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 March 31, 2000
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 77,290,824 at April 30, 2000.
<PAGE 2>
SKY FINANCIAL GROUP, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999 ..................... 3
Consolidated Statements of Income
Three months ended March 31, 2000 and 1999 ............... 4
Consolidated Statement of Changes in Shareholders' Equity
Three months ended March 31, 2000 ........................ 5
Consolidated Statements of Cash Flows
Three months ended March 31, 2000 and 1999 ............... 6
Notes to Consolidated Financial Statements ............... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ...................................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................ 22
Item 2. Changes in Securities .................................... 22
Item 3. Defaults Upon Senior Securities .......................... 22
Item 4. Submission of Matters to a Vote of Security Holders ...... 22
Item 5. Other Information ........................................ 22
Item 6. Exhibits and Reports on Form 8-K ......................... 22
SIGNATURES ......................................................... 23
EXHIBIT INDEX ...................................................... 24
<PAGE 3>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SKY FINANCIAL GROUP, INC.
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands,
except per share data) March 31, December 31,
2000 1999
ASSETS
Cash and due from banks $ 279,495 $ 380,980
Interest-earning deposits
with financial institutions 13,565 17,086
Federal funds sold 8,000 3,100
Loans held for sale 5,715 9,006
Securities available for sale 1,809,551 1,868,839
Total loans 5,571,210 5,477,494
Less allowance for credit losses (87,830) (86,750)
Net loans 5,483,380 5,390,744
Premises and equipment 117,292 115,675
Accrued interest receivable
and other assets 314,296 278,326
TOTAL ASSETS $8,031,294 $8,063,756
LIABILITIES
Deposits
Non-interest-bearing deposits $ 672,267 $ 715,912
Interest-bearing deposits 5,126,635 5,042,779
Total deposits 5,798,902 5,758,691
Securities sold under repurchase
agreements and federal funds purchased 651,044 657,913
Debt and Federal Home Loan Bank advances 882,404 964,557
Accrued interest payable
and other liabilities 127,817 116,264
TOTAL LIABILITIES 7,460,167 7,497,425
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;
78,188,065 and 78,163,065 shares
issued in 2000 and 1999 571,345 571,543
Retained earnings 49,925 34,381
Treasury stock; 753,546 and
274,250 shares in 2000 and 1999 (14,637) (6,215)
Unearned ESOP shares (717) (717)
Accumulated other comprehensive income (34,789) (32,661)
TOTAL SHAREHOLDERS' EQUITY 571,127 566,331
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $8,031,294 $8,063,756
<PAGE 4>
SKY FINANCIAL GROUP, INC.
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, Three Months Ended
except per share data) March 31,
2000 1999
Interest Income
Loans, including fees $119,486 $109,349
Securities
Taxable 26,714 28,590
Nontaxable 2,252 2,438
Federal funds sold and other 285 530
Total interest income 148,737 140,907
Interest Expense
Deposits 50,593 51,041
Borrowed funds 21,844 16,321
Total interest expense 72,437 67,362
Net Interest Income 76,300 73,545
Provision for Credit Losses 4,337 4,190
Net Interest Income After
Provision Credit Losses 71,963 69,355
Other Income
Trust income 3,732 2,929
Service charges and fees on
deposit accounts 6,298 6,853
Mortgage banking income 2,709 6,526
Brokerage and insurance
commissions 6,510 2,889
Collection agency fees 788 599
Net securities gains 182 312
Net gains on sales of
commercial financing loans 3,362 4,906
Other income 7,036 6,247
Total other income 30,617 31,261
Other Expense
Salaries and employee benefits 30,090 29,804
Occupancy and equipment expense 9,412 9,693
Merger, integration, and
restructuring expense -- --
Other operating expense 17,904 17,458
Total other expenses 57,406 56,955
Income Before Income Taxes 45,174 43,661
Income taxes 14,068 13,780
Net Income $ 31,106 $ 29,881
Earnings per Common Share:
Basic $ 0.40 $ 0.38
Diluted $ 0.40 $ 0.38
<PAGE 5>
SKY FINANCIAL GROUP, INC.
