360 $ 27,816 $(1,500) $ 6,166 $343,842
Net income 40,509 40,509
Common cash
dividends
($.21 per share) (18,946) (18,946)
Unrealized losses
on securities
available for
sale (10,653) (10,653)
Treasury shares
acquired (6,229) (6,229)
Treasury shares
issued for
stock options (1,591) 3,056 1,465
Shares issued to
acquire Picton
Cavanaugh, Inc. 313 481 380 1,174
Fractional shares
and other items 1 (1) --
Balance
June 30, 1999 $310,083 $ 49,859 $(4,673) $ (4,107) $351,162
SKY FINANCIAL GROUP, INC.
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended Six Months Ended
(Dollars in thousands) June 30, June 30,
1999 1998 1999 1998
Net Income $ 20,345 $15,404 $ 40,509 $28,621
Other comprehensive income:
Unrealized (losses) gains
arising during period (11,320) 1,701 (16,078) 1,513
Reclassification adjustment
for gains included in income (293) (331) (371) (464)
Net unrealized (loss) gain on
securities available for sale (11,613) 1,370 (16,449) 1,049
Tax effect 4,108 (482) 5,796 (369)
Total other comprehensive
(loss) gain (7,505) 888 (10,653) 680
Comprehensive Income $ 12,840 $16,292 $ 29,856 $29,301
<PAGE 6>
SKY FINANCIAL GROUP, INC.
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands) Six Months Ended June 30,
1999 1998
Net Cash From Operating Activities $ 111,803 $ 23,139
Investing Activities
Net increase in interest-bearing
deposits in other banks (3,892) (6,215)
Net decrease in federal funds sold 17,024 2,326
Securities available for sale:
Proceeds from maturities and payments 224,219 180,943
Proceeds from sales 28,579 15,058
Purchases (244,021) (254,237)
Securities held to maturity:
Proceeds from maturities and payments -- 20,260
Purchases -- (395)
Proceeds from sales of loans 12,870 6,324
Net increase in loans (95,039) (62,280)
Purchases of premises and equipment (11,216) (6,720)
Purchases of life insurance contracts (4,340) (1,200)
Proceeds from sales of premises and equipment 4,422 95
Proceeds from sales of other real estate 398 439
Net Cash From Investing Activities (70,996) (105,602)
Financing Activities
Net (decrease) increase in deposit accounts (114,382) 79,955
Net increase in federal funds
and repurchase agreements 38,880 9,919
Net decrease in short-term FHLB advances (7,731) (84,210)
Proceeds from issuance of debt
and long-term FHLB advances 67,187 154,500
Repayment of debt and long-term FHLB advances (10,904) (19,400)
Cash dividends and fractional shares paid (18,912) (12,842)
Proceeds from issuance of common stock 1,465 1,410
Treasury stock purchases (6,229) (27,481)
Other items -- (659)
Net Cash From Financing Activities (50,626) 101,192
Net (Decrease) Increase in Cash and
Due From Banks (9,819) 18,729
Cash and Due From Banks at Beginning of Year 165,946 153,336
Cash and Due From Banks at End of Period $ 156,127 $ 172,065
Noncash transactions:
Securitization of loans held for sale $ 3,880 $ 241
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SKY FINANCIAL GROUP, INC.
Notes to Consolidated Financial Information (Unaudited)
(Dollars in thousands, except per share data)
1. Accounting Policies
Sky Financial Group, Inc. (the Company) is a bank holding company
headquartered in Bowling Green, Ohio, which owns and operates three banks
primarily engaged in the commercial banking business. The Company also
operates businesses relating to collection services, broker-dealer operations,
insurance, commercial finance lending, and other financial related services.
The accounting and reporting policies followed by Sky Financial Group, Inc.
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 allowance for loan losses and fair values of
financial instruments are particularly subject to change.
The consolidated financial statements of the Company include the accounts of
Sky Bank, Mid Am Bank, The Ohio Bank (Ohio Bank), Sky Asset Management
Services, Inc. (SAMSI), Sky Investments, Inc. (SII), Sky Financial Solutions,
Inc. (SFSI), Mid Am Financial Services, Inc. (MAFSI), Sky Insurance Agency,
Inc. (Sky Insurance), Picton Cavanaugh, Inc. (Picton Cavanaugh), Mid Am Private
Trust, N.A. (MAPT), Sky Technology Resources, Inc. (Sky Tech), Mid Am Capital
Trust I (MACT) and various other insignificant subsidiaries. All significant
intercompany transactions and accounts have been eliminated in consolidation.
2. New Accounting Pronouncements
Beginning January 1, 2001, a new accounting standard will require all
derivatives to be recorded at fair value. Unless designated as hedges,
changes in these fair values will be recorded in the income statement. Fair
value changes involving hedges will generally be recorded by offsetting gains
and losses on the hedge and on the hedged item, even if the fair value of the
hedged item is not otherwise recorded. Based on the current portfolio, this
standard is not expected to have a material effect on the Company's financial
statements, but the effect will depend on derivative holdings when this
standard applies.
Mortgage loans originated in mortgage banking are converted into securities on
occasion. A new accounting standard for 1999 allows classifying these
securities as available for sale, trading, or held to maturity, instead of the
current requirement to classify as trading. This standard is not expected to
have a material effect on the Company's financial statements, but the effect
will vary depending on the level and designation of securitizations as well as
on market price movements.
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3. Mergers, Acquisitions, Business Formations and Divestitures
Effective August 6, 1999, Sky Financial Group, Inc. completed its acquisition
of First Western Bancorp, Inc. First Western Bancorp, Inc. is a $2.2 billion
bank holding company headquartered in New Castle, Pennsylvania. Under the
terms of the transaction, shareholders of First Western Bancorp, Inc. received
approximately 13,604,000 shares of the Company's common stock in a tax-free
exchange accounted for as a pooling of interests. Immediately following the
affiliation, First Western Bancorp, Inc.'s bank affiliate, First Western Bank,
N.A., was merged into Sky Bank (formerly Citizens Banking Company).
