UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Commission File No. 1-14473
Sky Financial Group, Inc.
(Exact Name of Registrant as Specified in its Charter)
Ohio 34-1372535
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
221 South Church Street, Bowling Green, Ohio 43402
(Address of Principal Executive Offices) (Zip Code)
(419) 327-6300
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
The number of shares outstanding of the Registrant's common stock, without
par value was 78,098,050 at November 8, 1999.
<PAGE 2>
SKY FINANCIAL GROUP, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Income
Three months ended September 30, 1999 and 1998
Nine months ended September 30, 1999 and 1998 4
Consolidated Statement of Changes in Shareholders' Equity
Nine months ended September 30, 1999 5
Consolidated Statements of Comprehensive Income
Three months ended September 30, 1999 and 1998
Nine months ended September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis and
Statistical Information 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
EXHIBIT INDEX 30
<PAGE 3>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SKY FINANCIAL GROUP, INC.
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands) September 30, December 31,
1999 1998
ASSETS
Cash and due from banks $ 284,313 $ 247,284
Interest-bearing deposits
with financial institutions 23,500 13,544
Federal funds sold 22,100 50,124
Loans held for sale 7,784 96,221
Securities available for sale 1,966,005 2,126,833
Securities held to maturity
(Estimated fair value $24,036) -- 23,910
Total loans 5,348,729 5,110,827
Less allowance for credit losses (85,560) (80,748)
Net loans 5,263,169 5,030,079
Premises and equipment 122,700 120,407
Accrued interest receivable
and other assets 269,692 324,864
TOTAL ASSETS $7,959,263 $8,033,266
LIABILITIES
Deposits
Non-interest-bearing deposits $ 728,230 $ 711,277
Interest-bearing deposits 4,970,635 5,295,635
Total deposits 5,698,865 6,006,912
Securities sold under repurchase
agreements and federal funds purchased 636,661 637,300
Debt and FHLB advances 930,291 618,328
Accrued interest payable
and other liabilities 105,716 159,013
TOTAL LIABILITIES 7,371,533 7,421,553
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;
78,553,523 and 77,961,833 shares
issued in 1999 and 1998 420,422 436,772
Retained earnings 189,473 180,355
Treasury stock; 337,527 and
1,328,310 shares in 1999 and 1998 (8,256) (18,684)
Unallocated common stock held by ESOP (717) (814)
Accumulated other comprehensive income (13,192) 14,084
TOTAL SHAREHOLDERS' EQUITY 587,730 611,713
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $7,959,263 $8,033,266
<PAGE 4>
SKY FINANCIAL GROUP, INC.
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, Three Months Ended Nine Months Ended
except per share data) September 30, September 30,
1999 1998 1999 1998
Interest Income
Loans, including fees $112,480 $111,056 $330,724 $328,023
Securities
Taxable 28,725 32,601 84,735 87,530
Nontaxable 2,397 2,551 7,285 7,555
Federal funds sold and other 1,130 1,629 3,365 4,919
Total interest income 144,732 147,837 426,109 428,027
Interest Expense
Deposits 48,197 57,643 148,167 164,531
Borrowed funds 19,255 17,048 51,831 48,483
Total interest expense 67,452 74,691 199,998 213,014
Net Interest Income 77,280 73,146 226,111 215,013
Provision for Credit Losses 7,355 4,028 16,097 13,927
Net Interest Income After
Provision Credit Losses 69,925 69,118 210,014 201,086
Other Income
Trust department income 3,290 2,772 9,194 8,517
Service charges and fees on
deposit accounts 7,029 6,362 20,786 18,071
Mortgage banking income 3,802 6,533 16,012 19,718
Brokerage and insurance
commissions 4,406 2,342 11,749 7,183
Collection agency fees 679 904 1,944 3,485
Net securities gains 297 1,317 916 1,852
Net gains on sales of
commercial financing loans 4,982 4,834 13,766 13,699
Other income 6,271 6,821 20,576 21,604
Total other income 30,756 31,885 94,943 94,129
Other Expense
Salaries and employee benefits 30,765 33,026 91,316 96,262
Occupancy and equipment expense 9,619 9,640 29,075 28,145
Merger, integration, and
restructuring expense 58,143 -- 58,143 4,904
Other operating expense 16,515 21,133 52,600 62,023
Total other expenses 115,042 63,799 231,134 191,334
Income(Loss) Before Income Taxes (14,361) 37,204 73,823 103,881
Income taxes (2,864) 11,404 24,801 31,865
Net Income (Loss) $(11,497) $ 25,800 $ 49,022 $ 72,016
Earnings (Loss) per Common Share:
Basic $ (0.15) $ 0.33 $ 0.63 $ 0.92
Diluted $ (0.15) $ 0.33 $ 0.62 $ 0.91
<PAGE 5>
SKY FINANCIAL GROUP, INC.
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated Unallocated
Other Common Stock
Common Retained Treasury Comprehensive Held By
Stock Earnings Stock Income ESOP Total
<S> <C> <C> <C> <C> <C> <C>
Balance as of
December 31,1998 $436,772 $180,355 $(18,684) $ 14,084 $ (814) $611,713
Net income 49,022 49,022
Common cash
dividends
($.57 per share) (40,618) (40,618)
Unrealized losses
on securities
available for
sale (27,641) (27,641)
Treasury shares
acquired (10,146) (10,146)
Treasury shares
issued (1,276) 3,390 2,114
Canceled treasury
shares (17,184) 17,184 --
Shares issued to
acquire Picton
Cavanaugh, Inc. 313 481 380 1,174
Effect of conforming
the year end of
pooled affiliate 1,000 596 (15) 3 1,584
Retirement of pooled
affiliate common
shares previously
acquired (897) (897)
Change in ESOP debt
and release
of shares 94 94
Fractional shares
and other items 1,694 (363) 1,331
Balance as of
September 30,1999 $420,422 $189,473 $(8,256) $(13,192) $ (717) $587,730
</TABLE>
SKY FINANCIAL GROUP, INC.
Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Net Income (Loss) $(11,497) $25,800 $ 49,022 $72,016
Other comprehensive income:
Unrealized (losses) gains
arising during period (2,160) 8,770 (41,724) 11,819
Reclassification adjustment
for gains included in income (297) (1,317) (916) (1,852)
Net unrealized (loss) gain on
securities available for sale (2,457) 7,453 (42,640) 9,967
Tax effect 861 (2,602) 14,999 (3,482)
Total other comprehensive
(loss) gain (1,596) 4,851 (27,641) 6,485
Comprehensive Income $(13,093) $30,651 $ 21,381 $78,501
<PAGE 6>
SKY FINANCIAL GROUP, INC.