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
(Dollars in thousands)
Accumulated
Unearned Other
Common Retained Treasury ESOP Comprehensive
Stock Earnings Stock Shares Income Total
Balance as of
December 31,1999 $571,543 $ 34,381 $ (6,215) $(717) $(32,661) $566,331
Comprehensive income
Net income 31,106 31,106
Other comprehensive
income (loss) (2,128) (2,128)
Total comprehensive
income 28,978
Common cash dividends
($.20 per share) (15,585) (15,585)
Treasury shares
acquired (10,787) (10,787)
Treasury shares
issued (702) 2,365 1,663
Fractional shares
and other items 504 23 527
Balance as of
March 31, 2000 $571,345 $ 49,925 $(14,637) $(717) $(34,789) $571,127
<PAGE 6>
SKY FINANCIAL GROUP, INC.
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands) Three Months Ended
March 31,
2000 1999
Net Cash From Operating Activities $ 17,863 $ 119,215
Investing Activities
Net decrease in interest-bearing
deposits in other banks 3,521 3,020
Net (increase) decrease in
federal funds sold (4,900) 20,308
Securities available for sale:
Proceeds from maturities and payments 121,001 222,235
Proceeds from sales 1,044 116,320
Purchases (67,538) (211,827)
Securities held to maturity:
Proceeds from maturities and payments -- 425
Proceeds from sales of loans 2,446 3,342
Net increase in loans (100,481) (2,246)
Purchases of premises and equipment (5,286) (7,523)
Purchases of life insurance contracts -- (2,652)
Proceeds from sales of premises and equipment 78 2,834
Proceeds from sales of other real estate 816 498
Net cash from investing activities (49,299) 144,734
Financing Activities
Cash transferred in connection with the
sale of branch deposits -- (91,152)
Net increase (decrease) in deposit accounts 40,211 (115,974)
Net decrease in federal funds and
repurchase agreements (6,869) (11,219)
Net decrease in short-term FHLB advances (115,500) (79,731)
Proceeds from issuance of debt
and long-term FHLB advances 170,000 40,000
Repayment of debt and long-term
FHLB advances (136,653) (8,235)
Cash dividends and fractional shares paid (15,620) (13,048)
Proceeds from issuance of common stock 1,338 907
Treasury stock purchases (6,956) (2,740)
Other items -- (17)
Net cash from financing activities (70,049) (281,209)
Net decrease in cash and due from banks (101,485) (17,260)
Effect on cash of conforming the year end
of pooled entity -- 3,331
Cash and due from banks at beginning of year 380,980 247,284
Cash and due from banks at end of period $ 279,495 $ 233,355
<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. (Sky Financial) is a financial services holding
company headquartered in Bowling Green, Ohio. Sky Financial has three bank
subsidiaries located in Ohio, southern Michigan, western Pennsylvania and
West Virginia, primarily engaged in the commercial banking business. Sky
Financial also operates businesses relating to collection activities,
broker/dealer operations, commercial finance lending, insurance, trust and
other financial related services.
The accounting and reporting policies followed by Sky Financial 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 amounts 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 Sky
Financial at March 31, 2000, 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. Sky Financial's Annual Report for the year
ended December 31, 1999, contains consolidated financial statements and
related notes which should be read in conjunction with the accompanying
consolidated financial statements.
