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, 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 83,736,330 at October 31, 2000.
<PAGE 2>
SKY FINANCIAL GROUP, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 ............... 3
Consolidated Statements of Income
Three months ended September 30, 2000 and 1999 and
Nine months ended September 30, 2000 and 1999 ........ 4
Condensed Consolidated Statements of Changes in
Shareholders' Equity
Three months ended September 30, 2000 and 1999 and
Nine months ended September 30, 2000 and 1999 ...... 5
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999 .......... 6
Notes to Consolidated Financial Statements ............... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ...................................... 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................ 26
Item 2. Changes in Securities .................................... 26
Item 3. Defaults Upon Senior Securities .......................... 26
Item 4. Submission of Matters to a Vote of Security Holders ...... 27
Item 5. Other Information ........................................ 27
Item 6. Exhibits and Reports on Form 8-K ......................... 27
SIGNATURES ......................................................... 28
EXHIBIT INDEX ...................................................... 29
<PAGE 3>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SKY FINANCIAL GROUP, INC.
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except share data) Sept. 30, December 31,
2000 1999
ASSETS
Cash and due from banks $ 208,342 $ 380,980
Interest-earning deposits
with financial institutions 21,381 17,086
Federal funds sold 7,000 3,100
Loans held for sale 12,105 9,006
Securities available for sale 1,849,420 1,868,839
Total loans 5,816,758 5,477,494
Less allowance for credit losses (91,675) (86,750)
Net loans 5,725,083 5,390,744
Premises and equipment 118,549 115,675
Accrued interest receivable
and other assets 316,865 278,326
TOTAL ASSETS $8,258,745 $8,063,756
LIABILITIES
Deposits
Non-interest-bearing deposits $ 726,322 $ 757,537
Interest-bearing deposits 5,059,544 5,001,154
Total deposits 5,785,866 5,758,691
Securities sold under repurchase
agreements and federal funds purchased 741,264 657,913
Debt and Federal Home Loan Bank advances 918,645 915,957
Obligated mandatorily redeemable capital
securities of subsidiary trusts 108,600 48,600
Accrued interest payable
and other liabilities 120,096 116,264
TOTAL LIABILITIES 7,674,471 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;
86,670,155 and 85,979,371 shares
issued in 2000 and 1999 580,001 571,543
Retained earnings 75,765 34,381
Treasury stock; 2,512,356 and
274,250 shares in 2000 and 1999 (45,204) (6,215)
Unearned ESOP shares (450) (717)
Accumulated other comprehensive income (25,838) (32,661)
TOTAL SHAREHOLDERS' EQUITY 584,274 566,331
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $8,258,745 $8,063,756
See accompanying notes to consolidated financial statements.
<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,
2000 1999 2000 1999
Interest Income
Loans, including fees $128,516 $111,402 $371,465 $330,724
Securities
Taxable 29,331 28,725 82,510 84,735
Nontaxable 1,362 2,397 5,789 7,285
Federal funds sold and other 358 2,208 1,052 3,365
Total interest income 159,567 144,732 460,816 426,109
Interest Expense
Deposits 57,400 48,197 161,342 148,167
Borrowed funds 26,636 19,255 72,201 51,831
Total interest expense 84,036 67,452 233,543 199,998
Net Interest Income 75,531 77,280 227,273 226,111
Provision for Credit Losses 6,094 7,355 15,164 16,097
Net Interest Income After
Provision Credit Losses 69,437 69,925 212,109 210,014
Other Income
Trust income 3,952 3,290 11,420 9,194
Service charges and fees on
deposit accounts 6,968 7,029 19,961 20,786
Mortgage banking income 3,103 3,802 8,713 16,012
Brokerage and insurance
commissions 8,331 4,406 21,173 11,749
Collection agency fees 446 679 1,725 1,944
Net securities (losses) gains (3,993) 297 (3,146) 916
Net gains on sales of
commercial financing loans 361 4,982 7,586 13,766
Other income 7,414 6,271 22,218 20,576
Total other income 26,582 30,756 89,650 94,943
Other Expense
Salaries and employee benefits 30,656 30,765 88,922 91,316
Occupancy and equipment expense 9,472 9,619 28,073 29,075
Merger, integration and
restructuring expense -- 58,143 -- 58,143
Other operating expense 19,250 16,515 56,932 52,600
Total other expenses 59,378 115,042 173,927 231,134
Income (Loss) Before Income Taxes 36,641 (14,361) 127,832 73,823
Income taxes 11,491 (2,864) 40,077 24,801
Net Income (Loss) $ 25,150 $(11,497) $ 87,755 $ 49,022
Earnings (Loss) per Common Share:
Basic $ 0.30 $ (0.13) $ 1.03 $ 0.57
Diluted $ 0.30 $ (0.13) $ 1.03 $ 0.56
See accompanying notes to consolidated financial statements.