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands) Nine Months Ended
September 30,
1999 1998
Net Cash From Operating Activities $ 176,725 $ 201,382
Investing Activities
Net (increase) decrease in interest-bearing
deposits in other banks (9,956) 1,980
Net decrease in federal funds sold 28,024 19,493
Securities available for sale:
Proceeds from maturities and payments 539,615 462,344
Proceeds from sales 163,479 37,744
Purchases (562,717) (966,310)
Securities held to maturity:
Proceeds from maturities and payments 2,210 109,599
Purchases -- (24,736)
Proceeds from sales of loans 16,222 29,454
Net increase in loans (264,265) (295,423)
Purchases of premises and equipment (15,450) (15,428)
Purchases of life insurance contracts (4,340) (12,000)
Proceeds from sales of premises and equipment 4,603 855
Proceeds from sales of other real estate 1,250 1,927
Net Cash From Investing Activities (101,325) (650,501)
Financing Activities
Cash transferred in connection with the
sale of branch deposits (95,917) (40,884)
Purchases of branch deposits, net 4,765 251,221
Net (decrease) increase in deposit accounts (216,895) 92,524
Net (decrease) increase in federal funds
and repurchase agreements (639) 142,323
Net increase (decrease) in short-term
FHLB advances 229,792 (77,864)
Proceeds from issuance of debt
and long-term FHLB advances 101,187 189,117
Repayment of debt and long-term FHLB advances (19,016) (56,899)
Cash dividends and fractional shares paid (37,362) (29,899)
Proceeds from issuance of common stock 2,528 3,412
Treasury stock purchases (10,145) (31,743)
Other items -- (558)
Net Cash From Financing Activities (41,702) 440,750
Net Increase (Decrease) in Cash and
Due From Banks 33,698 (8,369)
Effect on Cash of Conforming the Year End
of Pooled Entity 3,331 --
Cash and Due From Banks at Beginning of Year 247,284 226,278
Cash and Due From Banks at End of Period $ 284,313 $ 217,909
Noncash transactions:
Securitization of loans held for sale $ 3,915 $ 241
<PAGE 7>
SKY FINANCIAL GROUP, INC.
Notes to Consolidated Financial Information (Unaudited)
(Dollars in thousands, except per share data)
1. Accounting Policies
Sky Financial Group, Inc. (the Company) is a bank holding company
headquartered in Bowling Green, Ohio, which owns and operates four banks
primarily engaged in the commercial banking business. The Company also
operates businesses relating to collection services, broker-dealer
operations, insurance, commercial finance lending, and other financial
related services.
The accounting and reporting policies followed by Sky Financial Group, Inc.
conform to generally accepted accounting principles and to general practices
within the financial services industry. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amount of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements. Actual results
could differ from those estimates. The allowance for loan losses and fair
values of financial instruments are particularly subject to change.
These interim financial statements are prepared without audit and reflect all
accruals of a normal recurring nature which, in the opinion of management,
are necessary to present fairly the consolidated financial position of the
Company at September 30, 1999, and its results of operations and cash flows
for the periods presented. The accompanying consolidated financial
statements do not contain all financial disclosures required by generally
accepted accounting principles. The Company's Annual Report for the year
ended December 31, 1998, contains consolidated financial statements and
related notes which should be read in conjunction with the accompanying
consolidated financial statements.
The consolidated financial statements of the Company include the accounts of
Sky Bank, Mid Am Bank, The Ohio Bank (Ohio Bank), The Mahoning National Bank
of Youngstown (Mahoning), Sky Asset Management Services, Inc. (SAMSI), Sky
Investments, Inc. (SII), Sky Financial Solutions, Inc. (SFSI), Mid Am
Financial Services, Inc. (MAFSI), Sky Insurance Agency, Inc. (Sky Insurance),
Picton Cavanaugh, Inc. (Picton Cavanaugh), Freedom Financial Life Insurance
Company (FFLIC), Mid Am Private Trust, N.A. (MAPT), Sky Technology Resources,
Inc. (Sky Tech), Mid Am Capital Trust I (MACT), First Western Capital Trust I
(FWCT) and various other insignificant subsidiaries. All significant
intercompany transactions and accounts have been eliminated in consolidation.
2. New Accounting Pronouncements
Beginning January 1, 2001, a new accounting standard will require all
derivatives to be recorded at fair value. Unless designated as hedges,
changes in these fair values will be recorded in the income statement. Fair
value changes involving hedges will generally be recorded by offsetting gains
and losses on the hedge and on the hedged item, even if the fair value of the
<PAGE 8>
hedged item is not otherwise recorded. Based on the current portfolio, this
standard is not expected to have a material effect on the Company's financial
statements, but the effect will depend on derivative holdings when this
standard applies.
Mortgage loans originated in mortgage banking are converted into securities
on occasion. A new accounting standard for 1999 allows classifying these
securities as available for sale, trading, or held to maturity, instead of
the current requirement to classify as trading. This standard is not
expected to have a material effect on the Company's financial statements, but
the effect will vary depending on the level and designation of
securitizations as well as on market price movements.
3. Mergers, Acquisitions, Business Formations and Divestitures
Effective September 30, 1999, Sky Financial Group, Inc. completed its
acquisition of Mahoning National Bancorp, Inc., headquartered in Youngstown,
Ohio. Mahoning National Bancorp, Inc. was an $847 million one-bank holding
company. Under the terms of the transaction, shareholders of Mahoning
National Bancorp, Inc. received approximately 11,375,000 shares of the
Company's common stock in a tax-free exchange accounted for as a pooling of
interests. The Company expects to merge The Mahoning National Bank of
Youngstown into Sky Bank in the second quarter of 2000, when it will complete
its data conversion.
Effective August 6, 1999, Sky Financial Group, Inc. completed its acquisition
of First Western Bancorp, Inc. First Western Bancorp, Inc. was a
$2.2 billion bank holding company headquartered in New Castle, Pennsylvania.
Under the terms of the transaction, shareholders of First Western Bancorp,
Inc. received approximately 14,964,000 shares of the Company's common stock
in a tax-free exchange accounted for as a pooling of interests. Immediately
following the affiliation, First Western Bancorp, Inc.'s bank affiliate,
First Western Bank, N.A., was merged into Sky Bank (formerly Citizens Banking
Company).
Effective July 16, 1999, Sky Financial Group, Inc. completed its acquisition
of Wood Bancorp, Inc. and its affiliate, First Federal Bank, Bowling Green,
Ohio. First Federal Bank was a $167 million federal savings bank with seven
offices in northwest Ohio. Under the terms of the transaction, shareholders
of Wood Bancorp, Inc. received 2,312,000 shares of the Company's common stock
in a tax-free exchange accounted for as a pooling of interests. Immediately
following the affiliation, First Federal was merged into Mid Am Bank.
The following is a summary of the separate results of operations of the
Company, Mahoning National Bancorp, Inc., First Western Bancorp, Inc. and
Wood Bancorp, Inc. for the six months ended June 30, 1999 and the years ended
December 31, 1998 and 1997:
Six Months Ended
June 30, 1999 1998 1997
Net interest income
Company $ 93,944 $187,124 $180,614
Mahoning National Bancorp, Inc. 18,745 35,990 34,369
First Western Bancorp, Inc. 33,753 62,100 59,704
Wood Bancorp, Inc. 3,639 7,080 6,528
Combined $150,081 $292,294 $281,215
<PAGE 9>
Net income
Company $ 40,509 $ 17,808 $ 59,320
Mahoning National Bancorp, Inc. 7,787 13,863 12,941
First Western Bancorp, Inc. 10,922 17,923 20,282
Wood Bancorp, Inc. 1,301 2,369 1,675
Combined $ 60,519 $ 51,963 $ 94,218
Effective May 1, 1999, Sky Financial Group, Inc. completed its acquisition of
Picton Cavanaugh, Inc., a full service insurance agency which provides a wide
array of property, casualty, surety, professional liability, health, life and
executive benefit insurance products to individuals and businesses
nationwide. Picton Cavanaugh was formed in 1898 and is headquartered in
Toledo, Ohio. Under the terms of the transaction, shareholders of Picton
Cavanaugh received approximately 318,000 shares of the Company's common stock
in a tax-free exchange accounted for as a pooling of interests. The
financial statements were not restated for this merger due to immateriality.
