Exhibit 13
REFLECTING THE COMMUNITIES WE SERVE
SKY FINANCIAL GROUP, INC.
2000 ANNUAL REPORT
[LOGO] SKY
Under A Bright White Sun And Clear Blue Sky. Sky Financial Group is a
diversified financial services company regionally positioned to serve
communities in the heartland of Ohio, Michigan, Pennsylvania, Indiana and West
Virginia.
In addition to full-service banking operations, we provide clients with a
wide range of related services including: trust, investment and brokerage
services; personal and commercial insurance; and we are one of the country's
leading providers of dental practice financing.
As a company, we're driven to continuously improve both the quality and
diversity of the financial options we offer, while individually, every Sky
employee strives to strengthen client relationships and maximize our mutual
opportunities for success.
From the "around-the-corner" convenience of our banking centers, to the
latest e-commerce solution, Sky Financial is a community partner, committed to
offering products and services that meet the current and future needs of all our
clients, in every community we serve.
All under a bright white sun and clear blue sky.
Sky Financial Group
[PHOTO]
Banking
Sky Financial Group currently has over 200 banking centers, providing retail and
commercial clients with a full range of products and services; from 150 ATM
locations to Internet banking, home equity loans to commercial cash management
products.
Our banking operation functions as a group of local offices, allowing us
to build personal client relationships and develop new business opportunities.
Community-based loan officers are close to the client and responsible for making
local decisions based on their client's needs. This service-oriented process is
the core of an operating philosophy that will enable us to maximize the service
potential for every client we serve.
[PHOTO]
Investments
Through our licensed investment representatives, clients have access to
financial advisory services and a diverse selection of products ranging from
basic investments to no-load funds, stocks, bonds, traditional mutual funds and
tax-deferred annuities.
[PHOTO]
Trust
Regional trust offices are located within each of our banking regions, making it
possible to build on our close-to-the-client personal relationships and make
trust, investment management and estate planning part of our total financial
service. Commercial clients are assisted with the development of customized
benefit plans such as pension and profit sharing and 401(k).
[PHOTO]
Insurance
Our two insurance affiliates; Meyer & Eckenrode, based in Western Pennsylvania
and Picton Cavanaugh, based in Northwest Ohio, offer both retail and commercial
clients a comprehensive range of products and services including auto,
homeowners, life, healthcare and property & casualty insurance.
[PHOTO]
Healthcare Financing
Sky Financial Solutions is an industry leader in providing dentists and other
healthcare professionals with specialized financing. From new office start-ups
to equipment financing, and practice acquisition, Sky Financial Solutions
understands the needs of the medical professional.
CONTENTS
Letter to Shareholders 2
A reflection of the
communities we serve. 6
Reflecting our clients'
capabilities. 8
Reflecting the needs
of our clients. 10
Reflecting our clients'
interests. 12
Reflecting the needs
of business. 14
Reflecting the needs
of our neighbors. 16
Sky Board of Directors 18
Financial Report 19
Summary of Financial Data 20
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 21
Reports of Management and
Independent Auditors 34
Consolidated Balance Sheets 35
Consolidated Statements
of Income 36
Consolidated Statements
of Changes in
Shareholders' Equity 37
Consolidated Statements
of Cash Flows 38
Notes to Consolidated
Financial Statements 39
Sky Management 60
Affiliate Boards of Directors 61
Shareholder Information
and Acknowledgements 62
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)
Percent
2000 1999 Change
- -----------------------------------------------------------------------------------------
For the Year
Operating earnings/(1)/ $ 118,076 $ 123,793 (4.6)%
Net income 114,373 71,182 60.7
Return on average assets/(1)/ 1.46% 1.58%
Return on average common equity/(1)/ 20.42% 20.18%
Per Common Share Data
Diluted operating earnings/(1)/ $ 1.39 $ 1.43 (2.8)%
Basic net income 1.35 0.83 62.7
Diluted net income 1.35 0.82 64.6
Dividends 0.73 0.70 4.3
Book value at year end 7.31 6.61 10.6
At Year End
Assets $8,386,802 $8,063,756 4.0%
Loans 5,916,098 5,477,494 8.0
Deposits 5,891,932 5,758,691 2.3
Shareholders' equity 609,690 566,331 7.7
Average for the Year
Assets $8,090,747 $7,832,705 3.3%
Loans 5,656,836 5,230,048 8.2
Deposits 5,768,736 5,774,041 (0.1)
Shareholders' equity 578,307 613,528 (5.7)
- -----------------------------------------------------------------------------------------
Quarterly Financial Highlights
First Second Third Fourth
2000
Net interest income $76,300 $75,442 $75,531 $76,523
Provision for credit losses 4,337 4,733 6,094 7,086
Net income 31,106 31,499 25,150 26,618
Operating earnings/(1)/ 31,106 31,499 27,746 27,725
Basic net income per share 0.36 0.37 0.30 0.32
Diluted net income per share 0.36 0.37 0.30 0.32
Diluted operating earnings
per share/(1)/ 0.36 0.37 0.33 0.33
1999
Net interest income $73,545 $75,286 $77,280 $77,534
Provision for credit losses 4,190 4,552 7,355 4,615
Net income (loss) 29,881 30,638 (11,497) 22,160
Operating earnings/(1)/ 29,881 30,638 31,753 31,521
Basic net income (loss) per share 0.35 0.36 (0.13) 0.26
Diluted net income (loss) per share 0.34 0.35 (0.13) 0.26
Diluted operating earnings
per share/(1)/ 0.34 0.35 0.37 0.36
(1) For comparability purposes, certain ratios and financial data include
non-recurring gains, merger and restructuring expenses and non-recurring
provisions for credit losses. After-tax non-recurring items reduced net income
$3.7 million and $52.6 million in 2000 and 1999, respectively.
DEAR SHAREHOLDERS,
In 2000, Sky Financial Group ("Sky") achieved outstanding financial results and
made significant progress in positioning itself for long-term growth and
success. Earnings, excluding non-recurring items and the results of our
subsidiary Sky Financial Solutions, rose to $1.46 per share in 2000 compared to
$1.39 per share for 1999. Core return on average shareholders' equity and return
on average assets were an outstanding 20.42% and 1.46%, respectively, for 2000.
During the third quarter of 2000, Sky began retaining loans originated by
Sky Financial Solutions in our portfolio and recognizing income over the life of
the loans, versus selling the loans and recognizing income immediately. We
believe this change reflects our commitment to long-term shareholder value. Sky
Financial Solutions is one of the leading lenders to dentists in the United
States, and its loan production has expanded by a compounded annual growth rate
of 24% since 1997 while maintaining outstanding credit quality. Including the
effect of Sky Financial Solutions and non-recurring items, Sky's net income in
2000 totaled $114.4 million, or $1.35 per diluted share, compared to $71.2
million, or $.82 per diluted share in 1999, an increase of 65%.
In a year in which asset quality deteriorated at many financial
institutions, I am pleased to report that Sky's asset quality remained very
strong. Year-end non-performing loans amounted to only .36% of total loans and
the allowance for credit losses equaled
435% of non-performing loans. Our total
allowance for loan losses compared to
loans was 1.58% at December 31, 2000, and
[PHOTO] our net loan losses for 2000 were only
.28% of loans. These ratios were
consistent with our excellent performance
in 1999.
2
Sky continued to perform in the top quartile of the 100 largest bank
holding companies in return on shareholders' equity and key asset quality
ratios. Our return on assets and efficiency ratio, both impacted by the
previously mentioned change at Sky Financial Solutions, were still superior to
the average in our industry.
One Company, One Culture.
In 2000, we initiated four key strategies that will enable our employees to more
effectively focus attention on our clients. Under the banner of "One Company,
One Culture," these strategies create a common direction to our goals
while giving employees both the motivation and freedom to perform up to and
beyond expectations.
The first and most critical strategy was to establish a client-needs-based
sales process we call "Sky Trek." Our biggest challenge is revenue growth and
the Sky Trek process is designed to produce results through analyzing and
meeting the financial needs of our clients. Early results have been encouraging.
After two years of no deposit growth, consistent application of the Sky Trek
process enabled us to grow deposits over $100 million during the fourth quarter
of 2000.
The second important strategy, which is also a part of Sky Trek, was to
support our sales effort with highly effective client service. The result was
a program called "Service Quest," which establishes high performance standards
and encourages employees to strive to exceed client expectations. Service Quest
also includes on-going measurement of client satisfaction, a feedback mechanism
that is essential to the success of Sky Trek.
[chart inset]
2000 Performance Achievements vs
100 Largest Bank Holding Companies
Sky Top 25 Top 50
- ------------------------------------------------------
Return on Average Equity 20.42% 20.28% 16.64%
Return on Average Assets 1.46% 1.56% 1.28%
Efficiency Ratio 53.37% 52.74% 56.90%
Non-performing Loans
to Total Loans .36% .42% .57%
Allowance for Credit Losses
to Non-performing Loans 435% 347% 233%
(Based on internally-compiled operating results, excluding non-recurring items.)
The third and most publicly visible strategy was the organization of our
banking operations into six regions, all converting to the Sky Bank name. These
regions are designed to create client-focused, community banking operations
along geographic and size parameters. Each of Sky's six regions is under the
direction of a regional president who is charged with client-driven, client-
responsive sales and delivery of highly competitive financial services within a
defined geographic area. Our regional presidents, featured throughout the
following pages, live within their respective regions and have a deep
understanding of the unique economic and social framework of their particular
markets.
3
The management freedom enjoyed by each of the regions enables it to operate
very much like a community bank, with the regional presidents expected to share
their authority with officers and employees, allowing them to make decisions on
a client-by-client basis. However, under the umbrella of our Community Banking
Group, the regional management team is responsible for its results, and
performance is monitored closely. The community bank model not only offers us
the greatest opportunity for success in our current markets, it is also easily
recreated when we add other financial institutions to the Sky network.