Effective July 16, 1999, Sky Financial Group, Inc. completed its acquisition of
Wood Bancorp, Inc. and its affiliate, First Federal Bank, Bowling Green, Ohio.
First Federal Bank is a $167 million federal savings bank with seven offices
in northwest Ohio. Under the terms of the transaction, shareholders of Wood
Bancorp, Inc. received 2,102,000 shares of the Company's common stock in a
tax-free exchange accounted for as a pooling of interests. Immediately
following the affiliation, First Federal was merged into Mid Am Bank.
The transactions were accounted for as poolings of interests. The following is
a summary of the separate results of operations of the Company, First Western
Bancorp, Inc. and Wood Bancorp, Inc. for the six months ended June 30, 1999 and
the years ended December 31, 1998 and 1997:
Six Months Ended
June 30, 1999 1998 1997
Net interest income
Company $ 93,944 $187,124 $180,614
First Western Bancorp, Inc. 33,753 62,100 59,704
Wood Bancorp, Inc. 3,639 7,080 6,528
Combined $131,336 $256,304 $246,846
Net income
Company $ 40,509 $ 17,808 $ 59,320
First Western Bancorp, Inc. 10,922 17,923 20,282
Wood Bancorp, Inc. 1,301 2,369 1,675
Combined $ 52,732 $ 38,100 $ 81,277
Effective May 1, 1999, Sky Financial Group, Inc. completed its acquisition of
Picton Cavanaugh, Inc., a full service insurance agency which provides a wide
array of property, casualty, surety, professional liability, health, life and
executive benefit insurance products to individuals and businesses nationwide.
Picton Cavanaugh was formed in 1898 and is headquartered in Toledo, Ohio.
Under the terms of the transaction, shareholders of Picton Cavanaugh received
289,000 shares of the Company's common stock in a tax-free exchange accounted
for as a pooling of interests. The financial statements were not restated for
this merger due to immateriality.
<PAGE 9>
Effective December 4, 1998, The Ohio Bank, Findlay, Ohio, affiliated with the
Company in a transaction accounted for as a pooling of interests.
Shareholders of The Ohio Bank received 69.575 Company common shares of stock
in exchange for each share of The Ohio Bank stock owned, with cash paid in
lieu of fractional shares. A total of 5.8 million Company common shares were
issued in the merger. The Ohio Bank had assets of approximately $600 million,
with 17 banking offices in western, central and northeastern Ohio. The Ohio
Bank is operated as a wholly-owned subsidiary of the Company.
Effective October 2, 1998, Citizens Bancshares, Inc. (Bancshares) and Mid Am,
Inc. (Mid Am) affiliated in a merger-of-equals transaction which was accounted
for as a pooling of interests. In conjunction with the merger, Bancshares
changed its name to Sky Financial Group, Inc. Shareholders of Mid Am received
0.847 shares of Company common stock for each share of Mid Am stock owned, with
cash paid in lieu of fractional shares. A total of 19.8 million Company common
shares were issued in the merger. Mid Am had assets of approximately $2.3
billion, with 83 banking offices located in western Ohio and southern Michigan.
Effective May 12, 1998, Century Financial Corporation, Rochester, Pennsylvania
(CFC), merged into the Company. The transaction was affected through the
exchange of 0.8719 common shares of Company common stock for each of Century's
outstanding common shares, with cash paid in lieu of fractional shares. A
total of 4.5 million Company common shares were issued in the merger. CFC had
assets of approximately $453 million with 13 branches in Beaver and Butler
counties in Pennsylvania. Century National Bank, CFC's bank subsidiary, is now
operated as part of Citizens's branch network.
Effective March 6, 1998, UniBank, Steubenville, Ohio, affiliated with the
Company by merging into Citizens. The transaction was affected through the
exchange of 29.15 common shares of Company common stock for each of UniBank's
outstanding common shares, with cash paid in lieu of fractional shares. A
total of 2.1 million Company common shares were issued in the merger. UniBank
had assets of approximately $216 million with 12 offices in Jefferson and
Columbiana counties in Ohio, and is operated as part of Citizen's branch
network.
4. Merger, Integration and Restructuring Expenses
In 1998, the Company recorded merger, integration and restructuring charges
totaling $54,487 ($38,382 after tax). The majority of the charges were
associated with the merger and integration of the combined operations of
Citizens Bancshares, Inc., Mid Am, Inc. and The Ohio Bank. As of June 30,
1999, the remaining unpaid charges were $8,064, the majority of which are
expected to be paid during the second half of 1999.
<PAGE 10>
5. Securities Available for Sale
The amortized costs, unrealized gains and losses and estimated fair values at
June 30, 1999 and December 31, 1998 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
June 30, 1999 Cost Gains Losses Value
U.S. Treasury and U.S.
Government agencies $312,702 $ 625 $ (3,010) $310,317
Obligations of states and
political subdivisions 88,673 1,683 (190) 90,166
Corporate and other
Securities 21,288 60 (210) 21,138
Mortgage-backed
Securities 465,791 563 (5,856) 460,498
Total debt securities
available for sale 888,454 2,931 (9,266) 882,119
Marketable equity
Securities 92,283 3,997 (3,980) 92,300
Total securities
available for sale $980,737 $ 6,928 $(13,246) $974,419
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
U.S. Treasury and U.S.