Effective December 4, 1998, The Ohio Bank, Findlay, Ohio, affiliated with the
Company in a transaction accounted for as a pooling of interests.
Shareholders of The Ohio Bank received 76.532 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 approximately 6.4 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 0.932 shares of Company common stock for each share of Mid Am
stock owned, with cash paid in lieu of fractional shares. A total of
approximately 21.8 million Company common shares were issued in the merger.
Mid Am had assets of approximately $2.3 billion, with 83 banking offices
located in western Ohio and southern Michigan.
Effective May 12, 1998, Century Financial Corporation, Rochester,
Pennsylvania (CFC), merged into the Company. The transaction was affected
through the exchange of 0.959 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 approximately 4.9 million Company common shares were
issued in the merger. CFC had assets of approximately $453 million with 13
branches in Beaver and Butler counties in Pennsylvania. Century National
Bank, CFC's bank subsidiary, is now operated as part of Citizens's branch
network.
Effective March 6, 1998, UniBank, Steubenville, Ohio, affiliated with the
Company by merging into Citizens. The transaction was affected through the
exchange of 32.065 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 approximately 2.3 million Company common shares were
issued in the merger. UniBank had assets of approximately $216 million with
12 offices in Jefferson and Columbiana counties in Ohio, and is operated as
part of Citizen's branch network.
<PAGE 10>
4. Merger, Integration and Restructuring Expenses
In the third quarter of 1999, the Company recorded merger, integration and
restructuring charges of $58,143 ($41,690 after tax). The after-tax
non-recurring charges for the third quarter of 1999 included a $24,700
after-tax expense related to the mergers and restructuring of Wood Bancorp,
Inc., First Western Bancorp, Inc. and Mahoning National Bancorp, Inc., a
$14,200 after-tax impairment loss related to prior branch acquisitions, a
$2,800 after-tax expense for contractual payments related to changes in
executive management and a $1,600 after-tax provision for credit losses
related to the merged banks. As of September 30, 1999, the remaining unpaid
charges were $11,213, the majority of which are expected to be paid during
the fourth quarter of 1999. In 1998, the Company recorded merger,
integration and restructuring charges totaling $54,487 ($38,382 after tax).
The majority of the charges were associated with the merger and integration
of the combined operations of Citizens Bancshares, Inc., Mid Am, Inc. and The
Ohio Bank. As of September 30, 1999, the remaining unpaid charges were
$4,930, the majority of which are expected to be paid during the fourth
quarter of 1999.
5. Securities
Securities Available for Sale
The amortized costs, unrealized gains and losses and estimated fair values at
September 30, 1999 and December 31, 1998 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
September 30, 1999 Cost Gains Losses Value
U.S. Treasury and U.S.
Government agencies $ 720,252 $ 2,523 $ (7,696) $ 715,079
Obligations of states and
political subdivisions 200,193 1,591 (1,941) 199,843
Corporate and other
securities 62,544 384 (2,648) 60,280
Mortgage-backed
securities 903,500 1,482 (14,589) 890,393
Total debt securities
available for sale 1,886,489 5,980 (26,874) 1,865,595
Marketable equity
securities 99,811 6,187 (5,588) 100,410
Total securities
available for sale $1,986,300 $12,167 $(32,462) $1,966,005
<PAGE 11>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
U.S. Treasury and U.S.
Government agencies $ 672,895 $ 7,225 $ (589) $ 679,531
Obligations of states and
political subdivisions 211,148 4,174 (357) 214,965
Corporate and other
securities 82,928 4,826 (255) 87,499
Mortgage-backed
securities 1,042,791 7,185 (2,366) 1,047,610
Total debt securities
available for sale 2,009,762 23,410 (3,567) 2,029,605
Marketable equity
securities 95,414 4,526 (2,712) 97,228
Total securities
available for sale $2,105,176 $27,936 $(6,279) $2,126,833
Securities Held to Maturity
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
U.S. Treasury and U.S.
Government agencies $ 14,998 $ 2 $ (2) $ 14,998
Obligations of states and
political subdivisions 8,852 126 -- 8,978
Corporate and other
securities 60 -- -- 60
Total securities
held to maturity $ 23,910 $ 128 $ (2) $ 24,036
Securities held to maturity of approximately $6,800 were transferred from
held to maturity to available for sale upon completion of the merger of
Mahoning National Bancorp, Inc. in the third quarter of 1999.
6. Loans
The loan portfolios are as follows:
September 30, 1999 December 31, 1998
Real estate loans:
Construction $ 164,027 $ 175,706
Residential mortgage 1,727,190 1,739,128
Non-residential mortgage 1,279,137 1,251,981
Commercial, financial and
agricultural 1,281,383 1,087,511
Installment and credit card loans 885,525 848,648
Other loans 11,467 7,853
Total loans $5,348,729 $5,110,827
<PAGE 12>
7. Capital Resources
The Federal Reserve Board (FRB) has established risk-based capital guidelines
that must be observed by bank holding companies and banks. Under these
guidelines, total qualifying capital is categorized into two components:
Tier I and Tier II capital. Tier I capital generally consists of common
shareholders' equity, perpetual preferred stock (subject to limitations) and
minority interests in subsidiaries. Subject to limitations, Tier II capital
includes certain other preferred stock and debentures, and a portion of the
reserve for credit losses. These ratios are expressed as a percentage of
risk-adjusted assets, which include various risk-weighted percentages of
off-balance sheet exposures, as well as assets on the balance sheet. The FRB
regulations governing the various capital ratios do not recognize the effects
of SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities" on capital relating to changes in market value of securities
available for sale.
At September 30, 1999, a minimum Tier I capital ratio of 4.00% and a total
capital ratio of 8.00% were required. The Company's qualifying capital at
September 30, 1999 exceeded both the Tier I and Tier II risk-based capital
guidelines. In addition, a capital leverage ratio is used in connection with
the risk-based capital standards which is defined as Tier I capital divided
by total average assets adjusted for certain items. Included in Tier I
capital are $48,600 of capital securities issued by the Company through
special purpose trust subsidiaries. The following table presents the various
capital and leverage ratios of the Company.