<PAGE 5>
SKY FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
(Dollars in thousands, Three Months Ended Nine Months Ended
except per share data) September 30, September 30,
2000 1999 2000 1999
Balance at
beginning of period $574,058 $619,269 $566,331 $611,713
Comprehensive income
Net income (loss) 25,150 (11,497) 87,755 49,022
Other comprehensive
income (loss) 10,073 (1,933) 6,823 (27,641)
Total comprehensive
income (loss) 35,223 (13,430) 94,578 21,381
Common cash dividends (15,353) (14,401) (46,316) (40,618)
Treasury shares
acquired (20,684) (3,917) (44,105) (10,146)
Treasury shares
issued 1,504 649 3,461 2,114
Shares issued to acquire
Meyer & Eckenrode
Insurance Group, Inc.
(663,311 shares) 9,610 -- 9,610 --
Shares issued to acquire
Picton Cavanaugh, Inc.
(317,919 shares) -- -- -- 1,174
Effect of conforming the year
end of pooled affiliate -- -- -- 1,584
Fractional shares
and other items (84) (440) 715 528
Balance at
end of period $584,274 $587,730 $584,274 $587,730
Common cash dividends
per share $ 0.18 $ 0.17 $ 0.55 $ 0.52
See accompanying notes to consolidated financial statements.
<PAGE 6>
SKY FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited) Nine Months Ended
(Dollars in thousands) September 30,
2000 1999
Net Cash From Operating Activities $ 78,651 $ 176,725
Investing Activities
Net increase in interest-bearing
deposits in other banks (4,295) (9,956)
Net (increase) decrease in
federal funds sold (3,900) 28,024
Securities available for sale:
Proceeds from maturities and payments 276,979 539,615
Proceeds from sales 272,945 163,479
Purchases (524,927) (562,717)
Securities held to maturity:
Proceeds from maturities and payments -- 2,210
Proceeds from sales of loans 4,638 16,222
Net increase in loans (352,414) (264,265)
Purchases of premises and equipment (13,703) (15,450)
Purchases of life insurance contracts -- (4,340)
Proceeds from sales of premises and equipment 783 4,603
Proceeds from sales of other real estate 3,194 1,250
Cash acquired through acquisition 364 --
Net cash from investing activities (340,336) (101,325)
Financing Activities
Cash transferred in connection with
sale of branch deposits -- (95,917)
Purchases of branch deposits, net -- 4,765
Net increase (decrease) in deposit accounts 27,175 (216,895)
Net increase (decrease) in federal funds
and repurchase agreements 83,351 (639)
Net change in short-term FHLB advances (39,200) 229,792
Proceeds from issuance of debt
and long-term FHLB advances 419,184 101,187
Repayment of debt and long-term
FHLB advances (317,296) (19,016)
Cash dividends and fractional shares paid (46,554) (37,362)
Proceeds from issuance of common stock 2,661 2,528
Treasury stock purchases (40,274) (10,145)
Net cash from financing activities 89,047 (41,702)
Net decrease in cash and due from banks (172,638) 33,698
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 $ 208,342 $ 284,313
Cash paid for interest $ 233,342 $ 202,241
Cash paid for income taxes $ 41,800 $ 30,332
Noncash Transactions
Securitization of loans held for sale $ -- $ 3,915
See accompanying notes to consolidated financial statements.
<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 primarily engaged in the commercial banking business in Ohio,
southern Michigan, western Pennsylvania and West Virginia. Sky Financial
also operates several financial services companies which complement its
banks, including a trust company, broker/dealer operation, insurance agency,
commercial finance unit and collections affiliate.
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 September 30, 2000, and its results of operations and cash flows
for the periods presented. Certain amounts in prior financial statements
have been reclassified to conform to the current presentation. 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, Mid Am Bank, The Ohio Bank (Ohio Bank), Sky Asset Management
Services, Inc. (SAMSI), Sky Investments, Inc. (SII), Sky Financial Solutions,
Inc. (SFSI), Mid Am Financial Services, Inc. (MAFSI), Sky 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), Meyer &
Eckenrode Insurance Group, Inc. (Meyer & Eckenrode), Freedom Financial Life
Insurance Company and various other insignificant subsidiaries. All
significant intercompany transactions and accounts have been eliminated in
consolidation.
Sky Financial's Board of Directors declared a 10% stock dividend on its
common stock, paid November 10, 2000 to shareholders of record October 30,
2000.