The fourth and final strategic initiative was the creation of technology
and operational support areas that will allow the regional banking organizations
to more effectively pursue and develop profitable client relationships. This is
the start of a two- to three-year process designed to relieve customer service
employees of many operational tasks and free them to better serve our clients.
Whenever possible, we will extract operational process responsibilities from
marketing, sales, and relationship management functions.
Successful implementation of all four strategic initiatives will allow us
to more fully realize the efficiencies of our six-region structure and enable
us to provide focused attention to the needs of our clients, while continuing to
build the "Sky" brand throughout our markets.
Building On Our Strengths.
We added to our insurance brokerage business in July of 2000 when we purchased
Meyer & Eckenrode Insurance Group, located near Pittsburgh, PA. Meyer &
Eckenrode generates approximately $100 million in insurance premiums annually.
This new acquisition, along with our other insurance affiliate Picton Cavanaugh,
will benefit our commercial banking clients by providing products such as
healthcare and property & casualty insurance.
In 2000, we decided to exit three fee-based businesses that did not meet
our profitability criteria or provide us with cross-sale opportunities for our
banking clients. These businesses were: a Florida-based collection company; a
sub-prime mortgage lender based in Indiana; and an independent investment
representative business that operated in 29 states.
4
During 2001, we will:
. Concentrate every day on our client-needs-based sales process in order to
grow revenue faster than the industry averages.
. Focus on growing our trust, investment, and insurance brokerage businesses,
all of which are fee-producing and synergistic with our banking business.
. Pursue acquisitions that will add financial value for our shareholders,
enhance our product lines, and expand our geography.
. Invest in technology that helps us to better serve our clients and makes
us more efficient and competitive.
While Sky's financial performance continues to be among the best in the country,
the performance of our stock in 2000 was disappointing to management, employees,
and individual and institutional investors alike. We strongly believe that the
quality of our profitability, asset quality, and new strategies will be
reflected in our stock price in the future.
For The Greater Good.
Twelve of our directors voluntarily retired from the Sky Board of Directors
during 2000, reducing its size from 28 to 16 members. This smaller board will be
able to more quickly respond to the needs of the company and its shareholders.
The unselfish decisions by Gerald Aller, David Bryan, Keith Burgett, Del
Goedeker, Charles Homan, Lee Kinney, Marilyn McAlear, Kenneth McConnell, Thomas
Noneman, Patrick Rooney, Douglas Shierson, and Robert Stearns demonstrated a
commitment to put our shareholders first in all of our decision making.
Fortunately for all of us, these 12 highly qualified individuals continue to
serve Sky and its affiliates in other meaningful capacities.
As the new millennium begins, I believe the prospects for Sky's continued
success have never been brighter.
/s/ Marty E. Adams
- -------------------
Marty E. Adams
Chairman, President and CEO
--------------------------------------
Mission Statement
--------------------------------------
Sky financial Group will consistently generate superior performance which
will create exceptional shareholder returns.
Performance excellence will ensure the longevity of the company and the
preservation of Sky Financial's fundamental beliefs and values.
-------------------------------------
Vision Statement
-------------------------------------
Sky Financial Group will become one of America's finest companies and will be
nationally recognized as the standard by which:
Shareholders
measure consistently exceptional investment returns.
Employees
measure job satisfaction personal fulfilment, empowerment and fun.
Customers
measure service and product satisfaction, convenience and reliability.
Communities
measure corporate responsibility, ethics and integrity.
5
[PHOTO]
Keeping decision-making close to home and being readily accessible helps
us develop better long-term client relationships.
[PHOTO]
6
A REFLECTION OF THE COMMUNITIES WE SERVE.
International Plastics & Equipment (IPEC) of New Castle, Pennsylvania, is a
leading manufacturer of plastic caps for the beverage and dairy industry,
producing everything from tamper-evident "snap-on, screw-off" closures to "twist
and pull" spouts. Charles Long, Secretary & Treasurer (middle right) and Joseph
Giordano, President (far right) of IPEC, show Tom O'Shane, Sky's Community
Banking CEO (far left) and Steve Sant, Sky Bank's Regional President (middle
left) a sample of their latest product.
[MAP]
Pennsylvania Region
The Sky Is Our Umbrella.
[PHOTO]
On February 20, 2001, Mid Am Bank and The Ohio Bank changed their names to Sky
Bank. Having our affiliate company names the same as that of our holding company
allows us to deliver a consistent message and makes it easier for our clients to
understand who we are. As we move forward under the Sky Bank banner, added
client convenience, combined with an innovative method of managing client
relationships begins a new era, an era without limits; evolving and interactive,
with possibilities as limitless as the sky.
Community Banking Group.
Under the leadership of CEO Tom O'Shane, the Community Banking Group segments
banking operations into six regions, each under the direction of a regional
president.
This new structure allows us to share and implement "best practices" in
every region, enabling our employees to devote more time to building client
relationships. New operations and technology areas, also under Tom O'Shane's
direction, provide programs that facilitate more effective and efficient
operations, and allow us to better serve the needs of our clients.
Keeping It Close To Home.
Sky Bank regional presidents have complete managerial control over their market
area. Unlike the centralized management hierarchy and rigid decision-making of
larger banks, Sky employees make decisions locally. Developing one-to-one
customer relationships allows us to successfully market our comprehensive
portfolio of financial products and services.
[PHOTO]
[PHOTO]
7
[PHOTO]
(MAIN SPREAD TWO)
From the information highway to "around-the-corner" convenience, we provide our
clients with product and service availability.
[PHOTO]
8
REFLECTING OUR CLIENTS' CAPABILITIES.
Gene Cerra (seated) has been a customer of the Sky Bank Wintersville, Ohio
office since 1977. Gene's made his banking more convenient by taking advantage
of new technology. He's now online and uses Bank@Sky Internet banking every day
to access accounts, transfer funds, or pay bills. Dorinda Sabol, Assistant Vice
President/Wintersville (standing right) and Rick Hull, Regional President of Sky
Bank's Ohio Valley Region (standing left) appreciate Gene's suggestions for
enhancements to our product.
[MAP]
Ohio Valley Region
A Highway In The Sky.
In April 2000, we introduced Sky Trek, a specialized training process to help us
build and enhance our customer relationship skills. All banking and trust
employees with sales responsibility and those in sales support areas such as
operations and marketing received training. The value of Sky Trek was
demonstrated in September with the launch of our Skylympics deposit campaign, a
program created to generate $100 million in new core deposits (checking,
savings, CDs, etc.) in eight weeks. At the campaign's end, bank and trust sales
areas generated $214 million in new core deposits, an unqualified success and an
endorsement of the Sky Trek process.
[PHOTO]
[PHOTO]
Sky Trek is not a short-term program; it is a highway connecting us to our
clients, a continuing process that enables us to compete successfully in a
business where competitive products are often very similar. With Sky Trek
providing direction, we'll offer distinctly differentiated service and enjoy a
more profitable journey along the way.
[PHOTO]
A New Technology Environment.
During 2001, the company will begin implementing a fully integrated technology
environment that will help us more effectively serve our customers. In addition
to its exceptional functionality, the technology provides a robust data
warehouse, precise measurement tools and other systems that will increase the
efficiency of all our regional banking operations. This new technology
environment is designed to support Sky strategic objectives in the areas of
sales, customer service and growth over the next 5-7 years.
9
[PHOTO]
(MAIN SPREAD THREE)
A variety of consumer and commercial lending options helps our clients maximize
their potential and contribute to the prosperity of the community as a whole.
[PHOTO]
10
REFLECTING THE NEEDS OF OUR CLIENTS.
Toledo, Ohio real estate developers Richard Moses (center) and Thomas Schlachter
(left) are in the process of completing one of the largest residential
developments in Northwest Ohio. The Mid Am Region of Sky Bank is an expert in
mortgage and commercial real estate lending. Sharon Speyer, Regional President,
is proud that her region is one of the leading mortgage lenders in Northwest
Ohio, and is the number one lender in three of its largest counties.
[MAP]
Mid Am Region
The Sky Is The Limit.
Increased efficiencies realized through Sky Trek processes, combined with
innovative technological support, will help us more precisely anticipate and
meet client needs. The goal is to provide a common portfolio of products and
services, support decision-making that reflects local community economies,
enhance our client relationships and increase our return potential. This will
not only deliver more value to our clients, it will help enable us to attract
new client relationships and increase our opportunities to grow in the
communities we serve.
[PHOTO]
Making More Mortgages.
Local decision-making, competitive rates and a variety of mortgage products make
it possible for us to offer the benefits of home ownership to clients with
varying financial needs on a market-by- market basis. In the same manner, loans
for new cars, home improvements or other client needs are made on an individual,
local-market basis.
[PHOTO]
Working The Web.
Sky Bank Internet banking services give our clients the ability to review
transactions, print statements, pay bills, transfer funds, order checks
and more, 24 hours a day. Sky Financial's Internet Service Provider, Sky Access,
currently serves a portion of our markets. Along with plans to expand its
availability to all of our regions, our e-strategies include a pilot program
that offers discounted Sky Access service by having a checking account with our
bank.
[PHOTO]
11
[PHOTO]
Our clients' future success depends on our ability to meet their financial needs
today, while anticipating their needs for tomorrow.
[PHOTO]
REFLECTING OUR CLIENTS' INTERESTS.
Doug and Laura LaPlant (center) benefit from a collaborative relationship
between Tom Weissling, Sky Bank's Regional President (right) and Russ Wood,
SVP/Trust Officer (left). Tom's regional banking group provides the LaPlants
with the products and services to meet their business and personal banking
needs. Russ assists them with personal asset management and their company's
retirement plan through our Sky Trust subsidiary.