September 30, 1999 December 31, 1998
Total adjusted average assets
for leverage ratio $7,817,691 $7,900,171
Risk-weighted assets and
off-balance-sheet financial
instruments for capital ratio 6,097,494 5,769,206
Tier I capital 601,217 559,924
Total risk-based capital 728,406 689,022
Leverage ratio 7.7% 7.1%
Tier I capital ratio 9.9 9.7
Total capital ratio 11.9 11.9
Capital ratios applicable to the Company's banking subsidiaries at September
30, 1999 were as follows:
Total
Tier I Risk-based
Leverage Capital Capital
Regulatory Capital Requirements
Minimum 4.0% 4.0% 8.0%
Well-capitalized 5.0 6.0 10.0
Bank Subsidiaries
Sky Bank 7.0 10.4 12.1
Mid Am Bank 7.6 9.2 11.5
Ohio Bank 6.7 9.0 11.4
Mahoning 9.7 15.1 16.3
<PAGE 13>
In September, 1999, the Board of Directors of the Company authorized
management to undertake purchases of up to 3,850,000 shares of the Company's
outstanding common stock over a twelve month period in the open market or in
privately negotiated transactions. The shares reacquired are held as
treasury stock and reserved for use in the Company's stock option plan and
for future stock dividend declarations. As of November 8, 1999, the Company
had repurchased approximately 235,000 shares of common stock pursuant to its
1999 repurchase program. Under the 1998 plan, the Company repurchased
approximately 504,000 shares of common stock.
8. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of shares outstanding during the period. Diluted earnings per
share is computed using the weighted average number of shares determined for
the basic computation plus the number of shares of common stock that would be
issued assuming all contingently issuable shares having a dilutive effect on
earnings per share were outstanding for the period.
Earnings per share data have also been restated for the 10% stock dividend
declared in September and paid November 1, 1999.
The weighted average number of common shares outstanding for basic and
diluted earnings per share computations were as follows:
(Shares in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Numerator:
Net income $(11,497) $25,800 $49,022 $72,016
Denominator:
Weighted-average common
shares outstanding (basic) 78,253 77,859 78,148 77,991
Exercise of options 708 997 803 1,054
Weighted-average common
shares outstanding (diluted) 78,961 78,856 78,951 79,045
Earnings per share:
Basic $ (0.15) $ 0.33 $ 0.63 $ 0.92
Diluted $ (0.15) $ 0.33 $ 0.62 $ 0.91
<PAGE 14>
9. Line of Business Reporting
The Company manages and operates two major lines of business: Community
Banking and Financial Service Affiliates. Community Banking includes lending
and related services to businesses and consumers, mortgage banking, deposit-
gathering and institutional trust services. Financial Service Affiliates
consist of non-banking companies engaged in commercial finance lending and
leasing, broker/dealer operations, insurance, non-conforming mortgage
lending, collection activities, wealth management and other financial related
services. The business lines are identified by the entities through which
the product or service is delivered.
The reported line of business results reflect the underlying core operating
performance within the business units. Parent and Other is comprised of the
parent company and several smaller business units. It includes the net
funding cost of the parent company and intercompany eliminations. Expenses
for centrally provided services and support are fully allocated based
principally upon estimated usage of services. All significant non-recurring
items of income and expense company-wide are included in Parent and Other.
Substantially all of the Company's assets are part of the Community Banking
line of business. Prior periods have been presented to conform with current
reporting methodologies. Selected segment information is included in the
following tables.
Financial Parent
Three Months Ended Community Service and Consolidated
September 30, Banking Affiliates Other Total
1999
Net interest income $78,352 $ 858 $ (1,930) $ 77,280
Provision for credit losses 4,779 176 2,400 7,355
Net interest income
after provision 73,573 682 (4,330) 69,925
Other income 18,674 12,195 (113) 30,756
Other expenses 45,178 12,128 57,736 115,042
Income (loss) before
income taxes 47,069 749 (62,179) (14,361)
Income taxes 15,042 290 (18,196) (2,864)
Net income (loss) $32,027 $ 459 $(43,983) $(11,497)
1998
Net interest income $74,977 $ 289 $ (2,120) $ 73,146
Provision for credit losses 3,995 33 -- 4,028
Net interest income
after provision 70,982 256 (2,120) 69,118
Other income 20,808 10,364 713 31,885
Other expenses 53,778 9,987 34 63,799
Income (loss) before
income taxes 38,012 633 (1,441) 37,204
Income taxes 11,932 269 (797) 11,404
Net income (loss) $26,080 $ 364 $ (644) $ 25,800
<PAGE 15>
Financial Parent
Nine Months Ended Community Service and Consolidated
September 30, Banking Affiliates Other Total
1999
Net interest income $230,016 $ 1,968 $ (5,873) $226,111
Provision for credit losses 13,377 320 2,400 16,097
Net interest income
after provision 216,639 1,648 (8,273) 210,014
Other income 60,921 34,175 (153) 94,943
Other expenses 139,512 34,233 57,389 231,134
Income (loss) before
income taxes 138,048 1,590 (65,815) 73,823
Income taxes 44,167 663 (20,029) 24,801
Net income (loss) $ 93,881 $ 927 $(45,786) $ 49,022
1998
Net interest income $218,394 $ 807 $ (4,188) $215,013
Provision for credit losses 11,840 87 2,000 13,927
Net interest income
after provision 206,554 720 (6,188) 201,086
Other income 60,212 29,864 4,053 94,129
Other expenses 156,587 28,988 5,759 191,334
Income (loss) before
income taxes 110,179 1,596 (7,894) 103,881
Income taxes 35,029 646 (3,810) 31,865
Net income (loss) $ 75,150 $ 950 $ (4,084) $ 72,016
Item 2. Management's Discussion and Analysis and Statistical Information
(Dollars in thousands, except per share data)
Three Months Ended September 30, 1999 and 1998
Results of Operations
Net loss for the third quarter of 1999 was $11,497, a decrease of $37,297
over the third quarter of 1998 earnings of $25,800. Diluted earnings
per common share for the third quarter of 1999, giving effect to the 10%
stock dividend, was $(.15) ($(.15 basic), as to compared to $.33 ($.33 basic)
for the same period in 1998. Reported net income for the third quarter of
1999 includes after-tax non-recurring items which reduced net income $43,250
or $.55 per diluted share. The after-tax non-recurring charges for the third
quarter of 1999 included a $24,700 after-tax expense related to mergers and
restructuring, a $14,200 after-tax impairment loss related to prior branch
acquisitions, a $2,800 after-tax expense for contractual payments related to
changes in executive management and a $1,600 after-tax provision for credit
losses related to merged banks.
<PAGE 16>
Operating earnings, which exclude the after-tax non-recurring items,
increased $5,953 or 23% to $31,753 for the third quarter of 1999 as compared
to $25,800 for the same period in 1998. Operating earnings per diluted share
for 1999 increased 21% to $.40 from $.33 in 1998. On this same basis, ROE
was 20.65% and ROA was 1.60% in 1999 compared to 15.97% and 1.30%,
respectively, in 1998.
Business Line Results
Sky Financial Group, Inc. is managed along two major lines of business: the
community banking group and the financial service affiliates. The community
banking group is comprised of the Company's four commercial banks: Sky Bank,
Mid Am Bank, Ohio Bank and Mahoning. The financial service affiliates
include the Company's non-banking subsidiaries, which operate businesses
relating to commercial finance lending and leasing, broker-dealer operations,
insurance, non-conforming mortgage lending, collection activities, wealth
management and other financial related services.