<PAGE 8>
New Accounting Pronouncements
Beginning January 1, 2001, a new accounting standard will require all
derivative financial instruments 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 because management believes all
derivative financial instruments and related hedged items will qualify for
hedge accounting treatment under the standards. The effect will depend on
derivative holdings when this standard first applies. This standard may be
adopted early at the beginning of any fiscal quarter.
2. Mergers and Acquisitions
On July 13, 2000, Sky Financial acquired the Meyer & Eckenrode Insurance
Group, Inc., a full service insurance agency based in Carnegie, Pennsylvania.
Meyer & Eckenrode shareholders received 0.66 million shares of Sky Financial
common stock in a tax-free exchange accounted for as a purchase.
On September 30, 1999, Mahoning National Bancorp, Inc. (Mahoning Bancorp)
affiliated with Sky Financial in a tax-free exchange with a total of 12.5
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 it was
merged into Sky Bank.
On August 6, 1999, First Western Bancorp, Inc. affiliated with Sky Financial
in a tax-free exchange with a total of 16.5 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 2.5 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.
The Mahoning Bancorp, First Western and Wood Bancorp mergers were accounted
for as poolings 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 0.32 million Sky Financial's common shares in
a tax-free exchange accounted for as a pooling of interests. 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
September 30, 2000 and December 31, 1999 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
September 30, 2000
U.S. Treasury and U.S.
Government agencies $ 609,571 $ 1,440 $(13,907) $ 597,104
Obligations of states and
political subdivisions 64,176 257 (866) 63,567
Corporate and other
securities 18,890 12 (304) 18,598
Mortgage-backed
securities 1,023,956 1,385 (17,878) 1,007,463
Total debt securities
available for sale 1,716,593 3,094 (32,955) 1,686,732
Marketable equity
securities 172,576 3,997 (13,885) 162,688
Total securities
available for sale $1,889,169 $ 7,091 $(46,840) $1,849,420
December 31, 1999
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:
September 30, 2000 December 31, 1999
Real estate loans:
Construction $ 179,418 $ 176,940
Residential mortgage 1,669,223 1,744,162
Non-residential mortgage 1,541,207 1,296,019
Commercial, financial and
agricultural 1,516,549 1,411,902
Installment and credit card loans 899,137 834,106
Other loans 11,224 14,365
Total loans $5,816,758 $5,477,494
5. Borrowings
Sky Financial's borrowings include bank debt, Federal Home Loan Bank (FHLB)
advances and trust preferred securities as follows:
September 30, 2000 December 31, 1999
Borrowings under bank lines of credit $ 117,049 $ 84,000
Borrowings under FHLB lines of credit 747,199 763,170
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 1,791 1,903
Other items 2,606 16,884
Total borrowings $1,027,245 $ 964,557
6. Other Comprehensive Income
Other comprehensive income consisted of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Unrealized securities gains
(losses) arising during
period $11,503 $(2,804) $ 7,353 $(41,724)
Reclassification adjustment
for (gains) losses
included in income 3,993 (297) 3,146 (916)
Net unrealized gains (losses) on
securities available for sale 15,496 (3,101) 10,499 (42,640)
Tax effect (5,423) 1,168 (3,676) 14,999
Total other comprehensive
income (loss) $10,073 $(1,933) $ 6,823 $(27,641)
<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. For the three months
ended and the nine months ended September 30, 2000, there were 3,045,000
weighted shares and 3,211,000 weighted shares, respectively, under option
excluded from the diluted earnings per share calculation as they were
anti-dilutive.
Earnings per share data have also been restated for the 10% stock dividends
declared in October 2000 and September 1999 and paid in November 2000 and
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,
2000 1999 2000 1999
Numerator:
Net income (loss) $25,150 $(11,497) $87,755 $49,022
Denominator:
Weighted-average common
shares outstanding (basic) 84,486 86,078 84,923 85,964
Effect of stock options 383 779 381 882
Weighted-average common
shares outstanding (diluted) 84,869 86,857 85,304 86,846
Earnings (loss) per share:
Basic $ 0.30 $ (0.13) $ 1.03 $ 0.57
Diluted $ 0.30 $ (0.13) $ 1.03 $ 0.56
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 September 30, 2000, that Sky Financial
and its banks meet all capital adequacy requirements to which they are
subject.
<PAGE 12>
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.
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.