Government agencies $242,202 $ 2,793 $ (349) $244,626
Obligations of states and
political subdivisions 108,180 2,370 (311) 110,239
Corporate and other
securities 14,922 119 (130) 14,911
Mortgage-backed
Securities 534,376 5,004 (1,907) 537,473
Total debt securities
available for sale 899,680 10,286 (2,697) 907,269
Marketable equity
Securities 87,268 4,522 (2,633) 89,157
Total securities
available for sale $986,948 $14,808 $(5,330) $996,426
<PAGE 11>
6. Loans
The loan portfolios at June 30, 1999 and December 31, 1998 are as follows:
June 30, 1999 December 31, 1998
Real estate loans:
Construction $ 152,607 $ 149,795
Residential mortgage 1,024,879 1,054,290
Non-residential mortgage 1,019,370 926,191
Commercial, financial and
Agricultural 818,089 808,004
Installment and credit card loans 407,542 409,748
Other loans 12,351 7,853
Total loans $3,434,838 $3,355,881
7. 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 June 30, 1999, 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 June 30,
1999 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 average
assets adjusted for certain items. Included in Tier I capital are $23,600 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.
June 30, 1999 December 31, 1998
Total adjusted average assets
for leverage ratio $4,702,660 $4,798,176
Risk-weighted assets and
off-balance-sheet financial
instruments for capital ratio 4,001,970 3,893,627
Tier I capital 362,466 345,122
Total risk-based capital 471,464 450,025
Leverage ratio 7.7% 7.2%
Tier I capital ratio 9.1 8.9
Total capital ratio 11.8 11.6
<PAGE 12>
Capital ratios applicable to the Company's banking subsidiaries at June 30,
1999 were as follows:
Total
Tier I Risk-based
Leverage Capital Capital
Regulatory Capital Requirements
Minimum 4.0% 4.0% 8.0%
Well-capitalized 5.0 6.0 10.0
Bank Subsidiaries
Sky Bank 6.0 8.9 11.1
Mid Am Bank 7.5 8.7 11.1
Ohio Bank 6.6 8.6 10.9
In October, 1998, the Board of Directors of the Company authorized management
to undertake purchases of up to 1,980,000 shares of the Company's outstanding
common stock over a twelve month period in the open market or in privately
negotiated transactions. The shares reacquired are held as treasury stock and
reserved for use in the Company's stock option plan and for future stock
dividend declarations. As of June 30, 1999, the Company had repurchased
approximately 310,000 shares of common stock pursuant to its 1998 repurchase
program. Subsequent to June 30, 1999, the Company has repurchased 128,000
additional shares of common stock.
8. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of shares outstanding during the period. 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:
(Shares in thousands) Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Numerator:
Net income $20,345 $15,404 $40,509 $28,621
Denominator:
Weighted-average common
shares outstanding (basic) 45,141 45,051 45,070 45,209
Exercise of options 477 575 471 593
Weighted-average common
shares outstanding (diluted) 45,618 45,626 45,541 45,802
Earnings per share:
Basic $ 0.45 $ 0.34 $ 0.90 $ 0.63
Diluted $ 0.45 $ 0.34 $ 0.89 $ 0.62
<PAGE 13>
9. Line of Business Reporting
The Company manages and operates two major lines of business: Community
Banking and Financial Service Affiliates. Community Banking includes lending
and related services to businesses and consumers, mortgage banking, deposit-
gathering and institutional trust services. Financial Service Affiliates
consist of non-banking companies engaged in commercial finance lending and
leasing, broker/dealer operations, insurance, non-conforming mortgage lending,
collection activities, wealth management and other financial related services.
The business lines are identified by the entities through which the product or
service is delivered.
The reported line of business results reflect the underlying core operating
performance within the business units. Parent and Other is comprised of the
parent company and several smaller business units. It includes the net
funding cost of the parent company and intercompany eliminations. Expenses
for centrally provided services and support are fully allocated based
principally upon estimated usage of services. All significant non-recurring
items of income and expense company-wide are included in Parent and Other.
Substantially all of the Company's assets are part of the Community Banking
line of business. Prior periods have been presented to conform with current
reporting methodologies. Selected segment information is included in the
following tables.
Financial Parent
Three Months Ended Community Service and Consolidated
June 30, Banking Affiliates Other Total
1999
Net interest income $48,017 $ 588 $(1,045) $47,560
Provision for credit losses 2,620 102 0 2,722
Net interest income
after provision 45,397 486 (1,045) 44,838
Other income 14,396 11,672 95 26,163
Other expenses 29,755 11,884 (208) 41,431
Income (loss) before
income taxes 30,038 274 (742) 29,570
Income taxes 9,612 139 (526) 9,225
Net income (loss) $20,426 $ 135 $ (216) $20,345
1998
Net interest income $47,757 $ 308 $(1,018) $47,047
Provision for credit losses 2,372 40 1,999 4,411
Net interest income
after provision 45,385 268 (3,017) 42,636
Other income 13,594 10,454 1,185 25,233
Other expenses 34,934 10,063 707 45,704
Income (loss) before
income taxes 24,045 659 (2,539) 22,165
Income taxes 7,713 234 (1,186) 6,761
Net income (loss) $16,332 $ 425 $(1,353) $15,404
<PAGE 14>
Financial Parent
Six Months Ended Community Service and Consolidated
June 30, Banking Affiliates Other Total
1999
Net interest income $95,024 $ 1,110 $(2,190) $93,944
Provision for credit losses 4,938 144 0 5,082
Net interest income
after provision 90,086 966 (2,190) 88,862
Other income 28,438 22,215 19 50,672
Other expenses 59,021 22,312 (961) 80,372
Income (loss) before
income taxes 59,503 869 (1,210) 59,162
Income taxes 19,006 383 (736) 18,653
Net income (loss) $40,497 $ 486 $ (474) $40,509
1998
Net interest income $93,932 $ 517 $(1,733) $92,716
Provision for credit losses 4,335 54 1,998 6,387
Net interest income
after provision 89,597 463 (3,731) 86,329
Other income 27,890 19,499 876 48,265
Other expenses 69,635 18,996 4,634 93,265
Income (loss) before
income taxes 47,852 966 (7,489) 41,329
Income taxes 14,964 378 (2,634) 12,708
Net income (loss) $32,888 $ 588 $(4,855) $28,621
Item 2. Management's Discussion and Analysis and Statistical Information
(Dollars in thousands, except per share data)
Three Months Ended June 30, 1999 and 1998
Results of Operations
Net income for the second quarter of 1999 was $20,345, an increase of $4,941
or 32% over the second quarter of 1998 earnings of $15,404. Diluted earnings
per common share for the second quarter of 1999 was $.45 ($.45 basic), up 32%
when compared to $.34 ($.34 basic) for the same period in 1998. Return on
average equity (ROE) for the second quarter of 1999 was 23.01% while return on
average assets (ROA) was 1.73%. This compares to ROE and ROA ratios of 16.68%
and 1.32%, respectively, for the second quarter of 1998. Reported net income
for the second quarter of 1998 includes after-tax non-recurring items which
reduced net income $593 or $.01 per diluted share.