[MAP]
Ohio Bank Region
Finding The Future In The Sky.
Our investment and trust services company, Sky Trust, has offices in each of the
six banking regions. These regional trust offices provide close-to-the-client
personal service and make investment management and estate planning more
convenient.
[PHOTO]
Providing Protection.
Our insurance subsidiaries offer a variety of personal and commercial insurance
products such as auto, homeowners, life and disability insurance. Available in
all our regions, these insurance products create cross-over business
opportunities, giving banking clients insurance options and insurance clients
access to banking products and services.
[PHOTO]
Funding The Future.
Investment representatives, licensed to sell securities and other investment
products, are available in our regional markets. These representatives support
multiple offices and provide our banking customers with products and services
that go beyond traditional banking. In 2000, our banking and investment
professionals worked together to increase our bank-originated investments by 50%
over the previous year. These professionals provide clients with financial
solutions that consider all their needs and increase our new business
opportunities.
[PHOTO]
[PHOTO]
13
[PHOTO]
Using the sky trek process, our commercial employees are equipped to recommend
The right products and services to meet individual client needs.
[PHOTO]
REFLECTING THE NEEDS OF BUSINESS.
Dewey VanHoose, Regional President for the Stark County Region of Sky Bank
(left) has worked with Tim Murphy (right) since 1991. Tim is President of
Concorde Therapy Group, the largest private rehabilitation practice in the Stark
County area. They provide physical, occupational, and speech & language therapy
as well as athletic training and exercise physiology services. Committed to
meeting his clients' needs, Dewey and Sky Bank recently helped Tim's group
expand its operations in Canton, Ohio.
[MAP]
Stark County Region
A Clear Blue Sky.
Small businesses are big business for us and form the foundation of the
communities we serve. As a community-oriented company, we're proud of their
success and equally proud of the role we play in contributing to that success.
In order to be more immediately responsive to their needs, commercial sales
people have the authority to make decisions locally about a client's financing
needs. Our cash management services are expanding to provide clients with more
financial options and give them immediate access to their accounts.
[PHOTO]
[PHOTO]
Employee Benefit Plans & Insurance Products.
Employee benefit plans such as 401(k) and Pension and Profit Sharing are
available from Sky Trust, while Meyer & Eckenrode and Picton Cavanaugh provide
our business clients with property & casualty, healthcare and life insurance.
Together they present a complete portfolio and present us with another
Sky Trek-based avenue of opportunity.
[PHOTO]
Healthcare Financing.
Sky Financial Solutions enjoys a reputation as one of the industry's leaders in
the creation of specialized healthcare financing for dentists and other
healthcare professionals. Practice acquisition, new office start-ups, equipment
purchases and retirement planning services are all part of our commitment to
meeting the unique financial needs of medical professionals.
15
[PHOTO]
Sky is a committed community partner, contributing corporate resources and
encouraging employee participation in the places we call home.
[PHOTO]
REFLECTING THE NEEDS OF OUR NEIGHBORS.
In 1995, Sky Bank established a scholarship endowment at Youngstown State
University to benefit minority students enrolled in business-related curriculum.
Patrice Hight (far left) and Tanay Hill (middle right), accounting majors at
Youngstown State, are pictured with Reid Schmutz, President of the Youngstown
State University Foundation (middle back) and Frank Hierro, Regional President
of Sky Bank's Mahoning Valley Region (far right). This year, as part of Sky
Bank's commitment to community involvement, eleven students are receiving
scholarships from the endowment.
[MAP]
Mahoning Valley Region
Sharing The Same Sky.
Home is more than an address, more than streets and stores and schools. It's a
trust, held in common by private citizens and publicly held corporations alike,
to improve the quality of life for every member of the community. We encourage
all our employees to participate in non-profit and community-based programs and
organizations in every one of the communities we serve. We are proud to note
that Sky employees contribute their personal time and effort to countless local
and national organizations such as Juvenile Diabetes, Habitat for Humanity and
Big Brothers, Big Sisters. In 2001, Sky will honor selected employees with a
regional President's Award for outstanding employee involvement in their
community.
[PHOTO]
In addition to the many donations from our individual banks, the Sky
Foundation contributes to human services programs, the arts and education
throughout our markets. Involvement in our communities is our way of recognizing
that we all have needs and dreams and all share the same sky.
[PHOTO]
Investing In Kids.
Sky Financial is actively involved in programs that teach kids about banking,
investing and the stock market. Classes research company stock and actually make
purchases using money provided by Sky Financial.
[PHOTO]
Downtown Revitalization.
We recently collaborated with Downtown Ohio, Inc. to help bring community and
civic leaders together to plan the revitalization and redevelopment of various
downtown areas in Ohio. Downtown Ohio, Inc. was created in 1989 to encourage
down- town revitalization throughout Ohio. It is dedicated to assisting self-
motivated communities through technical assistance, training and networking in
all facets of downtown development.
[PHOTO]
17
SKY BOARD OF DIRECTORS
[PHOTO]
Pictured from right to left
Marty E. Adams /1/
Chairman, President and CEO
Sky Financial Group, Inc.
Thomas J. O'Shane /1/
Senior Executive Vice PresidentCommunity Banking CEO
Sky Financial Group, Inc.
Edward J. Reiter /1/
Senior Chairman
Sky Financial Group, Inc.
Richard R. Hollington, Jr. /1/
Lead Director of Sky Board
Senior Partner
Baker & Hostetler, LLP
George N. Chandler II /5/
Retired VP
Cleveland Cliffs, Inc.
Joseph N. Tosh II /1/
Executive Vice President
Sky Bank
Emerson J. Ross, Jr. /2, 3/
Manager, Corporate Community Relations
Owens Corning
James C. McBane /1/
Principal
McBane Insurance Agency, Inc.
Gerard P. Mastroianni /4/
President
Alliance Ventures
Jonathan A. Levy /3, 5/
Partner, Redstone Investments
C. Gregory Spangler /1, 2/
Chairman
Spangler Candy Company
Gregory L. Ridler /5/
Chairman, Mahoning Valley Region
of Sky Bank
Fred H. "Sam" Johnson III /2/
President and CEO
Summitcrest, Inc., M2 Genetic Systems LLC
Robert E. Spitler /4/
Managing Partner
Spitler, Vogtsberger & Huffman, LLP
Robert C. Duvall /3, 4/
Retired
D. James Hilliker /4/
Vice President
Better Food Systems, Inc.
Committees
1 Executive
2 Audit
3 Governance & Nominating
4 Compensation
5 Risk Management
18
FINANCIAL REPORT
Summary of Financial Data 20
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 21
Reports of Management and
Independent Auditors 34
Consolidated Balance Sheets 35
Consolidated Statements
of Income 36
Consolidated Statements
of Changes in
Shareholders' Equity 37
Consolidated Statements
of Cash Flows 38
Notes to Consolidated
Financial Statements 39
19
Summary of Financial Data
(Dollars in thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Income
Interest income $ 626,015 $ 573,595 $ 573,695 $ 545,619 $ 515,699
Interest expense 322,219 269,590 285,912 266,656 246,421
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 303,796 303,645 289,783 278,963 269,278
Provision for credit losses 22,250 20,712 31,992 18,859 18,746
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest income after provision for credit losses 281,546 282,933 257,791 260,104 250,532
Other income 121,958 124,342 124,550 108,316 85,591
Other expenses 235,407 302,497 306,567 230,523 215,365
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 168,097 104,778 75,774 137,897 120,758
Income taxes 53,724 33,596 23,811 43,679 37,202
- ----------------------------------------------------------------------------------------------------------------------------------
Net income/(1)/ $ 114,373 $ 71,182 $ 51,963 $ 94,218 $ 83,556
==================================================================================================================================
Net income available to common shareholders $ 114,373 $ 71,182 $ 51,963 $ 93,613 $ 81,149
==================================================================================================================================
Per Common Share/(2)/
Basic net income/(1)/ $ 1.35 $ 0.83 $ 0.61 $ 1.08 $ 0.95
Diluted net income/(1)/ 1.35 0.82 0.60 1.07 0.93
Cash dividends declared 0.73 0.70 0.54 0.42 0.31
Book value at year end 7.31 6.61 7.13 7.29 6.65
Weighted average shares outstanding -- basic 84,604,000 85,938,000 85,759,000 86,301,000 85,745,000
Weighted average shares outstanding -- diluted 84,967,000 86,774,000 86,897,000 88,289,000 90,074,000
==================================================================================================================================
Consolidated Balance Sheets (Year End)
Total assets $ 8,386,802 $ 8,063,756 $ 8,033,266 $ 7,267,164 $ 6,874,621
Securities available for sale 1,846,517 1,868,839 2,126,833 1,499,694 1,396,604
Securities held to maturity - - 23,910 381,209 450,662
Loans held for sale 13,984 9,006 96,221 59,453 148,510
Loans, net of unearned income 5,916,098 5,477,494 5,110,827 4,814,884 4,512,070
Allowance for credit losses 93,261 86,750 80,748 66,553 60,080
Deposits 5,891,932 5,758,691 6,006,912 5,520,937 5,367,457
Debt and FHLB advances 1,042,044 964,557 665,906 556,826 280,989
Total shareholders' equity 609,690 566,331 611,713 632,865 602,133
==================================================================================================================================
Selected Financial Ratios
Return on average assets/(1)/ 1.41% 0.91% 0.68% 1.34% 1.25%
Return on average shareholders' equity/(1)/ 19.78 11.60 8.14 15.70 15.30
Dividend payout ratio 53.66 78.98 86.95 38.76 37.69
Net interest margin, fully-taxable equivalent 4.12 4.28 4.16 4.30 4.38
Average loans to average deposits 98.28 91.01 86.29 88.13 84.49
Average equity to average assets 7.15 7.83 8.33 8.67 8.15
Allowance for credit losses to period-end loans 1.58 1.58 1.58 1.38 1.33
Allowance for credit losses to total non-performing loans 434.58 445.10 517.75 404.45 309.10
Non-performing loans to period-end loans 0.36 0.36 0.31 0.34 0.43
Net charge-offs to average loans 0.28 0.28 0.36 0.26 0.31
==================================================================================================================================
(1) The net income presented above includes non-recurring items of income and
expense. Further discussion of the non-recurring items and restated results of
2000, 1999 and 1998 to exclude non-recurring items can be found in the "Results
of Operations" section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
(2) Per share data has been restated to reflect the ten percent stock dividend
declared and paid in 2000, 1999 and 1998 and the two-for-one stock split
declared on May 12, 1998 and acquisitions accounted for as poolings of interest
(see Note 2 of the financial statements).