The Company's business line results for the third quarter ended September 30,
1999 and 1998 are summarized in the table below.
Net Income (Loss)
Quarter ended September 30, 1999 1998
Community Banking $ 32,027 $ 26,080
Financial Service Affiliates 459 364
Parent and Other (43,983) (644)
Consolidated $(11,497) $ 25,800
The increase in community banking net income in 1999 was primarily due to
reductions in non-interest expense. The efficiency ratio was 45.7% for the
third quarter of 1999 compared to 54.9% in the third quarter of 1998.
The 1999 community banking results reflect a ROE of 21.15% and a ROA of 1.65%
compared to 16.13% and 1.33%, respectively, in the third quarter of 1998.
The financial service affiliates' earnings reflect the Company's continued
investment in the development and growth of these businesses. While earnings
remain modest, revenues have grown 18% in 1999.
Parent and other includes the net funding costs of the parent company and all
significant non-recurring items of income and expense. The third quarter
1999 results included a non-recurring provision for credit losses of $2,400
($1,560 after tax) and merger, integration and restructuring costs of $58,143
($41,690 after tax).
Net Interest Income
Net interest income increased $4,134 to $77,280 in the third quarter of 1999
as compared to $73,146 for the same period in 1998. For the third quarter of
1999, average loans were $5,300,000, increasing 7% from the third quarter of
1998. Net interest income, the difference between interest income earned on
interest-earning assets and interest expense incurred on interest-bearing
liabilities, is the most significant component of the Company's earnings.
Net interest income is affected by changes in the volumes, rates and
<PAGE 17>
composition of interest-earning assets and interest-bearing liabilities. The
Company's net interest margin for the three months ended September 30, 1999
increased to 4.29% as compared to 4.07% for the same period in 1998.
Provision for Credit Losses
The provision for credit losses represents the charge to income necessary to
adjust the allowance for loan losses to an amount that represents
management's assessment of the estimated probable credit losses inherent in
the Company's loan portfolio which have been incurred at each balance sheet
date. The provision for credit losses increased $3,327 or 83% to $7,355 in
the third quarter of 1999 compared to $4,028 in the third quarter of 1998.
The higher provision for credit losses in the third quarter of 1999 was
attributable to the recognition of changes in risk factors and the Company's
application of its allowance for credit losses methodology (see discussion
under "Asset Quality"), primarily in the newly merged banks. The Company
estimates the additional provision for credit losses in the newly merged
banks was $2,400. Net charge-offs were $4,253 or 0.32% (annualized) of
average loans during the three months ended September 30, 1999, compared to
$3,135 or 0.25% (annualized) for the same period in 1998.
September 30, December 31, September 30,
1999 1998 1998
Allowance for credit losses
as a percentage of loans 1.60% 1.58% 1.42%
Allowance for credit losses
as a percentage of
non-performing loans 506.18 517.75 480.55
Other Income
The change in other income reflects the emphasis of the Company on
expanding its fee-based businesses, diversifying its revenue sources and
adding to profitability beyond traditional banking products and services,
offset by a cyclical decline in mortgage banking. Other income for the third
quarter of 1999 was $30,756, a decrease of $1,129 or 4% from the $31,885 for
the same quarter of 1998. The decrease was primarily due to a decrease of
$2,731 in mortgage banking income, a decrease of $1,020 in net securities
gains and a decrease in collection agency fees of $225. The decreases were
partially offset by an increase of $2,064 in brokerage and insurance
commissions, an increase of $667 in service charges and fees on deposit
accounts and an increase of $518 in trust department fee income. The
decrease in mortgage banking revenue was due to lower origination volumes
caused primarily by rising interest rates. The decrease in collection agency
fees was primarily due to a reorganization of the collection agency
business. The increase in brokerage and insurance commissions was primarily
due to the acquisition of Picton Cavanaugh in the second quarter of 1999 and
increased volumes.
<PAGE 18>
Other Expense
Other expense, excluding non-recurring charges, for the third quarter of 1999
was $56,899, a decrease of $6,900 or 11% from the $63,799 reported for the
same quarter of 1998. The reduction in core operating expenses reflects the
continuing benefits from the restructuring efforts to consolidate bank
charters, convert computer systems and redesign the workforce, as well as
cost savings achieved from the integration of the recently completed bank
mergers. The efficiency ratio, excluding non-recurring items, was 51.66% for
the third quarter of 1999, decreasing from 59.50% for the same quarter last
year. Salaries and employee benefits which comprise the largest component of
other expense decreased $2,261 or 7% in the third quarter of 1999 due to
savings realized from the consolidation of ten previously separate banks into
four banking units and elimination of duplicate positions. Occupancy and
equipment remained level and other expenses decreased $4,618 or 22% to
$16,515 in 1999 from $21,133 in 1998. The decrease in other expenses was
primarily due to efficiencies realized from consolidating the banks and the
conversion and integration of systems and processes within the Company.
Income Taxes
The provision for income taxes for the third quarter of 1999 decreased
$14,268 due to pre-tax non-recurring merger, integration and restructuring
expenses of $58,143. The effective tax rate for the third quarter of 1999,
excluding non-recurring charges, was 31.2% as compared to 30.7% for the same
period in 1998.
Nine Months Ended September 30, 1999 and 1998
Results of Operations
Net income for the nine months ended September 30, 1999 was $49,022, a
decrease of $22,994 or 32% from the nine months ended September 30, 1998
earnings of $72,016. Diluted earnings per common share year to date for
1999, giving effect to the 10% stock dividend, was $.62 ($.63 basic), as
compared to $.91 ($.92 basic) for the same period in 1998. After-tax non-
recurring items reduced year to date 1999 net income by $43,250 or $.55 per
diluted share and reduced year to date 1998 net income by $1,972 or $.03 per
diluted share.
Operating earnings, which exclude the after-tax non-recurring items,
increased $18,284 or 25% to $92,272 for the nine months ended September 30,
1999 as compared to $73,988 for the same period in 1998. Operating earnings
per diluted share for 1999 increased 25% to $1.17 from $.94 in 1998. On this
same basis, ROE was 19.91% and ROA was 1.58% in 1999 compared to 15.66% and
1.31%, respectively, in 1998.
<PAGE 19>
Business Line Results
Sky Financial Group, Inc. is managed along two major lines of business: the
community banking group and the financial service affiliates. The community
banking group is comprised of the Company's four commercial banks: Sky Bank,
Mid Am Bank, Ohio Bank and Mahoning. The financial service affiliates
include the Company's non-banking subsidiaries, which operate businesses
relating to commercial finance lending and leasing, broker-dealer operations,
insurance, non-conforming mortgage lending, collection activities, wealth
management and other financial related services.
The Company's business line results for the nine months ended September 30,
1999 and 1998 are summarized in the table below.
Net Income (Loss)
Nine Months Ended September 30, 1999 1998
Community Banking $ 93,881 $ 75,150
Financial Service Affiliates 927 950
Parent and Other (45,786) (4,084)
Consolidated $ 49,022 $ 72,016
The increase in community banking net income in 1999 was primarily due to
reductions in non-interest expense. The efficiency ratio was 47.0% year-to-
date for 1999 compared to 55.0% for 1998. The 1999 community banking results
reflect a ROE of 21.04% and a ROA of 1.64% compared to 16.81% and 1.35%,
respectively, for the nine months ended September 30, 1998.