Operating earnings, which exclude the after-tax non-recurring items, increased
$4,348 or 27% to $20,345 for the second quarter of 1999 as compared to $15,997
for the same period in 1998. Operating earnings per diluted share for 1999
increased 29% to $.45 from $.35 in 1998. On this same basis, ROE was 23.01%
and ROA was 1.73% in 1999 compared to 17.33% and 1.37%, respectively, in 1998.
<PAGE 15>
Business Line Results
Sky Financial Group, Inc. is managed along two major lines of business: the
community banking group and the financial service affiliates. The community
banking group is comprised of the Company's three commercial banks: Sky Bank,
Mid Am Bank and Ohio Bank. The financial service affiliates include the
Company's non-banking subsidiaries, which operate businesses relating to
commercial finance lending and leasing, broker-dealer operations, insurance,
non-conforming mortgage lending, collection activities, wealth management and
other financial related services.
The Company's business line results for the second quarter ended June 30, 1999
and 1998 are summarized in the table below.
Net Income (Loss)
Quarter ended June 30, 1999 1998
Community Banking $ 20,426 $ 16,332
Financial Service Affiliates 135 425
Parent and Other (216) (1,353)
Consolidated $ 20,345 $ 15,404
The increase in community banking net income in 1999 was primarily due to
reductions in non-interest expense. The efficiency ratio was 46.8% for the
second quarter of 1999 compared to 55.7% in the second quarter of 1998.
The 1999 community banking results reflect a ROE of 25.25% and a ROA of 1.78%
compared to 17.98% and 1.42%, respectively, in the second quarter of 1998.
The financial service affiliates' earnings reflect the Company's continued
investment in the development and growth of these businesses. While earnings
remain modest, revenues have grown 12% in 1999.
Parent and other includes the net funding costs of the parent company and all
significant non-recurring items of income and expense. The second quarter 1998
results included a one-time recovery of $1,475 ($1,412 after tax), a
non-recurring provision for credit losses of $2,000 ($1,300 after tax) and
merger, integration and restructuring costs of $972 ($705 after tax).
Net Interest Income
Net interest income increased $513 to $47,560 in the second quarter of 1999 as
compared to $47,047 for the same period in 1998. 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, rates and composition of interest-earning
assets and interest-bearing liabilities. The Company's net interest margin
for the three months ended June 30, 1999 remained level at 4.45% as compared to
the same period in 1998, and increased from 4.40% in the first quarter of 1999.
<PAGE 16>
Provision for Credit Losses
The provision for credit losses represents the charge to income necessary to
adjust the allowance for loan losses to an amount that represents management's
assessment of the estimated probable credit losses inherent in the Company's
loan portfolio which have been incurred at each balance sheet date. The
provision for credit losses decreased $1,689 or 38% to $2,722 in the second
quarter of 1999 compared to $4,411 in the second quarter of 1998. The higher
provision for credit losses in the second quarter of 1998 was attributable to
the recognition of changes in risk factors and the Company's application of its
allowance for credit losses methodology (see discussion under "Asset Quality"),
primarily in a newly merged bank. The Company estimates the additional
provision for credit losses in the newly merged bank was $2,000. Net charge-
offs were $2,678 or 0.32% (annualized) of average loans during the three months
ended June 30, 1999, compared to $1,728 or 0.22% (annualized) for the same
period in 1998.
June 30, December 31, June 30,
1999 1998 1998
Allowance for credit losses
as a percentage of loans 1.61% 1.61% 1.38%
Allowance for credit losses
as a percentage of
non-performing loans 448.21 431.68 399.67
Other Income
The increase in other income reflects the emphasis of the Company on
expanding its fee-based businesses, diversifying its revenue sources and
adding to profitability beyond traditional banking products and services.
Other income for the second quarter of 1999 was $26,163, an increase of
$2,405 or 10% from the $23,758 for the same quarter of 1998 excluding a $1,475
favorable legal settlement. The increase was primarily due to an increase of
$394 in service charges and fees on deposit accounts, an increase of $1,836 in
brokerage and insurance commissions, and an increase of $507 in value in bank
owned life insurance. The increases were partially offset by a decrease of
$518 in collection agency fees, a decrease of $555 in mortgage banking revenue
and a decrease of $837 in net gains on sales of commercial financing loans at
SFSI. The increase in brokerage and insurance commissions was primarily due to
the acquisition of Picton Cavanaugh in the second quarter of 1999 and increased
volumes. The increase in value in bank owned life insurance was due to the
purchase of approximately $22,690 in additional life insurance. The decrease
in collection agency fees was primarily due to a reorganization of the
collection agency business. The decreases in mortgage banking revenue and net
gains on sales of commercial financing loans were due to lower volumes and
rising interest rates.
<PAGE 17>
Other Expense
Other expense for the second quarter of 1999 was $41,431, a decrease of
$4,273 or 9% from the $45,704 reported for the same quarter of 1998. The
decrease resulted from a $4,047, or 9% reduction in core operating expenses,
a $972 non-recurring merger and restructuring charge in the prior year,
partially offset by operating expenses of the newly acquired Picton Cavanaugh.