The consolidated financial statements of Sky Financial include the accounts
of Sky Bank (Sky Bank), Mid Am Bank, The Ohio Bank (Ohio Bank), Sky Asset
Management Services, Inc. (SAMSI), Sky Investments, Inc. (SII), Sky Financial
Solutions, Inc. (SFS), Mid Am Financial Services, Inc. (MAFSI), Sky Trust,
N.A., (Sky Trust), Sky Technology Resources, Inc. (Sky Tech), Mid Am Capital
Trust I (MACT), Sky Financial Group Capital Trust I (SFGCT), First Western
Capital Trust I (FWCT), First Western Investment Services, Inc. (FWIS), First
Western Bancorp, Inc. (First Western), Picton Cavanaugh, Inc. (Picton),
Freedom Financial Life Insurance Company, Freedom Express, Inc. and various
other insignificant subsidiaries. All significant intercompany transactions
and accounts have been eliminated in consolidation.
<PAGE 8>
New Accounting Pronouncements
Beginning January 1, 2001, a new accounting standard will require all
derivatives to be recorded at fair value. Unless designated as hedges,
changes in these fair values will be recorded in the income statement. Fair
value changes involving hedges will generally be recorded by offsetting gains
and losses on the hedge and on the hedged item, even if the fair value of the
hedged item is not otherwise recorded. This is not expected to have a
material effect, but the effect will depend on derivative holdings when this
standard applies.
2. Mergers, Acquisitions, Business Formations and Divestitures
On September 30, 1999, Mahoning National Bancorp, Inc. (Mahoning Bancorp)
affiliated with Sky Financial in a tax-free exchange with a total of 11.4
million Sky Financial common shares issued in the merger. Mahoning Bancorp
was an $847 million bank holding company with offices in northeastern Ohio.
Its subsidiary, Mahoning National Bank of Youngstown, was operated as a
wholly-owned subsidiary of Sky Financial until April 14, 2000, when Sky
Financial merged Mahoning National Bank into Sky Bank.
On August 6, 1999, First Western Bancorp, Inc. affiliated with Sky Financial
in a tax-free exchange with a total of 15.0 million Sky Financial common
shares issued in the merger. First Western was a $2.2 billion bank holding
company with offices in northwestern Pennsylvania and eastern Ohio. First
Western's bank affiliate, First Western Bank, N. A., was merged into Sky
Bank.
Effective July 16, 1999, Wood Bancorp, Inc., Bowling Green, Ohio (Wood
Bancorp), affiliated with Sky Financial in a tax-free exchange with a total
of 2.3 million Sky Financial common shares issued in the merger. Wood
Bancorp was a $167 million bank holding company with offices located in
northwestern Ohio. Wood Bancorp's subsidiary, First Federal Bank, was merged
into Mid Am Bank.
Each of these mergers was accounted for as a pooling of interests.
Accordingly, all financial information has been restated to include the
historical information of the merged entities.
On May 1, 1999, Sky Financial completed its acquisition of Picton Cavanaugh,
Inc., a full-service insurance agency based in Toledo, Ohio. Picton
Cavanaugh shareholders received 0.3 million Sky Financial's common shares in
a tax-free exchange accounted for as a pooling of interests. Picton
Cavanaugh had total assets of $4.4 million and shareholders' equity of $0.9
million. Since Picton Cavanaugh's financial statements were not material
compared to Sky Financial's, prior financial statements were not restated.
<PAGE 9>
3. Securities Available for Sale
The amortized costs, unrealized gains and losses and estimated fair values at
March 31, 2000 and December 31, 1999 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
March 31, 2000 Cost Gains Losses Value
U.S. Treasury and U.S.
Government agencies $ 666,748 $ 164 $(19,173) $ 647,739
Obligations of states and
political subdivisions 189,330 1,416 (2,620) 188,126
Corporate and other
securities 19,397 -- (297) 19,100
Mortgage-backed
securities 838,474 492 (24,437) 814,529
Total debt securities
available for sale 1,713,949 2,072 (46,527) 1,669,494
Marketable equity
securities 149,124 3,074 (12,141) 140,057
Total securities
available for sale $1,863,073 $ 5,146 $(58,668) $1,809,551
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1999 Cost Gains Losses Value
U.S. Treasury and U.S.
