<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File No. 1-14473
Sky Financial Group, Inc.
(Exact Name of Registrant as Specified in its Charter)
Ohio 34-1372535
(State of Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
221 South Church Street, Bowling Green, Ohio 43402
(Address of Principal Executive Office) (Zip Code)
(419) 327-6300
(Registrant's Telephone Number)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, without par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K. [ X ]
Based on the closing sales price of February 28, 1999 the aggregate market
value of the voting stock held by non-affiliates of the Registrant was
approximately $1,040,043,000.
The number of shares outstanding of the Registrant's common stock, without par
value was 44,991,153 at February 28, 1999.
DOCUMENTS INCORPORATED BY REFERENCE* WHERE INCORPORATED
Annual Report Supplement to Shareholders
for year ended December 31, 1998 Parts I, II and IV
Definitive Proxy Statement for the Annual
Meeting of Shareholders to be held April 21,
1999, and filed with the Securities and Exchange
Commission on March 10, 1999 Part III
*As stated under various items of this report, only specified portions of such
documents are incorporated by reference herein.
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INDEX
<TABLE>
<CAPTION>
10-K
Page
<S> <C>
PART I
Item 1. Business ........................................ 3
Item 2. Properties ...................................... 8
Item 3. Legal Proceedings ............................... 8
Item 4. Submission of Matters to a Vote of Security
Holders ......................................... 8
PART II
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters ............................. 9
Item 6. Selected Financial Data ......................... 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............. 9
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk ..................................... 9
Item 8. Financial Statements and Supplementary Data ..... 9
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ............. 9
PART III
Item 10. Directors and Executive Officers of Registrant .. 10
Item 11. Executive Compensation .......................... 11
Item 12. Security Ownership of Certain Beneficial Owners
and Management .................................. 11
Item 13. Certain Relationships and Related Transactions .. 11
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ............................ 12
Signatures ............................................... 14
Exhibit Index ............................................ 16
</TABLE>
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PART I
Item 1. INFORMATION ABOUT SKY FINANCIAL GROUP, INC.
Sky Financial Group, Inc. (the Company), a financial services holding company,
has five bank subsidiaries with a total of 156 banking centers located in
Ohio, southern Michigan, western Pennsylvania and West Virginia. The Company
also owns nine financial services subsidiaries which engage in lines of
business which are closely related to banking. Based on total assets as of
December 31, 1998, the Company was the 7th largest bank holding company based
in Ohio. Through its banking subsidiaries, the Company offers a wide range of
lending, depository, trust, and related financial services to individual and
business customers. Through its financial services subsidiaries, the Company
offers specialty lending, investment, trust, collection and related financial
services to individual and business customers.
The Holding Company
Sky Financial Group, Inc., a registered bank holding company, is the
resulting company from the October 2, 1998 merger of equals between Citizens
Bancshares, Inc. (Bancshares) and Mid Am, Inc. (Mid Am). In conjunction with
the merger, Bancshares changed its name to Sky Financial Group, Inc. The
Company's corporate philosophy is to encourage its subsidiaries to operate as
locally-oriented, community-based financial service affiliates, augmented by
experienced, centralized support from the Company in selected critical areas.
This local market orientation is reflected in the bank subsidiaries' boards of
directors and branch banking centers, which generally have advisory boards
comprised of local business persons, professionals and other community
representatives, that assist the banking centers in responding to local
banking needs. The bank subsidiaries concentrate on customer service and
business development, while relying upon the support of the Company in
identifying operational areas that can be effectively centralized without
sacrificing the benefits of a local orientation. Primary candidates for
centralization are those functions which are not readily visible to customers
and those which are critical to risk management. Asset quality review, data
processing, loan and deposit processing, certain mortgage banking activities,
financial reporting, investment activities, internal audit, compliance and
funds management are among the functions which are managed at the holding
company level.
The Company's market area is economically diverse, with a base of
manufacturing, service industries, transportation and agriculture, and is not
dependent upon any single industry or employer. Similarly, the Company's
customer base is diverse, and the Company and its subsidiaries are not
dependent upon any single industry or upon any single customer.
Sky Financial Group, Inc.'s strategic plan includes expansion, market
diversification and growth of its fee-based income through internal business
formations, internal growth and through acquisitions of financial
institutions, branches and financial service businesses. The Company seeks
acquisition partners with experienced management, which have significant
market presence or have potential for improved profitability through financial
management, economies of scale and expanded services.
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There is significant competition in the financial services industry in the
Company's market area among commercial banks. As a result of the deregulation
of the financial services industry, the Company also competes with other
providers of financial services such as savings and loan associations, credit
unions, consumer finance companies, securities firms, insurance companies,
commercial finance and leasing companies, the mutual funds industry, full
service brokerage firms and discount brokerage firms. Some of the Company's
competitors, including certain regional bank holding companies which have made
acquisitions in the Company's market area, have substantially greater
resources than those of the Company, and as such, may have higher lending
limits and may offer other services not available through the bank and non-
bank subsidiaries. The bank and non-bank subsidiaries compete on the basis of
rates of interest charged on loans, the rates of interest paid for funds, the
availability of services and the responsiveness to the needs of its customers.
The Company's executive offices are located at 221 South Church Street,
Bowling Green, Ohio, and its telephone number is (419)327-6300.
The Bank Subsidiaries
Mid American National Bank and Trust Company (Mid Am Bank), headquartered in
Toledo, Ohio, was formed in 1952. With total assets of $1.025 billion at
December 31, 1998, it operates 36 banking centers in northwest Ohio.
First National Bank Northwest Ohio (First National), headquartered in Bryan,
Ohio, was founded in 1933 and joined the Company in 1988. First National had
total assets of $542 million at December 31, 1998, and operates through 18
banking centers in the northwest corner of Ohio.
Adrian State Bank (Adrian) is the Company's Adrian, Michigan headquartered
state-chartered bank, which was acquired by the Company in 1995. Adrian had
total assets of $171 million at December 31, 1998, and operates 6 banking
centers in southeastern Michigan.
The Citizens Banking Company (Citizens), headquartered in Salineville, Ohio
and owned by the Company since 1982, was organized and chartered in 1902.
Citizens had total assets of $1.809 billion at December 31, 1998, and operates
62 banking centers in eastern Ohio, western Pennsylvania and West Virginia.
The Ohio Bank (Ohio Bank), headquartered in Findlay, Ohio, was organized in
1897. At December 31, 1998, Ohio Bank had total assets of $1.223 billion and
34 banking centers in central western Ohio.
On January 24, 1999, First National and Adrian merged into Mid Am Bank which
converted to an Ohio chartered bank and changed its name to Mid Am Bank.
The Financial Services Subsidiaries
Sky Asset Management Services, Inc. (SAMSI) is the Company's Florida-based
professional recovery services firm, formed in 1996 as a result of the merger
of two of the Company's collection affiliates. SAMSI serves various
governmental agencies, retail, insurance and commercial clients primarily in
the Southeastern United States.
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Sky Investments, Inc. (SII), Bryan, Ohio is the Company's broker/dealer
affiliate, which provides its customers investment services throughout the
United States through its 175 registered representatives. SII also provides
non-depository investment products to the customers of the Bank Subsidiaries.
Mid Am Credit Corp. (MACC) is the Company's specialized medical financing and
leasing unit based in Columbus, Ohio. Beginning with its formation in 1996,
MACC has offered medical equipment and practice acquisition financing to
medical professionals throughout the United States. MACC intends to sell
substantially all of its financing originations to funding sources in the
secondary market.
Mid Am Financial Services, Inc. (MAFSI) and its subsidiary Simplicity Mortgage
Consultants, Inc. (Simplicity) is the Company's consumer finance company
headquartered in Carmel, Indiana. MAFSI, formed by the Company in connection
with the Company's 1996 acquisition of Simplicity, engages in
non-conforming residential mortgage lending for customers with difficult
financing needs, and sells substantially all of its originations in the
secondary market.
Mid Am Private Trust, N.A. (MAPT), Cleveland, Ohio, was formed in 1997 as the
Company's specialty trust bank subsidiary. MAPT was created to provide
families with substantial financial resources and individual and corporate
trustees a unique approach to fiduciary services through "insourcing"
investment managers and estate planners. MAPT expects to conduct business on
a nationwide basis.
Sky Technology Resources, Inc. (Sky Tech) is the Company's data processing and
operations affiliate which, through its Bowling Green, Ohio-based facility,
provides comprehensive back-room services and support to all of the Company's
affiliates.
Freedom Financial Life Insurance Company (Freedom), owned by the Company since
1985, was organized and chartered under the laws of the State of Arizona.
Freedom is a reinsurance company providing credit life and accident and health
insurance coverage to loan customers of the banks.
Freedom Express, Inc. (Express), owned by the Company since 1994, was
chartered in Ohio in 1984. Express is a courier company formed to transport
papers and documents between and among the states of Ohio, Pennsylvania and
West Virginia.
Supervision and Regulation
The Company is subject to the provisions of the Bank Holding Company Act of
1956, as amended (the Act), which requires a bank holding company to register
under the Act and to be subject to the regulations of the Board of Governors
of the Federal Reserve System (FRB). Pursuant to Federal Reserve policy, the
Company is expected to act as a source of financial strength to each
subsidiary bank and to commit resources to support such banks. As a bank
holding company, the Company is required to file with the Board of Governors
an annual report and such additional information as the Board of Governors may
require pursuant to the Act. The Act requires prior approval by the Board of
Governors of the acquisition by a bank holding company, or any subsidiary
thereof, of more than five percent (5%) of the voting stock or substantially
all the assets of any bank within the United States.
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The Act also prohibits a bank holding company, with certain exceptions, from
acquiring more than five percent (5%) of the voting stock of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. The Board of Governors is also authorized to approve,
among other things, the ownership of shares by a bank holding company in any
company the activities of which the Board of Governors has determined to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. The Board of Governors has, by regulation, determined that
certain activities, including mortgage banking, operating small loan
companies, factoring, furnishing certain data processing operations, holding
or operating properties used by banking subsidiaries or acquired for such
future use, providing certain investment and financial advice, leasing
(subject to certain conditions) real or personal property, providing
management consulting advice to certain depository institutions, providing
securities brokerage services, arranging commercial real estate equity
financing, underwriting and dealing in bank eligible securities, providing
consumer financial counseling, operating a collection agency, owning and
operating a savings association, operating a credit bureau and conducting
certain real estate investment activities and acting as insurance agent for
certain types of insurance, are closely related to banking within the
meaning of the Act. It also has determined that certain other activities,
including real estate brokerage and syndication, land development, and
property management, are not related to credit transactions and are not
permissible. Each of the non-banking activities conducted by the Company
through its financial services affiliates are activities which have been
deemed by the Board of Governors to be closely related to banking within the
meaning of the Act.
The Act and the regulations of the Board of Governors prohibit banks from
engaging in certain tie-in arrangements in connection with any extension of
credit, lease or sale of property, or furnishing of services. The Act also
imposes certain restrictions upon dealing by affiliated banks with the holding
company and among themselves including restrictions on interbank borrowing and
upon dealings in respect to the securities or obligations of the holding
company or other affiliates.
The Company is a legal entity separate and distinct from its banking and other
subsidiaries. Most of the Company's revenues result from dividends paid to it
by its bank subsidiaries. There are statutory and regulatory requirements
applicable to the payment of dividends by subsidiary banks as well as by the
Company to its shareholders.
With the completion of the bank consolidations in January, 1999, the Company's
three remaining bank subsidiaries, Mid Am Bank, Citizens and Ohio Bank are all
Ohio chartered banks and subject to supervision and regular examination by the
Ohio Divisions of Financial Institutions (DFI), and as members of the Federal
Reserve System, are subject to the applicable provisions of the Federal
Reserve Act. The Company's financial service subsidiaries are subject to
various state and federal regulatory bodies and licensing agencies. SII is
subject to regulations of the Federal Reserve Board, the Securities and
Exchange Commission and supervision by the National Association of Securities
Dealers as well as various state securities and insurance regulatory agencies.
SAMSI, MAFSI and MACC are subject to various state licensing requirements and
are subject to the regulations of the Federal Reserve Board. The Company, as
a bank holding company, is subject to supervision and regular examination by
the Federal Reserve System. The deposits of all banking subsidiaries of the
Company are insured by the Federal Deposit Insurance Corporation, to the
extent provided by law, and as such are subject to the provisions of the
Federal Deposit Insurance Act.
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Each Ohio chartered banking association is required by law to obtain the prior
approval of the DFI for the declaration and payment of dividends if the total
of all dividends declared by the board of directors of such bank in any year
will exceed the total of (i) such bank's net profits (as defined and
interpreted by regulation) for that year plus (ii) the retained net profits
(as defined and interpreted by regulation) for the preceding two years.
The payment of dividends by the Company and the Company's subsidiaries is also
affected by various regulatory requirements and policies, such as the
requirement to maintain capital at or above regulatory guidelines. In
addition, if, in the opinion of the applicable regulatory authority, a bank
under its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which, depending on the financial condition of the bank,
could include the payment of dividends), such authority may require, after
notice and hearing, that such bank cease and desist from such practice. The
FRB and the DFI have each indicated that paying dividends that deplete a
bank's capital base to an inadequate level should be an unsafe and unsound
banking practice. The FRB, the DFI and the FDIC have issued policy statements
which provide that bank holding companies and insured banks should generally
only pay dividends out of current operating earnings.
In addition, the information contained in Note 19 "Regulatory Matters" on
pages S-51 through S-53 of the Company's 1998 Annual Report Supplement is
incorporated by reference in response to this item.
Employees
As of December 31, 1998, the Company and its subsidiaries had approximately
2,271 full-time equivalent employees. The Company considers its and its
subsidiaries' employee relations to be good. None of the employees are
covered by a collective bargaining agreement.
Certain Statistical Information Regarding the Company
Certain financial and statistical information relative to the Company as
required under the Securities and Exchange Commission's Industry Guide 3,
"Statistical Disclosure By Bank Holding Companies," and related discussion is
incorporated by specific references to portions of the Company's 1998 Annual
Report Supplement as indicated below.
<TABLE>
<CAPTION>
Page in 1998 Annual
Report Supplement*
<S> <C>
Net Interest Income; Average Balance Sheets
and Related Yields and Rates; Volume and
Rate Variance Analysis ........................ S-8-10
Securities ...................................... S-17-18
Loan Portfolio; Risk Elements in Loan Portfolio.. S-13-15
Summary of Credit Loss Experience ............... S-16-17
Deposits ........................................ S-18
Financial Ratios ................................ S-6
</TABLE>
* Incorporated by reference from the indicated pages of the Company's 1998
Annual Report Supplement.
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Item 2. PROPERTIES
The Company's executive offices are located in Bowling Green, Ohio. The bank
subsidiaries operate 156 banking centers, the majority of which are owned,
with the remaining banking centers under lease agreements, including 13 leased
from Bancsites, Inc. (Bancsites) under long-term lease agreements. Bancsites
was a wholly-owned subsidiary of Mid Am Bank until 1977, when Mid Am Bank
distributed all shares of Bancsites to its shareholders. Certain senior
management officials of Bancsites also serve as senior management officials of
Mid Am Bank. Also, the information contained in Note 5 "Bank Premises and
Equipment" on page S-40 of the Company's 1998 Annual Report Supplement is
incorporated herein by reference in response to this item.
Item 3. LEGAL PROCEEDINGS
The information contained in Note 16 "Contingencies" on page S-50 of the
Company's 1998 Annual Report Supplement is incorporated herein by reference
in response to this item.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 1, 1998, at a Special Meeting of Shareholders of the Company,
shareholders took the following actions:
1. Approved and adopted the Amended and Restated Agreement and Plan of
Merger, dated as of August 5, 1998, between Bancshares and Mid Am,
pursuant to which Bancshares and Mid Am would be combined in a merger
of equals transaction: 13,924,707 votes cast for, 569,584 votes cast
against, 289,736 votes withheld.
2. Amended the Bancshares Articles of Incorporation to repeal the control
share acquisition provision set forth in Article Sixth thereof:
13,562,784 votes cast for, 755,152 votes cast against, 466,091 votes
withheld.
3. Approved and adopted the Amended and Restated 1998 Non-Statutory Stock
Option Plan for Non-Employee Directors: 12,479,795 votes cast for,
1,890,499 votes cast against, 413,733 votes withheld.
4. Approved and adopted the 1998 Stock Option Plan for Employees:
13,376,499 votes cast for, 988,102 votes cast against, 419,426 votes
withheld.
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PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
The information contained under the caption "SHAREHOLDER INFORMATION" on page
S-3 and the information contained in Note 19 "Regulatory Matters" on pages
S-51 through S-53 of the Company's 1998 Annual Report Supplement is
incorporated herein by reference in response to this item. The Company's
common stock is traded on the NASDAQ National Market System under the symbol
"SKYF." At February 28, 1999, there were approximately 17,993 holders of
record of the Company's common stock.