Salaries and employee benefits which comprise the largest component of other
expense decreased 5% in the second quarter of 1999 due to savings realized from
the consolidation of ten previously separate banks into three banking units and
elimination of duplicate positions. Occupancy and equipment expense increased
$174 or 3%. Brokerage commissions increased due to an increase in the volume
of transactions for the second quarter of 1999 as compared to the same period
for 1998. Other expenses decreased $2,283 or 15% to $12,846 in 1999 from
$15,129 in 1998. The decrease in other expenses was primarily due to
efficiencies realized from the conversion and integration of systems and
processes within the Company.
Income Taxes
The provision for income taxes for the second quarter of 1999 increased $2,464,
or 36%, to $9,225 compared to $6,761 for the same period in 1998 due to an
increase in pre-tax income. The effective tax rate for the second quarter of
1999 was 31.2% as compared to 30.5% for the same period in 1998.
Six Months Ended June 30, 1999 and 1998
Results of Operations
Net income for the first half of 1999 was $40,509, an increase of $11,888 or
42% over the first half of 1998 earnings of $28,621. Diluted earnings per
common share for the first half of 1999 was $.89 ($.90 basic), up 43% when
compared to $.62 ($.63 basic) for the same period in 1998. Return on average
equity for the first half of 1999 was 23.17% while return on average assets was
1.73%. This compares to ROE and ROA ratios of 15.44% and 1.25%, respectively,
for the first half of 1998. Reported net income for the first half of 1998
includes after-tax non-recurring items which reduced net income $3,443 or $.08
per diluted share.
Operating earnings, which exclude the after-tax non-recurring items, increased
$8,445 or 26% to $40,509 for the first half of 1999 as compared to $32,064 for
the same period in 1998. Operating earnings per diluted share for 1999
increased 27% to $.89 from $.70 in 1998. On this same basis, ROE was 23.17%
and ROA was 1.73% in 1999 compared to 17.30% and 1.40%, respectively, in 1998.
<PAGE 18>
Business Line Results
Sky Financial Group, Inc. is managed along two major lines of business: the
community banking group and the financial service affiliates. The community
banking group is comprised of the Company's three commercial banks: Sky Bank,
Mid Am Bank and Ohio Bank. The financial service affiliates include the
Company's non-banking subsidiaries, which operate businesses relating to
commercial finance lending and leasing, broker-dealer operations, insurance,
non-conforming mortgage lending, collection activities, wealth management and
other financial related services.
The Company's business line results for the six months ended June 30, 1999
and 1998 are summarized in the table below.
Net Income (Loss)
Six Months Ended June 30, 1999 1998
Community Banking $ 40,497 $ 32,888
Financial Service Affiliates 486 588
Parent and Other (474) (4,855)
Consolidated $ 40,509 $ 28,621
The increase in community banking net income in 1999 was primarily due to
reductions in non-interest expense. The efficiency ratio was 46.8% for the
first half of 1999 compared to 56.0% in the first half of 1998. The 1999
community banking results reflect a ROE of 25.50% and a ROA of 1.75% compared
to 18.37% and 1.45%, respectively, in the first half of 1998.
The financial service affiliates' earnings reflect the Company's continued
investment in the development and growth of these businesses. While earnings
remain modest, revenues have grown 14% in 1999.
Parent and other includes the net funding costs of the parent company and all
significant non-recurring items of income and expense. The first half 1998
results included a one-time recovery of $1,475 ($1,412 after tax), a
non-recurring provision for credit losses of $2,000 ($1,300 after tax) and
merger, integration and restructuring costs of $4,904 ($3,555 after tax).
Net Interest Income
Net interest income increased $1,228 to $93,944 in the first half of 1999 as
compared to $92,716 for the same period in 1998. 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, rates and composition of interest-earning
assets and interest-bearing liabilities. The Company's net interest margin
for the six months ended June 30, 1999 decreased to 4.42 in 1999 as compared to
4.44% for the same period in 1998. The decline in the net interest margin is
primarily due to lower yields on earning assets, while funding costs were
basically flat, as increased reliance on higher cost borrowings offset the
benefit of lower deposit costs.
<PAGE 19>
Provision for Credit Losses
The provision for credit losses represents the charge to income necessary to
adjust the allowance for loan losses to an amount that represents management's
assessment of the estimated probable credit losses inherent in the Company's
loan portfolio which have been incurred at each balance sheet date. The
provision for credit losses decreased $1,305 or 20% to $5,082 in the first
half of 1999 compared to $6,387 in the first half of 1998. The higher
provision for credit losses in the first half of 1998 was attributable to the
recognition of changes in risk factors and the Company's application of its
allowance for credit losses methodology (see discussion under "Asset Quality"),
primarily in a newly merged bank. The Company estimates the additional
provision for credit losses in the newly merged bank was $2,000. Net charge-
offs were $3,897 or 0.23% (annualized) of average loans during the six months
ended June 30, 1999, compared to $2,588 or 0.16% (annualized) for the same
period in 1998.
Other Income
The increase in other income reflects the emphasis of the Company on
expanding its fee-based businesses, diversifying its revenue sources and
adding to profitability beyond traditional banking products and services.
Other income for the first half of 1999 was $50,672, an increase of
$3,882 or 8% from the $46,790 for the same period of 1998 excluding a $1,475
favorable legal settlement. The increase was primarily due to an increase of
$1,013 in service charges and fees on deposit accounts, an increase of $2,502
in brokerage and insurance commissions, and an increase of $1,040 in value in
bank owned life insurance. The increases were partially offset by a decrease
of $1,316 in collection agency fees and a decrease of $805 in mortgage banking
revenue. The increase in brokerage and insurance commissions was primarily
due to the acquisition of Picton Cavanaugh in the second quarter of 1999 and
increased volumes. The increase in value in bank owned life insurance was due
to the purchase of approximately $22,690 in additional life insurance. The
decrease in collection agency fees was primarily due to a reorganization of the
collection agency business. The decrease in mortgage banking revenue was due
to lower volumes and rising interest rates.