Government agencies $ 691,045 $ 331 $(16,936) $ 674,440
Obligations of states and
political subdivisions 192,111 1,335 (2,606) 190,840
Corporate and other
securities 21,170 -- (367) 20,803
Mortgage-backed
securities 865,857 379 (24,629) 841,607
Total debt securities
available for sale 1,770,183 2,045 (44,538) 1,727,690
Marketable equity
securities 148,904 3,534 (11,289) 141,149
Total securities
available for sale $1,919,087 $ 5,579 $(55,827) $1,868,839
<PAGE 10>
4. Loans
The loan portfolios are as follows:
March 31, 2000 December 31, 1999
Real estate loans:
Construction $ 180,506 $ 176,940
Residential mortgage 1,753,804 1,744,162
Non-residential mortgage 1,309,007 1,296,019
Commercial, financial and
agricultural 1,382,408 1,411,902
Installment and credit card loans 931,682 834,106
Other loans 13,803 14,365
Total loans $5,571,210 $5,477,494
5. Debt and Federal Home Loan Bank Advances
Sky Financial's debt and Federal Home Loan Bank (FHLB) advances are as
follows:
March 31, 2000 December 31, 1999
Borrowings under bank line of credit $ 34,000 $ 84,000
Borrowings under FHLB lines of credit 677,891 763,170
Subordinated note, 7.08%, January 2008 50,000 50,000
Obligated mandatorily redeemable capital
securities of subsidiary trusts
Due February 2027 at 9.875% 25,000 25,000
Due June 2027 at 10.20% 23,600 23,600
Due May 2030 at 9.34% 60,000 --
Capital lease obligations 1,869 1,903
Other items 10,044 16,884
Total debt and FHLB advances $ 882,404 $ 964,557
6. Other Comprehensive Income
Other comprehensive income consisted of the following:
Three Months Ended
March 31,
2000 1999
Other comprehensive income
Unrealized gains (losses) arising
during period $(3,091) $(10,754)
Reclassification adjustment for
gains included in income (182) (312)
Net unrealized gain (loss) on securities
available for sale (3,273) (11,066)
Tax effect 1,145 3,881
Total other comprehensive income (loss) $(2,128) $ (7,185)
<PAGE 11>
7. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of shares outstanding during the period, as restated for
shares issued in business combinations accounted for as pooling-of-interests,
stock splits and stock dividends. Diluted earnings per share is computed
using the weighted average number of shares determined for the basic
computation plus the number of shares of common stock that would be issued
assuming all contingently issuable shares having a dilutive effect on
earnings per share were outstanding for the period.
Earnings per share data have also been restated for the 10% stock dividend
declared in September 1999 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
March 31,
2000 1999
Numerator:
Net income $31,106 $29,881
Denominator:
Weighted-average common
shares outstanding (basic) 77,620 77,998
Exercise of options 366 839
Weighted-average common
shares outstanding (diluted) 77,986 78,837
Earnings per share:
Basic $ 0.40 $ 0.38
Diluted $ 0.40 $ 0.38
8. Capital Resources
The Federal Reserve Board (FRB) has established risk-based capital guidelines
that must be observed by financial service holding companies and banks.
Failure to meet specified minimum capital requirements can result in certain
mandatory actions by primary regulators of Sky Financial and its bank
subsidiaries that could have a material effect on Sky Financial's financial
condition or results of operations. Under capital adequacy guidelines, Sky
Financial 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. Sky Financial's and its
banks' capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors. Management believes, as of March 31, 2000, that Sky Financial and
its banks meet all capital adequacy requirements to which they are subject.
Sky Financial and its banks have been notified by their respective regulators
that, as of the most recent regulatory examinations, each is regarded as well
capitalized under the regulatory framework for prompt corrective action.
<PAGE 12>
Such determinations have been made evaluating Sky Financial 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 well capitalized categorizations of Sky Financial and its bank
subsidiaries.