Item 6. SELECTED FINANCIAL DATA
The information contained under the caption "SKY FINANCIAL GROUP, INC. SUMMARY
OF FINANCIAL DATA" on page S-6 of the Company's 1998 Annual Report Supplement
is incorporated herein by reference in response to this item.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information contained under the caption "MANAGEMENT'S DISCUSSION AND
ANALYSIS AND STATISTICAL INFORMATION" on pages S-7 through S-24 of the
Company's 1998 Annual Report Supplement is incorporated herein by reference in
response to this item.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained under the caption " MANAGEMENT'S DISCUSSION AND
ANALYSIS AND STATISTICAL INFORMATION" on pages S-22 and S-23 of the
Company's 1998 Annual Report Supplement is incorporated herein by reference in
response to this item.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information contained under the caption "SKY FINANCIAL GROUP, INC.
SELECTED QUARTERLY DATA" on page S-5 and the audited financial statements
contained on pages S-25 through S-56 of the Company's 1998 Annual Report
Supplement is incorporated herein by reference in response to this item.
With the exception of the aforementioned information and the information
incorporated in Items 5, 6, 7 and 14, the Company's 1998 Annual Report
Supplement to Shareholders is not to be deemed filed as part of this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
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PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information contained under the captions "ELECTION OF DIRECTORS" on pages
1 through 4 and "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" on
page 17 of the Company's 1999 Proxy Statement filed with the Securities and
Exchange Commission on March 10, 1999, is incorporated herein by reference in
response to this item.
The following table sets forth the names and ages and business experience of
each of the executive officers of the Company. Each executive officer of the
Company is appointed by the Board of Directors on an annual basis, and serves
at the pleasure of the Board.
<TABLE>
<CAPTION>
Position With Company or Officer
Executive Officer Age Subsidiary and Experience Since*
<S> <C> <C> <C>
David R. Francisco 52 Chairman and Chief Executive 1970
Officer of the Company;
formerly President and Chief
Operating Officer of Mid Am
Marty E. Adams 46 President and Chief Operating 1977
Officer of the Company;
formerly Vice Chairman of the
Board, President and Chief
Executive Officer of Bancshares
and Citizens
Frank J. Koch 45 Executive Vice President and 1988
Senior Credit Officer of the
Company; formerly Executive
Vice President of Bancshares
W. Granger Souder 38 Executive Vice President and 1989
General Counsel of the Company;
formerly Executive Vice President
and General Counsel of Mid Am;
formerly employed as a securities
attorney in private practice
Kevin T. Thompson 45 Executive Vice President and 1998
Chief Financial Officer of the
Company; formerly Senior Vice
President/Controller of First
of America Bank Corporation
James F. Burwell 48 Chief Operating Officer of Ohio 1980
Bank; formerly President and
Chief Executive Officer of First
National; formerly President and
Chief Operating Officer of First
National
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Jack W. Donaldson 58 President and Chief Executive 1981
Officer of Ohio Bank; formerly
Executive Vice President and Chief
Operating Officer of Ohio Bank
Richard L. Hardgrove 60 President and Chief Executive 1998
Officer of Citizens; formerly
Deputy Superintendent of the
Ohio Division of Financial
Institutions; formerly Chief
Operating Officer of First
Bancorporation
Patrick A. Kennedy 52 President and Chief Executive 1981
Officer of Mid Am Bank; formerly
Executive Vice President/Lending
of Mid Am Bank; formerly Senior
Vice President/Lending of
First National
</TABLE>
* Includes period in which executive officer was an officer of a subsidiary or
acquired company.
Item 11. EXECUTIVE COMPENSATION
The information contained under the captions "COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION" and "EXECUTIVE COMPENSATION" on pages 8 through 17
of the Company's 1999 Proxy Statement filed with the Securities and Exchange
Commission on March 10, 1999, is incorporated herein by reference in response
to this item.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information contained under the captions "ELECTION OF DIRECTORS" on pages
1 through 4, "BENEFICIAL OWNERSHIP OF THE COMPANY'S COMMON STOCK" on pages 6
through 8 and "EXECUTIVE COMPENSATION" on pages 12 through 17 of the Company's
1999 Proxy Statement filed with the Securities and Exchange Commission on
March 10, 1999, is incorporated herein by reference in response to this item.
The Company has no knowledge of any person or any group (as defined in Section
13.d.3 of the Securities Exchange Act of 1934) which owns in excess of five
percent of the outstanding common stock of the Company.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "CERTAIN TRANSACTIONS" on page
17 of the Company's 1999 Proxy Statement filed with the Securities and
Exchange Commission on March 10, 1999, is incorporated herein by reference in
response to this item.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Page in 1998 Annual
Report Supplement*
(1) Financial Statements:
Report of Independent Auditors .................. S-25
Consolidated Balance Sheets at
December 31, 1998 and 1997 .................... S-26
Consolidated Statements of Income for
the three years ended December 31, 1998 ....... S-27
Consolidated Statements of Changes in
Shareholders' Equity for the three years
ended December 31, 1998 ....................... S-28
Consolidated Statements of Comprehensive Income
for the three years ended December 31, 1998 ... S-29
Consolidated Statements of Cash Flows for
the three years ended December 31, 1998 ....... S-30
Notes to Consolidated Financial Statements ...... S-31-56
* Incorporated by reference from the indicated pages of the 1998 Annual Report
Supplement. All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
The following Exhibits required by Item 601 of Regulation S-K are filed as part
of this report:
Exhibit
Number Exhibit
2.1 Agreement and Plan of Merger dated as of December 14, 1998 by and between
Sky Financial Group, Inc. and First Western Bancorp, Inc.
2.2 Agreement and Plan of Merger dated as of December 16, 1998 by and between
Sky Financial Group, Inc, and Wood Bancorp, Inc.
3.1 Company's Fifth Amended Articles of Incorporation
3.2 Amendment to the Fifth Amended Articles of Incorporation of the Company
3.3 Company's Code of Regulations, as amended
3.4 Amendment to the Code of Regulations of the Company
4.1 Shareholder Rights Agreement dated as of July 21, 1998, between the
Company and The Citizens Banking Company, as Rights Agent
10.1 The Company's Amended and Restated 1998 Stock Option Plan for Nonemployee
Directors
10.2 The Company's 1998 Stock Option Plan for Employees
10.3* Sky Financial Group, Inc. Non-Qualified Retirement Plan
10.4 Stock Option Agreement effective as of December 15, 1998, by and between
Sky Financial Group, Inc. and First Western Bancorp, Inc.
10.5 Stock Option Agreement dated as of December 16, 1998, by and between Sky
Financial Group, Inc. and Wood Bancorp, Inc.
10.6* Form of Indemnification Agreement between the Company and individual
directors, certain officers and representatives.
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10.7 Employment Agreement between the Company and David R. Francisco
10.8 Employment Agreement between the Company and Marty E. Adams
10.9* Letter agreement between the Company and Jack W. Donaldson dated December
22, 1998.
10.10 Employment Agreement by and among the Company, The Citizens Banking
Company, Century National Bank and Trust Company and Joseph N. Tosh,
II
10.11* Agreement by and among the Company, The Citizens Banking Company and
Frank J. Koch.
10.12* Form of Change in Control Agreement between the Company and certain
officers of the Company.
11.1 Statement Re: Computation of Per Share Earnings
13 The Company's 1998 Annual Report Supplement
18.0 Change in Accounting Principle
20.1 The Company's Proxy Statement dated March 19, 1999 for its 1999 Annual
Meeting
21.1* Subsidiaries of the Company
23.1 Consent of Independent Auditors
24.1* Power of Attorney
27.1* Financial Data Schedule (1998)
27.2* Financial Data Schedule (1997)
27.3* Financial Data Schedule (1996)
* Incorporated by reference to the Form 10-K of the Company filed with the
Securities and Exchange Commission as of March 16, 1999.
(b) Reports on Form 8-K
On October 15, 1998, the Company filed a current report on Form 8-K regarding
the October 2, 1998 consummation of the merger of Mid Am, Inc. into Citizens
Bancshares, Inc., the change of Bancshares' name to Sky Financial Group, Inc.
and the reporting of financial statements and related information giving
effect to the merger.
On October 16, 1998, the Company filed a current report on Form 8-K regarding
the October 2, 1998 consummation of the merger of Mid Am, Inc. into Citizens
Bancshares, Inc., and the reauthorization by the Board of Directors of the
Company's common stock repurchase plan.
On December 14, 1998, the Company filed a current report on Form 8-K regarding
the announcement of the Company and First Western Bancorp, Inc. signing a
definitive agreement to merge.
On December 21, 1998, the Company filed a current report on Form 8-K regarding
the December 4, 1998 completion of its affiliation of The Ohio Bank.
On December 28, 1998, the Company filed a current report on Form 8-K regarding
the December 17, 1998 announcement of the Company and Wood Bancorp, Inc.
signing a definitive agreement to merge.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SKY FINANCIAL GROUP, INC.
BY: /s/ Kevin T. Thompson
Kevin T. Thompson
Executive Vice President and
Chief Financial Officer
May 12, 1999
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signatures
David R. Francisco Director/Chairman/C.E.O.
*
Marty E. Adams Director/President/C.O.O. March 1, 1999
Kevin T. Thompson Exec. Vice Pres./C.F.O.
*
Gerald D. Aller Director March 1, 1999
*
David A. Bryan Director March 1, 1999
*
Keith D. Burgett Director March 1, 1999
*
George N. Chandler, II Director March 1, 1999
*
Willard L. Davis Director March 1, 1999
*
Del E. Goedeker Director March 1, 1999
*
D. James Hilliker Director March 1, 1999
*
Richard R. Hollington, Jr. Director March 1, 1999
14
<PAGE> 15
*
Fred H. Johnson, III Director March 1, 1999
*
H. Lee Kinney Director March 1, 1999
*
Marilyn O. McAlear Director March 1, 1999
*
James C. McBane Director March 1, 1999
*
Kenneth E. McConnell Director March 1, 1999
*
Gerard P. Mastroianni Director March 1, 1999
*
Thomas S. Noneman Director March 1, 1999
*
Edward J. Reiter Director March 1, 1999
*
Patrick W. Rooney Director March 1, 1999
*
Emerson J. Ross,Jr. Director March 1, 1999
*
Douglas J. Shierson Director March 1, 1999
*
C. Gregory Spangler Director March 1, 1999
*
Robert E. Stearns Director March 1, 1999
*
Glenn F. Thorne Director March 1, 1999
*
Joseph N. Tosh, II Director March 1, 1999
* The undersigned attorney-in-fact, by signing his name below, does hereby
sign this Report on Form 10-K on behalf of the above-named officers and
directors pursuant to a power of attorney executed by such persons and filed
with the Securities and Exchange Commission contemporaneously herewith.
BY: /s/ Kevin T. Thompson
Kevin T. Thompson
Attorney-In-Fact
May 12, 1999
15
<PAGE> 16
FORM 10-K
EXHIBIT INDEX
Exhibit
Number Exhibit
2.1 Agreement and Plan of Merger dated as of December 14, 1998 by and
between Sky Financial Group, Inc. and First Western Bancorp, Inc.
(incorporated by reference to Exhibit 2 to the Form 8-K of the
Company filed with the Securities and Exchange Commission as of
December 14, 1998).
2.2 Agreement and Plan of Merger dated as of December 16, 1998 by and
between Sky Financial Group, Inc. and Wood Bancorp, Inc.
(incorporated by reference to Exhibit 2 to the Form 8-K of the
Company filed with the Securities and Exchange Commission as of
December 28, 1998).
3.1 Company's Fifth Amended Articles of Incorporation
(incorporated by reference to Exhibit 3.1 of Form S-4 Registration
Statement No. 333-60741 of the Company).
3.2 Amendment to the Fifth Amended Articles of Incorporation of the
Company (incorporated by reference to Appendix B of the Joint
Proxy Statement/Prospectus in Form S-4 Registration Statement
No. 333-60741 of the Company).
3.3 Company's Code of Regulations, as amended
(incorporated by reference to Exhibit 3(2) of Form S-4 Registration
Statement No. 0-18209 of the Company).
3.4 Amendment to the Code of Regulations of the Company
(incorporated by reference to Appendix C of the Joint Proxy
Statement/Prospectus in Form S-4 Registration Statement
No. 333-60741 of the Company).
4.1 Shareholder Rights Agreement dated as of July 21, 1998, between the
Company and The Citizens Banking Company, as Rights Agent
(incorporated by reference to Exhibit 4 of Form S-4 Registration
Statement No. 333-60741 of the Company).
10.1 The Company's Amended and Restated 1998 Stock Option Plan for
Nonemployee Directors
(incorporated by reference to Appendix G of the Joint Proxy
Statement/Prospectus in Form S-4 Registration Statement
No. 333-60741 of the Company).
10.2 The Company's 1998 Stock Option Plan for Employees
(incorporated by reference to Appendix H of the Joint Proxy
Statement/Prospectus in Form S-4 Registration Statement
No. 333-60741 of the Company).
10.3* Sky Financial Group, Inc. Non-Qualified Retirement Plan
(As Amended and Restated Effective January 1, 1999).
10.4 Stock Option Agreement effective as of December 15, 1998, by and
between Sky Financial Group, Inc. and First Western Bancorp, Inc.
(incorporated by reference to Exhibit 99 of Schedule 13D filed
by the Company as of December 24, 1998).
10.5 Stock Option Agreement dated as of December 16, 1998, by and
between Sky Financial Group, Inc. and Wood Bancorp, Inc.
(incorporated by reference to Exhibit B of Schedule 13D filed
by the Company as of December 28, 1998).
16
<PAGE> 17
Exhibit Index (continued)
10.6* Form of Indemnification Agreement between the Company and
individual directors, certain officers and representatives.
10.7 Employment Agreement between the Company and David R. Francisco
(incorporated by reference to Exhibit 10.2 of Form S-4
Registration Statement No. 333-60741 of the Company).
10.8 Employment Agreement between the Company and Marty E. Adams
(incorporated by reference to Exhibit 10.3 of Form S-4
Registration Statement No. 333-60741 of the Company).
10.9* Letter agreement between the Company and Jack W. Donaldson dated
December 22, 1998.
10.10 Employment Agreement by and among the Company, The Citizens Banking
Company, Century National Bank and Trust Company and
Joseph N. Tosh, II
(incorporated by reference to Exhibit 10(18) of the Form 10-Q
of the Company for the quarter ended June 30, 1998).
10.11* Agreement by and among the Company, The Citizens Banking Company
and Frank J. Koch.
10.12* Form of Change in Control Agreement between the Company and certain
officers of the Company.
11.1 Statement Re: Computation of Per Share Earnings
(incorporated by reference from the information contained in
Note 10 "Earnings Per Share" on page S-44 of the Company's
1998 Annual Report Supplement). See Exhibit 13.1
13 The Company's 1998 Annual Report Supplement
(except for the portions of the report expressly incorporated
by reference, the report is furnished solely for the information
of the Commission and is not deemed "filed" as part hereof).
18.0 Change in Accounting Principle
(incorporated by reference from the information contained in
Note 1 "Summary of Significant Accounting Policies" on
pages S-31 through S-35 of the Company's 1998 Annual Report
Supplement). See Exhibit 13.1
20.1 The Company's Proxy Statement for its 1999 Annual Meeting
(incorporated by reference from the information contained in
the Company's 1999 Proxy Statement filed with the Securities
and Exchange Commission on March 10, 1999).
21.1* Subsidiaries of the Company
23.1 Consent of Independent Accountants
24.1* Power of Attorney
27.1* Financial Data Schedule (1998)
27.2* Financial Data Schedule (1997)
27.3* Financial Data Schedule (1996)
* Incorporated by reference to the Form 10-K of the Company filed with the
Securities and Exchange Commission as of March 16, 1999.
17
<PAGE> 1
EXHIBIT 13
1998
ANNUAL REPORT SUPPLEMENT
Sky Financial Group LOGO
<PAGE> 2
SKY FINANCIAL GROUP, INC.
1998 ANNUAL REPORT SUPPLEMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
CONTENTS PAGE
- ------------------------------------------------------------------
<S> <C>
A Message to our Shareholders............................... S-1
Financial Highlights........................................ S-2
Shareholder Information..................................... S-3
Corporate Information....................................... S-4
Selected Quarterly Data..................................... S-5
Sky Financial Group, Inc. Summary of Financial Data......... S-6
Management's Discussion and Analysis and Statistical
Information............................................... S-7
Report of Independent Auditors.............................. S-25
Consolidated Balance Sheets................................. S-26
Consolidated Statements of Income........................... S-27
Consolidated Statements of Changes in Shareholders'
Equity.................................................... S-28
Consolidated Statements of Comprehensive Income............. S-29
Consolidated Statements of Cash Flows....................... S-30
Notes to Consolidated Financial Statements.................. S-31
- ------------------------------------------------------------------
</TABLE>
A MESSAGE TO OUR SHAREHOLDERS
This Annual Report Supplement to our Proxy Statement contains our audited
financial statements, management's discussion and analysis and other information
previously presented in our annual report to shareholders. This Supplement
contains all of the information that regulations of the Securities and Exchange
Commission (the "SEC") requires to be presented in annual reports to
shareholders. For legal purposes, this Supplement is part of the Sky Financial
Group, Inc. Annual Report to Shareholders. Although attached to our Proxy
Statement, this Supplement is not part of our Proxy Statement, is not deemed to
be soliciting material, and is not deemed to be filed with the SEC except to the
extent that it is expressly incorporated by reference in a document filed with
the SEC.