September 30, 2000 December 31, 1999
Total adjusted average assets
for leverage ratio $8,086,672 $7,909,479
Risk-weighted assets and
off-balance-sheet financial
instruments for capital ratio 6,763,977 6,206,820
Tier I capital 672,269 612,257
Total risk-based capital 820,727 751,976
Leverage ratio 8.3% 7.7%
Tier I capital ratio 9.9 9.9
Total capital ratio 12.1 12.1
Capital ratios applicable to Sky Financial's banking subsidiaries at
September 30, 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 7.5 10.4 12.6
Mid Am Bank 7.8 8.9 11.1
Ohio Bank 6.5 8.2 10.4
In September, 2000, the Board of Directors of Sky Financial reauthorized
management to undertake purchases of up to an additional 5% (or approximately
4.2 million 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 future
stock dividends and use in its stock option plans or general corporate
purposes. Under the 1999 repurchase program, Sky Financial had repurchased
approximately 2,946,000 shares of common stock. As of September 30, 2000,
Sky Financial had repurchased approximately 158,000 shares of common stock
pursuant to its 2000 repurchase program.
<PAGE 13>
9. Line of Business Reporting
Prior to the third quarter of 2000, Sky Financial reported two major lines of
business: community banking and financial service affiliates. In the third
quarter of 2000, management began reporting the results of its commercial
finance lending affiliate (SFSI) separately from its other financial service
affiliates. Prior periods were restated for comparability. Community
banking includes lending and related services to businesses and consumers,
mortgage banking and deposit-gathering. Commercial finance lending includes
specialized lending to health care professionals, primarily dentists. Other
financial service affiliates consist of non-banking companies engaged in
broker/dealer operations, non-conforming mortgage lending, collection
activities, trust and wealth management, insurance and other financial-
related services.
The third quarter results reflect the implementation by Sky Financial of its
new program to retain in its loan portfolio the commercial financing loans to
health care professionals originated through its subsidiary, SFSI, which in
prior periods had been sold upon origination to investors in the secondary
market. The implementation of the new program and the elimination of gain on
sale accounting treatment, which was announced in August 2000, reduced
operating earnings by $4,086 compared to the third quarter last year. Sky
Financial has entered into amortizing interest rate swaps, whereby it pays a
fixed rate of interest and receives a variable rate. The swap is designed to
fix the rate on the borrowings of a warehouse line that is used to fund the
loan originations at SFSI. The impact of these swaps is not material to the
financial statements.
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 for the three months ended September 30, 2000 is
included in the following table:
Other
Commercial Financial Parent
Three Months Ended Community Finance Service and
September 30, Banking Lending Affiliates Other Total
2000
Net interest income $ 77,739 $ 361 $ 282 $ (2,851) $ 75,531
Provision for
credit losses 4,064 1,961 69 -- 6,094
Net interest income
after provision 73,675 (1,600) 213 (2,851) 69,437
Other income 17,485 852 12,734 (4,489) 26,582
Other expenses 44,306 4,034 11,738 (700) 59,378
Income (loss) before
income taxes 46,854 (4,782) 1,209 (6,640) 36,641
Income taxes 15,301 (1,724) 479 (2,565) 11,491
Net income (loss) $ 31,553 $(3,058) $ 730 $ (4,075) $ 25,150
<PAGE 14>
Other
Commercial Financial Parent
Three Months Ended Community Finance Service and
September 30, Banking Lending Affiliates Other Total
1999
Net interest income $ 78,352 $ 230 $ 628 $ (1,930) $ 77,280
Provision for
credit losses 4,779 -- 176 2,400 7,355
Net interest income
after provision 73,573 230 452 (4,330) 69,925
Other income 15,745 5,339 9,773 (101) 30,756
Other expenses 43,143 3,918 10,094 57,887 115,042
Income (loss) before
income taxes 46,175 1,651 131 (62,318) (14,361)
Income taxes 14,682 623 28 (18,197) (2,864)
Net income (loss) $ 31,493 $ 1,028 $ 103 $(44,121) $(11,497)
Selected segment information for the nine months ended September 30, 2000 is
included in the following table:
Other
Commercial Financial Parent
Three Months Ended Community Finance Service and
September 30, Banking Lending Affiliates Other Total
2000
Net interest income $232,768 $ 803 $ 962 $ (7,260) $227,273
Provision for
credit losses 12,999 1,961 204 -- 15,164
Net interest income
after provision 219,769 (1,158) 758 (7,260) 212,109
Other income 51,081 8,835 35,734 (6,000) 89,650
Other expenses 133,635 11,560 32,753 (4,021) 173,927
Income (loss) before
income taxes 137,215 (3,883) 3,739 (9,239) 127,832
Income taxes 43,816 (1,352) 1,383 (3,770) 40,077
Net income (loss) $ 93,399 $(2,531) $ 2,356 $ (5,469) $ 87,755
1999
Net interest income $230,016 $ 852 $ 1,116 $ (5,873) $226,111
Provision for
credit losses 13,377 -- 320 2,400 16,097
Net interest income
after provision 216,639 852 796 (8,273) 210,014
Other income 52,359 15,072 27,568 (56) 94,943
Other expenses 133,509 11,330 28,017 58,278 231,134
Income (loss) before
income taxes 135,489 4,594 347 (66,607) 73,823
Income taxes 42,999 1,736 100 (20,034) 24,801
Net income (loss) $ 92,490 $ 2,858 $ 247 $(46,573) $ 49,022
<PAGE 15>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Dollars in thousands, except per share data)
Three Months Ended September 30, 2000 and 1999
Results of Operations
Operating earnings for the third quarter of 2000 was $27,746, a decrease of
$4,007 compared to the third quarter of 1999 operating earnings of $31,753.