The following table presents the capital ratios of Sky Financial.
March 31, 2000 December 31, 1999
Total adjusted average assets
for leverage ratio $7,954,669 $7,909,479
Risk-weighted assets and
off-balance-sheet financial
instruments for capital ratio 6,273,351 6,206,820
Tier I capital 678,873 612,257
Total risk-based capital 820,457 751,976
Leverage ratio 8.5% 7.7%
Tier I capital ratio 10.8 9.9
Total capital ratio 13.1 12.1
Capital ratios applicable to Sky Financial's banking subsidiaries at
March 31, 2000 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 7.3 10.6 12.8
Mid Am Bank 7.7 9.4 11.7
Ohio Bank 6.5 8.8 11.1
In September, 1999, the Board of Directors of Sky Financial authorized
management to undertake purchases of up to 3,850,000 shares of Sky
Financial'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 Sky Financial's stock option
plan and for future stock dividend declarations. As of March 31, 2000, Sky
Financial had repurchased approximately 908,000 shares of common stock
pursuant to its 1999 repurchase program. As of April 30, 2000, Sky Financial
had repurchased approximately 1,056,000 shares of common stock pursuant to
its 1999 repurchase program.
9. Line of Business Reporting
Sky Financial 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 and
deposit-gathering. Financial service affiliates consist of non-banking
companies engaged in commercial finance lending and leasing, broker/dealer
operations, non-conforming mortgage lending, collection activities, trust and
wealth management, insurance and other financial-related services.
<PAGE 13>
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.
Prior periods have been presented to conform with current reporting
methodologies. Substantially all of Sky Financial's assets are part of the
community banking line of business. Selected segment information is included
in the following table:
Financial Parent
Three Months Ended Community Service and Consolidated
March 31, Banking Affiliates Other Total
2000
Net interest income $77,725 $ 516 $ (1,941) $ 76,300
Provision for credit losses 4,261 76 -- 4,337
Net interest income
after provision 73,464 440 (1,941) 71,963
Other income 15,567 15,584 (534) 30,617
Other expenses 44,979 14,179 (1,752) 57,406
Income (loss) before
income taxes 44,052 1,845 (723) 45,174
Income taxes 13,853 670 (455) 14,068
Net income (loss) $30,199 $ 1,175 $ (268) $ 31,106
1999
Net interest income $75,052 $ 522 $ (2,029) $ 73,545
Provision for credit losses 4,148 42 -- 4,190
Net interest income
after provision 70,904 480 (2,029) 69,355
Other income 18,180 13,231 (150) 31,261
Other expenses 45,436 11,848 (329) 56,955
Income (loss) before
income taxes 43,648 1,863 (1,850) 43,661
Income taxes 13,827 688 (735) 13,780
Net income (loss) $29,821 $ 1,175 $ (1,115) $ 29,881
<PAGE 14>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Dollars in thousands, except per share data)
Three Months Ended March 31, 2000 and 1999
Results of Operations
Net income for the first quarter of 2000 was $31,106, an increase of $1,225
over the first quarter of 1999 earnings of $29,881. Diluted earnings per
common share for the first quarter of 2000 was $.40 ($.40 basic), as
compared to $.38 ($.38 basic) for the same period in 1999. Return on average
equity was 21.87% and return on average assets was 1.57% for the first
quarter of 2000 compared to 19.48% and 1.55%, respectively, in 1999.
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's three commercial banks: Sky
Bank, Mid Am Bank and Ohio Bank. The financial service affiliates include
Sky Financial's non-banking subsidiaries, which operate businesses relating
to commercial finance lending and leasing, broker-dealer operations,
non-conforming mortgage lending, collection activities, trust and wealth
management, insurance and other financial-related services.
Sky Financial's business line results for the first quarter ended March 31,
2000 and 1999 are summarized in the table below.