Our 1998 Annual Report to Shareholders accompanies the Proxy Statement. That
report presents the financial results of our company in a format and level of
detail that we believe our shareholders will find useful and informative.
Shareholders who would like to receive more detail than provided in the
following Annual Report Supplement are invited to request our Annual Report on
Form 10-K.
Our Annual Report on Form 10-K, as filed with the SEC, will be provided without
charge to any shareholder upon written request to Sky Financial Group, Inc.
Shareholder Relations Department, 10 East Main Street, Salineville, Ohio 43945.
S-1
<PAGE> 3
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(Dollars in thousands, Percentage
except per share and ratio data) 1998 1997 Change
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
FOR THE YEAR
Operating earnings(1)............................ $ 65,787 $ 57,934 13.6%
Net income....................................... 17,808 59,320 (70.0)
Return on average assets(1)...................... 1.40% 1.31%
Return on average common equity(1)............... 17.31 15.66
PER COMMON SHARE DATA
Diluted operating earnings(1).................... $ 1.44 $ 1.24 16.1%
Basic net income................................. 0.39 1.29 (69.8)
Diluted net income............................... 0.39 1.27 (69.3)
Dividends........................................ 0.65 0.51 27.5
Book value at year end........................... 7.64 8.45 (9.6)
AT YEAR END
Assets........................................... $4,815,121 $4,562,303 5.5%
Loans............................................ 3,355,881 3,144,439 6.7
Deposits......................................... 3,832,662 3,662,941 4.6
Shareholders' equity............................. 343,842 387,278 (11.2)
AVERAGE FOR THE YEAR
Assets........................................... $4,705,789 $4,411,975 6.7%
Loans............................................ 3,269,830 3,086,137 6.0
Deposits......................................... 3,749,280 3,568,474 5.1
Shareholders' equity............................. 380,120 376,398 1.0
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
QUARTERLY FINANCIAL HIGHLIGHTS First Second Third Fourth
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
1998
Net interest income........................... $45,669 $47,047 $46,770 $47,638
Provision for credit losses................... 1,976 4,411 2,272 16,309
Net income.................................... 13,217 15,404 16,833 (27,646)
Operating earnings(1)......................... 16,067 15,997 16,833 16,890
Basic net income per share.................... $ 0.29 $ 0.34 $ 0.37 $ (0.61)
Diluted net income per share.................. 0.29 0.34 0.37 (0.61)
Diluted operating earnings per share(1)....... 0.35 0.35 0.37 0.37
1997
Net interest income........................... $43,998 $45,045 $45,571 $46,000
Provision for credit losses................... 2,762 1,740 2,138 4,288
Net income.................................... 16,836 14,838 15,289 12,357
Operating earnings(1)......................... 13,368 14,838 15,419 14,309
Basic net income per share.................... $ 0.37 $ 0.32 $ 0.33 $ 0.27
Diluted net income per share.................. 0.36 0.32 0.33 0.27
Diluted operating earnings per share(1)....... 0.28 0.32 0.33 0.31
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) For comparability purposes, certain ratios and financial data exclude
non-recurring gains, merger and restructuring expenses and merger related
provisions for credit losses. After-tax non-recurring items reduced net
income $48.0 million in 1998 and increased net income $1.4 million in 1997.
S-2
<PAGE> 4
SHAREHOLDER INFORMATION
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
QUARTERLY COMMON STOCK PRICES, Book Dividend
DIVIDENDS AND YIELDS Value per per Dividend
1998 High Low Share Share Yield
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Fourth Quarter............................... $32.00 $25.23 $7.64 $0.21 2.94%
Third Quarter................................ 33.19 23.19 8.59 0.145 2.06
Second Quarter............................... 34.31 27.95 8.31 0.145 1.86
First Quarter................................ 34.66 31.25 8.22 0.145 1.76
1997
- ----------------------------------------------------------------------------------------------------
Fourth Quarter............................... $34.55 $23.75 $8.45 $0.14 1.92%
Third Quarter................................ 25.00 23.41 8.29 0.13 2.15
Second Quarter............................... 25.34 16.48 8.01 0.12 2.31
First Quarter................................ 18.06 14.77 7.89 0.12 2.93
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
STOCK INFORMATION Common
At December 31, 1998 Stock
<S> <C>
- --------------------------------------------------------------------------
Shares authorized........................................... 150,000,000
Shares issued............................................... 45,082,890
Treasury shares............................................. 57,063
Number of shareholders of record............................ 18,264
Closing market price per share.............................. $26.44
Book value per share........................................ $7.64
Stock exchange.............................................. NASDAQ
Stock symbol................................................ SKYF
- --------------------------------------------------------------------------
</TABLE>
DIVIDEND REINVESTMENT PLAN
The Company offers a Dividend Reinvestment Plan which allows shareholders to
reinvest their Sky Financial Group, Inc. dividends in additional Company common
stock at the prevailing market price. The plan has 5,950 participants, or 32.6
percent of our common shareholders of record. Plan information may be obtained
by calling the Shareholder Relations Department at (800) 576-5007, or by
writing: Sky Financial Group, Inc. Dividend Reinvestment Plan, 10 East Main
Street, Salineville, Ohio 43945.
S-3
<PAGE> 5
CORPORATE INFORMATION
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Annual Meeting
Place:....................... Renaissance Cleveland Hotel Date: April 21, 1999
Cleveland, Ohio Time: 9:30 a.m.
Headquarters
Write:....................... Sky Financial Group, Inc. Telephone: (419) 327-6300
221 South Church Street
P.O. Box 428
Bowling Green, Ohio 43402
Shareholder Relations
and Form 10-K
Write:....................... Sky Financial Group, Inc. Telephone: (800) 576-5007
Shareholder Relations Department
10 East Main Street
Salineville, Ohio 43945
Investor Relations
Write:....................... Kelly Semer Telephone: (419) 327-6305
Sky Financial Group, Inc.
221 South Church Street
P. O. Box 428
Bowling Green, Ohio 43402
Transfer Agent
Write:....................... The Bank of New York Telephone: (888) 683-4901
Receive and Deliver Dept.-11W
P. O. Box 11002
Church Street Station
New York, New York, 10286
Online Information
Internet:.................... Information concerning the
Company and its affiliates can
also be found on our website at
http://www.skyfi.com
</TABLE>
S-4
<PAGE> 6
SELECTED QUARTERLY DATA
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Quarter Ended
(Dollars in thousands,
except per share data) December 31 September 30 June 30 March 31
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
1998
Net interest income..................... $47,638 $46,770 $47,047 $45,669
Provision for credit losses............. 16,309 2,272 4,411 1,976
Net income (loss)....................... (27,646) 16,833 15,404 13,217
Earnings (loss) per common share:
Basic................................. (0.61) 0.37 0.34 0.29
Diluted............................... (0.61) 0.37 0.34 0.29
Return on average total assets(1)....... -- 1.41% 1.32% 1.17%
Return on average common shareholders'
equity(1)............................. -- 17.54 16.68 14.21
- --------------------------------------------------------------------------------------------
1997
Net interest income..................... $46,000 $45,571 $45,045 $43,998
Provision for credit losses............. 4,288 2,138 1,740 2,762
Net income.............................. 12,357 15,289 14,838 16,836
Earnings per common share:
Basic................................. 0.27 0.33 0.32 0.37
Diluted............................... 0.27 0.33 0.32 0.36
Return on average total assets(1)....... 1.09% 1.35% 1.36% 1.60%
Return on average common shareholders'
equity(1)............................. 12.98 16.06 16.44 18.95
- --------------------------------------------------------------------------------------------
</TABLE>
(1) Calculated on an annualized basis.
The following discussion and analysis represents a review of Sky Financial
Group, Inc.'s consolidated financial condition and results of operations. Sky
Financial Group, Inc. (the "Company"), a financial services holding company, had
five bank subsidiaries: The Citizens Banking Company ("Citizens"), Mid American
National Bank and Trust Company ("Mid Am Bank"), The Ohio Bank ("Ohio Bank"),
First National Bank Northwest Ohio ("First National"), and Adrian State Bank
("Adrian"); a collection and credit services company, Sky Asset Management
Services, Inc. ("SAMSI"); a securities broker/dealer, Sky Investments, Inc.
("SII"); a data processing company, Sky Technology Resources, Inc. ("Sky Tech");
a commercial finance company, Mid Am Credit Corp. ("MACC"); a consumer finance
company, Mid Am Financial Services, Inc. ("MAFSI"); a mortgage brokerage
company, Simplicity Mortgage Consultants, Inc. ("Simplicity"); a national trust
bank, Mid Am Private Trust, N.A. ("MAPT"); 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. First National and Adrian merged into Mid Am Bank in January of
1999. This review should be read in conjunction with the consolidated financial
statements and other financial data presented elsewhere herein.
S-5
<PAGE> 7
The major components of the Company's results of operations and statements
of condition and selected financial ratios for the past five years are
summarized in the following table:
SKY FINANCIAL GROUP, INC. SUMMARY OF FINANCIAL DATA
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
(Dollars in thousands, except shares,
per share and ratio data) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME DATA:
Interest income.............................. $ 363,680 $ 347,531 $ 323,050 $ 307,848 $ 267,901
Interest expense............................. 176,556 166,917 150,936 144,520 110,690
---------- ---------- ---------- ---------- ----------
Net interest income.......................... 187,124 180,614 172,114 163,328 157,211
Provision for credit losses.................. 24,968 10,928 7,713 6,472 4,988
---------- ---------- ---------- ---------- ----------
Net interest income after provision for
credit losses.............................. 162,156 169,686 164,401 156,856 152,223
Other income................................. 97,214 82,167 62,244 46,612 42,735
Other expenses............................... 232,708 164,783 149,131 132,053 131,678
---------- ---------- ---------- ---------- ----------
Income before income taxes................... 26,662 87,070 77,514 71,415 63,280
Income taxes................................. 8,854 27,750 24,364 22,348 19,329
---------- ---------- ---------- ---------- ----------
Net income................................... $ 17,808 $ 59,320 $ 53,150 $ 49,067 $ 43,951
========== ========== ========== ========== ==========
Net income available to common
shareholders............................... $ 17,808 $ 58,715 $ 50,743 $ 46,316 $ 41,034
========== ========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA: (1)
Basic net income............................. $ 0.39 $ 1.29 $ 1.14 $ 1.03 $ 0.92
Diluted net income........................... 0.39 1.27 1.11 1.01 0.91
Cash dividends declared...................... 0.65 0.51 0.38 0.23 0.14
Shareholders' equity, period end............. 7.64 8.45 7.77 7.31 6.38
Weighted average shares outstanding basic.... 45,124,000 45,402,000 44,510,000 44,876,000 44,825,000
Weighted average shares outstanding
diluted.................................... 45,686,000 46,699,000 47,812,000 48,435,000 48,512,000
- -----------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CONDITION DATA
(YEAR END):
Total assets................................. $4,815,121 $4,562,303 $4,263,034 $4,088,793 $3,849,371
Securities available for sale................ 996,426 961,199 901,640 906,031 402,552
Securities held to maturity.................. -- 87,207 88,371 74,851 560,790
Loans held for sale.......................... 77,471 19,314 23,995 20,318 14,213
Loans, net of unearned income................ 3,355,881 3,144,439 2,932,396 2,694,889 2,581,681
Allowance for credit losses.................. 54,008 40,376 35,401 33,315 33,690
Deposits..................................... 3,832,662 3,662,941 3,551,726 3,436,990 3,198,225
Total shareholders' equity................... 343,842 387,278 377,195 362,953 326,639
- -----------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS:
Return on average assets..................... 0.38% 1.34% 1.28% 1.24% 1.17%
Return on average common shareholders'
equity..................................... 4.68 16.04 15.33 15.02 14.51
Dividend pay-out ratio....................... 173.64 42.62 41.35 39.82 36.76
Net interest margin, fully taxable
equivalent................................. 4.37 4.48 4.55 4.51 4.57
Average loans to average deposits............ 87.21 86.48 80.94 79.68 77.73
Average shareholders' equity to average
assets..................................... 8.08 8.53 8.81 8.75 8.60
Allowance for credit losses to period end
loans...................................... 1.61 1.28 1.21 1.24 1.30
Allowance for loan losses to total non-
performing loans........................... 431.68 348.25 347.72 225.44 228.44
Non-performing loans to period end loans..... 0.37 0.37 0.35 0.55 0.57
Net charge-offs to average loans............. 0.35 0.19 0.20 0.26 0.17
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Per share data has been restated to reflect the ten percent stock dividend
declared and paid in 1998, 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.)
S-6
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND STATISTICAL INFORMATION
(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
Net income in 1998 was $17,808, as compared to net income in 1997 of
$59,320 and $53,150 in 1996. Diluted earnings per common share were $0.39, down
from $1.27 in 1997 and $1.11 in 1996. Reported net income includes after-tax
non-recurring items which reduced net income $47,979, or $1.05 per diluted
share, in 1998, increased net income $1,386, or $0.03 per diluted share, in 1997
and reduced net income $325, or $0.01 per diluted share, in 1996.
Operating earnings, which exclude the after-tax non-recurring items,
increased 13.6% to $65,787 in 1998, versus $57,934 in 1997 and $53,475 in 1996.
Operating earnings per diluted share for 1998 increased 16.1% to $1.44 from
$1.24 in 1997 and $1.12 in 1996. On this same basis, return on average equity
was 17.31% and return on average assets was 1.40% in 1998 compared to 15.66% and
1.31%, respectively, in 1997 and 15.43% and 1.29%, respectively, in 1996.
The 1998 and 1997 operating earnings improvements reflect continued revenue
growth, expense control and strong asset quality, particularly in the community
banks of Sky Financial Group, Inc. The contribution to earnings from the
fee-based financial service affiliates was modest in 1998, as the Company
continued to invest in developing and expanding these businesses to further
diversify and add to future profitability.
For 1998, after-tax non-recurring items included $38,991 merger and
restructuring expenses, $10,400 provision for credit losses to align allowance
accounting methodologies and policies of the merging companies, and a $1,412
gain related to a favorable legal settlement. In 1997, after-tax non-recurring
items included $5,018 gains from the sale of branches, $1,928 merger and
restructuring expenses and $1,690 provision for credit losses. In 1996,
after-tax non-recurring items included a $2,749 SAIF assessment, $545 merger and
restructuring expenses and a $2,969 gain on the sale of a credit card portfolio.
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 Sky Financial Group, Inc.'s three commercial
banks: Mid Am Bank, Citizens 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, non-conforming mortgage lending,
collection activities, wealth management and other financial related services.
Additional information regarding the Company's business lines and the
financial measurement methodologies is provided in Note 20 of the consolidated
financial statements.
S-7
<PAGE> 9
The Company's business line results for the three years ended December 31,
1998 are summarized in the table below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Net Income (Loss)
------------------------------------
Year ended December 31, 1998 1997 1996
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Community Banking........................................... $ 67,209 $57,690 $53,123
Financial Service Affiliates................................ 978 409 (351)
Parent and Other............................................ (50,379) 1,221 378
-------- ------- -------
Consolidated................................................ $ 17,808 $59,320 $53,150
======== ======= =======
- ----------------------------------------------------------------------------------------------------
</TABLE>
The increase in community banking net income in 1998 and 1997 was primarily
due to strong revenue growth with significant improvement from mortgage banking
activities in each year. The 1998 community banking results reflect a return on
equity of 18.1% and a return on assets of 1.46%.
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 significantly, increasing 45% in 1998 and 68%
in 1997.
Parent and other includes the net funding costs of the parent company and
all significant non-recurring items of income and expense. The 1998 results
reflect the merger and restructuring costs incurred for the mergers completed
during the year. The 1997 results include gains from the sale of branches
partially offset by merger related expenses.
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, rates and composition 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, 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Year ended December 31, 1998 1997 1996
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Net interest income..................................... $187,124 $180,614 $172,114
Taxable equivalent adjustments to net interest income... 5,299 4,814 4,705
-------- -------- --------
Net interest income, fully-taxable equivalent........... $192,423 $185,428 $176,819
======== ======== ========
Net interest margin..................................... 4.25% 4.36% 4.43 %
Taxable equivalent adjustment........................... .12 .12 .12
-------- -------- --------
Net interest margin, fully taxable equivalent........... 4.37% 4.48% 4.55 %
======== ======== ========
- ------------------------------------------------------------------------------------------------------
</TABLE>
The increases in net interest income in 1998 and 1997 were due to growth in
average earning assets, primarily loans, more than offsetting declines in the
net interest margin. In 1998, the net interest margin decreased 11 basis points
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
deposits costs. In 1997, the net interest margin declined 7 basis points,
primarily due to increased funding costs.