Diluted operating earnings per common share for the third quarter of 2000 was
$.33 ($.33 basic), as compared to $.37 ($.37 basic) for the same period in
1999. The third quarter results reflect the implementation by Sky Financial
of its new program to retain in its loan portfolio the commercial financing
loans to health care professionals originated through its subsidiary, Sky
Financial Solutions, Inc., which in prior periods had been sold upon
origination to investors in the secondary market. The implementation of the
new program and the elimination of gain on sale accounting treatment, which
was announced August 21, 2000, reduced operating earnings by $4,086, or $.05
per diluted share, compared to the third quarter last year. On an operating
basis, return on average equity (ROE) and return on average assets (ROA),
also impacted by the new program, were 18.93% and 1.36%, respectively, for
the third quarter of 2000, compared to 20.65% and 1.60%, respectively, in
1999.
On a reported basis, net income for the third quarter of 2000 was $25,150, an
increase of $36,647 over the third quarter of 1999 loss of $(11,497).
Diluted earnings per common share for the third quarter of 2000 was $.30
($.30 basic), as compared to $(.13) ($(.13) basic) for the same period in
1999. Third quarter of 2000 net income was reduced by $2,595 or $.03 per
diluted share, for net losses on the sales of securities. For the third
quarter of 1999, after-tax non-recurring items, primarily merger and
restructuring charges, reduced net income by $43,250, or $.50 per diluted
share.
Business Line Results
Sky Financial's business line results for the third quarter ended
September 30, 2000 and 1999 are summarized in the table below.
Net Income (Loss)
Quarter Ended September 30, 2000 1999
Community Banking $ 31,553 $ 31,493
Commercial Finance Lending (3,058) 1,028
Other Financial Service Affiliates 730 103
Parent and Other (4,075) (44,121)
Consolidated Total $ 25,150 $(11,497)
<PAGE 16>
The community banking net income for the third quarter of 2000 was basically
even from 1999 third quarter earnings. This was primarily due to a slight
decrease in net interest income that was offset by a lower provision for
credit losses, and the increase in non-interest income was offset by a
similar increase in non-interest expense. The efficiency ratio was 45.9% for
the third quarter of 2000 compared to 44.9% in the third quarter of 1999.
The 2000 community banking results reflect a ROE of 20.67% and a ROA of 1.58%
compared to 20.86% and 1.63%, respectively, in the third quarter of 1999.
The commercial finance lending affiliate earnings decreased $4,086 for the
third quarter of 2000 as compared to the same period in 1999. The third
quarter results reflect the implementation by Sky Financial of its new
program to retain in its loan portfolio the commercial financing loans to
health care professionals originated through its subsidiary, Sky Financial
Solutions, which in prior periods had been sold upon origination to investors
in the secondary market. The implementation of the new program and the
elimination of gain on sale accounting treatment reduced operating earnings
$4,086 compared to the third quarter of 1999.
The other financial service affiliates' earnings reflect Sky Financial's
continued investment in the development and growth of these businesses. For
the third quarter of 2000, earnings increased $627 as compared to 1999,
primarily due to earnings increases in non-conforming mortgage lending and
trust. For the third quarter of 2000, revenues increased $2,961 as compared
to 1999, primarily due to increases in brokerage and insurance commissions,
which include Meyer & Eckenrode revenues, and trust revenues.
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. 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 for the third quarter of 2000 was $75,531, a decrease of
$1,749 or 2% from $77,280 in the third quarter of 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. Average earnings assets increased
3% from the third quarter last year, with continued growth in average loans,
up 7% from last year. Sky Financial's net interest margin for the three
months ended September 30, 2000 decreased to 4.05% as compared to 4.29% for
the same period in 1999. The impact on funding costs of continued increases
in short-term interest rates over the last year and the cost of funding share
repurchases were the primary factors contributing to the net interest margin
decline.