20
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
The following discussion and analysis represents a review of Sky Financial's
consolidated financial condition and results of operations. This review should
be read in conjunction with the consolidated financial statements presented
elsewhere in this report.
Financial data for all periods have been restated to reflect mergers
accounted for as pooling-of-interests and stock dividends in prior periods. For
further discussion of mergers and acquisitions, see Note 2 of the consolidated
financial statements.
Summary of Earnings and Non-recurring Items
Net income for 2000 was $114,373, or $1.35 per diluted share, up from $71,182,
or $0.82 per diluted share, in 1999 and $51,963, or $0.60 per diluted share, in
1998. Net income included after-tax non-recurring items, which reduced net
income $3,703, or $0.04 per diluted share, in 2000, $52,611, or $0.61 per
diluted share, in 1999, and $47,182, or $0.55 per diluted share, in 1998.
For 2000, Sky Financial's after-tax non-recurring items included $2,596
for net losses on the sales of securities, resulting from a restructuring of the
securities portfolio in the third quarter, and $2,514 restructuring expenses,
including costs to complete the name changes of its commercial banks and a loss
on the sale of its collection agency, partially offset by $1,406 reversion
gains on the termination of acquired pension plans and the sale of credit card
receivables. In 1999, after-tax non-recurring items included $51,051 merger and
restructuring expenses and a $1,560 provision for credit losses mainly in merged
banks. In 1998, after-tax non-recurring items included $39,966 merger and
restructuring expenses, a $10,400 provision for credit losses, mainly in merged
banks, and $3,184 gains related to a bulk sale of mortgage portfolio loans,
branch sales and a favorable legal settlement.
In the first quarter of 2001, Sky Financial expects to complete the sale
of its independent broker/dealer subsidiary and realize an after-tax gain of
approximately $600.
Results of Operations
Operating earnings, which exclude the affect of non-recurring items, was
$118,076, or $1.39 per diluted share, in 2000 compared to $123,793, or $1.43 per
diluted share, in 1999, which increased from $99,145, or $1.15 per diluted
share, in 1998. On this same basis, return on average equity was 20.42% and
return on average assets was 1.46% in 2000 compared to 20.18% and 1.58%,
respectively, in 1999 and 15.54% and 1.29%, respectively, in 1998.
The 2000 operating earnings reflect the mid-year elimination of gains on
the sales of commercial financing loans originated by Sky Financial Solutions,
Inc. (SFS), the company's subsidiary specializing in financing for health care
professionals. In the third quarter of 2000, Sky Financial ceased selling the
loans originated by SFS and began retaining them in its loan portfolio. As a
result of this change, Sky Financial's 2000 operating earnings were reduced by a
net loss at SFS of $6,248, or $.07 per diluted share. In 1999 and 1998, Sky
Financial's operating earnings included net income from SFS of $3,027, or $.03
per diluted share, and $4,441, or $.05 per diluted share, respectively. In 2001,
Sky Financial expects SFS to continue operating at a net loss, reducing Sky
Financial's earnings by $.09 to $.10 per diluted share. SFS is expected to
return to profitability in 2003, when the retained portfolio is expected to be
sufficient in size for net interest income to exceed operating expenses and
provisions for credit losses.
Excluding SFS, operating earnings improved in 2000 by $3,558, or $.07 per
diluted share, and in 1999 by $26,063, or $.30 per diluted share. The operating
earnings improvement in 2000 resulted from growth in targeted fee-based revenues
and well-controlled expenses, while net interest income was basically unchanged
from 1999, as the benefit from growth in earning assets was offset by a decline
in the net interest margin. In 1999, operating earnings improved reflecting
growth in total revenues and significant expense reductions resulting from
mergers and acquisitions completed in 1999 and 1998.
Business Line Results
Sky Financial Group is managed along three primary business lines: community
banking, the financial service affiliates and SFS. The community banking group
is comprised of Sky Financial's three commercial banks which service businesses
and consumers through a regional structure. In 2001, Sky Financial will complete
the name changes for all of its commercial banks to "Sky Bank."
The financial service affiliates include Sky Financial's businesses
relating to trust and investment management, insurance, non-conforming mortgage
lending, broker/dealer operations, collection activities and other financial
related services. In December 2000, Sky Financial sold its collection agency
business and discontinued the origination of loans through its non-conforming
mortgage loan company. In the first quarter of 2001, it expects to complete the
sale of its independent broker/dealer operation.
SFS is Sky Financial's subsidiary specializing in financing to health care
professionals, primarily dentists.
Additional information regarding Sky Financial's business lines, and the
financial measurement methodologies is provided in Note 21 of the consolidated
financial statements. Prior year amounts have been restated to conform to the
current business line structure. Table 1 summarizes Sky Financial's business
line results for each of the last three years.
- --------------------------------------------------------------------------------
Table 1 Business Line Results
- --------------------------------------------------------------------------------
Net Income (Loss)
-----------------------------------
Year ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Community Banking $126,613 $123,240 $ 98,647
Financial Service Affiliates 2,656 444 (941)
Sky Financial Solutions (6,248) 3,027 4,441
Parent and Other (8,648) (55,529) (50,184)
- --------------------------------------------------------------------------------
Consolidated $114,373 $ 71,182 $ 51,963
================================================================================
21
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
The increase in community banking net income in 2000 and 1999 was primarily
due to growth in net interest income and reductions in non-interest expenses
realized from the mergers and acquisitions completed in 1999 and 1998. The
community banking results for 2000 reflect a return on equity of 21.22%, a
return on assets of 1.60% and an efficiency ratio of 45.30%.
The improved earnings from the financial service affiliates in each of the
last two years reflects Sky Financial's focused efforts on expanding its
profitable trust and insurance agency businesses, and reducing the impact of its
under-performing companies.
The decline in 2000 earnings at SFS resulted from the mid-year
implementation of Sky Financial's new program to retain SFS's loan originations
in its loan portfolio, which eliminated the gains on the sales of these loan
originations. In prior periods, SFS's loan originations were sold into the
secondary market with gains recognized on the sales. SFS is expected to operate
at a net loss over the next few years, until the retained portfolio grows
sufficiently in size for net interest income to exceed operating expenses and
provisions for credit losses.
Parent and other includes the net funding costs of the parent company and
all significant non-recurring items of income and expense. In 2000, the parent
net funding costs increased, as Sky Financial issued $60,000 of trust preferred
securities primarily to continue its share repurchase program. The 1999 and 1998
results reflect the merger and restructuring costs incurred for the mergers
completed during each year.
================================================================================
Net Interest Income
Net interest income, the difference between interest income earned on interest-
earning assets and interest expense incurred on interest-bearing liabilities, is
the most significant component of Sky Financial's earnings. Net interest income
is affected by changes in the volumes, rates and composition of interest-earning
assets and interest-bearing liabilities.
Table 2 summarizes net interest income and net interest margin for each of
the three years ended December 31, 2000.
- --------------------------------------------------------------------------------
Table 2 Net Interest Income
- --------------------------------------------------------------------------------
Year ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Net interest income $303,796 $303,645 $289,783
Taxable equivalent adjustments
to net interest income 6,730 8,451 8,627
- --------------------------------------------------------------------------------
Net interest income, fully
taxable equivalent $310,526 $312,096 $298,410
================================================================================
Net interest margin 4.03% 4.16% 4.04%
Taxable equivalent adjustment .09 .12 .12
- --------------------------------------------------------------------------------
Net interest margin, fully
taxable equivalent 4.12% 4.28% 4.16%
================================================================================
Sky Financial's net interest income was $303,796 in 2000, basically
unchanged from $303,645 in 1999. In 2000, average earning assets grew 3.2%
mainly due to growth in loans of 8%. However, the benefit from growth was offset
by a decline in the net interest margin. The net interest margin, on a fully
tax-equivalent basis, was 4.12% for 2000, compared with 4.28% and 4.16% in the
preceding two years. The margin decline in 2000 from the preceding year resulted
from earning asset yields increasing less rapidly than funding costs, as
interest rates rose during the year. The higher funding costs reflected the
issuance of $60,000 in trust preferred securities during the year and greater
reliance on more expensive wholesale funds as loan growth outpaced core deposit
growth. In 1999, the net interest margin increased 12 basis points due to
declining funding costs primarily driven by lower retail rates, coupled with
lower borrowing costs. The yield on earning assets declined less significantly
due to an increased percentage of loans within total earning assets.
Table 3 reflects the components of Sky Financial's net interest income for
each of the three years ended December 31, 2000, setting forth: (i) average
assets, liabilities, and shareholders' equity, (ii) interest income earned on
interest-earning assets and interest expense incurred on interest-bearing
liabilities, (iii) average yields earned on interest-earning assets and average
rates incurred on interest-bearing liabilities, (iv) the net interest rate
spread (i.e., the average yield earned on interest-earning assets less the
average rate incurred on interest-bearing liabilities), and (v) the net interest
margin (i.e., net interest income divided by average interest-earning assets).
Rates are computed on a tax equivalent basis. Non-accrual loans have been
included in the average balances.