S-8
<PAGE> 10
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, 1998, 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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Year Ended December 31, Balance Expense Rates Balance Expense Rates Balance Expense Rates
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets
Interest-earning
deposits.............. $ 13,100 $ 654 4.99% $ 5,586 $ 292 5.23% $ 4,974 $ 284 5.71%
Federal funds sold and
other................. 54,767 2,962 5.41 49,133 2,712 5.52 77,802 4,171 5.36
Securities.............. 1,061,244 66,608 6.28 1,002,668 65,862 6.57 996,958 64,575 6.48
Loans................... 3,269,830 298,755 9.14 3,086,137 283,479 9.19 2,810,238 258,725 9.21
---------- -------- ---------- -------- ---------- --------
Total interest-earning
assets................ 4,398,941 368,979 8.39 4,143,524 352,345 8.50 3,889,972 327,755 8.43
-------- -------- --------
Nonearning assets......... 306,848 268,451 247,253
---------- ---------- ----------
Total assets............ $4,705,789 $4,411,975 $4,137,225
========== ========== ==========
Interest-bearing
liabilities
Demand deposits......... $ 346,133 5,973 1.73 $ 448,969 10,933 2.44 $ 468,802 9,847 2.10
Savings deposits........ 955,981 27,803 2.91 813,934 23,705 2.91 812,185 23,914 2.94
Time deposits........... 2,008,282 112,609 5.61 1,909,610 107,578 5.63 1,841,412 103,527 5.62
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
deposits.............. 3,310,396 146,385 4.42 3,172,513 142,216 4.48 3,122,399 137,288 4.40
Short-term borrowings... 206,234 9,566 4.64 211,228 10,460 4.95 147,050 6,768 4.60
Debt and FHLB
advances.............. 325,267 20,605 6.33 229,219 14,241 6.21 115,988 6,880 5.93
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
liabilities........... 3,841,897 176,556 4.60 3,612,960 166,917 4.62 3,385,437 150,936 4.46
-------- -------- --------
Non-interest-bearing
liabilities............. 483,772 422,617 387,320
Shareholders' equity...... 380,120 376,398 364,468
---------- ---------- ----------
Total liabilities and
equity................ $4,705,789 $4,411,975 $4,137,225
========== ========== ==========
Net interest income, fully
taxable equivalent;
Net interest spread..... $192,423 3.79% $185,428 3.88% $176,819 3.97%
======== ==== ======== ===== ======== ====
Net interest income, fully
taxable equivalent to
earning assets.......... 4.37% 4.48% 4.55%
==== ===== ====
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- - For purposes of this schedule, nonaccrual loans are included in loans.
- - Fees collected on loans are included in interest on loans.
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, 1998. Changes not due solely to either a change in volume or a change
S-9
<PAGE> 11
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>
- -----------------------------------------------------------------------------------------------------
- ---------Year-ended-December-31,-----------------------1998--------------------------1997------------
Change from 1997 in Change from 1996 in
interest income interest income
or expense due to or expense due to
--------------------------- ---------------------------
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Interest income attributable to:
Interest-bearing deposits............... $ 393 $ (31) $ 362 $ 35 $ (27) $ 8
Federal funds sold...................... 311 (61) 250 (1,537) 78 (1,459)
Securities.............................. 3,848 (3,102) 746 370 917 1,287
Loans, net.............................. 16,873 (1,597) 15,276 25,401 (647) 24,754
------- ------- ------- ------- ------- -------
Total interest income........... 21,425 (4,791) 16,634 24,269 321 24,590
------- ------- ------- ------- ------- -------
Interest expense attributable to:
Deposits:
Interest-bearing demand.............. (2,504) (2,456) (4,960) (417) 1,503 1,086
Savings.............................. 4,137 (39) 4,098 51 (260) (209)
Time................................. 5,559 (528) 5,031 3,834 217 4,051
------- ------- ------- ------- ------- -------
Total deposits.................. 7,192 (3,023) 4,169 3,468 1,460 4,928
Short-term borrowings..................... (247) (647) (894) 2,954 738 3,692
Debt and FHLB advances.................... 5,967 397 6,364 6,716 645 7,361
------- ------- ------- ------- ------- -------
Total interest expense.......... 12,912 (3,273) 9,639 13,138 2,843 15,981
------- ------- ------- ------- ------- -------
Net interest income....................... $ 8,513 $(1,518) $ 6,995 $11,131 $(2,522) $ 8,609
======= ======= ======= ======= ======= =======
- -----------------------------------------------------------------------------------------------------
</TABLE>
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.
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.
The provision for credit losses expense for 1998 was $24,968 compared with
$10,928 for 1997 and $7,713 in 1996. The increase in the provision for credit
losses expense in 1998 was attributable to an increase in net loan charge-offs,
the recognition of changes in current risk factors and the Company's application
of its allowance for credit losses methodology (see discussion under "Summary of
Credit Loss Experience"). The allowance for credit losses increased $13,632 in
1998 after increasing $4,975 in 1997. Net charge-offs increased $5,383 in 1998
and $326 in 1997. The increases in both the allowance and net charge-offs were
primarily in merged banks. The Company estimates that additional provisions for
credit losses in merged banks was $16,000 in 1998 and $2,600 in 1997.
S-10
<PAGE> 12
NON-INTEREST INCOME
The table below summarizes the sources of the Company's non-interest
income.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1998 1997
Vs. Vs.
Year ended December 31, 1998 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Trust department income............................ $ 5,434 $ 4,269 $ 3,291 27% 30%
Service charges and fees on deposit accounts....... 15,248 14,691 12,509 4 17
Mortgage banking income............................ 24,501 15,525 12,093 58 28
Brokerage commissions.............................. 9,430 6,083 9,156 55 (34)
Collection agency fees............................. 4,115 5,053 4,213 (19) 20
Net gains (losses) on sales of securities.......... 1,194 (118) 1,553 -- --
Net gains on sales of commercial financing loans... 19,378 13,027 2,992 49 335
Gain on sale of credit card accounts............... -- -- 4,568 -- --
Gain on sale of deposits and branch offices........ -- 8,703 -- -- --
International department fees...................... 965 978 1,011 (1) (3)
Net gains on sales of other loans.................. 732 976 395 (25) 147
Other.............................................. 16,217 12,980 10,463 25 24
------- ------- -------
$97,214 $82,167 $62,244 18% 32%
======= ======= =======
- --------------------------------------------------------------------------------------------------------
</TABLE>
Non-interest revenue grew $15,047, to $97,214 in 1998, increasing 18.3%
compared with $82,167 in 1997, which increased $19,923, or 32%, from $62,244 in
1996. Excluding non-recurring gains of $1,475 in 1998 for a favorable legal
settlement , $7,992 for net gains related to the sale of branches in 1997 and
$4,568 in 1996 for a gain on the sale of credit card accounts, non-interest
revenues increased 29% in both 1998 and 1997. The substantial increase 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.
Mortgage banking, which includes both conventional and non-conforming loan
products, remains the largest component of non-interest income and consists of
net gains on the sales of mortgage loans and mortgage loan servicing fees.
Mortgage banking revenues grew $8,976, or 58% in 1998 and $3,432, or 28% in
1997, the increases were mainly due to higher volumes of mortgage loans sold.
Gains on the sale of commercial financing loans, for medical and dental
businesses, increased $6,351, or 49% in 1998 and $10,035, or 335% in 1997. This
business was initiated in 1996 and the rise in revenues was primarily
attributable to increasing volumes of loans sold and to higher profit margins.
Brokerage commissions on investment and insurance products increased
$3,347, or 55%, in 1998 after decreasing $3,073, or 34% in 1997. The revenue
increase in 1998 was the result of increased volumes created by adding new
independent registered representatives (brokers). The number of registered
representatives decreased in mid-year 1996 after a change in the clearinghouse
used by the Company's broker-dealer subsidiary which lead to the decline in
revenues in 1997.
Trust fees on traditional and new wealth management products grew $1,165,
or 27% in 1998, and $633, or 30% in 1997. The increase was primarily due to
revenues generated through the formation of Mid Am Private Trust in January of
1997.
S-11
<PAGE> 13
Other income increased $3,237 in 1998 and $2,517 in 1997. Contributing to
these increases was the increase in cash surrender values of bank owned life
insurance policies which were purchased beginning in 1997.
NON-INTEREST EXPENSE
Non-interest 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 non-interest expense.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
1998 1997
Vs. Vs.
Year ended December 31, 1998 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Salaries and employee benefits.................... $ 93,639 $ 86,461 $ 71,228 8% 21%
Occupancy and equipment expense................... 26,056 24,245 22,264 7 9
Merger, integration and restructuring expense..... 54,487 1,603 838 -- 91
Brokerage commissions............................. 6,209 3,597 5,604 73 (36)
FDIC expense...................................... 706 714 5,573 (1) (87)
Franchise taxes................................... 4,717 4,547 4,426 4 3
Printing and supplies............................. 3,844 3,853 3,952 -- (3)
Legal and other professional fees................. 7,294 5,767 3,908 26 48
Telephone......................................... 4,912 4,367 4,242 12 3
Amortization of intangible assets................. 2,743 2,957 2,442 (7) 21
Other............................................. 28,101 26,672 24,654 5 8
-------- -------- --------
$232,708 $164,783 $149,131 41% 10%
======== ======== ========
- ----------------------------------------------------------------------------------------------------
</TABLE>
Non-interest expense in 1998 was $232,708 compared with $164,783 in 1997
and $149,131 in 1996. Merger and restructuring charges were $54,487 in 1998 and
$1,603 in 1997 and $838 in 1996. Non-recurring expenses also included $1,415 in
1997, mainly employee related expenses resulting from the sale of branches, and
$4,230 in 1996, for the special assessment on deposits insured through SAIF.
Excluding the merger and restructuring charges, and other non-recurring expenses
and non-interest expense was $178,221 in 1998, an increase of $16,456, or 10%,
from 1997, which increased $17,702, or 12%, from 1996.
Salaries and employee benefits increased $7,178, or 8%, in 1998 and
$15,233, or 21%, in 1997. The increases were primarily attributable to increases
in salary rates, staffing in the financial service affiliates, commissions based
on mortgage loan originations and fee-based products, and incentives and
benefits based on the operating performance of the Company.
Net occupancy and equipment expense increased $1,811, or 7%, in 1998 and
$1,981, or 9%, in 1997, mainly to support the expansion of the Company's
financial service affiliates.
In 1998, the merger and restructuring expenses of $54,487 included costs to
complete the merger transactions, convert and integrate systems and processes,
redesign the workforce, and reorganize the Company. The major portion of this
effort was completed during the fourth quarter of 1998 with the benefits of
reduced expenses to be realized with the beginning of 1999. Further discussion
of the mergers and the related restructuring expenses is included in Notes 2 and
13 of the consolidated financial statements.
INCOME TAXES
The provision for income taxes decreased to $8,854 in 1998 from $27,750 in
1997 due to a decrease in pre-tax income. The effective income tax rates for
1998, 1997 and 1996 were 33.2%, 31.9% and 31.4%. The increase in the effective
tax rate in 1998 resulted from non-tax deductible merger and restructuring costs
incurred in the year. The Company became subject to state income taxes in 1997
because of expansion of its fee-based financial services businesses into new
states.
S-12
<PAGE> 14
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>
- ------------------------------------------------------------------------------------------------------
December 31, 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Real estate loans
Construction.................. $ 149,795 $ 140,656 $ 123,634 $ 108,636 $ 102,738
Residential mortgage.......... 1,054,290 1,047,112 1,038,177 1,060,767 1,083,420
Non-residential mortgage...... 926,191 782,930 638,950 491,287 442,378
Commercial, financial and
agricultural loans............ 808,004 754,392 761,350 680,052 605,257
Installment and credit card
loans......................... 409,748 410,170 362,583 345,841 337,467
Other loans..................... 7,853 9,179 7,702 8,306 10,421
---------- ---------- ---------- ---------- ----------
Total Loans........... $3,355,881 $3,144,439 $2,932,396 $2,694,889 $2,581,681
========== ========== ========== ========== ==========
- ------------------------------------------------------------------------------------------------------
Real estate loans
Construction.................. 4.5% 4.5% 4.2% 4.0% 4.0%
Residential mortgage.......... 31.4 33.3 35.4 39.4 42.0
Non-residential mortgage...... 27.6 24.9 21.8 18.2 17.1
Commercial, financial and
agricultural loans............ 24.1 24.0 26.0 25.2 23.4
Installment and credit card
loans......................... 12.2 13.0 12.4 12.8 13.1
Other loans..................... 0.2 0.3 0.3 0.3 0.4
---------- ---------- ---------- ---------- ----------
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, 1998. 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 (24%) 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 (13%) 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.
S-13
<PAGE> 15
The following table shows the amount of commercial, financial and
agricultural loans and real estate construction loans outstanding as of December
31, 1998 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
December 31, 1998 1 Year 1 Yr - 5 Yrs 5 Years Total
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural............. $207,019 $306,235 $294,750 $808,004
Construction....................................... 76,422 28,660 44,713 149,795
-------- -------- -------- --------
Total.................................... $283,441 $334,895 $339,463 $957,799
======== ======== ======== ========
Total due after one year
Fixed rate commercial, financial, agricultural and
construction..................................... $ 90,078 $ 53,159 $143,237
Variable rate commercial, financial, agricultural
and construction................................. 244,817 286,304 531,121
-------- -------- --------
Total.................................... $334,895 $339,463 $674,358
======== ======== ========
- ---------------------------------------------------------------------------------------------------
</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>
- -----------------------------------------------------------------------------------------------------
December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans................................ $10,619 $11,119 $ 9,690 $13,874 $14,419
Restructured loans.............................. 1,892 475 491 904 329
------- ------- ------- ------- -------
Total nonperforming loans....................... 12,511 11,594 10,181 14,778 14,748
Other real estate owned......................... 1,330 767 3,053 2,850 3,384
------- ------- ------- ------- -------
Total nonperforming assets...................... $13,841 $12,361 $13,234 $17,628 $18,132
======= ======= ======= ======= =======
Loans 90 days or more past due and not on
nonaccrual.................................... $ 4,061 $ 4,822 $ 7,395 $ 2,339 $ 4,766
======= ======= ======= ======= =======
Nonperforming loans to total loans.............. 0.37% 0.37% 0.35% 0.55% 0.57%
Nonperforming assets to total loans plus other
real estate owned............................. 0.41 0.39 0.44 0.65 0.69
Allowance for credit losses to total
nonperforming loans........................... 431.68 348.25 347.72 225.44 228.44
Loans 90 days or more past due and not on
nonaccrual to total loans..................... 0.12 0.15 0.25 0.09 0.18
- -----------------------------------------------------------------------------------------------------
</TABLE>
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. All impaired loans, as defined
by SFAS 114, are included in the non-performing loans.
S-14
<PAGE> 16
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.
The Ohio Bank and Mid Am Bank have outstanding lease receivables and loans
with an aggregate outstanding balance at December 31, 1998 of $1,643 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 $1,643 in loans from The Ohio Bank and Mid Am 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 $23,168 and $30,353 at December 31, 1998 and 1997,
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 loans, but believes
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.
Other real estate owned amounted to $1,330 and $767 at December 31, 1998
and 1997, respectively.
As of December 31, 1998, the Company did not have any loan concentrations
which exceeded 10% of total loans.
S-15
<PAGE> 17
SUMMARY OF CREDIT LOSS EXPERIENCE
The following table presents a summary of credit loss experience for the
periods indicated.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
December 31, 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Balance at beginning of the period..... $ 40,376 $35,401 $33,315 $33,690 $32,947
Loans charged-off:
Real estate............................ (3,466) (842) (1,410) (770) (815)
Commercial and agricultural loans...... (6,782) (3,949) (2,944) (5,816) (3,990)
Installment and credit card............ (4,955) (3,853) (4,754) (3,403) (2,638)
Other loans............................ (5) (68) (14) (14)
-------- ------- ------- ------- -------
Total charge-offs...................... (15,208) (8,712) (9,121) (9,989) (7,457)
-------- ------- ------- ------- -------
Recoveries:
Real estate............................ 335 296 384 526 229
Commercial and agricultural loans...... 2,191 1,306 1,863 1,595 1,934
Installment and credit card............ 1,313 1,111 1,191 985 1,049
Other loans............................ 33 46 57 36
-------- ------- ------- ------- -------
Total recoveries....................... 3,872 2,759 3,495 3,142 3,212
-------- ------- ------- ------- -------
Net loans charged-off.................. (11,336) (5,953) (5,627) (6,847) (4,245)
Provision charged to operating
expense.............................. 24,968 10,928 7,713 6,472 4,988
-------- ------- ------- ------- -------
Balance at the end of the period....... $ 54,008 $40,376 $35,401 $33,315 $33,690
======== ======= ======= ======= =======
Ratio of net charge-offs to average
loans outstanding.................... 0.35% 0.19% 0.70% 0.26% 0.17%
Allowance for credit losses to total
loans................................ 1.61 1.28 1.21 1.24 1.30
Allowance for loan losses to total non-
performing loans..................... 431.68 348.25 347.72 225.44 228.44
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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.
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.
At December 31, 1998, the allowance for credit losses was $54,008, or 1.61%
of total loans outstanding, and 432% of total non-performing loans, compared
to an allowance at December 31, 1997 of $40,376, or 1.28% of total loans
outstanding and 348% of total non-performing loans. At year-end 1998, the
allocated portion of the allowance for credit losses was $38,794 compared with
$20,302 at year-end 1997. The increase of $18,492 resulted primarily from
adjusting and extending loss factors for components of each segment within the
loan portfolio. These adjustments mainly applied to banks merged during 1998.