<PAGE 17>
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 decreased $1,261 to $6,094 in the
third quarter of 2000 compared to $7,355 in the third quarter of 1999. The
higher provision for credit losses in the third quarter of 1999 was due to a
non-recurring provision for credit losses of $2,400. Excluding the
non-recurring provision in 1999, the provision for credit losses increased
$1,139 or 23% to $6,094 in the third quarter of 2000 compared to $4,955 in
the third quarter of 1999. The higher provision for credit losses was
attributable to growth in the loan portfolio. Net charge-offs were $2,437 or
0.17% (annualized) of average loans during the three months ended September
30, 2000, compared to $4,253 or 0.32% (annualized) for the same period in
1999.
September 30, December 31, September 30,
2000 1999 1999
Allowance for credit losses
as a percentage of loans 1.58% 1.58% 1.60%
Allowance for credit losses
as a percentage of
non-performing loans 450.58 445.10 506.18
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 to
offset cyclical declines in mortgage banking. Other income for the third
quarter of 2000 was $26,582, a decrease of $4,174 or 14% from the $30,756 for
the same quarter of 1999. On a reported basis, third quarter 2000 other
income was reduced $3,993 for net losses on the sales of securities. During
the quarter, Sky Financial restructured its securities portfolio to improve
its liquidity, interest rate risk position and yields on the portfolio.
Investments totaling $270,000 were sold with the proceeds reinvested. The
net losses incurred during the quarter are expected to be recouped through
higher investment yields over the next five to six quarters. Excluding net
securities gains and losses and the impact of eliminating gains on the sales
of loans at SFSI, other income for the third quarter of 2000 was $30,214, up
from $25,477 for the third quarter of 1999. Other income growth was most
significant in brokerage and insurance commissions, up $3,925, or 89%,
including $2,700 attributable to Meyer & Eckenrode, an insurance agency
acquired during the third quarter of 2000, and trust income, up $662, or 20%.
Mortgage banking income was down $699 from the same quarter last year due to
lower origination volumes in the current less favorable interest rate
environment.
<PAGE 18>
Other Expense
Other expense for the third quarter of 2000 was $59,378, a decrease of
$55,664 from the $115,042 reported for the same quarter of 1999. For the
third quarter of 2000, other expense included $2,500 of operating expenses
for Meyer & Eckenrode, which was acquired during the quarter. For the third
quarter of 1999, other expense included $58,143 of non-recurring merger,
integration and restructuring costs for 1999 acquisitions. Excluding the new
acquisition in 2000 and the non-recurring costs in 1999, other expenses for
the third quarter of 2000 were essentially flat compared to the same quarter
for 1999, as expense savings realized from the acquisitions completed in
1999, primarily related to staffing costs, have offset increased other
expenses to support revenue growth. The efficiency ratio was 55.19% for the
third quarter of 2000, up from 51.69% for the same quarter last year, with
the increase primarily related to lower current other income resulting from
the implementation of the new program at SFSI.
Income Taxes
The provision for income taxes for the third quarter of 2000 increased
$14,355 to $11,491 from $(2,864) for the same period in 1999. The credit in
1999 was due to non-recurring merger, integration and restructuring costs
during the third quarter of 1999. The effective tax rate for the third
quarter of 2000 was 31.4%.
Nine Months Ended September 30, 2000 and 1999
Results of Operations
For the nine months ended September 30, 2000, operating earnings, which were
reduced $4,086, or $.05 per diluted share by the newly implemented SFSI
program, were $90,351, or $1.06 per diluted share ($1.06 basic), compared to
$92,272, or $1.06 per diluted share ($1.07 basic) for the prior year to date.
ROA and ROE were 1.50% and 20.90%, respectively, for the year to date, versus
1.58% and 19.91%, respectively, for the prior year.
On a reported basis, including the after-tax non-recurring items, net income
for the nine months ended September 30, 2000 was $87,755, an increase of
$38,733 over the nine months ended September 30, 1999 earnings of $49,022.
For the nine months ended September 30, 1999, after-tax non-recurring items,
primarily merger and restructuring charges, reduced net income by $43,250, or
$.50 per diluted share. Diluted earnings per common share year to date for
2000 was $1.03 ($1.03 basic), as compared to $.56 ($.57 basic) for the same
period in 1999. ROA was 1.46% and ROE was 20.30% for the nine months ended
September 30, 2000 compared to 0.84% and 10.58%, respectively, in 1999.
<PAGE 19>
Business Line Results
Sky Financial's business line results for the nine months ended September 30,
2000 and 1999 are summarized in the table below.
Net Income (Loss)
Nine Months Ended September 30, 2000 1999
Community Banking $ 93,399 $ 92,490
Commercial Finance Lending (2,531) 2,858
Other Financial Service Affiliates 2,356 247
Parent and Other (5,469) (46,573)
Consolidated $ 87,755 $ 49,022
The increase in community banking net income in 2000 was primarily due to
growth in net interest income, partially offset by a decrease in mortgage
banking income. The efficiency ratio was 46.2% for the nine months ended
September 30, 2000 compared to 46.3% in the same period of 1999. The 2000
community banking results reflect a ROA of 1.59% and a ROE of 21.17% compared
to 1.61% and 20.71%, respectively, for the nine months ended September 30,
1999.