The financial service affiliates' earnings reflect the Company's continued
investment in the development and growth of these businesses. While earnings
remain modest, revenues have grown 14% in 1999.
Parent and other includes the net funding costs of the parent company and all
significant non-recurring items of income and expense. For 1999, results
included a non-recurring provision for credit losses of $2,400 ($1,560 after
tax) and merger, integration and restructuring costs of $58,143 ($41,690
after tax). For 1998, results included one-time recoveries of $3,740 ($2,884
after tax), a non-recurring provision for credit losses of $2,000 ($1,300
after tax) and merger, integration and restructuring costs of $4,904 ($3,555
after tax).
Net Interest Income
Net interest income increased $11,098 to $226,111 in the nine months ended
September 30, 1999 as compared to $215,013 for the same period in 1998. Net
interest income, the difference between interest income earned on interest-
earning assets and interest expense incurred on interest-bearing liabilities,
is the most significant component of the Company's earnings. Net interest
income is affected by changes in the volumes, rates and composition of
interest-earning assets and interest-bearing liabilities. The Company's net
interest margin for the nine months ended September 30, 1999 increased to
4.28 in 1999 as compared to 4.19% for the same period in 1998.
<PAGE 20>
Provision for Credit Losses
The provision for credit losses represents the charge to income necessary to
adjust the allowance for loan losses to an amount that represents
management's assessment of the estimated probable credit losses inherent in
the Company's loan portfolio which have been incurred at each balance sheet
date. The provision for credit losses increased $2,170 or 16% to $16,097 for
the nine months ended September 30, 1999 compared to $13,927 for the same
period in 1998. The higher provision for credit losses in 1999 was
attributable to the recognition of changes in risk factors and the Company's
application of its allowance for credit losses methodology (see discussion
under "Asset Quality"), primarily in the merged banks. Net charge-offs were
$11,318 or 0.29% (annualized) of average loans during the nine months ended
September 30, 1999, compared to $9,061 or 0.25% (annualized) for the same
period in 1998.
Other Income
The increase in other income reflects the emphasis of the Company on
expanding its fee-based businesses, diversifying its revenue sources and
adding to profitability beyond traditional banking products and services,
partially offset by a cyclical decline in mortgage banking. Other income for
the nine months ended September 30, 1999 was $94,943, an increase of $2,289
or 2% from the $92,654 for the same period of 1998 excluding a $1,475
favorable legal settlement. The increase was primarily due to an increase of
$2,715 in service charges and fees on deposit accounts, an increase of $4,566
in brokerage and insurance commissions, and an increase of $677 in trust
department fee income. The increases were partially offset by a decrease of
$3,706 in mortgage banking revenue and a decrease of $1,541 in collection
agency fees. The increase in brokerage and insurance commissions was
primarily due to the acquisition of Picton Cavanaugh in the second quarter of
1999 and increased volumes. The increase in trust department fee income was
due to the increase in customers. The decrease in mortgage banking revenue
was due to lower origination volumes caused primarily by rising interest
rates. The decrease in collection agency fees was primarily due to a
reorganization of the collection agency business.
Other Expense
Other expense, excluding non-recurring items, for the nine months ended
September 30, 1999 was $172,991, a decrease of $13,439 or 7% from the
$186,430 reported for the same period of 1998. The reduction in core
operating expenses reflects the continuing benefits from the restructuring
efforts to consolidate bank charters, convert computer systems and redesign
the workforce, as well as cost savings achieved from the integration of hte
recently completed bank mergers. The efficiency ratio, excluding non-
recurring items, was 52.83% for the nine months ended September 30, 1999,
decreasing from 59.78% for the same period in 1998. Salaries and employee
benefits which comprise the largest component of other expense decreased 5%
year to date for 1999 due to savings realized from the consolidation of ten
previously separate banks into four banking units and elimination of
duplicate positions. Occupancy and equipment expense increased $930 or 3%.
Other expenses decreased $9,423 or 15% to $52,600 in 1999 from $62,023 in
1998. The decrease in other expenses was primarily due to efficiencies
realized from consolidating the banks and the conversion and integration of
systems and processes within the Company.
<PAGE 21>
Income Taxes
The provision for income taxes for the nine months ended September 30, 1999
decreased $7,064, or 22%, to $24,801 compared to $31,865 for the same period
in 1998 due to a decrease in pre-tax income. The effective tax rate for 1999
was 33.6% as compared to 30.7% for the same period in 1998.
Asset Quality
The following table presents the aggregate amounts of non-performing assets
and respective ratios on the dates indicated.
September 30, December 31, September 30,
1999 1998 1998
Non-accrual loans $14,726 $13,570 $14,344
Restructured loans 2,177 2,026 518
Total non-performing loans 16,903 15,596 14,862
Other real estate owned 3,511 1,977 2,058
Total non-performing assets $20,414 $17,573 $16,920
Loans 90 days or more past due
and not on non-accrual $ 8,050 $ 7,797 $10,278
Non-performing loans to
total loans 0.32% 0.31% 0.30%
Non-performing assets to
total loans plus other
real estate owned 0.38 0.34 0.34
Allowance for credit losses to
total non-performing loans 506.18 517.75 480.55
Loans 90 days or more past due
and not on non-accrual to
total loans 0.15 0.15 0.20
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 $28,814 and $30,423 at September 30, 1999 and
December 31, 1998, respectively, and are being closely monitored by
management and the Boards of Directors of the subsidiaries. The
classification of these loans, however, does not imply that management
expects losses on each of these loans, but rather that a higher level of
scrutiny is prudent under the circumstances. The decrease in loans where
some concern exists is primarily attributable to the Company's continuous
process of loan review, which has identified various improvements in the
financial condition of certain of the individual borrowers. In the opinion
of management, these loans require close monitoring despite the fact that
they are performing according to their terms. Such classifications relate to
specific concerns relating to each individual borrower and do not relate to
any concentrated risk elements common to all loans in this group.
As of September 30, 1999, the Company did not have any loan concentrations
which exceeded 10% of total loans.
<PAGE 22>
The following table presents a summary of the Company's credit loss
experience for the nine months ended September 30, 1999 and 1998.
1999 1998
Balance of allowance at
beginning of year $80,748 $66,553
Loans charged-off:
Real estate 2,500 958
Commercial and agricultural 2,631 3,780
Installment and credit card 10,436 8,638
Other loans 67 5
Total loans charged-off 15,634 13,381
Recoveries:
Real estate 690 473
Commercial and agricultural 1,190 1,894
Installment and credit card 2,414 1,914
Other loans 22 39
Total recoveries 4,316 4,320
Net loans charged-off 11,318 9,061
Provision charged to operating
expense 16,097 13,927
Balance of allowance at
end of period $85,560 $71,419
Ratio of net charge-offs to
average loans outstanding 0.29% 0.25%
Allowance for credit losses
to total loans 1.60 1.42
Allowance for credit losses
to total non-performing loans 506.18 480.55
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.