Additional factors contributing to the increase in the allocated allowance
include overall growth in total loans of 6.7%, an increased concentration in
commercial real estate loans (27.6% of total loans at year-end 1998, compared
to 24.9% at year-end 1997), the impact of the downturn in the agribusiness
industry, and non-performing loan levels, which remained constant after 1998
charge-offs greater than historical levels. At year-end 1998, the unallocated
portion of the allowance for credit losses was $15,214 compared with $20,074
at year-end 1997. The decrease of $4,860 was primarily attributable to reduced
estimation risk related to the adjustment of loss factors which increased the
allocated portion of the allowance.
Non-performing loans, at year-end 1998, totaled $13,841, or .37% of total
loans outstanding compared with $12,361 or .37% of total loans outstanding at
year-end 1997. While non-performing loans have remained relatively stable, net
loan charge-offs increased in 1998 to $11,336, or .35% of average total loans,
compared with $5,593, or .19% of total loans, in 1997. The increase in loan
charge-offs was mainly in banks merged in 1998 and primarily in the commercial
real estate and commercial agricultural loan portfolios which increased during
the year.
At December 31, 1998, average annual net charge-offs for the past three
years were .25% of average loans compared with .22% at December 31, 1997.
Based on these averages for net charge-offs, the allowance for credit losses
represented 6.5 years of net credit losses at December 31, 1998 and 5.9 years
of net credit losses at December 31, 1997. Historical net charge-offs may not
be indicative of losses realized in the future.
S-16
<PAGE> 18
The following table sets forth the allocation of the allowance for credit
losses for the periods indicated.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
December 31, 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Construction.......................... $ 693 $ 93 $ 77 $ 53 $ 37
Real estate........................... 6,504 2,110 2,294 1,824 3,800
Commercial, financial and
agricultural........................ 20,647 13,028 10,301 10,892 12,489
Installment and credit card........... 9,130 4,716 4,016 3,378 3,580
Other loans........................... 1,820 355 1,106 474 422
Unallocated........................... 15,214 20,074 17,607 16,694 13,362
------- ------- ------- ------- -------
Total................................. $54,008 $40,376 $35,401 $33,315 $33,690
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SECURITIES
The following tables set forth the fair value of securities available for
sale at the respective year end for each of the last three years and the
aggregate amortized cost of the Company's securities held to maturity at
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Estimated Fair Value
------------------------------
December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities and obligations of U.S. Government
agencies and corporations................................. $244,646 $304,620 $256,897
Obligations of states and political subdivisions............ 110,239 81,319 83,272
Corporate and other securities.............................. 14,911 28,090 16,436
Mortgage-backed securities.................................. 537,473 486,087 494,432
-------- -------- --------
Total debt securities available for sale.................... 907,269 900,116 851,037
Marketable equity securities................................ 89,157 61,083 50,603
-------- -------- --------
Total securities available for sale......................... $996,426 $961,199 $901,640
======== ======== ========
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Amortized Cost
------------------------------
December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SECURITIES HELD TO MATURITY
U.S. Treasury securities and obligations of U.S. Government
agencies and corporations................................. $ -- $ 61,599 $ 60,798
Obligations of states and political subdivisions............ 22,013 23,623
Corporate and other securities.............................. 1,496 1,498
Mortgage-backed securities.................................. 2,099 2,452
-------- -------- --------
Total securities held to maturity........................... $ -- $ 87,207 $ 88,371
======== ======== ========
- --------------------------------------------------------------------------------------------
</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
S-17
<PAGE> 19
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, 1998. 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.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Within 1 Yr 1 - 5 Yrs 5 - 10 Yrs Over 10 Yrs
---------------- ---------------- ---------------- ----------------
December 31, 1998 Amount Yield Amount Yield Amount Yield Amount Yield
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury and U.S. Government agencies and
corporations.................................. $ 79,398 6.50% $150,937 6.32% $ 9,478 7.67% $ 4,835 6.56%
Obligations of states and political
subdivisions.................................. 13,582 6.93 51,817 6.85 29,086 6.90 15,752 7.22
Corporate and other securities.................. 3,037 6.83 8,624 5.96 933 5.70 2,317 1.32
Mortgage-backed securities...................... 10,839 6.44 30,784 6.08 132,521 7.02 363,329 6.90
-------- -------- -------- --------
Total debt securities available for sale........ $106,856 6.55% $242,162 6.39% $172,018 7.03% $386,233 6.88%
======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------
</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, 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand deposits... $ 438,884 $ 395,961 $ 349,774
Interest-bearing demand deposits....... 346,133 448,969 468,802 1.73% 2.44% 2.10%
Savings deposits....................... 955,981 813,934 812,185 2.91 2.91 2.94
Time deposits.......................... 2,008,282 1,909,610 1,841,412 5.61 5.63 5.62
---------- ---------- ----------
Total.................................. $3,749,280 $3,568,474 $3,472,173
========== ========== ==========
- ---------------------------------------------------------------------------------------------------
</TABLE>
The following is a schedule of maturities of time deposits in amounts of
$100,000 or more as of December 31, 1998:
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
December 31, 1998
- ----------------------------------------------------------------------
Three months or less........................................ $165,925
Three through six months.................................... 105,679
Six through twelve months................................... 87,346
Over twelve months.......................................... 99,977
--------
Total....................................................... $458,927
========
- ----------------------------------------------------------------------
</TABLE>
S-18
<PAGE> 20
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, 1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total securities sold under agreement to repurchase
and
Federal funds purchased at period-end.............. $207,458 $182,362 $186,782
Weighted average interest rate at period-end......... 4.43% 4.95% 5.19 %
Maximum outstanding at any month-end during the
year............................................... $231,453 $268,320 $210,294
Average amount outstanding........................... 206,234 211,228 147,050
Weighted average rates during the year............... 4.64% 4.95% 4.60 %
- ---------------------------------------------------------------------------------------
</TABLE>
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, 1998, 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, 1998 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 $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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total adjusted average assets for leverage ratio............ $4,798,176 $4,441,325
Risk-weighted assets and off-balance-sheet financial
instruments for capital ratio............................. 3,893,627 3,442,250
Tier I capital.............................................. 345,122 389,190
Total risk-based capital.................................... 450,025 428,320
Leverage ratio.............................................. 7.2% 8.8 %
Tier I capital ratio........................................ 8.9 11.3
Total capital ratio......................................... 11.6 12.4
- --------------------------------------------------------------------------------------
</TABLE>
S-19
<PAGE> 21
Capital ratios applicable to the Company's main banking subsidiaries at
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Total
Tier I Risk-based
December 31, 1998 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 at period end:
Mid Am Bank............................................... 6.9 7.8 10.2
Citizens.................................................. 5.5 8.4 10.5
Ohio Bank................................................. 6.0 8.2 10.5
First National............................................ 6.0 7.5 10.2
- ---------------------------------------------------------------------------------------------
</TABLE>
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.
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 December 31, 1998,
securities and other short-term investments with maturities of one year or less
totaled $132,880, with additional liquidity provided by the remainder of the
investment portfolio. The banks utilize several short-term and long-term
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 December 31,
1998, these lines of credit enable the banks to borrow up to $482,440, of which
$244,297 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 $15,586 at December 31,
1998.
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 permitted
the Company to borrow up to $25,000 through December 30, 1998. In December 1998,
the agreement was renewed allowing the Company to borrow up to $30,000 through
November 30, 1999, and at December 31, 1998, the full line was utilized. The
Company is currently in the process of renegotiating the agreement to increase
the line of credit to $75,000.
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
were used for general corporate purposes, 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.
S-20
<PAGE> 22
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. In 1998, the Company retired securities with a face value of
$2,900, and at December 31, 1998, securities outstanding totaled $23,600. On or
after June 1, 2017, the remaining 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.
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 repricing distributions as of
December 31, 1998 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. Core deposits and loans with non-contractual maturities are
included in the gap repricing distributions based upon historical patterns of
balance attrition and pricing behavior. The gap repricing distributions also
include principal cash flows from loans and mortgage-backed securities in the
time frames in which they are expected to be received. Mortgage prepayments are
estimated by applying industry median projections of prepayment speeds to
portfolio segments based on coupon range.
Total interest-earning assets exceeded interest-bearing liabilities by
$551,249 at December 31, 1998. This difference was funded through
non-interest-bearing liabilities and shareholders' equity. The table below is
based on contractual maturities and repricing only and includes 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 $156,853. However, repricing of certain
categories of assets and liabilities is subject to competitive and other
influences that are
S-21
<PAGE> 23
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.
<TABLE>
<CAPTION>
- ----------------------------------
Maturity or Next Rate Adjustment Date
-----------------------------------------------
0-3 3-12 1-5 Over 5
December 31, 1998 Months Months Years Years Total
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS (RSA)
Loans and loans held for sale... $1,183,726 $ 774,958 $1,348,205 $126,463 $3,433,352
Securities...................... 145,395 197,183 414,025 239,823 996,426
Federal funds sold.............. 26,024 26,024
Interest-bearing deposits....... 9,851 9,851
---------- ---------- ---------- -------- ----------
Rate sensitive assets........ $1,364,996 $ 972,141 $1,762,230 $366,286 $4,465,653
========== ========== ========== ======== ==========
RATE SENSITIVE LIABILITIES (RSL)
Interest-bearing deposits....... $1,030,618 $1,030,642 $1,277,570 $ 10,345 $3,349,175
Short-term borrowings, debt and
FHLB advances................ 344,796 87,934 118,200 14,299 565,229
---------- ---------- ---------- -------- ----------
Rate sensitive
liabilities............. $1,375,414 $1,118,576 $1,395,770 $ 24,644 $3,914,404
========== ========== ========== ======== ==========
Gap(a).......................... $ (10,418) $ (146,435) $ 366,460 $341,642 $ 551,249
Cumulative gap.................. (10,418) (156,853) 209,607 551,249
Cumulative gap/Total RSA........ (.023)% (3.51)% (4.69)% 12.34%
</TABLE>
- --------------------------------------------------------------------------------
(a) Gap is defined as rate sensitive assets less rate sensitive liabilities and
may be expressed in dollars or as a percentage.
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.
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 1998. 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
S-22
<PAGE> 24
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 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:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Year-end ALCO
One Year Net Interest Income Change 1998 Guidelines
<S> <C> <C>
- ------------------------------------------------------------------------------------
+200 Basis points........................................... (1.4)% (10.0)%
- -200 Basis points........................................... (0.9) (10.0)
- ------------------------------------------------------------------------------------
Net Present Value of Equity Change
- ------------------------------------------------------------------------------------
+200 Basis points........................................... (12.1)% (30.0)%
- -200 Basis points........................................... 10.5 (30.0)
- ------------------------------------------------------------------------------------
</TABLE>
The projected volatility of net interest income and the net present value
of equity rates to a +/- 200 basis points change at December 31, 1998 fall well
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.
Information for certain affiliates was not available for year-end 1997.
YEAR 2000 SOFTWARE INITIATIVES
Since 1996, the affiliates of Sky Financial Group, Inc. have been reviewing
the potential effects of the Year 2000 issue on the Company. Internally, the
Company, though its project staff, has invested more than 15,000 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.
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.
Four federal agencies share the responsibility to make sure financial
institutions are Year 2000 compliant. These agencies are conducting special
examinations of insured banks to see that they are taking the necessary steps to
be prepared for the century date change. The Company and its affiliates are
working closely with these regulators following their specific criteria to
assess our progress in Year 2000 readiness.
The Company's efforts have been directed by a 5-phase plan to be completed
in preparation for the Year 2000. The phases were established by the federal
agencies which regulate financial institutions.
Awareness -- Initially the Year 2000 issue was discussed at all levels of
the corporation for several purposes: to avoid purchasing any new systems which
weren't Year 2000 compliant; to gain the resources necessary to identify and fix
any existing equipment problems; and to consider Year 2000 compliance before
moving forward on all strategic business efforts.
Assessment -- Project teams with representatives from each Sky Financial
Group, Inc. affiliate have met regularly to report on progress and share
information. More than 650 systems, including hardware, software, communications
equipment, data exchange vendors and suppliers were evaluated for potential Year
2000 issues. Business initiatives such as major systems development and system
interdependencies were also appraised.
S-23
<PAGE> 25
Renovation -- The Company's vendors were contacted in this phase to
determine the status of their systems and their plans to become Year 2000
compliant. For non-compliant systems, project team members decided whether to
replace, repair or retire the systems.
Validation -- The Company has been testing all affected systems. Vendors
are also being tested at various locations during this phase. Those systems
which were modified or repaired are being re-tested as necessary. Testing
remains ongoing through the first half of 1999.
Implementation -- This phase includes putting replaced or repaired systems
into production. As these systems are tested throughout 1999, the Company will
continue to update inventory, test changes and develop and test contingency
plans. Testing and validation of all critical systems will be complete by June
30, 1999.
In the unlikely event critical systems fail to function after the century
date changes, contingency planning is underway. 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. We will have a completed contingency plan in place by June 30,
1999.
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 total cost of the Company's Year 2000 project is estimated at $900,000.
The majority of the costs have been internal in nature. Approximately 60% of
this cost relates to internal staff hours to work on the project. External costs
have been approximately $311,000 and include equipment replacement or upgrade,
seminar sponsorships, vendor payments, and customer communication and education.
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 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 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.
S-24
<PAGE> 26
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Sky Financial Group, Inc.