The commercial finance lending affiliate earnings decreased $5,389 for the
nine months ended September 30, 2000 as compared to the same period in 1999.
The results reflect the implementation by Sky Financial of its new program at
SFSI as explained earlier in the discussion of third quarter business line
results.
The other financial service affiliates' earnings reflect Sky Financial's
continued investment in the development and growth of these businesses. Year
to date for 2000, earnings increased $2,109 as compared to 1999, primarily
due to earnings increases in non-conforming mortgage lending and trust. For
the nine months ended September 30, 2000, revenues increased $8,166 as
compared to 1999, primarily due to increases in brokerage and insurance
commissions, which include Meyer & Eckenrode revenues, and trust revenues.
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. The year to date results for 1999 included after-tax
non-recurring merger and restructuring costs of $43,250.
Net Interest Income
Net interest income increased $2,162 to $227,273 in the nine months ended
September 30, 2000 as compared to $226,111 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 nine
months ended September 30, 2000, average loans were $5,594,734, increasing 8%
from the nine months ended September 30, 1999. Sky Financial's net interest
margin for the nine months ended September 30, 2000 decreased to 4.17% as
compared to 4.28% for the same period in 1999. The continued increase in
short-term interest rates and the cost of funding share repurchases were the
primary factors contributing to the net interest margin decline.
<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
Sky Financial's loan portfolio which have been incurred at each balance sheet
date. The provision for credit losses increased $1,467 or 11% to $15,164 in
the nine months ended September 30, 2000 compared to $13,697 (excluding the
non-recurring provision for credit losses of $2,400 made in the third quarter
of 1999) in the nine months ended September 30, 1999. The higher provision
for credit losses in the nine months ended September 30, 2000 was
attributable to growth in the loan portfolio. Net charge-offs were $10,239
or 0.24% (annualized) of average loans during the nine months ended September
30, 2000, compared to $11,318 or 0.29% (annualized) for the same period in
1999.
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 to
offset cyclical declines in mortgage banking. Other income for the nine
months ended September 30, 2000 was $89,650, a decrease of $5,293 or 6% from
the $94,943 for the same period in 1999. On a reported basis, year to date
2000 other income was reduced $3,993 for net losses on sales of securities
due to the restructuring of Sky Financial's securities portfolio as explained
earlier in the discussion of third quarter other income results. Excluding
net securities gains and losses and the impact of eliminating gains on the
sales of loans at SFSI, other income for the nine months ended September 30,
2000 was $85,210, up from $80,261 for the same period in 1999. Other income
growth was most significant in brokerage and insurance commissions, up
$9,424, or 80%, including $2,700 attributable to Meyer & Eckenrode, an
insurance agency acquired during the third quarter of 2000, and trust income,
up $2,226, or 24%. Mortgage banking income was down $7,299 or 46% from the
same period last year due to lower origination volumes caused primarily by
rising interest rates.
Other Expense
Other expense for the nine months ended September 30, 2000 was $173,927, a
decrease of $57,207 from the $231,134 reported for the same period in 1999.
For 2000, other expense included $2,500 of operating expenses for Meyer &
Eckenrode, which was acquired in the third quarter. For 1999, other expense
included $58,143 of non-recurring merger, integration and restructuring costs
for 1999 acquisitions. Excluding the new acquisition in 2000 and the
non-recurring costs in 1999, other expenses for the nine months ended
September 30, 2000 were essentially flat compared to the same period for
1999, as expense savings realized from the acquisitions completed in 1999,
primarily related to staffing costs, have offset increased other expenses to
support revenue growth. The efficiency ratio was 53.24% for the nine months
ended September 30, 2000, up from 52.84% for the same period last year, with
the increase primarily related to lower current other income resulting from
the implementation of the new program at SFSI.
<PAGE 21>
Income Taxes
The provision for income taxes for the nine months ended September 30, 2000
increased $15,276 to $40,077 from $24,801 in 1999. The effective tax rate
for the nine months ended September 30, 2000 was 31.4% as compared to 33.6%
for the same period in 1999.
Balance Sheet
At September 30, 2000, total assets were $8,258,745, an increase of $194,989
from December 31, 1999. The increase was primarily attributable to continued
strong growth in loans, up $339,264 to $5,816,758, partially offset by a
reduction in cash and due from banks of $172,638. The net growth in assets
was funded primarily by growth in total deposits, up $27,175 and borrowed
funds, up $146,039.