22
- ----------------------------------------------------------------------------------------------------------------------------------
Table 3 Three-Year Average Balance Sheet and Net Interest Margin
- ----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets
Interest-earning
deposits $ 17,074 $ 1,015 5.94% $ 16,994 $ 929 5.47% $ 17,672 $ 970 5.49%
Federal funds
sold and other 6,022 363 6.03 22,305 1,102 4.94 64,881 3,517 5.42
Securities 1,835,888 123,641 6.73 1,999,719 128,113 6.41 2,118,626 134,474 6.35
Loans 5,669,637 507,726 8.96 5,254,937 451,902 8.60 4,972,537 445,361 8.96
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-
earning assets 7,528,621 632,745 8.41 7,293,955 582,046 7.98 7,173,716 584,322 8.15
- ----------------------------------------------------------------------------------------------------------------------------------
Nonearning assets 562,126 538,750 483,249
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $8,090,747 $7,832,705 $7,656,965
==================================================================================================================================
Interest-bearing liabilities
Demand deposits $ 141,744 $ 3,372 2.38% $ 231,858 $ 3,627 1.56% $ 764,843 $ 15,326 2.00%
Savings deposits 1,844,659 47,168 2.56 1,859,922 38,407 2.06 1,333,332 36,722 2.75
Time deposits 3,045,522 171,671 5.64 2,952,016 155,829 5.28 3,028,688 168,277 5.56
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-
bearing deposits 5,031,925 222,211 4.42 5,043,796 197,863 3.92 5,126,863 220,325 4.30
Short-term borrowings 667,301 35,977 5.39 612,584 29,230 4.77 541,802 27,017 4.99
Trust preferred securities 93,946 9,121 9.71 49,551 4,831 9.75 52,500 5,237 9.98
Debt and FHLB advances 868,977 54,910 6.32 697,856 38,026 5.45 571,974 33,333 5.83
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-
bearing liabilities 6,662,149 322,219 4.84 6,403,787 269,950 4.22 6,293,139 285,912 4.54
- ----------------------------------------------------------------------------------------------------------------------------------
Non-interest-bearing
liabilities 850,291 815,390 725,774
Shareholders' equity 578,307 613,528 638,052
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $8,090,747 $7,832,705 $7,656,965
==================================================================================================================================
Net interest income, fully
taxable equivalent; Net
interest spread $ 310,526 3.57% $ 312,096 3.76% $ 298,410 3.61%
==================================================================================================================================
Net interest income, fully
taxable equivalent to
earning assets 4.12% 4.28% 4.16%
==================================================================================================================================
- - For purposes of this schedule, nonaccrual loans are included in loans.
- - Loan fees are included in interest income.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Net interest income may also be analyzed by segregating the volume and rate
components of interest income and interest expense. Table 4 presents an analysis
of increases and decreases in interest income and expense in terms of changes in
volume and interest rates during the three years ended December 31, 2000.
Changes not due solely to either a change in volume or a change in rate have
been allocated to the change due to rates. The table is presented on a tax-
equivalent basis.
- --------------------------------------------------------------------------------------------------------
Table 4 Net Interest Income - Rate/Volume Analysis
- --------------------------------------------------------------------------------------------------------
Year ended December 31, 2000 1999
- --------------------------------------------------------------------------------------------------------
Change from 1999 in interest Change from 1998 in interest
income or expense due to income or expense due to
- --------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- --------------------------------------------------------------------------------------------------------
Interest income attributable to:
Interest-bearing deposits $ 4 $ 82 $ 86 $ (37) $ (4) $ (41)
Federal funds sold (804) 65 (739) (2,308) (107) (2,415)
Securities (10,496) 6,024 (4,472) (7,547) 1,186 (6,361)
Loans, net 35,662 20,162 55,824 25,293 (18,752) 6,541
- --------------------------------------------------------------------------------------------------------
Total interest income 24,366 26,333 50,699 15,401 (17,677) (2,276)
- --------------------------------------------------------------------------------------------------------
Interest expense attributable to:
Deposits:
Interest-bearing demand (1,410) 1,155 (255) (10,680) (1,019) (11,699)
Savings (315) 9,076 8,761 14,503 (12,818) 1,685
Time 4,936 10,906 15,842 (4,260) (8,188) (12,448)
- --------------------------------------------------------------------------------------------------------
Total deposits 3,211 21,137 24,348 (437) (22,025) (22,462)
Short-term borrowings 2,611 4,136 6,747 3,530 (1,317) 2,213
Trust preferred securities 4,328 (38) 4,290 (294) (112) (406)
Debt and FHLB advances 9,324 7,560 16,884 7,336 (2,643) 4,693
- --------------------------------------------------------------------------------------------------------
Total interest expense 19,474 32,795 52,269 10,135 (26,097) (15,962)
- --------------------------------------------------------------------------------------------------------
Net interest income $ 4,892 $ (6,462) $ (1,570) $ 5,266 $ 8,420 $ 13,686
========================================================================================================
Non-interest Income
Total non-interest income in 2000 declined $2,384 from 1999, which was basically
unchanged from 1998. Excluding net gains and losses of the sale of securities
and net gains on the sales of commercial financing loans, non-interest income
rose 11% in 2000, after increasing 2% in 1999. Table 5 summarizes the sources of
Sky Financial's non-interest income.
- --------------------------------------------------------------------------------------------------------
Table 5 Non-interest Income
- -----------------------------------------------------------------------------------------------------------
2000 1999
Vs. Vs.
Year ended December 31, 2000 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
Trust services income $ 15,147 $ 12,581 $ 11,268 20% 12%
Service charges and fees on deposit accounts 27,003 27,480 25,142 (2) 9
Mortgage banking income 12,204 18,953 26,687 (36) (29)
Brokerage and insurance commissions 29,177 15,960 9,430 83 69
Collection agency fees 1,912 2,465 4,115 (22) (40)
Net securities gains (losses) (3,023) 1,325 1,409 (328) (6)
Net gains on sales of commercial financing loans 7,586 17,305 19,378 (56) (11)
International department fees 1,248 1,006 965 24 4
Gain on sale of deposits and branch offices 560 -- 1,071 -- --
Gains on sales of credit card accounts and other loans 1,681 3,203 1,927 (48) 66
Income from bank-owned life insurance 5,323 4,709 3,178 13 48
Other 23,140 19,355 19,980 20 (3)
- -----------------------------------------------------------------------------------------------------------
Total non-interest income $ 121,958 $ 124,342 $ 124,550 (2)% --%
===========================================================================================================
________________________________________________________________________________
For the year 2000, Sky Financial realized net losses on the sales of
securities of $3,023, resulting from the restructuring of the securities
portfolio during the third quarter in which net losses of $3,993 were realized.
In 1999 and 1998, Sky Financial realized net gains on the sales of securities of
$1,325 and $1,409, respectively.
Gains on the sales of commercial financing loans, originated through SFS,
declined in 2000 to $7,586 from $17,305 in 1999 and $19,378 in 1998. While
origination volumes in 2000 grew to $183 million from $167 million in 1999 and
$135 million in 1998, in mid-year 2000, Sky Financial ceased selling these loan
originations into the secondary market and began retaining them in its loan
portfolio, thereby eliminating gains on the sales. In 2001, Sky Financial
expects to continue retaining the SFS loan originations in its loan portfolio.
Brokerage commissions on investment and insurance products increased
$13,217, or 83%, in 2000 and $6,530, or 69% in 1999. The revenue increases were
from increased sales volumes through Sky Financial's independent brokers and
bank sales representatives, and from the acquisition of two insurance agencies,
Meyer & Eckenrode Insurance Group, Inc. in July of 2000 and Picton Cavanaugh,
Inc. in May of 1999. In the first quarter of 2001, Sky Financial expects to
complete the sale of its independent broker/dealer which realized $13.4 million
in commission revenues in 2000.
Trust services income grew $2,566, or 20%, in 2000 and $1,313, or 12%, in
1999, primarily due to revenues generated through new business volumes. In
January of 2000, Sky Trust was formed through the consolidation of all trust
activities in Sky Financial and at year-end 2000 had $2.9 billion in assets
under administration.
Service charges and fees on deposits declined $477 in 2000 after
increasing $2,338 in 1999. The change in 2000 was primarily related to new
product strategies implemented during the year. The increase in 1999 was mainly
due to branch purchases in June of 1998.
Mortgage banking, which includes both conventional and non-conforming loan
products, consists of net gains on the sales of mortgage loans and mortgage loan
servicing fees. Mortgage banking income decreased $6,749 in 2000 and $7,734 in
1999. The decline over the last two years was primarily due to an unfavorable
interest rate environment, which lowered volumes of mortgages originated and
sold, and the downsizing of the non-conforming loan business. In December 2000,
Sky Financial discontinued the origination of loans through its non-conforming
mortgage subsidiary, which in 2000 realized $1.2 million in gains on the sales
of its loan originations.
Collection agency fees declined to $1,912 in 2000 from $2,465 in 1999 and
$4,115 in 1998. In December 2000, Sky Financial sold its collection agency
business.
Other income in 2000 included non-recurring gains of $1,873 from the
termination of acquired pension plans and $727 from the sale of $5 million of
credit card receivables. In 1998, other income included a non-recurring gain of
$1,475 from a favorable legal settlement.
================================================================================
Non-interest Expense
Total non-interest expense declined $67,090, or 22%, in 2000 and $4,070, or 1%,
in 1999. On an operating basis, excluding merger, integration and restructuring
expenses, total non-interest expense rose $1,588, or 1%, in 2000 and decreased
$20,628, or 8%, in 1999. The efficiency ratio, which measures operating expenses
as a percent of total operating revenues, was 53.37% in 2000, 52.69% in 1999 and
59.84% in 1998.