Other Expense
Other expense for the first half of 1999 was $80,372, a decrease of $12,893 or
14% from the $93,265 reported for the same period of 1998. The decrease
resulted from a $8,735, or 10% reduction in core operating expenses, a $4,904
non-recurring merger and restructuring charge in the prior year, partially
offset by operating expenses of the newly acquired Picton Cavanaugh.
Salaries and employee benefits which comprise the largest component of other
expense decreased 7% in the first half of 1999 due to savings realized from the
consolidation of ten previously separate banks into three banking units and
elimination of duplicate positions. Occupancy and equipment expense increased
$290 or 2%. Brokerage commissions increased due to an increase in the volume
of transactions for the first half of 1999 as compared to the same period for
1998. Other expenses decreased $5,120 or 17% to $24,372 in 1999 from $29,492
in 1998. The decrease in other expenses was primarily due to efficiencies
realized from the conversion and integration of systems and processes within
the Company.
<PAGE 20>
Income Taxes
The provision for income taxes for the first half of 1999 increased $5,945,
or 47%, to $18,653 compared to $12,708 for the same period in 1998 due to an
increase in pre-tax income. The effective tax rate for the first half of 1999
was 31.5% as compared to 30.7% for the same period in 1998.
Asset Quality
The following table presents the aggregate amounts of non-performing assets
and respective ratios on the dates indicated.
June 30, December 31, June 30,
1999 1998 1998
Non-accrual loans $10,076 $10,619 $10,525
Restructured loans 2,238 1,892 528
Total non-performing loans 12,314 12,511 11,053
Other real estate owned 1,910 1,330 686
Total non-performing assets $14,224 $13,841 $11,739
Loans 90 days or more past due
and not on non-accrual $ 5,838 $ 4,061 $ 6,267
Non-performing loans to
total loans 0.36% 0.37% 0.35%
Non-performing assets to
total loans plus other
real estate owned 0.41 0.41 0.37
Allowance for credit losses to
total non-performing loans 448.21 431.68 399.67
Loans 90 days or more past due
and not on non-accrual to
total loans 0.17 0.12 0.20
The Ohio Bank and Mid Am Bank have outstanding lease receivables and loans
with an aggregate outstanding balance at June 30, 1999 of $442 to The
Bennett Funding Group, Inc. and related entities (Bennett) which remain
subject to the Bennett bankruptcy proceeding commenced in March 1998. In
December 1997 and January 1998, the bankruptcy judge ruled that The Ohio Bank
and Mid Am Bank, respectively, were secured creditors with respect to certain
of their outstanding Bennett portfolios. These decisions have been appealed
by the bankruptcy trustee and the appeals are pending. No decision has been
rendered with respect to $442 in loans from The Ohio Bank and Mid Am Bank
which present different issues from the issues rendered by the bankruptcy
judge. The Bennett loans are included in non-accrual loans.
Loans now current but where some concerns exist as to the ability of the
borrower to comply with present loan repayment terms, excluding non-performing
loans, approximated $17,567 and $23,168 at June 30, 1999 and December 31,
1998, respectively, and are being closely monitored by management and the
Boards of Directors of the subsidiaries. The classification of these loans,
however, does not imply that management expects losses on each of these
<PAGE 21>
loans, but rather that a higher level of scrutiny is prudent under the
circumstances. The decrease in loans where some concern exists is primarily
attributable to the Company's continuous process of loan review, which has
identified various improvements in the financial condition of certain of the
individual borrowers. In the opinion of management, these loans require
close monitoring despite the fact that they are performing according to their
terms. Such classifications relate to specific concerns relating to each
individual borrower and do not relate to any concentrated risk elements common
to all loans in this group.
As of June 30, 1999, the Company did not have any loan concentrations which
exceeded 10% of total loans.
The following table presents a summary of the Company's credit loss experience
for the six months ended June 30, 1999 and 1998.
1999 1998
Balance of allowance at
beginning of year $54,008 $40,376
Loans charged-off:
Real estate 1,060 581
Commercial and agricultural 1,639 1,886
Installment and credit card 2,512 2,536
Other loans 6
Total loans charged-off 5,217 5,003
Recoveries:
Real estate 144 172
Commercial and agricultural 405 1,525
Installment and credit card 751 688
Other loans 20 30
Total recoveries 1,320 2,415
Net loans charged-off 3,897 2,588
Provision charged to operating
expense 5,082 6,387
Balance of allowance at
end of period $55,193 $44,175
Ratio of net charge-offs to
average loans outstanding 0.23% 0.16%
Allowance for credit losses
to total loans 1.61 1.38
Allowance for credit losses
to total non-performing loans 448.21 399.67
The Company maintains an allowance for credit losses at a level adequate to
absorb management's estimate of probable losses inherent in the loan
portfolio. The allowance is comprised of a general allowance, a specific
allowance for identified problem loans and an unallocated allowance.
<PAGE 22>
The general allowance is determined by applying estimated loss factors to the
credit exposures from outstanding loans. For construction, commercial and
commercial real estate loans, loss factors are applied based on internal risk
grades of these loans. For residential real estate, installment, credit card
and other loans, loss factors are applied on a portfolio basis. Loss factors
are based on peer and industry loss data compared to the Company's historical
loss experience, and are reviewed for correction on a quarterly basis, along
with other factors affecting the collectability of the loan portfolio.
Specific allowances are established for all criticized and classified loans,
where management has determined that, due to identified significant
conditions, the probability that a loss has been incurred exceeds the general
allowance loss factor determination for those loans.
The unallocated allowance both recognizes the estimation risk associated with
the allocated general and specific allowances and incorporates management's
evaluation of existing conditions that are not included in the allocated
allowance determinations. These conditions are reviewed quarterly by
management and include general economic conditions, credit quality trends,
recent loss experience, bank regulatory examination results, and internal loan
review examination findings.
The following table sets forth the Company's allocation of the allowance for
credit losses as of June 30, 1999 and December 31, 1998.