Net Income (Loss)
Quarter ended March 31, 2000 1999
Community Banking $ 30,199 $ 29,821
Financial Service Affiliates 1,175 1,175
Parent and Other (268) (1,115)
Consolidated $ 31,106 $ 29,881
The increase in community banking net income in 2000 was primarily due to
growth in net interest income and reductions in non-interest expense,
partially offset by a decrease in mortgage banking income. The efficiency
ratio was 47.2% for the first quarter of 2000 compared to 47.7% in the first
quarter of 1999. The 2000 community banking results reflect a ROE of 21.08%
and a ROA of 1.56% compared to 20.56% and 1.57%, respectively, in the first
quarter of 1999.
The financial service affiliates' earnings reflect Sky Financial's continued
investment in the development and growth of these businesses. While earnings
remain modest, revenues have grown 18% in 2000, primarily due to an increase
of $3,621 in brokerage and insurance commissions.
<PAGE 15>
Parent and other includes the net funding costs of the parent company and all
significant non-recurring items of income and expense. The reason for the
improvement in parent and other business segment is a reduction in non-
interest expense.
Net Interest Income
Net interest income increased $2,755 to $76,300 in the first quarter of 2000
as compared to $73,545 for the same period in 1999. 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. For the first quarter of 2000,
average loans were $5,510,000, increasing 8% from the first quarter of 1999.
Sky Financial's net interest margin for the three months ended March 31, 2000
increased to 4.26% as compared to 4.23% for the same period in 1999.
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
Sky Financial's loan portfolio which have been incurred at each balance sheet
date. The provision for credit losses increased $147 or 4% to $4,337 in
the first quarter of 2000 compared to $4,190 in the first quarter of 1999.
The higher provision for credit losses in the first quarter of 2000 was
attributable to the recognition of changes in risk factors and Sky
Financial's application of its allowance for credit losses methodology (see
discussion under "Allowance for Credit Losses"). Net charge-offs were $3,257
or 0.24% (annualized) of average loans during the three months ended March
31, 2000, compared to $2,804 or 0.22% (annualized) for the same period in
1999.
March 31, December 31, March 31,
2000 1999 1999
Allowance for credit losses
as a percentage of loans 1.58% 1.58% 1.62%
Allowance for credit losses
as a percentage of
non-performing loans 374.33 445.10 511.28
Other Income
The change in other income reflects the emphasis of Sky Financial 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 first
quarter of 2000 was $30,617, a decrease of $644 or 2% from the $31,261 for
the same quarter of 1999. The decrease was primarily due to a decrease of
$3,817 in mortgage banking income, a decrease of $1,544 in net gains on sales
of commercial financing loans and a decrease in service charges and fees on
deposit accounts of $555. The decreases were partially offset by an increase
<PAGE 16>
of $3,621 in brokerage and insurance commissions, an increase of $803 in
trust income and an increase of $789 in other income. The decrease in
mortgage banking revenue was due to lower origination volumes caused
primarily by rising interest rates. 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.
Other Expense
Other expense for the first quarter of 2000 was $57,406, an increase of $451
or 1% from the $56,955 reported for the same quarter of 1999. The efficiency
ratio was 52.68% for the first quarter of 2000, decreasing from 53.27% for
the same quarter last year. Salaries and employee benefits, which comprise
the largest component of other expense, increased $286 or 1% in the first
quarter of 2000 as compared to the same period in 1999. Occupancy and
equipment expense decreased $281 or 3% and other expenses increased $446 or
3% to $17,904 in 2000 from $17,458 in 1999.
Income Taxes
The provision for income taxes for the first quarter of 2000 increased
$288 to $14,068 from $13,780 in 1999. The effective tax rate for the first
quarter of 2000 was 31.1% as compared to 31.6% for the same period in 1999.