Non-interest expense includes costs, other than interest, that are incurred
in the operations of Sky Financial. Table 6 summarizes the components of Sky
Financial's non-interest expense.
- ---------------------------------------------------------------------------------
Table 6 Non-interest Expense
- ---------------------------------------------------------------------------------
2000 1999
Vs. Vs.
Year ended December 31, 2000 1999 1998 1999 1998
- ---------------------------------------------------------------------------------
Salaries and employee benefits $117,957 $120,546 $128,960 (2)% (7)%
Occupancy and equipment expense 37,004 38,985 38,665 (5) 1
Merger, integration and
restructuring expense 3,867 72,545 55,987 (95) 30
Brokerage commissions 11,973 7,925 6,209 51 28
State franchise taxes 7,097 4,442 5,903 60 (25)
Printing and supplies 5,149 5,741 6,523 (10) (12)
Legal and other professional fees 6,747 6,179 9,365 9 (34)
Telephone 5,939 6,421 5,301 (8) 21
Marketing 6,825 6,598 7,554 3 (13)
Amortization of intangible assets 4,831 5,243 6,104 (8) (14)
Other 28,018 27,872 35,996 1 (23)
- ---------------------------------------------------------------------------------
Total non-interest expense $235,407 $302,497 $306,567 (22)% (1)%
=================================================================================
Salaries and employee benefits declined $2,589, or 2%, in 2000 and $8,414,
or 7%, in 1999. The decreases over the last two years were mainly due to the
reductions in staff resulting from restructuring under-performing financial
service affiliates and the bank mergers completed during 1999 and 1998,
partially offset by increases attributable to the insurance agency acquisitions
completed during 2000 and 1999.
25
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share data)
________________________________________________________________________________
Franchise taxes increased $2,655, or 60%, in 2000, after decreasing $1,461, or
25%, in 1999. In 1999, Sky Financial received refunds of taxes paid in prior
years.
Brokerage commissions expense grew $4,048, or 51%, in 2000 and $1,716, or
28%, in 1999. The increases were due to the increased sales volumes generated
through independent brokers.
In 2001, Sky Financial expects expense reductions resulting from the sale
of its collection agency business, the discontinuance of loan originations
through its non-conforming mortgage company and the pending sale of its
independent broker/dealer operation, which is expected to close in the first
quarter of 2001. In 2000, Sky Financial's non-interest expenses pertaining to
these specific business operations totaled approximately $18 million.
Merger, integration and restructuring charges were $3,867 in 2000, $72,545
in 1999 and $55,987 in 1998. In 2000, restructuring charges included $515 for
the loss on the sale of its collection agency business and $3,352 for the
further development of Sky Financial's regional bank design, including expenses
to complete the name changes of all of its commercial banks. In 1999, merger and
restructuring expenses included $46,197 related to the First Western, Wood
Bancorp and Mahoning Bancorp acquisitions, a $21,787 impairment loss related to
prior branch acquisitions and $6,961 in other restructuring charges. In 1998,
the merger and restructuring charges included $45,602 related to the merger of
Mid Am and Citizens to form Sky Financial Group, $8,885 in connection with the
Century and UniBank acquisitions and $1,500 in other restructuring charges.
Further discussion of the mergers and the related restructuring expenses is
included in Notes 2 and 14 of the consolidated financial statements.
================================================================================
Loan Portfolio
Real estate loans, including construction and mortgage loans, approximated 58%
of total loans at December 31, 2000, level with 59% at year-end 1999. Sky
Financial's general collateral policy for residential real estate mortgages is
to follow FNMA and FHLMC guidelines, which generally require a loan-to-value
ratio of 80% or private mortgage insurance for loan-to-value ratios in excess of
80%.
Commercial loans comprise 27% of the total loan portfolio, increasing from
24% in 1999. Growth in this portfolio reflects new business development largely
targeted in new markets as well as growth in existing markets. Beginning in July
of 2000, Sky Financial began retaining in its loan portfolio the commercial
financing loans originated through its subsidiary, SFS. These loans, primarily
to health care professionals, were previously sold to investors in the secondary
market by a third-party intermediary. The amount of collateral required on
commercial loans is generally determined based on a loan-by-loan assessment.
Loan-to-value ratios for commercial loans typically range from 50% to 80%.
Factors which are considered include, among other things, the purpose of the
loan, the current financial status of the borrower and the borrower's prior
credit history.
The remaining portion of Sky Financial's loan portfolio is installment
loans, credit card loans and other loans and leases, which decreased to 15% of
the loan portfolio from 17% in the prior year. Sky Financial makes consumer
loans on both a secured and unsecured basis depending, in part, on the nature,
purpose and term of the loan. Loan-to-value ratios for secured consumer loans
range from 70% to 90% as a general rule.
As of December 31, 2000, Sky Financial did not have any loan concentrations
which exceeded 10% of total loans.
Table 8 shows the amount of commercial, financial and agricultural loans
and real estate construction loans outstanding as of December 31, 2000 which,
based on remaining scheduled repayments of principal, are due in the periods
indicated. Also, the amounts due after one year are classified according to
their sensitivity to changes in interest rates.
- --------------------------------------------------------------------------------------------------------
Table 7 Loan Portfolio
- --------------------------------------------------------------------------------------------------------------
December 31, 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Real estate loans:
Construction $ 210,135 $ 176,940 $ 175,706 $ 170,767 $ 150,211
Residential mortgage 1,663,111 1,744,162 1,739,132 1,712,385 1,643,101
Non-residential mortgage 1,575,907 1,296,019 1,251,977 1,085,582 928,061
Commercial, financial and agricultural loans 1,568,766 1,322,747 1,087,511 988,690 981,262
Installment and credit card loans 884,750 923,261 848,648 848,281 801,733
Other loans 13,429 14,365 7,853 9,179 7,702
- --------------------------------------------------------------------------------------------------------------
Total loans $5,916,098 $5,477,494 $5,110,827 $4,814,884 $4,512,070
==============================================================================================================
Real estate loans:
Construction 3.6% 3.2% 3.4% 3.6% 3.3%
Residential mortgage 28.1 31.8 34.0 35.6 36.4
Non-residential mortgage 26.6 23.7 24.5 22.5 20.6
Commercial, financial and agricultural loans 26.5 24.1 21.3 20.5 21.7
Installment and credit card loans 15.0 16.9 16.6 17.6 17.8
Other loans 0.2 0.3 0.2 0.2 0.2
- --------------------------------------------------------------------------------------------------------------
Total loans 100.0% 100.0% 100.0% 100.0% 100.0%
==============================================================================================================
26
- --------------------------------------------------------------------------------------------------------------------
Table 8 Loan Maturity and Price Sensitivity
- --------------------------------------------------------------------------------------------------------------------
Due In Due In Due After
December 31, 2000 1 Year 1 Yr-5 Yrs 5 Years Total
- --------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural $ 935,512 $ 546,357 $ 86,897 $1,568,766
Construction 73,042 28,241 108,852 210,135
- --------------------------------------------------------------------------------------------------------------------
Total $1,008,554 $ 574,598 $195,749 $1,778,901
- --------------------------------------------------------------------------------------------------------------------
Total due after one year:
Fixed rate commercial, financial, agricultural and construction $ 192,340 $ 71,937 $ 264,277
Variable rate commercial, financial, agricultural and construction 382,258 123,812 506,070
- --------------------------------------------------------------------------------------------------------------------
Total $ 574,598 $195,749 $ 770,347
====================================================================================================================
Actual maturities of loans will differ from the contractual maturities presented
in the table above because of prepayments, rollovers and renegotiation of
payment terms, among other factors.
================================================================================
Under-Performing Assets
Residential mortgage, installment and other consumer loans are collectively
evaluated for impairment. Individual commercial loans exceeding size thresholds
established by management are evaluated for impairment. Impaired loans are
recorded at the loan's fair value by the establishment of a specific allowance
where necessary. The fair value of the underlying collateral-dependent loans is
determined by the fair value of the underlying collateral. The fair value of
noncollateral-dependent loans is determined by discounting expected future
interest and principal payments at the loan's effective interest rate. All
impaired loans are included in the non-performing loans.
Non-accrual loans are comprised principally of loans 90 days past due, as
well as certain loans which are current but where serious doubts exist as to the
ability of the borrower to comply with the repayment terms. Interest previously
accrued and not yet paid on non-accrual loans is reversed or charged against the
allowance for credit losses during the period in which the loan is placed in a
non-accrual status, except where Sky Financial has determined that such loans
are adequately secured as to principal and interest. Interest earned thereafter
is included in income only to the extent that it is received in cash. In certain
cases, interest received may be credited against principal outstanding under the
cost recovery method.
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 $48,968 and $28,023 at December 31, 2000 and 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 believes
that a higher level of scrutiny is prudent under the circumstances. The increase
in loans where some concern exists reflects Sky Financial's continuous process
of loan review and is primarily attributable to recently acquired banks. 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.
- -----------------------------------------------------------------------------------------------------------------------------
Table 9 Under-Performing Assets
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Non-accrual loans $ 20,329 $17,423 $13,570 $15,980 $18,535
Restructured loans 1,131 2,067 2,026 475 902
- -----------------------------------------------------------------------------------------------------------------------------
Total non-performing loans 21,460 19,490 15,596 16,455 19,437
Other real estate owned 2,221 3,293 1,977 2,291 3,823
- -----------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 23,681 $22,783 $17,573 $18,746 $23,260
=============================================================================================================================
Loans 90 days or more past due and not on non-accrual $ 10,294 $ 9,538 $ 7,797 $ 8,313 $ 9,968
=============================================================================================================================
Non-performing loans to total loans 0.36% 0.36% 0.31% 0.34% 0.43%
Non-performing assets to total loans plus other real estate owned 0.40 0.42 0.34 0.39 0.52
Allowance for credit losses to total non-performing loans 434.58 445.10 517.75 404.45 309.10
Loans 90 days or more past due and not on non-accrual to total loans 0.17 0.17 0.15 0.17 0.22
=============================================================================================================================
27
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Provision and Allowance for Credit Losses
The provision for credit losses represents the charge to income necessary to
adjust the allowance for credit losses to an amount that represents management's
assessment of the estimated probable credit losses inherent in Sky Financial's
loan portfolio that have been incurred at each balance sheet date. All lending
activity contains associated risks of loan losses. Sky Financial recognizes
these credit risks as a necessary element of its business activity. To assist in
identifying and managing potential loan losses, Sky Financial maintains a loan
review function that continuously evaluates individual credit relationships as
well as overall loan portfolio conditions. One of the primary objectives of this
loan review function is to make recommendations to management as to both
specific loss reserves and overall portfolio loss reserves.