June 30, 1999 December 31, 1998
Construction $ 1,060 $ 693
Real estate 7,530 6,504
Commercial, financial
and agricultural 20,170 20,647
Installment and credit card 8,468 9,130
Other loans 1,324 1,820
Unallocated 16,641 15,214
Total $55,193 $54,008
Liquidity
The liquidity of a financial institution reflects its ability to provide funds
to meet 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 this normally considered in
terms of the nature and mix of the institution's sources and uses of funds.
The Company's banking subsidiaries maintain adequate liquidity primarily
through the use of investment securities and unused borrowing capacity, in
addition to maintaining a stable core deposit base. At June 30, 1999,
securities and other short-term investments with maturities of one year or
less totaled $109,584, with additional liquidity provided by the remainder of
the investment portfolio. The banks utilize several short-term and long-term
<PAGE 23>
borrowing sources. Each of the banking subsidiaries is a member of the
Federal Home Loan Bank (FHLB) and have lines of credit with the FHLB. At
June 30, 1999, these lines of credit enable the banks to borrow up to
$528,575, of which $281,062 is currently outstanding.
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 the banking subsidiaries, regulatory
approval 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 $4,616 at June 30,1999.
In March, 1999, the Company renegotiated an agreement with unrelated financial
institutions which enabled the Company to borrow up to $75,000 through
March 8, 2000. At June 30, 1999, the Company had borrowings of $48,000
under this agreement.
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. At June 30, 1999, the
Company had a manageable positive gap position and therefore does not expect
to experience any significant fluctuations in its net interest income as a
consequence of changes in interest rates. See also Item. 3, "Quantitative and
Qualitative Disclosures About Market Risk".
Year 2000 Readiness
The Year 2000 problem is the result of many existing computer programs using
only the last two digits, rather than four digits, to indicate the year. Such
programs may be unable to recognize a year that begins with "20" rather than
"19". If not corrected, many computer programs could cause systems to fail or
produce erroneous results.
Since 1996, the Company has been preparing for the Year 2000 problem and has
been taking steps to ensure that its internal systems are secure from
disruption of operations. The Company's Year 2000 project team, comprised of
representatives of the Company and its affiliates, has invested more than
22,000 hours to date on this project. The Company core project team has met
monthly addressing both internal and external issues. The team has identified
over 650 systems that could be potentially affected by the Year 2000 problem.
These systems include all information technology systems and computer chip
embedded functions such as vaults, elevators, security systems, heating and
cooling equipment and other operating facilities. The Company's efforts have
been directed by a 5-phase plan to be completed in preparation for the Year
2000. The phases, which were established by the federal agencies that regulate
financial institutions, include awareness, assessment, renovation, validation
and implementation. These agencies are conducting special examinations of
insured banks to see that they are taking the necessary steps to be prepared
<PAGE 24>
for the century date change. The Company and its affiliates are working
closely with these agencies and have been following their specific criteria to
assess our progress in Year 2000 readiness.
With regard to information technology systems, the Company utilizes standard
industry hardware and widely used, licensed banking software for most of its
information technology needs. The software packages are purchased, and the
Company utilizes such software without material program modifications.
Because of its reliance upon third parties, the Company has contacted its
hardware and software vendors to obtain assurances that its systems are Year
2000 compliant. Additionally, all mission critical hardware and software
systems (identified as 61 systems by the project team) have been tested and
validated and have been deemed Year 2000 compliant. Furthermore, the Company
has completed all scheduled vendor inquiries and testing for non-information
technology systems, including building and banking equipment.
Externally, the Company has contacted its business partners regarding their
Year 2000 preparedness. These partners include commercial customers, vendors,
service suppliers, data exchange vendors and utility companies. The Company's
affiliate banks have also sponsored educational seminars in select market
areas to educate commercial clients regarding Year 2000 issues.
The Company is dependent on the continued operations of numerous third party
vendors, suppliers and service providers. Any interruption in a third party's
ability to provide goods and services, such as telecommunications, utilities
and transportation, could create Year 2000 problems for the Company.
The Company has developed and adopted a comprehensive contingency plan in the
unlikely event critical systems fail to function after the century date
changes. Alternative methods of doing business have been developed and are in
the process of being tested. These methods address data gathering, customer
service procedures, and staffing needs before, during and after the Year 2000
changeover. This planning also includes non-compliance by third parties which
may affect the Company's ability to conduct business.
Notwithstanding the Company's efforts to date to replace or repair affected
systems and develop contingency plans for potential risks, if the Company does
not complete all activities associated with resolving its Year 2000 issues, the
Company could be materially adversely affected as a result of not being able to
process transactions related to its core business activities. In addition,
non-compliance by the Company's business partners, including without
limitation, the Company's business customers, vendors, service suppliers and
utilities, could have a material adverse affect on the Company.
The external costs of the Company's Year 2000 project is estimated at
$1,200,000. External costs include equipment replacement or upgrade, seminar
sponsorships, vendor payments, and customer communication and education.
Additionally, the Company estimates that internal costs will amount to
$500,000, comprised primarily of personnel expense.
<PAGE 25>
Forward-Looking Statements
This report includes forward-looking statements by the Company 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 on
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
restructuring or integration of acquisitions; unforeseen difficulties in
realizing expected cost savings from acquisitions; product redesign
initiative; the effect of the year 2000 on the Company, its computer systems,
customers, vendors and service suppliers; and other risks identified, from
time-to-time in the Company's other public documents on file with the
Securities and Exchange Commission.
Item 3. 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. 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 June 30, 1999. The present
value of financial instruments is calculated using estimated cash flows based
on weighted-average contractual rates and terms, then discounted at the
estimated current market interest rate for similar 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.
<PAGE 26>
The following table presents an analysis of the potential sensitivity of the
Company's annual net interest income and present value of the Company's
financial instruments to sudden and sustained 200 basis-point changes in
market interest rates.