Balance Sheet
At March 31, 2000, total assets were $8,031,294, a decline of $32,462 from
December 31, 1999. The decline was primarily attributable to reduced cash
and due from banks, down $101,485. At year end, excess cash was on hand for
Year 2000 preparedness. The reduction in cash resulted in reduced
borrowings, as debt and FHLB advances declined $82,153 during the quarter.
At quarter end, total loans were $5,571,210, an increase of $93,716 during
the quarter. This loan growth was funded primarily by growth in total
deposits, up $40,211 and reduced securities available for sale, down $59,288
since year end.
Shareholders' equity totaled $571,127 at March 31, 2000, increasing $4,796
from December 31, 1999. Net retained earnings (net income less cash
dividends) for the quarter totaled $15,521. This increase was offset mainly
by a net increase in treasury stock of $8,422, as Sky Financial continued its
program of systematic share repurchases for issuance in future stock
dividends and stock option plans.
<PAGE 17>
Non-Performing Assets
The following table presents the aggregate amounts of non-performing assets
and respective ratios on the dates indicated.
March 31, December 31, March 31,
2000 1999 1999
Non-accrual loans $21,842 $17,423 $13,675
Restructured loans 1,621 2,067 2,396
Total non-performing loans 23,463 19,490 16,071
Other real estate owned 3,664 3,293 2,102
Total non-performing assets $27,127 $22,783 $18,173
Loans 90 days or more past due
and not on non-accrual $ 7,099 $ 9,538 $13,734
Non-performing loans to
total loans 0.42% 0.36% 0.32%
Non-performing assets to
total loans plus other
real estate owned 0.49 0.42 0.36
Allowance for credit losses to
total non-performing loans 374.33 445.10 511.28
Loans 90 days or more past due
and not on non-accrual to
total loans 0.13 0.17 0.27
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 $38,863 and $40,825 at March 31, 2000 and
December 31, 1999, 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 Sky Financial'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 March 31, 2000, Sky Financial did not have any loan concentrations
which exceeded 10% of total loans.
<PAGE 18>
Allowance for Credit Losses
The following table presents a summary of Sky Financial's credit loss
experience for the three months ended March 31, 2000 and 1999.
2000 1999
Balance of allowance at
beginning of year $86,750 $80,748
Loans charged-off:
Real estate (348) (346)
Commercial and agricultural (2,012) (638)
Installment and credit card (3,682) (2,836)
Other loans -- --
Total loans charged-off (6,042) (3,820)
Recoveries:
Real estate 472 86
Commercial and agricultural 1,321 260
Installment and credit card 987 656
Other loans 5 14
Total recoveries 2,785 1,016
Net loans charged-off (3,257) (2,804)
Provision charged to operating
expense 4,337 4,190
Effect of conforming year end
of pooled entity 34
Balance of allowance at
end of period $87,830 $82,168
Ratio of net charge-offs to
average loans outstanding 0.24% 0.22%
Allowance for credit losses
to total loans 1.58 1.62
Allowance for credit losses
to total non-performing loans 374.33 511.28
Sky Financial 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 Sky Financial's
historical loss experience, and are reviewed for correction on a quarterly
basis, along with other factors affecting the collectibility of the loan
portfolio.
<PAGE 19>
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 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,
and internal loan review examination findings.
The following table sets forth Sky Financial's allocation of the allowance
for credit losses as of March 31, 2000 and December 31, 1999.
March 31, 2000 December 31, 1999
Construction $ 807 $ 707
Real estate 22,913 22,186
Commercial, financial
and agricultural 15,443 15,365
Installment and credit card 24,592 22,434
Other loans 929 800
Unallocated 23,146 25,258
Total $87,830 $86,750
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 thus normally
considered in terms of the nature and mix of the institution's sources and
uses of funds.
Sky Financial'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 March 31, 2000,
securities and other short-term investments with maturities of one year or
less totaled $174,389, 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
March 31, 2000, these lines of credit enable the banks to borrow up to
$891,816, of which $677,891 is currently outstanding.