The provision for credit losses expense for 2000 was $22,250, compared with
$20,712 for 1999 and $31,992 in 1998. The changes in the provision for credit
losses were attributable to the changes in net loan charge-offs, the recognition
of changes in current risk factors and the addition to the portfolio of new
loans originated at SFS.
- ----------------------------------------------------------------------------------------------------
Table 10 Allowance for Loan Losses
- ----------------------------------------------------------------------------------------------------
Year Ended December 31, 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Balance at beginning of the period $ 86,750 $ 80,748 $ 66,553 $ 60,080 $ 55,029
Loans charged-off:
Real estate (1,798) (2,803) (3,861) (1,343) (1,507)
Commercial, financial and agricultural
loans (8,024) (3,366) (7,719) (5,360) (3,016)
Installment and credit card (13,678) (14,233) (11,757) (10,145) (14,019)
Other loans (453) (68) (5) (68) (14)
- ----------------------------------------------------------------------------------------------------
Total charge-offs (23,953) (20,470) (23,342) (16,916) (18,556)
- ----------------------------------------------------------------------------------------------------
Recoveries:
Real estate 1,032 938 551 476 476
Commercial, financial and agricultural
loans 3,483 1,711 2,334 1,368 2,034
Installment and credit card 3,567 3,052 2,627 2,640 2,294
Other loans 132 25 33 46 57
- ----------------------------------------------------------------------------------------------------
Total recoveries 8,214 5,726 5,545 4,530 4,861
- ----------------------------------------------------------------------------------------------------
Net loans charged-off (15,739) (14,744) (17,797) (12,386) (13,695)
Provision charged to operating expense 22,250 20,712 31,992 18,859 18,746
Effect of conforming year end of pooled
entity - 34 - - -
- ----------------------------------------------------------------------------------------------------
Balance at the end of the period $ 93,261 $ 86,750 $ 80,748 $ 66,553 $ 60,080
====================================================================================================
Net charge-offs to average loans outstanding 0.28% 0.28% 0.36% 0.26% 0.31%
Allowance for credit losses to total loans 1.58 1.58 1.58 1.38 1.33
Allowance for credit losses to total
nonperforming loans 434.58 445.10 517.75 404.45 309.10
- ----------------------------------------------------------------------------------------------------
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.
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 and regulatory examination findings.
At December 31, 2000, the allowance for credit losses was $93,261, or 1.58%
of total loans outstanding, and 435% of total non-performing loans, compared to
an allowance at December 31, 1999 of $86,750, or 1.58% of total loans
outstanding and 445% of total non-performing loans. At year-end 2000, the
allocated portion of the allowance for credit losses was $76,457, compared with
$61,492 at year-end 1999. The increase of 24% resulted primarily from the
overall growth in total loans of 8% and the adjustment and extension of loss
factors for components of certain segments within the loan portfolio,
particularly the commercial financing segment. At year-end 2000, the unallocated
portion of the allowance for credit losses was $16,804 compared with $25,258 at
year-end 1999. The decrease was primarily attributable to reduced estimation
risk related to the adjustment of loss factors which increased the allocated
portion of the allowance.
Non-performing loans at year-end 2000 totaled $21,460, or .36% of total loans
outstanding, compared with $19,490, or .36% of total loans outstanding at year-
end 1999. In 2000, higher net charge-offs in commercial and agricultural loans
were offset partially by lower net charge-offs in installment and credit card
loans. Net charge-offs remained stable at $15,739, or .28% of average total
loans, compared with $14,744, or .28% of average total loans in 1999. The
increase in loan charge-offs was primarily in the commercial real estate and
commercial, financial and agricultural loan portfolios.
At December 31, 2000, average annual net charge-offs for the past three years
were .31% of average loans compared with .30% at December 31, 1999. Based on
these averages for net charge-offs, the allowance for credit losses represented
5.1 years of net credit losses at December 31, 2000 and 5.3 years of net credit
losses at December 31, 1999. Historical net charge-offs may not be indicative of
losses realized in the future.
- -----------------------------------------------------------------------------------------
Table 11 Allocation of the Allowance for Credit Losses
- -----------------------------------------------------------------------------------------
December 31, 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------
Construction $ 1,132 $ 707 $ 693 $ 93 $ 77
Real estate 27,091 22,186 21,771 9,120 7,707
Commercial, financial and agricultural 21,619 15,365 12,748 14,381 13,682
Installment and credit card 25,606 22,434 17,976 11,963 13,298
Other loans 1,009 800 1,820 355 1,341
Unallocated 16,804 25,258 25,740 30,641 23,975
- -----------------------------------------------------------------------------------------
Total $93,261 $86,750 $80,748 $66,553 $60,080
=========================================================================================
The overall increase in the allowance for credit losses in 2000 was mainly
due to the 8% growth in total loans from 1999. This was particularly reflected
in the increased allowance for commercial, financial and agricultural loans, as
that portion of the loan portfolio grew 19% in 2000 overall, with 11% generated
by the community banking segment and 8% by SFS. The increased allowance
allocation for real estate loans principally reflects a shift in the real estate
portfolio from residential mortgage loans to non-residential mortgage loans.
Non-residential loans increased to 46% of the real estate portfolio at year-end
2000, compared to 40% at year-end 1999.
29
Management's Discussion and Analysis of
Financial Condition and Result of Operations
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Securities
The investment portfolio at Sky Financial is used as a management tool to
maintain acceptable levels of liquidity and exposure to changes in market
interest rates. Once these criteria are satisfied then portfolio yield is
maximized.
During 2000, the investment portfolio was restructured. Municipal and U.S.
Treasury securities were reduced, while U.S. agency debt securities and
mortgage-backed securities were increased. This portfolio restructuring was
undertaken to maximize the liquidity, cash flow and investment yield while
maintaining the portfolio's credit quality and average life.
The portfolio contains mortgage-backed securities, and to a limited extent
other securities, that have uncertain cash flow characteristics. The variable
cash flows present additional risk to Sky Financial in the form of prepayment or
extension risk primarily caused by changes in market interest rates. This
additional risk is generally rewarded in the form of higher yields.
Sky Financial utilizes a variety of tools to monitor and minimize this risk.
All securities must pass a stress test at the time of purchase estimating how
the security would perform in various interest rate environments. Additionally,
the corporate investment policy defines certain types of high risk securities
ineligible for purchase, including securities that may not return full principal
to Sky Financial. It is also the practice of Sky Financial to minimize premiums
paid on mortgage securities to avoid yield reduction if prepayments accelerate.
These policies help to insure that there will be no material impact from these
investments to the financial statements due to changes in market interest rates.
There are no securities of any single issuer where the aggregate carrying
value of such securities exceed 10% of shareholders' equity, except those of the
U.S. Treasury, U.S. Government agencies and substantially all mortgage-backed
securities issued by Federal Home Loan Mortgage Corporation, Federal National
Mortgage Association and Government National Mortgage Association. Table 13
shows the contractual maturities and weighted average yields of Sky Financial's
securities as of December 31, 2000. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties. Mortgage-backed
securities are presented in the table based on current prepayment assumptions.
The weighted average yields on income from tax exempt obligations of state and
political subdivisions have been adjusted to a tax equivalent basis.
- -----------------------------------------------------------------------------------------------------------------------
Table 12 Securities Available for Sale and Securities Held to Maturity
- -----------------------------------------------------------------------------------------------------------------------
Estimated Fair Value
- -----------------------------------------------------------------------------------------------------------------------
December 31, 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Securities Available for Sale:
U.S. Treasury securities and obligations of
U.S. Government agencies and corporations $ 619,549 $ 674,440 $ 679,531
Obligations of states and political subdivisions 48,045 190,840 214,965
Corporate and other securities 78,246 65,821 33,793
Mortgage-backed securities 987,622 841,607 1,072,000
- -----------------------------------------------------------------------------------------------------------------------
Total debt securities available for sale 1,733,462 1,772,708 2,000,289
Marketable equity securities 113,055 96,131 126,544
- -----------------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 1,846,517 $ 1,868,839 $ 2,126,833
=======================================================================================================================
Amortized Cost
- -----------------------------------------------------------------------------------------------------------------------
December 31, 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Treasury securities and obligations of
U.S. Government agencies and corporations $ -- $ -- $ 14,998
Obligations of states and political subdivisions -- -- 8,852
Corporate and other securities -- -- 60
Mortgage-backed securities -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ -- $ -- $ 23,910
=======================================================================================================================
30
- ------------------------------------------------------------------------------------------------------------------------------
Table 13 Maturity Distribution of Debt Securities Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Within 1 Yr 1-5 Yrs 5-10 Yrs Over 10 Yrs
---------------------------------------------------------------------------------
December 31, 2000 Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and U.S. Government
agencies and corporations $118,931 6.14% $306,106 6.41% $169,550 6.82% $ 26,249 6.87%
Obligations of states and
political subdivisions 8,817 5.59 8,070 7.42 12,843 7.99 18,551 7.41
Corporate and other securities 5,082 6.10 11,913 6.76 400 6.25 65,750 8.30
Mortgage-backed securities 233,919 6.84 485,903 6.78 169,403 6.89 98,092 6.77
- ------------------------------------------------------------------------------------------------------------------------------
Total debt securities available for sale $366,749 6.57% $811,992 6.65% $352,196 6.90% $208,642 7.32%
==============================================================================================================================
Funding Sources
Sky Financial Group obtains its funding through a variety of sources. Retail
deposits are gathered from individuals and businesses within the local
communities served by the banking affiliates. Deposits encompass the full range
of banking products including checking, savings and time deposits. In addition,
Sky Financial obtains funds under a number of borrowing arrangements. The
banking affiliates are all members of the Federal Home Loan Bank and may obtain
both overnight and term advances. The banking affiliates also obtain funds
through securities sold under repurchase agreement and federal funds lines. SFS
maintains a line of credit with a non-affiliated bank to fund loans until
permanent funding can be arranged through the issuance of collateralized notes
in a private placement. The parent company also maintains a line of credit with
a group of non-affiliated banks.