<PAGE 23>
The unallocated allowance both recognizes the estimation risk associated with
the allocated general and specific allowances and incorporates management's
evaluation of existing conditions that are not included in the allocated
allowance determinations. These conditions are reviewed quarterly by
management and include general economic conditions, credit quality trends,
recent loss experience, bank regulatory examination results, and internal
loan review examination findings.
The following table sets forth the Company's allocation of the allowance for
credit losses as of September 30, 1999 and December 31, 1998.
September 30, 1999 December 31, 1998
Construction $ 745 $ 693
Real estate 10,072 8,091
Commercial, financial
and agricultural 23,816 25,739
Installment and credit card 21,775 18,008
Other loans 501 1,820
Unallocated 28,651 26,397
Total $85,560 $80,748
Liquidity
The liquidity of a financial institution reflects its ability to provide
funds to meet requests, to accommodate possible outflows in deposits and to
take advantage of interest rate market opportunities. Funding of loan
requests, providing for liability outflows, and management of interest rate
fluctuations require continuous analysis in order to match the maturities of
specific categories of short-term loans and investments with specific types
of deposits and borrowings. Financial institution liquidity is this normally
considered in terms of the nature and mix of the institution's sources and
uses of funds.
The Company's banking subsidiaries maintain adequate liquidity primarily
through the use of investment securities and unused borrowing capacity, in
addition to maintaining a stable core deposit base. At September 30, 1999,
securities and other short-term investments with maturities of one year or
less totaled $188,786, 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
September 30, 1999, these lines of credit enable the banks to borrow up to
$886,867, of which $736,024 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 without
prior regulatory approval were limited to $25,110 at September 30,1999.
<PAGE 24>
In September, 1999, the Company renegotiated an agreement with unrelated
financial institutions which enabled the Company to borrow up to $100,000
through March 8, 2000. At September 30, 1999, the Company had borrowings of
$77,000 under this agreement.
Asset/Liability Management
Closely related to liquidity management is the management of interest-earning
assets and interest-bearing liabilities. The Company manages its rate
sensitivity position to avoid wide swings in net interest margins and to
minimize risk due to changes in interest rates. At September 30, 1999, the
Company had a manageable negative gap position and therefore does not expect
to experience any significant fluctuations in its net interest income as a
consequence of changes in interest rates. See also Item. 3, "Quantitative
and Qualitative Disclosures About Market Risk".
Year 2000 Readiness
The Year 2000 problem is the result of many existing computer programs using
only the last two digits, rather than four digits, to indicate the year.
Such programs may be unable to recognize a year that begins with "20" rather
than "19". If not corrected, many computer programs could cause systems to
fail or produce erroneous results.
Since 1996, the Company has been preparing for the Year 2000 problem and has
been taking steps to ensure that its internal systems are secure from
disruption of operations. The Company's Year 2000 project team, comprised of
representatives of the Company and its affiliates, has invested more than
22,000 hours to date on this project. The Company's core project team has
met at least monthly addressing both internal and external issues. The team
has identified over 650 systems that could be potentially affected by the
Year 2000 problem. These systems include all information technology systems
and computer chip embedded functions such as vaults, elevators, security
systems, heating and cooling equipment and other operating facilities. The
Company's efforts have been directed by a 5-phase plan to be completed in
preparation for the Year 2000. The phases, which were established by the
federal agencies that regulate financial institutions, include awareness,
assessment, renovation, validation and implementation. These agencies are
conducting special examinations of insured banks to see that they are taking
the necessary steps to be prepared for the century date change. The Company
and its affiliates are working closely with these agencies and have been
following their specific criteria to assess our progress in Year 2000
readiness.
With regard to information technology systems, the Company utilizes standard
industry hardware and widely used, licensed banking software for most of its
information technology needs. The software packages are purchased, and the
Company utilizes such software without material program modifications.
Because of its reliance upon third parties, the Company has obtained
assurances from its primary hardware and software vendors that its systems
are Year 2000 compliant. Additionally, all mission critical hardware and
software systems (identified as 61 systems by the project team) have been
tested and validated and have been deemed Year 2000 compliant. Furthermore,
the Company has completed all scheduled vendor inquiries and testing for non-
information technology systems, including building and banking equipment.
<PAGE 25>
Externally, the Company has contacted its business partners regarding their
Year 2000 preparedness. These partners include significant 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 and consumer clients
regarding Year 2000 issues.
The Company has developed and adopted a comprehensive contingency plan in the
unlikely event critical systems fail to function after the century date
changes. Alternative methods of doing business have been developed and have
been 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.
The Company is dependent on the continued operations of numerous third party
vendors, suppliers, utilities and service providers. Any interruption in a
third party's ability to provide goods and services, such as
telecommunications, utilities and transportation, could create Year 2000
problems for the Company. In addition, the failure of adequate Year 2000
preparation by the Company's commercial business customers could adversely
effect the Company.
The external costs of the Company's Year 2000 project is estimated at
$1,200,000. External costs include equipment replacement or upgrade, seminar
sponsorships, vendor payments, and customer communication and education.
Additionally, the Company estimates that internal costs will amount to
$500,000, comprised primarily of personnel expense.
Forward-Looking Statements
This report includes forward-looking statements by the Company relating to
such matters as anticipated operating results, prospects for new lines of
business, technological developments, economic trends (including interest
rates), reorganization transactions and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for forward-
looking statements, and the purpose of this paragraph is to secure the use of
the safe harbor provisions. While the Company believes that the assumptions
underlying the forward-looking statements contained herein and in other
public documents are reasonable, any of the assumptions could prove to be
inaccurate, and accordingly, actual results and experience could differ
materially from the anticipated results or other expectations expressed by
the Company in its forward-looking statements. Factors that could cause
actual results or experience to differ from results discussed in the forward-
looking statements include, but are not limited to: economic conditions;
volatility and direction of market interest rates; capital investment in and
operating results on non-banking business ventures of the Company; the
ability of the Company's broker/dealer subsidiary to recruit registered
representatives; governmental legislation and regulation; material unforeseen
changes in the financial condition or results of operations of the Company's
customers; customer reaction to and unforeseen complications with respect to
the Company's restructuring or integration of acquisitions; unforeseen
difficulties in realizing expected cost savings from acquisitions; product
redesign initiative; the effect of the year 2000 on the Company, its computer
systems, customers, vendors and service suppliers; and other risks
identified, from time-to-time in the Company's other public documents on file
with the Securities and Exchange Commission.
<PAGE 26>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary market risk to which the Company is exposed is interest rate
risk. The primary business of the Company and the composition of its balance
sheet consists of investments in interest-earning assets, which are funded by
interest-bearing liabilities. These financial instruments have varying
levels of sensitivity to changes in the market rates of interest, resulting
in market risk. None of the Company's financial instruments are held for
trading purposes.
One method the Company uses to manage its interest rate risk is a rate
sensitivity gap analysis. The Company also monitors its interest rate risk
through a sensitivity analysis, whereby it measures potential changes in its
future earnings and the fair values of its financial instruments that may
result from one or more hypothetical changes in interest rates. This
analysis is performed by estimating the expected cash flows of the Company's
financial instruments using interest rates in effect at September 30, 1999.