Shareholders' equity totaled $584,274 at September 30, 2000, increasing
$17,943 from December 31, 1999. Net retained earnings (net income less cash
dividends) for the nine months ended September 30, 2000 totaled $41,439.
This increase was offset mainly by a net increase in treasury stock of
$38,989 as Sky Financial continued to repurchase shares, as authorized by its
Board of Directors, for issuance in future stock dividends and stock option
plans (see Condensed Consolidated Statement of Changes in Shareholders'
Equity and Note 8).
Non-Performing Assets
The following table presents the aggregate amounts of non-performing assets
and respective ratios on the dates indicated.
Septmeber 30, December 31, September 30,
2000 1999 1999
Non-accrual loans $19,161 $17,423 $14,726
Restructured loans 1,185 2,067 2,177
Total non-performing loans 20,346 19,490 16,903
Other real estate owned 2,393 3,293 3,511
Total non-performing assets $22,739 $22,783 $20,414
Loans 90 days or more past due
and not on non-accrual $ 9,186 $ 9,538 $ 8,050
Non-performing loans to
total loans 0.35% 0.36% 0.32%
Non-performing assets to
total loans plus other
real estate owned 0.39 0.42 0.38
Allowance for credit losses to
total non-performing loans 450.58 445.10 506.18
Loans 90 days or more past due
and not on non-accrual to
total loans 0.16 0.17 0.15
<PAGE 22>
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 $49,682 and $40,825 at September 30, 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. 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, 2000, Sky Financial did not have any loan concentrations
which exceeded 10% of total loans.
Allowance for Credit Losses
The following table presents a summary of Sky Financial's credit loss
experience for the nine months ended September 30, 2000 and 1999.
2000 1999
Balance of allowance at
beginning of year $86,750 $80,748
Loans charged-off:
Real estate (1,080) (2,500)
Commercial and agricultural (5,560) (2,631)
Installment and credit card (9,489) (10,436)
Other loans (453) (67)
Total loans charged-off (16,582) (15,634)
Recoveries:
Real estate 926 690
Commercial and agricultural 2,632 1,190
Installment and credit card 2,778 2,414
Other loans 7 22
Total recoveries 6,343 4,316
Net loans charged-off (10,239) (11,318)
Provision charged to operating
expense 15,164 16,097
Effect of conforming year end
of pooled entity -- 33
Balance of allowance at
end of period $91,675 $85,560
Ratio of net charge-offs to
average loans outstanding 0.24% 0.29%
Allowance for credit losses
to total loans 1.58 1.60
Allowance for credit losses
to total non-performing loans 450.58 506.18
<PAGE 23>
Sky Financial maintains an allowance for credit losses at a level adequate to
absorb management's estimate of probable losses 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.
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 September 30, 2000 and December 31, 1999.
September 30, 2000 December 31, 1999
Construction $ 731 $ 707
Real estate 27,297 22,186
Commercial, financial
and agricultural 16,109 15,365
Installment and credit card 24,857 22,434
Other loans 969 800
Unallocated 21,712 25,258
Total $91,675 $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.
<PAGE 24>
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 September 30, 2000,
securities and other short-term investments with maturities of one year or
less totaled $123,808, 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, 2000, these lines of credit enable the banks to borrow up to
$835,601, of which $747,199 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 $41,015 at September 30,
2000.
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 September 30, 2000, Sky Financial had borrowings
of $90,000 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 share repurchases, as authorized by the Board of Directors, for
use in future stock dividends and stock option plans.
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 September 30, 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
<PAGE 25>
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.
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 September 30, 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.
<PAGE 26>
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.
September 30, December 31,
2000 1999 Guidelines
One Year Net Interest
Income Change
+200 Basis points (1.1)% (3.7)% (10.0)%
- -200 Basis points 0.2 1.7 (10.0)
Net Present Value of
Equity Change
+200 Basis points (29.3) (22.4)% (30.0)%
- -200 Basis points 38.3 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 September 30, 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.
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.
<PAGE 27>
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 28>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SKY FINANCIAL GROUP, INC.
/s/ W. Granger Souder, Jr.
W. Granger Souder, Jr.
Executive Vice President / General Counsel
DATE: November 14, 2000
<PAGE 29>
SKY FINANCIAL GROUP, INC.
EXHIBIT INDEX
Exhibit No. Description Page Number
(11.1) Statement Re Computation of Earnings
Per Common Share
The information required by this exhibit
is incorporated herein by reference from
the information contained in Note 7
"Earnings Per Share" on page 11 of Sky
Financial's Form 10-Q for September 30, 2000.
(27.1) Financial Data Schedule 30