Bowling Green, Ohio
We have audited the accompanying consolidated balance sheets of Sky Financial
Group, Inc. as of December 31, 1998 and 1997 and the related consolidated
statements of income, comprehensive income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with 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 consolidated financial position of Sky
Financial Group, Inc. as of December 31, 1998 and 1997 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
CROWE, CHIZEK AND COMPANY LLP
SIGNATURE
Crowe, Chizek and Company LLP
Columbus, Ohio
February 16, 1999
S-25
<PAGE> 27
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
December 31,
December 31, 1998 and 1997 -----------------------
(Dollars in thousands, except per share data) 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 165,946 $ 153,336
Interest-bearing deposits with financial institutions....... 9,851 7,051
Federal funds sold.......................................... 26,024 39,726
Loans held for sale......................................... 77,471 19,314
Securities available for sale............................... 996,426 961,199
Securities held to maturity (Estimated fair value
$88,018).................................................. -- 87,207
Total loans................................................. 3,355,881 3,144,439
Less allowance for credit losses....................... (54,008) (40,376)
---------- ----------
Net loans............................................ 3,301,873 3,104,063
Premises and equipment...................................... 85,966 92,682
Accrued interest receivable and other assets................ 151,564 97,725
---------- ----------
TOTAL ASSETS......................................... $4,815,121 $4,562,303
========== ==========
LIABILITIES
Deposits
Non-interest-bearing deposits............................. $ 483,487 $ 414,509
Interest-bearing deposits................................. 3,349,175 3,248,432
---------- ----------
Total deposits......................................... 3,832,662 3,662,941
Securities sold under repurchase agreements and federal
funds purchased........................................... 207,458 182,362
Debt and Federal Home Loan Bank advances.................... 357,771 285,695
Accrued interest payable and other liabilities.............. 73,388 44,027
---------- ----------
TOTAL LIABILITIES.................................... 4,471,279 4,175,025
---------- ----------
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;
45,082,890 and 46,004,419 shares issued in 1998 and
1997...................................................... 311,360 218,881
Retained earnings........................................... 27,816 165,742
Treasury stock; 57,063 and 186,422 shares in 1998 and
1997...................................................... (1,500) (4,096)
ESOP obligations and unearned shares........................ -- (325)
Accumulated other comprehensive income...................... 6,166 7,076
---------- ----------
TOTAL SHAREHOLDERS' EQUITY........................... 343,842 387,278
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $4,815,121 $4,562,303
========== ==========
- -------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
S-26
<PAGE> 28
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
For the years December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share data) 1998 1997 1996
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans, including fees.................................. $296,682 $281,902 $257,355
Securities
Taxable................................................ 58,455 57,502 55,557
Nontaxable............................................. 4,927 5,123 5,683
Federal funds sold and other........................... 3,616 3,004 4,455
-------- -------- --------
Total interest income................................ 363,680 347,531 323,050
-------- -------- --------
INTEREST EXPENSE
Deposits............................................... 146,385 142,216 137,288
Borrowed funds......................................... 30,171 24,701 13,648
-------- -------- --------
Total interest expense............................... 176,556 166,917 150,936
-------- -------- --------
Net Interest Income.................................... 187,124 180,614 172,114
Provision for Credit Losses............................ 24,968 10,928 7,713
-------- -------- --------
Net Interest Income After Provision for Credit
Losses............................................... 162,156 169,686 164,401
-------- -------- --------
OTHER INCOME
Trust department income................................ 5,434 4,269 3,291
Service charges and fees on deposit accounts........... 15,248 14,691 12,509
Mortgage banking income................................ 24,501 15,525 12,093
Brokerage commissions.................................. 9,430 6,083 9,156
Collection agency fees................................. 4,115 5,053 4,213
Net securities gains (losses).......................... 1,194 (118) 1,553
Net gains on sales of commercial financing loans....... 19,378 13,027 2,992
Other income........................................... 17,914 23,637 16,437
-------- -------- --------
Total other income................................... 97,214 82,167 62,244
-------- -------- --------
OTHER EXPENSES
Salaries and employee benefits......................... 93,639 86,461 71,228
Occupancy and equipment expense........................ 26,056 24,245 22,264
Merger, integration, and restructuring expense......... 54,487 1,603 838
Other operating expense................................ 58,526 52,474 54,801
-------- -------- --------
Total other expenses................................. 232,708 164,783 149,131
-------- -------- --------
Income Before Income Taxes............................. 26,662 87,070 77,514
Income Taxes........................................... 8,854 27,750 24,364
-------- -------- --------
Net Income........................................... $ 17,808 $ 59,320 $ 53,150
======== ======== ========
Net Income Available to Common Shareholders.......... $ 17,808 $ 58,715 $ 50,743
======== ======== ========
Basic Earnings Per Common Share........................ $ .39 $ 1.29 $ 1.14
======== ======== ========
Diluted Earnings Per Common Share...................... $ .39 $ 1.27 $ 1.11
======== ======== ========
- ----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
S-27
<PAGE> 29
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
ESOP
For the years December 31, 1998, Obligation Accumulated
1997 and 1996 and Other
(Dollars in thousands, Preferred Common Retained Treasury Unearned Comprehensive
except per share data) Stock Stock Earnings Stock Shares Income Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995..... $ 35,569 $197,843 $ 134,027 $ (8,445) $(331) $ 4,290 $362,953
Net income..................... 53,150 53,150
Preferred cash dividends....... (2,407) (2,407)
Common cash dividends
($.38 per share)............. (20,981) (20,981)
Common stock dividend.......... (3,271) (14,604) 17,875
Unrealized losses on securities
available for sale........... (3,779) (3,779)
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..... 30,093 199,038 149,144 (1,178) (413) 511 377,195
Net income..................... 59,320 59,320
Preferred cash dividends....... (605) (605)
Common cash dividends
($.51 per share)............. (25,024) (25,024)
Common stock dividend.......... 10,608 (17,020) 6,412
Unrealized gains on securities
available for sale........... 6,565 6,565
Treasury shares acquired....... (10,217) (10,217)
Treasury shares issued......... 481 887 1,368
Preferred stock conversions.... (17,213) 17,213
Preferred stock retired........ (12,880) (8,921) (21,801)
Fractional shares and other
items........................ 462 (73) 88 477
-------- -------- --------- -------- ----- ------- --------
Balance, December 31, 1997..... -- 218,881 165,742 (4,096) (325) 7,076 387,278
Net income..................... 17,808 17,808
Common cash dividends
($.65 per share)............. (30,921) (30,921)
Common stock dividend.......... 124,779 (124,779)
Unrealized losses on securities
available for sale........... (910) (910)
Treasury shares acquired....... (32,067) (32,067)
Treasury shares issued......... (3,417) 5,780 2,363
Canceled treasury shares....... (28,883) 28,883
Change in ESOP debt and release
of shares.................... 325 325
Fractional shares and other
items........................ (34) (34)
-------- -------- --------- -------- ----- ------- --------
Balance, December 31, 1998..... $ -- $311,360 $ 27,816 $ (1,500) $ -- $ 6,166 $343,842
======== ======== ========= ======== ===== ======= ========
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
S-28
<PAGE> 30
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
For the years December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share data) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INCOME.................................................. $17,808 $59,320 $53,150
Other comprehensive income:
Unrealized gains (losses) arising during period........ (181) 9,976 (4,261)
Reclassification adjustment for (gains) losses included
in income............................................ (1,194) 118 (1,553)
------- ------- -------
Net unrealized gain (loss) on securities available for
sale................................................. (1,375) 10,094 (5,814)
Tax effect............................................. 465 (3,529) 2,035
------- ------- -------
Total other comprehensive income (loss)........... (910) 6,565 (3,779)
------- ------- -------
COMPREHENSIVE INCOME........................................ $16,898 $65,885 $49,371
======= ======= =======
- -----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
S-29
<PAGE> 31
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
For the years December 31, 1998, 1997 and 1996
(Dollars in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 17,808 $ 59,320 $ 53,150
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and valuation adjustments........ 31,228 16,715 14,176
Net gains on sales of assets................................ (45,000) (35,707) (18,182)
Provision for credit losses................................. 24,968 10,928 7,713
Net decrease (increase) in loans held for sale.............. (15,633) 23,529 4,520
Net change in other assets and liabilities.................. (15,570) (2,735) 8,891
--------- --------- --------- ---
NET CASH FROM OPERATING ACTIVITIES........................ (2,199) 72,050 70,268
--------- --------- --------- ---
INVESTING ACTIVITIES
Net decrease (increase) in interest-bearing deposits with
financial institutions.................................... (2,800) (2,605) 350
Net decrease (increase) in federal funds sold............... 13,702 (1,960) 74,402
Securities available for sale:
Proceeds from maturities and payments....................... 444,342 213,482 245,452
Proceeds from sales......................................... 41,066 91,060 55,983
Purchases................................................... (453,763) (349,369) (234,798)
Securities held to maturity:
Proceeds from maturities and payments....................... 20,260 59,723 49,888
Purchases................................................... (395) (58,444) (57,565)
Proceeds from sales of loans................................ 35,240 33,670 43,845
Net increase in loans....................................... (255,841) (213,749) (342,877)
Purchases of premises and equipment......................... (14,502) (19,658) (15,372)
Purchases of life insurance contracts....................... (30,350) (20,000) (500)
Purchases of loans.......................................... -- (11,989) (3,604)
Proceeds from sales of premises and equipment............... 978 2,489 782
Proceeds from sales of other real estate.................... 863 3,340 789
Cash acquired through acquisitions.......................... -- -- 80
--------- --------- --------- ---
NET CASH FROM INVESTING ACTIVITIES........................ (201,200) (274,010) (183,145)
--------- --------- --------- ---
FINANCING ACTIVITIES
Cash transferred in connection with sale of branch
deposits.................................................. -- (84,927) --
Purchases of branch deposits, net........................... -- 64,605 51,116
Net increase in deposit accounts............................ 169,721 106,641 53,340
Net increase (decrease) in federal funds and repurchase
agreements................................................ 25,096 (6,000) 77,964
Net (decrease) increase in short-term FHLB advances......... (76,278) 92,710 (21,500)
Proceeds from issuance of debt and long-term FHLB
advances.................................................. 260,314 137,175 21,350
Repayment of debt and long-term FHLB advances............... (111,960) (49,707) (42,984)
Cash dividends and fractional shares paid................... (21,471) (25,249) (23,404)
Pre-merger acquisition of pooled affiliate common stock..... -- -- (1,127)
Preferred stock retired..................................... -- (21,801) --
Proceeds from issuance of common stock...................... 2,363 1,368 412
Treasury stock purchases.................................... (32,067) (10,217) (11,020)
Other items................................................. 291 (1,115) 79
--------- --------- --------- ---
NET CASH FROM FINANCING ACTIVITIES........................ 216,009 203,483 104,226
--------- --------- --------- ---
Net Increase (Decrease) in Cash and Due From Banks.......... 12,610 1,523 (8,651)
Cash and Due From Banks at Beginning of Year................ 153,336 151,813 160,464
--------- --------- --------- ---
Cash and Due From Banks at End of Year...................... $ 165,946 $ 153,336 $ 151,813
========= ========= ========= ===
Noncash transactions:
Securitization of loans held for sale..................... $ 241 $ 6,344 $ 73,527
========= ========= ========= ===
- -----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
S-30
<PAGE> 32
SKY FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. SUMMARY OF SIGNIFICANT 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 activities, broker-dealer operations,
commercial finance lending, and other financial related services.
A new accounting standard changes the way public companies report
information about their operating segments in annual and interim financial
statements. The standard, applicable in 1998, adopts a management approach to
determine operating segments and then imposes quantitative criteria to determine
which operating segments, if any, must be reported. See Note 20 for disclosure
of the Company's business segments.
Basis of Presentation -- 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 allowance for loan losses and fair values of financial
instruments are particularly subject to change.
These consolidated financial statements give retroactive effect to the
merger transactions accounted for by the pooling of interests method as
discussed in Note 2. Certain amounts in the prior consolidated financial
statements and pooled affiliates financial statements have been reclassified to
conform to the current presentation.
Consolidation -- The consolidated financial statements of the Company
include the accounts of The Citizens Banking Company ("Citizens"), Mid American
National Bank and Trust Company ("Mid Am Bank"), The Ohio Bank ("Ohio Bank"),
First National Bank Northwest Ohio ("First National"), Adrian State Bank
("Adrian"), Sky Asset Management Services, Inc. ("SAMSI"), Sky Investments, Inc.
("SII"), Mid Am Credit Corp. ("MACC"), Mid Am Financial Services, Inc.
("MAFSI"), Simplicity Mortgage Consultants, Inc. ("Simplicity"), Mid Am Private
Trust, N.A. ("MAPT"), Sky Technology Resources, Inc. ("Sky Tech"), 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.
In January 1999, First National and Adrian were merged into Mid Am Bank. In
December 1998, American Community Bank, N.A.("AmeriCom") and AmeriFirst Bank,
N.A. ("AmeriFirst") were merged into Ohio Bank and Century National Bank
("Century") was merged into Citizens. In July 1998, First National Bank of
Chester ("Chester") was merged into Citizens. All of these transactions were
accounted for as internal reorganizations, similar to a pooling of interests.
Cash and Due from Banks -- The Company's subsidiary banks are required to
have cash on hand or on deposit with the Federal Reserve Bank to meet regulatory
reserve requirements. The reserve requirements at December 31, 1998 and 1997
approximated $49,364 and $41,513, respectively. 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. 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.
S-31
<PAGE> 33
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Equity securities that have a readily determinable fair value are also
classified as available for sale. The unrealized appreciation or depreciation
from these securities' acquisition costs is recorded in a valuation account, net
of the applicable income tax effect, in the shareholders' equity section of the
balance sheet. 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. Gains and losses on
security sales are calculated 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, 1998, 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 $624,078 and $584,404 at
December 31, 1998 and 1997, respectively.
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. 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.
S-32
<PAGE> 34
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for Credit Losses -- The allowance for credit losses is an amount
that management believes will be adequate to absorb losses inherent in existing
loans and leases and 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. In establishing the allowance and provision, management takes 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. In management's quarterly analysis, risk factors
are applied to categories of similar credits segregated by loan type, repayment
source, geographic lending area, the results of internal grading systems,
regulatory examination findings and other known factors which may impact the
amount of losses inherent in the category. The corporate allowance for loan and
lease losses policy calls for risk factors to be determined through
consideration of the Company's actual or industry average net loss experience
and allocations of the allowance are established based on the application of
these factors to a category. Additionally, allocations of the allowance may be
established for specific problem credits, including impaired loans. 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.
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, 1998 and 1997, other real estate owned totaled $1,330 and $767.
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, 1998 and 1997
aggregated $14,065 and $21,216, 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, other personnel related
costs, valuation adjustments for certain premises, equipment and other assets,
and integration costs related to mergers and acquisitions. (See Note 13.)
S-33
<PAGE> 35
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes -- The Company utilizes an asset and liability approach for
financial accounting and reporting of income taxes. The provision for income
taxes is the sum of taxes currently payable and the change in deferred tax
assets and liabilities. 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.
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.
Stock Dividends and Treasury Stock -- Shares of the Company's stock are
acquired for reissuance in connection with stock option plans and for future
stock dividend declarations. The treasury shares acquired are recorded at cost.
Stock dividends are recorded at fair market value to the extent of available
retained earnings.
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, 1998, 1997 and 1996 the
Company paid interest of $177,791, $164,712 and $151,719, and income taxes of
$27,860, $32,543 and $21,275.
Comprehensive Income -- Comprehensive income consists of net income and
other comprehensive income. Other comprehensive income includes unrealized gains
and losses on securities available for sale which are also recognized as
separate components of equity. The accounting standard that requires reporting
comprehensive income first applies for 1998, with prior information restated to
be comparable.
New Accounting Pronouncements -- Beginning January 1, 2000, 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. This is not
expected to have a material effect, but the effect will depend on derivative
holdings when this standard applies.
S-34
<PAGE> 36
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Mortgage loans originated in mortgage banking are converted into securities
on occasion. A new accounting standard for 1999 will allow classifying these
securities as available for sale, trading, or held to maturity, instead of the
current requirement to classify as trading. This is not expected to have a
material effect, but the effect will vary depending on the level and designation
of securitizations as well as on market price movements.
NOTE 2. MERGERS, ACQUISITIONS, BUSINESS FORMATIONS AND DIVESTITURES
Effective December 17, 1998, the Company executed a definitive agreement
with 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. Wood Bancorp shareholders will receive 0.7315 shares
of Company stock for each share of Wood Bancorp stock in a tax-free exchange to
be accounted for as a pooling of interests. Approximately 2.1 million Company
common shares are expected to be issued in the merger. It is anticipated that
the transaction will be completed in the third quarter of 1999, pending
regulatory approvals and approval of Wood Bancorp's shareholders. Immediately
following the affiliation, First Federal will be merged into Mid American
National Bank & Trust Company.
Effective December 14, 1998, the Company executed a definitive agreement
with First Western Bancorp, Inc., a $2.2 billion bank holding company
headquartered in New Castle, Pennsylvania. First Western shareholders will
receive 1.211 shares of Company common stock for each share of First Western
common stock in a tax-free exchange to be accounted for as a pooling of
interests. Approximately 13.5 million Company common shares are expected to be
issued in the merger. It is anticipated that the transaction will be completed
in the third quarter of 1999, pending regulatory and shareholder approvals.
First Western's bank affiliate, First Western Bank, N.A., will be merged into
Citizens Banking Company immediately following the affiliation.
Effective December 4, 1998, The Ohio Bank, Findlay, Ohio, affiliated with
the Company in a transaction accounted for as a pooling of interests. In
conjunction with the merger, Bancshares changed its name to Sky Financial Group,
Inc. 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. Of its five bank affiliates, Mid Am Bank, Adrian and First
National were wholly-owned subsidiaries of the Company at year end 1998, while
AmeriCom and AmeriFirst were merged into Ohio Bank. Mid Am also owned 9
financial services subsidiaries, now subsidiaries of the Company, which engage
in lines of business closely related to banking.
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 $453,000 with 13 branches in Beaver and Butler
counties in Pennsylvania. Century National Bank, CFC's bank subsidiary, is now
operated as part of Citizens' branch network.
S-35
<PAGE> 37
NOTE 2. MERGERS, ACQUISITIONS, BUSINESS FORMATIONS AND DIVESTITURES (CONTINUED)
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 $216,000 with 12 offices in Jefferson and Columbiana
counties in Ohio, and is operated as part of Citizens' branch network.
The transactions were accounted for as poolings of interests. The following
is a summary of the separate results of operations of the Company, Mid Am, The
Ohio Bank, Century and UniBank for the years ended December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
- ------------------------------------------------------------------------------------------
Net interest income
Company................................................... $ 42,625 $ 42,533
Mid Am.................................................... 89,526 84,914
The Ohio Bank............................................. 22,630 20,635
Century................................................... 17,396 16,698
UniBank................................................... 8,437 7,334
-------- --------
Combined............................................... $180,614 $172,114
======== ========
Net income
Company................................................... $ 16,756 $ 14,706
Mid Am.................................................... 30,881 25,992
The Ohio Bank............................................. 6,019 5,428
Century................................................... 4,222 4,906
UniBank................................................... 1,442 2,118
-------- --------
Combined............................................... $ 59,320 $ 53,150
======== ========
- ------------------------------------------------------------------------------------------
</TABLE>
Following is a summary of the 1998 results of operations of the previously
separate affiliates for the year-to-date period through the quarter-end
immediately preceding the date of their respective mergers into the Company, as
indicated below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Year-to-Date Net Interest Net
(unaudited) Period Ending Income Income
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Century..................................... March 31, 1998 $ 4,335 $ 1,363
Mid Am...................................... September 30, 1998 67,906 23,053
The Ohio Bank............................... September 30, 1998 18,262 5,501
- ------------------------------------------------------------------------------------------------------
</TABLE>
On November 21, 1997, the Company 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. The Company paid a premium of $5.8 million in the
transaction, which is reflected in other assets in the 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 consolidated balance sheet and is being amortized on an
accelerated basis over 10 years.
S-36
<PAGE> 38
NOTE 2. MERGERS, ACQUISITIONS, BUSINESS FORMATIONS AND DIVESTITURES (CONTINUED)
On February 17, 1997, Mid Am, Inc., prior to its merger, sold seven of its
branches in the metropolitan Cincinnati area to Star Banc Corporation. The
branch sale included the transfer of $95,000 of deposits. The branch sales
resulted in a pre-tax gain of $8,703 (after-tax $5,657).
In January, 1997, MAFSI commenced operations as a consumer finance unit,
which specializes in non-conforming residential mortgage and consumer loans on a
nationwide basis. MAFSI is headquartered in Indianapolis, Indiana.
In January, 1997, MAPT was formed to provide trust and investment
management services to families and individuals with substantial assets and to
corporate trustees. MAPT is headquartered in Cleveland, Ohio.
During 1996, Mid Am, Inc., prior to its merger, completed its acquisition
of Simplicity, an Indiana-based mortgage brokerage company, and National
Recovery Services, Professional Adjustment of Ft. Myers, Florida, and Gulf Coast
Collection Bureau, Inc., Florida-based collection agencies. The aggregate
purchase price of the four transactions was $1,500 and included $551 cash and
the issuance of 51,598 shares of Company common stock. The results of operations
includes the results of the acquired entities from the dates of their respective
acquisitions.