Since Sky Financial 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 Sky Financial by its bank subsidiaries,
without prior regulatory approval, were limited to $31,375 at March 31, 2000.
<PAGE 20>
In March, 2000, Sky Financial renegotiated an agreement with unrelated
financial institutions which enabled Sky Financial to borrow up to $120,000
through March 6, 2001. At March 31, 2000, Sky Financial had borrowings of
$34,000 under this agreement.
On March 31, 2000, Sky Financial completed the issuance of $60,000 of trust
preferred securities. The proceeds from this issuance will be used to
continue its program of systematic share repurchases for use in future stock
dividends and stock option plans, as well as to reduce outstanding borrowings
under Sky Financial's revolving line of credit.
Asset/Liability Management
Closely related to liquidity management is the management of interest-earning
assets and interest-bearing liabilities. Sky Financial manages its rate
sensitivity position to avoid wide swings in net interest margins and to
minimize risk due to changes in interest rates. At March 31, 2000, Sky
Financial 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."
Forward-Looking Statements
This report includes forward-looking statements by Sky Financial 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 Sky Financial 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
Sky Financial 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 Sky Financial;
governmental legislation and regulation; material unforeseen changes in the
financial condition or results of operations of Sky Financial's customers;
customer reaction to and unforeseen complications with respect to Sky
Financial's restructuring or integration of acquisitions; difficulties in
realizing expected cost savings from acquisitions; difficulties associated
with data conversions in acquisitions or migrations to a single platform
system; and other risks identified, from time-to-time in Sky Financial's
other public documents on file with the Securities and Exchange Commission.
<PAGE 21>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary market risk to which Sky Financial is exposed is interest rate
risk. The primary business of Sky Financial 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 Sky Financial's financial instruments are
held for trading purposes.
Sky Financial monitors and manages its rate sensitivity position to maximize
net interest income, while minimizing the risk due to changes in interest
rates. One method Sky Financial uses to manage its interest rate risk is a
rate sensitivity gap analysis.
Sky Financial 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 Sky Financial's financial instruments
using interest rates in effect at March 31, 2000 and December 31, 1999. For
the fair value estimates, the cash flows are then discounted to year end to
arrive at an estimated present value of Sky Financial's financial
instruments. Hypothetical changes in interest rates are then applied to the
financial instruments, and the cash flows and fair values are again estimated
using these hypothetical rates. For the net interest income estimates, the
hypothetical rates are applied to the financial instruments based on the
assumed cash flows. Sky Financial 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 Sky
Financial's annual net interest income and present value of Sky Financial's
financial instruments to sudden and sustained 200 basis-point changes in
market interest rates.
March 31, December 31,
2000 1999 Guidelines
One Year Net Interest
Income Change
+200 Basis points (3.4)% (3.7)% (10.0)%
- -200 Basis points 0.7 1.7 (10.0)
Net Present Value of
Equity Change
+200 Basis points (26.1) (22.4)% (30.0)%
- -200 Basis points 19.7 15.3 (30.0)
The projected volatility of net interest income and the net present value of
equity rates to a +/- 200 basis points change at March 31, 2000 and December
31, 1999 fall within the Board of Directors guidelines.
The above analysis is based on numerous assumptions, including relative
levels of market interest rates, loan prepayments and reactions of depositors
to changes in interest rates, and should not be relied upon as being
indicative of actual results. Further, the analysis does not necessarily
contemplate all actions Sky Financial may undertake in response to changes in
interest rates.
<PAGE 22>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Sky Financial is, from time-to-time, involved in various 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 Sky
Financial.
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
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11.1) Statement Re Computation of Earnings Per Common Share
(b) Reports on Form 8-K
Not applicable.
<PAGE 23>
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: May 12, 2000
<PAGE 24>
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 7
"Earnings Per Share" on page 11 of Sky
Financial's Form 10-Q for March 31, 2000.
(27.1) Financial Data Schedule 25