June 30, December 31,
1999 1998 Guidelines
One Year Net Interest
Income Change
+200 Basis points (0.6)% (1.4)% (10.0)%
- -200 Basis points (3.1) (0.9) (10.0)
Net Present Value of
Equity Change
+200 Basis points (23.5) (12.1)% (30.0)%
- -200 Basis points 15.3 10.5 (30.0)
The change in market interest rate sensitivity for June 30, 1999 as compared to
December 31, 1998 is primarily due to a reduction in prepayment speeds on loans
and securities resulting from the higher interest rate environment and the
growth in fixed rate loan originations. The projected volatility of net
interest income and the net present value of equity rates to a +/- 200 basis
points change at June 30, 1999 fall within the Board of Directors guidelines.
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in lawsuits and claims, 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.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
<PAGE 27>
Item 4. Submission of Matters to a Vote of Security Holders
At the Special Meeting of Sky Financial Group, Inc. Shareholders on July 21,
1999, ballot totals for the approval of the Amended and Restated Agreement and
Plan of Merger dated as of April 19, 1999, by and among Sky Financial Group,
Inc., First Western Bancorp, Inc. and First Western Acquisition Corporation
(Transitory Sub) were as follows:
FOR 28,321,085 62.63%
AGAINST 924,676 2.04%
ABSTAIN 516,585 1.14%
At the Annual Meeting of Sky Financial Group, Inc. Shareholders on April 21,
1999, ballot totals for the election of eight Class I Directors to serve until
the annual meeting of shareholders in 2002 were as follows:
FOR WITHHELD
Class I
Gerald D. Aller 32,786,273 72.7% 608,385
Willard L. Davis 32,773,305 72.7 621,353
Kenneth E. McConnell 32,746,365 72.6 648,293
Edward J. Reiter 32,786,555 72.7 608,103
Patrick W. Rooney 32,792,069 72.7 602,589
C. Gregory Spangler 32,795,596 72.7 599,062
Robert E. Stearns 32,786,846 72.7 607,812
Glenn F. Thorne 32,753,252 72.6 641,406
The following incumbent Class II and Class III Directors who were not nominees
for election at the April 21, 1999 Annual Meeting are as follows:
David A. Bryan Thomas S. Noneman Fred H. Johnson, III
Keith D. Burgett Emerson J. Ross, Jr. Marilyn O. McAlear
George N. Chandler, II Douglas J. Shierson James C. McBane
David R. Francisco Marty E. Adams Gerard P. Mastroianni
Del E. Goedeker D. James Hilliker Joseph N. Tosh, II
H. Lee Kinney Richard R. Hollington, Jr.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. Statement Re Computation of Earnings Per Common Share
(b) Reports on Form 8-K
The Company filed a report on Form 8-K with the Securities and Exchange
Commission as of June 7, 1999, describing the definitive agreement to merge
Mahoning National Bancorp, Inc. into Sky Financial Group, Inc.
<PAGE 28>
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.
/s/ Kevin T. Thompson
Kevin T. Thompson
Executive Vice President / Chief Financial Officer
DATE: August 13, 1999
<PAGE 29>
SKY FINANCIAL GROUP, INC.
EXHIBIT INDEX
Exhibit No. Description Page Number
(11.1) Statement Re Computation of Earnings
Per Common Share
The information required by this exhibit
is incorporated herein by reference from
the information contained in Note 8
"Earnings Per Share" on page 12 of the
Company's Form 10-Q for June 30, 1999.
(27.1) Financial Data Schedule 30
(99.1) Form 8-K describing the definitive agreement
to merge Mahoning National Bancorp, Inc.
into Sky Financial Group, Inc.
The information required by this exhibit
is incorporated herein by reference from
the Company's Form 8-K dated June 7, 1999,
filed with the Securities and Exchange
Commission on June 7, 1999.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets, the Consolidated Statements of Income and
Management's Discussion and Analysis and Statistical Information and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 156,127 156,127
<INT-BEARING-DEPOSITS> 13,743 13,743
<FED-FUNDS-SOLD> 9,000 9,000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 974,419 974,419
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 3,434,838 3,434,838
<ALLOWANCE> 55,193 55,193
<TOTAL-ASSETS> 4,785,692 4,785,692
<DEPOSITS> 3,718,280 3,718,280
<SHORT-TERM> 246,338 246,338
<LIABILITIES-OTHER> 63,589 63,589
<LONG-TERM> 406,323 406,323
0 0
0 0
<COMMON> 310,083 310,083
<OTHER-SE> 41,079 41,079
<TOTAL-LIABILITIES-AND-EQUITY> 4,785,692 4,785,692
<INTEREST-LOAN> 73,625 146,863
<INTEREST-INVEST> 14,016 28,190
<INTEREST-OTHER> 407 694
<INTEREST-TOTAL> 88,048 175,747
<INTEREST-DEPOSIT> 32,802 66,505
<INTEREST-EXPENSE> 40,488 81,803
<INTEREST-INCOME-NET> 47,560 93,944
<LOAN-LOSSES> 2,722 5,082
<SECURITIES-GAINS> 293 371
<EXPENSE-OTHER> 41,431 80,372
<INCOME-PRETAX> 29,570 59,162
<INCOME-PRE-EXTRAORDINARY> 29,570 59,162
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 20,345 40,509
<EPS-BASIC> 0.45 0.90
<EPS-DILUTED> 0.45 0.89
<YIELD-ACTUAL> 4.45 4.42
<LOANS-NON> 10,076 10,076
<LOANS-PAST> 5,838 5,838
<LOANS-TROUBLED> 2,238 2,238
<LOANS-PROBLEM> 17,567 17,567
<ALLOWANCE-OPEN> 55,149 54,008
<CHARGE-OFFS> 3,309 5,217
<RECOVERIES> 631 1,320
<ALLOWANCE-CLOSE> 55,193 55,193
<ALLOWANCE-DOMESTIC> 33,407 33,407
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 21,786 21,786
</TABLE>