The Company also entered a merger transaction on October 11, 1996, with The
Navarre Deposit Bank Company, Navarre, Ohio. The Company issued 1.1 million
shares in the Navarre transaction, which was accounted for as a pooling of
interests.
In April 1996, Mid Am Credit Corp. commenced operations as a full-service
loan and leasing financing unit. MACC's lending and leasing efforts are
concentrated primarily on medical and dental equipment and practice acquisition
financing on a nationwide basis. MACC, a wholly-owned subsidiary of the Company,
is headquartered in Columbus, Ohio, with a satellite office in Los Angeles,
California. MACC sells substantially all of the loans and leases to investors in
the secondary market.
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
1998 Cost Gains Losses Value
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and U.S. Government
agencies and corporations.......... $242,202 $ 2,793 $ (349) $244,646
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
======== ======= ======= ========
- -------------------------------------------------------------------------------------------------------
</TABLE>
S-37
<PAGE> 39
NOTE 3. SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1997 Cost Gains Losses Value
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and U.S. Government
agencies and corporations........... $303,069 $ 2,162 $ (611) $304,620
Obligations of states and political
subdivisions........................ 78,783 2,625 (89) 81,319
Corporate and other securities........ 27,870 328 (108) 28,090
Mortgage-backed securities............ 483,979 3,459 (1,351) 486,087
-------- ------- ------- --------
Total debt securities available for
sale............................. 893,701 8,574 (2,159) 900,116
Marketable equity securities.......... 56,645 4,440 (2) 61,083
-------- ------- ------- --------
Total securities available for
sale............................. $950,346 $13,014 $(2,161) $961,199
======== ======= ======= ========
SECURITIES HELD TO MATURITY
U.S. Treasury and U.S. Government
agencies and corporations........... $ 61,599 $ 209 $ (21) $ 61,787
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>
Securities held to maturity of approximately $60,500 were transferred from
held to maturity to available for sale upon completion of the mergers of UniBank
and CFC in 1998.
The amortized cost and estimated fair value of debt securities at December
31, 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 with or without call or prepayment penalties.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Amortized Estimated
Cost Fair Value
<S> <C> <C>
- ---------------------------------------------------------------------------------------------
DEBT SECURITIES AVAILABLE FOR SALE
Due in one year or less..................................... $ 95,482 $ 96,017
Due after one year through five years....................... 208,420 211,378
Due after five years through ten years...................... 38,664 39,497
Due after ten years......................................... 22,738 22,904
Mortgage-backed securities.................................. 534,376 537,473
-------- --------
Total debt securities available for sale.................. $899,680 $907,269
======== ========
- ---------------------------------------------------------------------------------------------
</TABLE>
The gross realized gains and losses from the sales of securities are as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Gross realized gains on sales............................... $1,217 $ 888 $1,806
Gross realized losses on sales.............................. 23 1,006 253
- ---------------------------------------------------------------------------------------------------
</TABLE>
S-38
<PAGE> 40
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The loan portfolio at year-end was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
- --------------------------------------------------------------------------------------
Real estate loans:
Construction.............................................. $ 149,795 $ 140,656
Residential mortgage...................................... 1,054,290 1,047,112
Non-residential mortgage.................................. 926,191 782,930
Commercial, financial and agricultural...................... 808,004 754,392
Installment and credit card loans........................... 409,748 410,170
Other loans................................................. 7,853 9,179
---------- ----------
Total Loans............................................ $3,355,881 $3,144,439
========== ==========
- --------------------------------------------------------------------------------------
</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 1998 is as follows:
<TABLE>
<S> <C>
- ---------------------------------------------------------------------
Aggregate balance -- December 31, 1997...................... $49,430
New loans................................................... 23,740
Repayments.................................................. (15,770)
Other changes............................................... (17,925)
-------
Aggregate balance -- December 31, 1998...................... $39,475
=======
- ---------------------------------------------------------------------
</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>
- -------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Balance at beginning of year................................ $40,376 $35,401 $33,315
Provision for credit losses................................. 24,968 10,928 7,713
Recoveries.................................................. 3,872 2,759 3,495
Loans charged-off........................................... (15,208) (8,712) (9,122)
------- ------- -------
Balance at end of year...................................... $54,008 $40,376 $35,401
======= ======= =======
- -------------------------------------------------------------------------------------------
</TABLE>
S-39
<PAGE> 41
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
- ------------------------------------------------------------------------------
Year-end impaired loans with no allowance for credit losses
allocated................................................. $ 831 $ 799
Year-end impaired loans with allowance for credit losses
allocated................................................. 7,861 7,287
Year-end allowance for credit losses allocated to impaired
loans..................................................... 3,299 1,530
Average investment in impaired loans during the year........ 11,077 9,070
Cash-basis interest income recognized during the year....... 847 248
- ------------------------------------------------------------------------------
</TABLE>
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment as of year-end are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
- ------------------------------------------------------------------------------------------
Land, buildings and improvements............................ $ 89,950 $ 95,668
Equipment, furniture and fixtures........................... 77,367 75,809
Construction in process..................................... 3,399 1,670
-------- --------
Total premises and equipment........................... 170,716 173,147
Less accumulated depreciation and amortization.............. (84,750) (80,465)
-------- --------
Premises and equipment, net................................. $ 85,966 $ 92,682
======== ========
- ------------------------------------------------------------------------------------------
</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 $3,810 and $3,549 at December 31, 1998 and 1997.
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 $444 in 1998, $496 in 1997, and $537 in 1996. Rental
payments for land are treated as operating lease expense. Rent expense amounted
to $2,653 in 1998, $2,261 in 1997 and $2,239 in 1996.
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>
- ----------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
Interest-bearing demand..................................... $ 336,693 $ 432,488
Savings..................................................... 1,011,656 831,433
Time
In denominations under $100,000........................... 1,541,899 1,560,154
In denominations of $100,000 or more...................... 458,927 424,357
---------- ----------
Total interest-bearing deposits........................ $3,349,175 $3,248,432
========== ==========
- ----------------------------------------------------------------------------------------------
</TABLE>
S-40
<PAGE> 42
NOTE 6. INTEREST-BEARING DEPOSITS (CONTINUED)
At December 31, 1998, the scheduled maturities of certificates of deposit
are as follows:
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------
1999........................................................ $1,487,526
2000........................................................ 359,392
2001........................................................ 95,075
2002........................................................ 31,850
2003 and thereafter......................................... 26,983
----------
$2,000,826
==========
- -----------------------------------------------------------------------------
</TABLE>
NOTE 7. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND FEDERAL FUNDS PURCHASED
The Company has retail repurchase agreements with customers within its
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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at year-end..................................... $207,458 $182,362
Weighted average interest rate at year end.................. 4.43% 4.95 %
Maximum amount outstanding as of any month-end.............. $231,453 $268,320
Average amount outstanding.................................. 206,234 211,228
Approximate weighted average interest rate during the
year...................................................... 4.64% 4.95 %
- ----------------------------------------------------------------------------------------
</TABLE>
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>
- ---------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------
Short-term borrowings under bank line of credit............. $ 30,000 $ 15,000
Borrowings under FHLB lines of credit at weighted interest
rate of 5.30% and 5.98% in 1998 and 1997.................. 244,297 238,682
Capital lease obligations................................... 2,184 2,481
Subordinated note 7.08%, due January 2008................... 50,000 --
Obligated mandatorily redeemable capital securities of
subsidiary trust, interest at 10.20%, due June 2027....... 23,600 27,500
Other items................................................. 7,690 2,032
-------- --------
Total.................................................. $357,771 $285,695
======== ========
- ---------------------------------------------------------------------------------
</TABLE>
S-41
<PAGE> 43
NOTE 8. 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 loans.
Based on the carrying amount of FHLB stock owned by subsidiary banks, total FHLB
advances are limited to approximately $482,440, subject to the ability to pledge
qualified residential mortgage loans. At December 31, 1998, required annual
principal payments on FHLB advances were as follows:
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
1999........................................................ $ 47,752
2000........................................................ 13,506
2001........................................................ 10,523
2002........................................................ 18,555
2003 and thereafter......................................... 153,961
--------
$244,297
========
- ----------------------------------------------------------------------
</TABLE>
On December 31, 1996, the Company entered into a 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 permitted the Company to borrow up to $25,000 through December 31, 1998. In
December, 1998, the agreement was renewed allowing the Company to borrow up to
$30,000 through November 30, 1999. The Company is in the process of
renegotiating the agreement with the financial institution that currently
maintains the line of credit to increase the commitment to $75,000. 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 minimum tangible net worth, as defined, of $305,000,
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 average amount outstanding under the agreement was
$7,584 in 1998, with an average interest rate of 5.86%.
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. In 1998, the
Company retired securities with a face value of $2,900 at a premium of 15.9%, or
$460. 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.
S-42
<PAGE> 44
NOTE 9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal................................................... $ 21,041 $30,347 $25,769
State and local........................................... 267 220 --
-------- ------- -------
21,308 30,567 25,769
Deferred:
Federal................................................... (12,350) (2,744) (1,405)
State and local........................................... (104) (73) --
-------- ------- -------
(12,454) (2,817) (1,405)
-------- ------- -------
Total provision for income taxes............................ $ 8,854 $27,750 $24,364
======== ======= =======
- --------------------------------------------------------------------------------------------
</TABLE>
The sources of gross deferred tax assets and liabilities were as follows at
year end:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Items giving rise to deferred tax assets:
Allowance for loan losses in excess of tax reserve........ $ 15,551 $ 10,154 $ 8,215
Merger, integration and restructuring expense............. 6,854 176 155
Deferred compensation..................................... 2,008 1,373 1,064
Other..................................................... 4,862 3,218 2,271
-------- -------- -------
29,275 14,921 11,705
-------- -------- -------
Items giving rise to deferred tax liabilities:
Depreciation.............................................. (2,598) (2,742) (3,031)
FHLB stock dividends...................................... (3,089) (2,394) (1,809)
Mortgage servicing rights................................. (3,452) (2,288) (1,486)
Unrealized gain on securities available for sale.......... (3,312) (3,773) (228)
Other..................................................... (1,726) (1,409) (2,112)
-------- -------- -------
(14,177) (12,606) (8,666)
-------- -------- -------
Net deferred tax asset................................. $ 15,098 $ 2,315 $ 3,039
======== ======== =======
- ---------------------------------------------------------------------------------------------
</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>
- -------------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------- --------------- --------------
Tax Tax Tax
Amount Rate Amount Rate Amount Rate
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax expense based upon the federal statutory
rate on income before income taxes................... $ 9,331 35.0% $30,475 35.0% $27,130 35.0%
Tax exempt income...................................... (3,024) (11.3) (3,096) (3.6) (3,096) (4.0)
Non-deductible merger and restructuring costs.......... 2,966 11.1 -- -- -- --
Other.................................................. (419) (1.6) 371 0.5 330 0.4
------- ----- ------- ----- ------- ----
$ 8,854 33.2% $27,750 31.9% $24,364 31.4%
======= ===== ======= ===== ======= ====
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Tax expense (benefit) attributable to securities gains and losses totaled
$418, ($43) and $544 in 1998, 1997 and 1996.
S-43
<PAGE> 45
NOTE 10. 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. 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>
- -----------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NUMERATOR
Net income........................................ $ 17,808 $ 59,320 $ 53,150
Less: Preferred stock dividends................... -- (605) (2,407)
----------- ----------- -----------
Net income available to common shareholders
(basic)...................................... 17,808 58,715 50,743
Effect of dilutive securities:
Convertible preferred stock....................... -- 605 2,407
----------- ----------- -----------
Net income (diluted)........................... $ 17,808 $ 59,320 $ 53,150
=========== =========== ===========
DENOMINATOR:
Weighted-average common shares outstanding
(basic)........................................ 45,124,000 45,402,000 44,510,000
Exercise of options............................... 562,000 355,000 253,000
Convertible preferred stock....................... -- 942,000 3,049,000
----------- ----------- -----------
Weighted-average common shares outstanding
(diluted)...................................... 45,686,000 46,699,000 47,812,000
=========== =========== ===========
EARNINGS PER SHARE:
Basic............................................. $ 0.39 $ 1.29 $ 1.14
=========== =========== ===========
Diluted........................................... $ 0.39 $ 1.27 $ 1.11
=========== =========== ===========
- -----------------------------------------------------------------------------------------------
</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. In addition, the Company
declared 10% stock dividends in each year presented. All share and per share
data have been retroactively adjusted to reflect the mergers discussed in Note
2, stock dividends and splits.
S-44
<PAGE> 46
NOTE 11. 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>
- -------------------------------------------------------------------------------------------------
1998 1997
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amounts Fair Value Amounts Fair Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and due from banks................ $ 165,946 $ 165,946 $ 153,336 $ 153,336
Interest-bearing deposits with other
financial institutions............... 9,851 9,851 7,051 7,051
Federal funds sold..................... 26,024 26,024 39,726 39,726
Securities available for sale.......... 996,426 996,426 961,199 961,199
Securities held to maturity............ -- -- 87,207 88,018
Loans held for sale and loans, net of
the allowance for credit losses...... 3,379,344 3,410,182 3,123,377 3,115,359
Accrued interest receivable............ 29,450 29,450 30,078 30,078
Deposits............................... (3,832,662) (3,847,687) (3,662,941) (3,685,743)
Securities sold under repurchase
agreements and federal funds
purchased............................ (207,458) (207,458) (182,362) (182,362)
Debt and FHLB advances................. (355,587) (367,140) (283,214) (289,572)
Accrued interest payable............... (11,747) (11,747) (12,105) (12,105)
- -------------------------------------------------------------------------------------------------
</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 were 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,
1998 and 1997, 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, 1998 and 1997, applied for the time period
until maturity. The capital lease obligations of $2,184 and $2,481 at December
31, 1998 and 1997 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, 1998 or 1997, 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,
1998 and 1997 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.
S-45
<PAGE> 47
NOTE 12. OTHER INCOME AND OTHER EXPENSE
The following is a summary of other income and other expense:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OTHER INCOME
International department fees........................... $ 965 $ 978 $ 1,011
Gain on sale of credit card accounts.................... -- -- 4,568
Gain on sale of deposits and branch offices............. -- 8,703 --
Net gains on sales of other loans....................... 732 976 395
Other................................................... 16,217 12,980 10,463
------- ------- -------
Total other income................................... $17,914 $23,637 $16,437
======= ======= =======
OTHER OPERATING EXPENSE
Brokerage commissions................................... $ 6,209 $ 3,597 $ 5,604
FDIC insurance.......................................... 706 714 5,573
State franchise taxes................................... 4,717 4,547 4,426
Printing and supplies................................... 3,844 3,853 3,952
Legal and other professional fees....................... 7,294 5,767 3,908
Telephone............................................... 4,912 4,367 4,242
Amortization of intangible assets....................... 2,743 2,957 2,442
Other................................................... 28,101 26,672 24,654
------- ------- -------
Total other operating expense........................ $58,526 $52,474 $54,801
======= ======= =======
- --------------------------------------------------------------------------------------
</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 13. MERGER, INTEGRATION AND RESTRUCTURING EXPENSES
In 1998, the Company recorded charges totaling $54,487 ($38,382 after tax,
or $.84 per diluted share.) The majority of the charges are associated with the
merger and integration of the combined operations of Citizens Bancshares, Inc.,
Mid Am, Inc. and The Ohio Bank. Included in the total are severance and other
employee-related costs of $18,250, valuation adjustments of property, equipment
and other assets of $15,933, transaction costs of $8,311 and other merger and
integration related costs of $11,994.
Severance and other employee-related charges were incurred as part of the
consolidation of ten separate banking organizations into three
geographically-based banking entities and the resultant reduction of duplicate
positions and as part of a process redesign applied to all business segments
throughout the organization. The employee related costs resulted from the
elimination of approximately 260 positions, including 26 senior management and
officer positions. Prior to December 31, 1998, approximately 40% of
employee-related expenses were paid. The remaining expenses are expected to be
paid and the remaining position reductions completed during the first and second
quarters of 1999.
Asset valuation adjustments were comprised of charges to reflect at fair
value redundant premises and equipment to be disposed of and related intangible
assets; to reflect the impairment of premises for which there has been a
significant change in the extent or manner of use; and to reflect the impairment
of intangible assets. Fair values for significant assets were determined by
professional appraisal. Premises and equipment to be disposed of had a carrying
value of $1,902 at year-end 1998, after valuation adjustments of $1,980. These
dispositions, substantially all of which are in the community banking segment,
are expected to be accomplished during 1999. The assets associated with the
remaining valuation adjustments were primarily in the community banking
subsidiaries. The
S-46
<PAGE> 48
NOTE 13. MERGER, INTEGRATION AND RESTRUCTURING EXPENSES (CONTINUED)
charges for these valuation allowances are aggregated with other merger,
integration and restructuring expenses and are reflected in the parent and other
segment for line of business reporting purposes (See Note 20) as part of the
Company-wide reorganization.