The present value of financial instruments is calculated using estimated cash
flows based on weighted-average contractual rates and terms, then discounted
at the estimated current market interest rate for similar financial
instruments. Hypothetical changes in interest rates are then applied to the
financial instruments, and the cash flows and fair values are again estimated
using these hypothetical rates. For the net interest income estimates, the
hypothetical rates are applied to the financial instruments based on the
assumed cash flows. The Company applies these interest rate shocks to its
financial instruments up and down 200 basis points.
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.
September 30,
1999 Guidelines
One Year Net Interest
Income Change
+200 Basis points (3.5)% (10.0)%
- -200 Basis points 0.7 (10.0)
Net Present Value of
Equity Change
+200 Basis points (18.0) (30.0)%
- -200 Basis points 13.7 (30.0)
Prior year end data for comparison purposes is not available. The projected
volatility of net interest income and the net present value of equity rates
to a +/- 200 basis points change at September 30, 1999 fall within the Board
of Directors guidelines.
<PAGE 27>
The above analysis is based on numerous assumptions, including relative
levels of market interest rates, loan prepayments and reactions of depositors
to changes in interest rates, and should not be relied upon as being
indicative of actual results. Further, the analysis does not necessarily
contemplate all actions the Company may undertake in response to changes in
interest rates.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in lawsuits and claims, which arise in the normal
course of business. In the opinion of management, any liabilities that may
result from these lawsuits and claims will not materially affect the
financial position or results of operations of the Company.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At the Special Meeting of Sky Financial Group, Inc. Shareholders on July 21,
1999, ballot totals for the approval of the Amended and Restated Agreement
and Plan of Merger dated as of April 19, 1999, by and among Sky Financial
Group, Inc., First Western Bancorp, Inc. and First Western Acquisition
Corporation (Transitory Sub) were as follows:
FOR 28,321,085 62.63%
AGAINST 924,676 2.04%
ABSTAIN 516,585 1.14%
Item 5. Other Information
Not applicable.
<PAGE 28>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. Statement Re Computation of Earnings Per Common Share
(b) Reports on Form 8-K
The Company filed a report on Form 8-K with the Securities and Exchange
Commission as of July 29, 1999, describing the completion of the Company's
acquisition of Wood Bancorp, Inc.
The Company filed a report on Form 8-K with the Securities and Exchange
Commission as of August 30, 1999, describing the completion of the Company's
acquisition of First Western Bancorp, Inc.
The Company filed a report on Form 8-K/A with the Securities and Exchange
Commission as of September 28, 1999, reporting the financial statements and
pro forma financial information required pursuant to Item 7 of Form 8-K with
respect to the merger of First Western Bancorp, Inc.
The Company filed a report on Form 8-K with the Securities and Exchange
Commission as of October 1, 1999, describing the completion of the Company's
acquisition of Mahoning National Bancorp, Inc., the change in executive
management of the Company, the declaration of a 10% common stock dividend and
the reauthorization of the Company's common stock repurchase plan.
<PAGE 29>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SKY FINANCIAL GROUP, INC.
/s/ Kevin T. Thompson
Kevin T. Thompson
Executive Vice President / Chief Financial Officer
DATE: November 15, 1999
<PAGE 30>
SKY FINANCIAL GROUP, INC.
EXHIBIT INDEX
Exhibit No. Description Page Number
(11.1) Statement Re Computation of Earnings
Per Common Share
The information required by this exhibit
is incorporated herein by reference from
the information contained in Note 8
"Earnings Per Share" on page 12 of the
Company's Form 10-Q for September 30, 1999.
(27.1) Financial Data Schedule 30
(99.1) Form 8-K describing the completion of the
Company's acquisition of Wood Bancorp, Inc.
The information required by this exhibit
is incorporated herein by reference from
the Company's Form 8-K dated July 16, 1999,
filed with the Securities and Exchange
Commission on July 29, 1999.
(99.2) Form 8-K describing the completion of the
Company's acquisition of First Western Bancorp, Inc.
The information required by this exhibit
is incorporated herein by reference from
the Company's Form 8-K dated August 30, 1999,
filed with the Securities and Exchange
Commission on August 30, 1999.
(99.3) Form 8-K reporting the financial statements required
pursuant to Item 7 of Form 8-K with respect to the
merger of First Western Bancorp, Inc.
The information required by this exhibit
is incorporated herein by reference from
the Company's Form 8-K dated September 28, 1999,
filed with the Securities and Exchange
Commission on September 28, 1999.
(99.4) Form 8-K describing the completion of the Company's
acquisition of Mahoning National Bancorp, Inc., the
change in executive management of the Company, the
declaration of a 10% common stock dividend and the
reauthorization of the Company's common stock
repurchase plan.
The information required by this exhibit
is incorporated herein by reference from
the Company's Form 8-K dated October 1, 1999,
filed with the Securities and Exchange
Commission on October 1, 1999.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets, the Consolidated Statements of Income and
Management's Discussion and Analysis and Statistical Information and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 284,313 284,313
<INT-BEARING-DEPOSITS> 23,500 23,500
<FED-FUNDS-SOLD> 22,100 22,100
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 1,966,005 1,966,005
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 5,348,729 5,348,729
<ALLOWANCE> 85,560 85,560
<TOTAL-ASSETS> 7,959,263 7,959,263
<DEPOSITS> 5,698,865 5,698,865
<SHORT-TERM> 636,661 636,661
<LIABILITIES-OTHER> 105,716 105,716
<LONG-TERM> 930,291 930,291
0 0
0 0
<COMMON> 420,422 420,422
<OTHER-SE> 167,308 167,308
<TOTAL-LIABILITIES-AND-EQUITY> 7,959,263 7,959,263
<INTEREST-LOAN> 112,480 330,724
<INTEREST-INVEST> 31,122 92,020
<INTEREST-OTHER> 1,130 3,365
<INTEREST-TOTAL> 144,732 426,109
<INTEREST-DEPOSIT> 48,197 148,167
<INTEREST-EXPENSE> 67,452 199,998
<INTEREST-INCOME-NET> 77,280 226,111
<LOAN-LOSSES> 7,355 16,097
<SECURITIES-GAINS> 297 916
<EXPENSE-OTHER> 115,042 231,134
<INCOME-PRETAX> (14,361) 73,823
<INCOME-PRE-EXTRAORDINARY> (14,361) 73,823
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (11,497) 49,022
<EPS-BASIC> (0.15) 0.63
<EPS-DILUTED> (0.15) 0.62
<YIELD-ACTUAL> 4.29 4.28
<LOANS-NON> 14,726 14,726
<LOANS-PAST> 8,050 8,050
<LOANS-TROUBLED> 2,177 2,177
<LOANS-PROBLEM> 28,814 28,814
<ALLOWANCE-OPEN> 82,459 80,748
<CHARGE-OFFS> 6,474 15,634
<RECOVERIES> 2,220 4,316
<ALLOWANCE-CLOSE> 85,560 85,560
<ALLOWANCE-DOMESTIC> 59,983 59,983
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 25,577 25,577
</TABLE>