Charges of $1,603 in 1997 related to branch and other acquisitions and $838
in 1996 related to a community bank acquisition.
NOTE 14. EMPLOYEE BENEFITS
The Company maintains two plans which management intends to be the
Company's primary ongoing retirement plans, as well as a supplemental retirement
plan for certain individuals. In 1998, 1997 and 1996, employees of the former
Mid Am, Inc. and its affiliates were eligible to participate in these plans.
Beginning in 1999, all employees of the Company will be eligible to participate.
Employee Stock Ownership and Savings Plan: The plan provides for annual
contributions by the Company based upon its income (as defined by the plan)
after providing for a specified return on shareholders' equity. 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. Employees may contribute to this plan upon employment. Employer
matching provisions commence after the employees have completed twelve months of
service. At year end 1998, the plan held 1,094,848 shares of Company stock.
Employee Stock Ownership Pension Plan: Under this plan, the Company also
sponsors an Employee Stock Ownership Pension Plan which provides for an annual
employer contribution equal to 6% of eligible employees' annual compensation. At
year end 1998, the plan held 637,501 shares of Company stock.
Supplemental Retirement Plan: This plan replaces retirement benefits
eliminated under the Company's qualified retirement plans because of eligible
compensation limitations under current tax law. The Company contributes
authorized shares of its common stock to a trust established to hold the shares
on behalf of participating employees. The Company'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 the Company's qualified plans (12% in each year presented). The
funding of shares typically occurs in January of the succeeding year.
Expense relating to these plans totaled $4,726, $3,593 and $2,762 in 1998,
1997 and 1996.
Pension Plans: Citizens and Century maintained defined benefit pension
plans covering certain employees. Retirement benefits are based primarily on
years of service and compensation rates near retirement. Employees became
eligible to participate in the plans after meeting certain service requirements
and became fully vested in the benefits after five years of service. Citizens'
funding policy was to contribute the maximum amount deductible for federal
income tax purposes. Citizens' board of directors froze all future benefits
effective December 31, 1998. The benefit obligation, pension expense and accrued
pension liability and are not material in any period presented.
A summary of the other retirement plans of merged affiliates follows.
Management intends to either terminate these plans, merge them into an ongoing
plan or otherwise eliminate the plans.
Profit Sharing and 401(k) Plans: Citizens, Ohio Bank, UniBank and CFC
maintained defined contribution profit sharing plans in which substantially all
employees, other than employees of Freedom Express, Inc., participated. Amounts
contributed to the plan were determined annually by the Board of Directors. In
addition, Ohio Bank's plan allowed employee contributions, 50% of which were
matched by the Bank up to a maximum of 6% of the participant's compensation.
Expense under the plans totaled $1,776, $2,421 and $2,172 in 1998, 1997 and
1996.
S-47
<PAGE> 49
NOTE 14. EMPLOYEE BENEFITS (CONTINUED)
Postretirement Health Insurance Benefits: Citizens continues to pay health
insurance premiums for certain employees after retirement. Citizens accrued 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.
Employee Stock Ownership Plan: Citizens maintained an Employee Stock
Ownership Plan (ESOP) for substantially all employees. Corporate contributions
to the plan were discretionary and determined annually by the Board of
Directors. Acquisitions of common shares by the ESOP were funded through
borrowings with unrelated financial institutions with the common shares
purchased serving as collateral for the related loans. Loans outstanding,
totaling $325, were repaid in 1998 in conjunction with the merger to form Sky.
The plan held a total of 107,294 shares at year-end 1998 and 1997, all of which
were allocated or committed to be released at year-end 1998. Expenses associated
with the ESOP were not material.
NOTE 15. STOCK OPTIONS
Options to buy stock have been granted to directors, officers and employees
under various stock option plans. The Sky Financial Group, Inc. 1998 Stock
Option Plan for Employees and the Sky Financial Group, Inc. Amended and Restated
Stock Option Plan for Nonemployee Directors were approved by the Company's
shareholders in 1998. Under these plans, options may be granted to buy a maximum
of 2.9 million common shares, or 7.5% of the Company's issued and outstanding
common shares at the time of its merger with Mid Am. Options expire 10 years
after the date of grant and are issued at an option price no less than the
market price of the Company's stock on the date of grant. Certain individuals,
including directors, may also elect to receive options, determined under a
formula, in lieu of a portion of their salary or director fees, as applicable.
Vesting of options granted to directors is determined at the time of grant.
Options granted to officers and other key employees are generally exercisable at
40% after two years and in annual 20% increments thereafter, except for options
received in lieu of salary, which are immediately exercisable.
The Company's stock option plan in place prior to its merger with Mid Am,
as well as plans of Mid Am and Century, were frozen in 1998 and no further
options may be granted under these plans. Vesting of options granted under these
plans was determined at the time of grant, generally 3 to 5 years after the
grant date.
A summary of the activity in the plans is as follows.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Outstanding at beginning of
year........................... 1,869,344 $15.06 1,586,489 $12.85 1,432,573 $12.28
Granted.......................... 1,305,804 28.06 477,396 20.85 212,620 16.20
Exercised........................ (186,054) 12.40 (174,611) 10.68 (38,170) 11.00
Forfeited........................ (43,911) 21.30 (19,930) 15.20 (20,534) 13.03
--------- ------ --------- ------ --------- ------
Outstanding at end of year....... 2,945,183 $20.95 1,869,344 $15.06 1,586,489 $12.85
========= ====== ========= ====== ========= ======
Options exercisable at
year-end....................... 1,832,482 $17.45 1,230,858 $13.40 1,144,947 $11.89
Weighted average fair value of
options granted during year.... $ 5.94 $ 3.06 $ 2.60
- -----------------------------------------------------------------------------------------------------
</TABLE>
S-48
<PAGE> 50
NOTE 15. STOCK OPTIONS (CONTINUED)
Options outstanding at year-end 1998 were as follows.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Outstanding Exercisable
---------------------------- --------------------
Weighted Average Weighted
Range of Remaining Average
Exercise Contractual Exercise
Prices Number Life (Months) Number Price
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
$ 5 to $10................................... 164,415 56 164,394 $ 9.18
$10 to $15................................... 726,206 71 690,811 12.34
$15 to $20................................... 518,969 89 422,602 17.13
$20 to $25................................... 235,683 105 80,320 24.79
$25 to $30................................... 1,196,391 117 392,401 25.88
$30 to $35................................... 103,519 113 81,954 31.16
--------- ---------
Outstanding at year-end...................... 2,945,183 96 1,832,482 17.45
========= =========
- --------------------------------------------------------------------------------------------------
</TABLE>
Had compensation cost for stock options been measured using FASB Statement
No. 123, net income and earnings per share would have been the pro forma amounts
indicated below. The pro forma effect may increase in the future if more options
are granted.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Net income as reported.................................... $17,808 $59,320 $53,150
Pro forma net income...................................... 15,718 57,384 52,724
Basic earnings per share as reported...................... 0.39 1.29 1.14
Pro forma basic earnings per share........................ 0.35 1.25 1.13
Diluted earnings per share as reported.................... 0.39 1.27 1.11
Pro forma diluted earnings per share...................... 0.34 1.23 1.10
- ----------------------------------------------------------------------------------------------------
</TABLE>
The pro forma effects are computed using option-pricing models, using the
following weighted average assumptions as of the grant date:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
Risk-free interest rate..................................... 4.81% 6.16% 6.06 %
Expected option life (years)................................ 7.00 6.89 7.25
Expected stock price volatility............................. 0.20 0.17 0.21
Dividend yield.............................................. 3.24% 3.03% 3.74 %
- --------------------------------------------------------------------------------------
</TABLE>
The Company maintains a stock appreciation rights (SAR) plan under which
SARs were granted in tandem with stock options until 1998. Expense related to
the SARs was $213 in 1998, $1,793 in 1997 and $222 in 1996. A summary of the
activity in this plan follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
SARs Price SARs Price SARs Price
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
Outstanding at beginning of
year..................... 44,123 $11.72 118,358 $10.61 111,334 $10.45
Granted.................... 4,774 32.73 9,172 14.77 7,130 13.18
Exercised.................. (25,035) 10.49 (82,500) 10.45 -- --
Forfeited.................. (438) 18.08 (907) 13.37 (106) 13.18
------- ------ ------- ------ ------- ------
Outstanding at end of
year..................... 23,424 $17.21 44,123 $11.72 118,358 $10.61
======= ====== ======= ====== ======= ======
- ----------------------------------------------------------------------------------------------
</TABLE>
S-49
<PAGE> 51
NOTE 16. CONTINGENCIES
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.
NOTE 17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
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>
- ---------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------
Commitments to extend credit................................ $620,466 $716,531
Standby letters of credit................................... 64,959 63,084
Letters of credit........................................... 692 1,734
- ---------------------------------------------------------------------------------
</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.
Most of the Company's business activity is with customers located within
the respective local business areas of its bank subsidiaries. However, MACC's
loan and lease activities are with customers in medical and dental related
fields located throughout 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
S-50
<PAGE> 52
NOTE 17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
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, 1998, the outstanding balance of loans and leases sold was
$305,667. A portion of the purchase price is deferred and paid to MACC on a
delayed basis. At December 31, 1998 and 1997, MACC recorded receivables of
$9,191 and $4,339, respectively, for deferred sales proceeds. Changes in the
liability for recourse provisions relating to sold loans and leases is as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
- -------------------------------------------------------------------------------
Balance at beginning of year................................ $ 3,050 $ 618
Additions (reductions):
Provision for recourse liability.......................... 5,592 2,924
Recourse claims paid...................................... (2,578) (696)
Recoveries of claims paid................................. 169 204
------- ------
Balance at end of year...................................... $ 6,233 $3,050
======= ======
- -------------------------------------------------------------------------------
</TABLE>
NOTE 18. 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>
- ----------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
Amounts held in agency accounts............................. $ 13,417 $ 11,814
Amounts held in escrow accounts............................. 9,084 9,120
Mortgage banking receivables for advanced funds............. 3,000 488
Unpaid mortgage loan principal for loans serviced for
investors................................................. 1,942,931 1,624,694
Mortgage servicing rights, net of accumulated
amortization.............................................. 10,773 6,173
Allowance for impairment of capitalized mortgage servicing
rights.................................................... 904 341
- ----------------------------------------------------------------------------------------------
</TABLE>
In 1998, 1997 and 1996, the Company sold certain servicing rights on
mortgages which had an outstanding principal balance of $68,980, $96,691 and
$41,038, respectively, and realized gains of $64, $446 and $351, respectively.
At December 31, 1998 the Company had firm commitments for the sale of
approximately $77,220 of loans held for sale. No provision for loss on the
carrying amount on loans held for sale is considered necessary at December 31,
1998.
NOTE 19. 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
S-51
<PAGE> 53
NOTE 19. REGULATORY MATTERS (CONTINUED)
judgments by the regulators about components, risk weightings and other factors.
Management believes, as of December 31, 1998, that the Company and its banks
meet all capital adequacy requirements to which they are subject.
As of December 31, 1998, 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.
The Company's and its significant banks' capital ratios are presented in
the following table:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Minimum Required to be
Required for Well Capitalized
Capital Under Prompt
Adequacy Corrective Action
Actual Purposes Regulations
----------------- ----------------- -----------------------
December 31, 1998 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Total capital to risk-weighted assets
Company............................. $450,025 11.6% $311,490 8.0% $389,363 10.0%
Mid Am Bank......................... 90,859 10.2 71,337 8.0 89,172 10.0
Citizens............................ 123,750 10.5 94,432 8.0 118,040 10.0
Ohio Bank........................... 94,917 10.5 72,161 8.0 90,201 10.0
First National...................... 43,975 10.2 34,523 8.0 43,154 10.0
Tier 1 capital to risk-weighted assets
Company............................. $345,122 8.9% $155,745 4.0% $233,618 6.0%
Mid Am Bank......................... 69,713 7.8 35,669 4.0 53,503 6.0
Citizens............................ 98,995 8.4 47,216 4.0 70,824 6.0
Ohio Bank........................... 73,642 8.2 36,081 4.0 54,121 6.0
First National...................... 32,581 7.5 17,262 4.0 25,892 6.0
Tier 1 capital to average assets
Company............................. $345,122 7.2% $191,927 4.0% $239,909 5.0%
Mid Am Bank......................... 69,713 6.9 40,351 4.0 50,438 5.0
Citizens............................ 98,995 5.5 72,128 4.0 90,160 5.0
Ohio Bank........................... 73,642 6.0 49,234 4.0 61,543 5.0
First National...................... 32,581 6.0 21,750 4.0 27,187 5.0
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
S-52
<PAGE> 54
NOTE 19. REGULATORY MATTERS (CONTINUED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Minimum Required to be
Required for Well Capitalized
Capital Under Prompt
Adequacy Corrective Action
Actual Purposes Regulations
----------------- ----------------- -----------------
December 31, 1997 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Total capital to risk-weighted assets
Company............................. $428,320 12.4% $275,380 8.0% $344,225 10.0%
Mid Am Bank......................... 80,841 10.6 60,832 8.0 76,041 10.0
Citizens............................ 67,512 10.9 49,647 8.0 62,059 10.0
Ohio Bank........................... 50,066 11.8 33,853 8.0 42,316 10.0
First National...................... 44,269 11.0 32,271 8.0 40,338 10.0
Tier 1 capital to risk-weighted assets
Company............................. $389,190 11.3% $137,690 4.0% $206,535 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
Ohio Bank........................... 45,591 10.8 16,926 4.0 25,390 6.0
First National...................... 41,308 10.2 16,135 4.0 24,203 6.0
Tier 1 capital to average assets
Company............................. $389,190 8.8% $177,653 4.0% $222,066 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
Ohio Bank........................... 45,591 8.1 22,419 4.0 28,024 5.0
First National...................... 41,308 7.7 21,437 4.0 26,796 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. Regulatory approval is required in order to pay
dividends in excess of the bank subsidiaries' earnings retained for the current
year plus retained net profits since January 1, 1996. As of December 31, 1998,
$15,586 was available for distribution to the Company as dividends without prior
regulatory approval.
NOTE 20. 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, 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
S-53
<PAGE> 55
NOTE 20. LINE OF BUSINESS REPORTING (CONTINUED)
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 table.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Financial
Community Service Parent Consolidated
Banking Affiliates and Other Total
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
1998
Net interest income................. $190,212 $ 1,271 $ (4,359) $187,124
Provision for loan losses........... 8,833 152 15,983 24,968
-------- ------- -------- --------
Net interest income after
provision......................... 181,379 1,119 (20,342) 162,156
Non-interest income................. 56,656 40,275 283 97,214
Non-interest expense................ 140,049 39,719 52,940 232,708
-------- ------- -------- --------
Income (loss) before income taxes... 97,986 1,675 (72,999) 26,662
Income tax expense (benefit)........ 30,777 697 (22,620) 8,854
-------- ------- -------- --------
Net income (loss)................... $ 67,209 $ 978 $(50,379) $ 17,808
======== ======= ======== ========
1997
Net interest income................. $180,582 $ 812 $ (780) $180,614
Provision for loan losses........... 8,290 38 2,600 10,928
-------- ------- -------- --------
Net interest income after
provision......................... 172,292 774 (3,380) 169,686
Non-interest income................. 47,129 27,887 7,151 82,167
Non-interest expense................ 135,186 27,718 1,879 164,783
-------- ------- -------- --------
Income (loss) before income taxes... 84,235 943 1,892 87,070
Income tax expense (benefit)........ 26,545 534 671 27,750
-------- ------- -------- --------
Net income (loss)................... $ 57,690 $ 409 $ 1,221 $ 59,320
======== ======= ======== ========
1996
Net interest income................. $170,787 $ 175 $ 1,152 $172,114
Provision for loan losses........... 7,713 -- -- 7,713
-------- ------- -------- --------
Net interest income after
provision......................... 163,074 175 1,152 164,401
Non-interest income................. 41,107 16,846 4,291 62,244
Non-interest expense................ 126,885 17,499 4,747 149,131
-------- ------- -------- --------
Income (loss) before income taxes... 77,296 (478) 696 77,514
Income tax expense (benefit)........ 24,173 (127) 318 24,364
-------- ------- -------- --------
Net income (loss)................... $ 53,123 $ (351) $ 378 $ 53,150
======== ======= ======== ========
- --------------------------------------------------------------------------------------------------------
</TABLE>
S-54
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the following
Registration Statements and in the related prospectuses of our report dated
February 16, 1999 on the consolidated balance sheets of Sky Financial Group,
Inc. as of December 31, 1998 and 1997, and the related consolidated statements
of income, comprehensive income, changes in shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1998; which report
is incorporated by reference into this Annual Report on Form 10-K/A.
Form S-8 No. 333-67233
Form S-8 No. 333-47315 (Post-Effective Amendment No. 1 on Form S-8 to Form S-4)
Form S-8 No. 333-60741 (Post-Effective Amendment No. 1 on Form S-8 to Form S-4)
Form S-3 No. 333-64127 (Filed as Citizens Bancshares, Inc.)
Form S-8 No. 333-18867 (Filed as Citizens Bancshares, Inc.)
/s/ CROWE, CHIZEK AND COMPANY LLP
Crowe, Chizek and Company LLP
Columbus, Ohio
May 11, 1999