- -----------------------------------------------------------------------------------------------------
Table 14 Funding Sources
- -----------------------------------------------------------------------------------------------------
Average Amounts Outstanding Average Rate Paid
------------------------------------------------------
Year Ended December 31, 2000 1999 1998 2000 1999 1998
- -----------------------------------------------------------------------------------------------------
Non-interest-bearing demand deposits $ 736,811 $ 730,245 $ 635,451
Interest-bearing demand deposits 141,744 231,858 764,843 2.38% 1.56% 2.00%
Savings deposits 1,844,659 1,859,922 1,333,332 2.56 2.06 2.75
Time deposits 3,045,522 2,952,016 3,028,688 5.64 5.28 5.56
- -----------------------------------------------------------------------------------------------------
Total deposits 5,768,736 5,774,041 5,762,314
Short-term borrowings 667,301 612,584 541,802 5.39 4.77 4.99
Trust preferred securities 93,946 49,551 52,500 9.71 9.75 9.98
Debt and FHLB advances 868,977 697,856 571,974 6.32 5.45 5.83
- -----------------------------------------------------------------------------------------------------
Total funding sources $7,398,960 $7,134,032 $6,928,590
=====================================================================================================
Table 15 is a schedule of maturities of time deposits in denominations of
$100,000 or more as of December 31, 2000:
- -------------------------------------------------------
Table 15 Maturity of Time Deposits of $100,000 or More
- -------------------------------------------------------
Three months or less $241,193
Three through six months 132,341
Six through twelve months 277,128
Over twelve months 136,998
- -------------------------------------------------------
Total $787,660
=======================================================
31
Management's Discussion and Analyss of
Financial Condition and Results of Operations
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Short-term Borrowings
Table 16 sets forth certain information relative to the securities sold under
agreements to repurchase and Federal funds purchased. Generally, repurchase
agreements are sold to local government entities and businesses and have
maturity terms of overnight to 30 days. Federal funds purchased generally have
overnight terms.
- -------------------------------------------------------------------------------------------------------------------------------
Table 16 Short-Term Borrowings
- -------------------------------------------------------------------------------------------------------------------------------
December 31, 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase and federal funds purchased at period-end $702,985 $657,913 $589,722
Weighted average interest rate at period-end 5.62% 4.67% 4.83%
Maximum outstanding at any month-end during the year $741,264 $657,913 $621,672
Average amount outstanding 667,301 612,584 541,802
Weighted average rates during the year 5.39% 4.77% 4.99%
- -------------------------------------------------------------------------------------------------------------------------------
For further information on the securities sold under agreements to repurchase, see Note 7.
===============================================================================================================================
Liquidity Management
Management of liquidity is of growing importance to the banking industry. The
liquidity of a financial institution reflects its ability to meet loan requests,
to accommodate possible outflows of deposits and to take advantage of interest
rate market opportunities. The ability of a financial institution to meet its
current financial obligations is a function of balance sheet structure, the
ability to liquidate assets, and the availability of alternative sources of
funds.
In addition to maintaining a stable core deposit base, Sky Financial's
banking subsidiaries maintain adequate liquidity primarily through the use of
investment securities and unused borrowing capacity. At December 31, 2000,
securities and other short term investments with maturities of one year or less
totaled $132,830. In addition, the mortgage-backed securities provide an
estimated cash flow of approximately $233,919 over a twelve-month timeframe.
Each of the banking subsidiaries is a member of the Federal Home Loan Bank
(FHLB). The FHLB provides a reliable source of funds over and above retail
deposits. As of December 31, 2000, the banking subsidiaries had total credit
availability with the FHLB of $874,652, of which $805,581 was outstanding.
Sky Financial, through one of its affiliates, entered into a conduit
warehousing facility with a financial institution to provide up to $125,000 of
interim funding for loans originated by SFS. Term funding will be arranged
through the issuance of collateralized notes in a private placement.
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 that could be paid to
Sky Financial by its subsidiaries, without prior regulatory approval, were
limited to $2,701 as of December 31, 2000.
Sky Financial maintains a $120 million line of credit with a group of
unaffiliated banks that expires March 30, 2001. As of December 31, 2000, Sky had
no outstanding balance on the line of credit.
Capital Resources
Shareholders' equity at year end 2000 totaled $609,690, compared to $566,331 at
December 31, 1999, an increase of 7.7%
The Federal Reserve Board has established risk-based capital guidelines that
must be observed by financial holding companies and banks. Sky Financial has
consistently maintained the regulatory capital ratios of the corporation and
each of its banks above "well capitalized" requirements. For further information
on capital ratios, see Note 20 of the consolidated financial statements.
The capital position is managed through balance sheet size and composition,
issuance of debt and equity instruments, treasury stock activities, dividend
policies and retention of earnings.
On March 31, 2000, Sky Financial Capital Trust I issued $60,000 of capital
securities due May 1, 2030, which are considered to be Tier I capital.
On September 20, 2000, Sky Financial's Board of Directors authorized the
repurchase of up to 4,200,000 shares of Sky Financial Group common stock over a
twelve-month period in the open market or in privately negotiated transactions.
This action represents a continuation of Sky Financial's program in which shares
are repurchased for use in future stock dividends and for use in its stock
option plans. Sky Financial or its predecessors have declared a 10% stock
dividend in each of the last five years. Through December 31, 2000, 712,000
shares had been repurchased under this authorization.
32
- --------------------------------------------------------------------------------
Market Risk Management
Market risk is the risk that a financial institution's earnings and capital, or
its ability to meet its business objectives, will be adversely affected by
movements in market rates or prices such as interest rates, foreign exchange
rates, equity prices, credit spreads and/or commodity prices. Within Sky
Financial Group, the dominant market risk exposure is changes in interest rates.
The negative effects of this exposure is felt through the net interest margin,
mortgage banking revenues and the market value of various assets and
liabilities.
Sky Financial manages market risk through its Asset/ Liability Committees
(ALCO) at both the subsidiary and consolidated levels. These committees monitor
interest rate risk through sensitivity analysis, whereby it measures potential
changes in future earnings and the fair market 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 year-end
2000. 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.
Table 17 presents an analysis of the potential sensitivity of Sky Financial's
annual net interest income and the present value of Sky Financial's financial
instruments to sudden and sustained 200 basis point changes in market rates
- --------------------------------------------------------------------------------
Table 17 Rate Shock Analysis
- ---------------------------------------------------------------------
Year end Year end ALCO
2000 1999 Guidelines
- ---------------------------------------------------------------------
One Year Net Interest
Income Change
+200 Basis points (2.7)% (3.7)% (10.0)%
- -200 Basis points .6 1.7 (10.0)
Net Present Value of
Equity Change
+200 Basis points (25.4)% (22.4)% (30.0)%
- -200 Basis points 34.0 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 December 31, 2000 and 1999 fall
within the ALCO guidelines.
The preceeding 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.
Effects of Inflation
The assets and liabilities of Sky Financial are primarily monetary in nature and
are more directly affected by the fluctuation in interest rates than inflation.
Movement in interest rates is a result of the perceived changes in inflation as
well as monetary and fiscal policies. Interest rates and inflation do not
necessarily move with the same velocity or within the same period; therefore, a
direct relationship to the inflation rate cannot be shown. The financial
information presented in this report has been prepared in accordance with
generally accepted accounting principles, which require that Sky Financial
measure financial position and operating results primarily in terms of
historical dollars.
Forward Looking Statements
This report includes forward-looking statements by Sky Financial relating to
such matters as anticipated operating results, credit quality expectations,
prospects for new lines of business, technological developments, economic trends
(including interest rates), reorganization transactions and similar matters.
Such statements are based upon the current beliefs and expectations of Sky
Financial's management and are subject to risks and uncertainties. While Sky
Financial believes that the assumptions underlying the forward-looking
statements contained herein 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
of 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. 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.
33
Reports of Management and Independent Auditors
- --------------------------------------------------------------------------------
Report of Management
Management of Sky Financial Group, Inc. is responsible for the preparation,
content and integrity of the consolidated financial statements and all other
information whether audited or unaudited in this annual report. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles and, where necessary, are based on management's best
estimates and judgment. The financial information contained elsewhere in this
annual report is consistent with that contained in the consolidated financial
statements.
Sky Financial Group, Inc.'s independent auditors have been engaged to perform an
audit of the consolidated financial statements in accordance with generally
accepted auditing standards and the independent auditors' report expresses their
opinion as to the fair presentation of the consolidated financial statements in
accordance with generally accepted accounting principles.
Management maintains accounting systems and internal controls to meet its
responsibilities for reliable consolidated financial statements. There are
inherent limitations in the effectiveness of internal controls, including the
possibility of errors or irregularities. Furthermore, because of changes in
conditions, the effectiveness of internal controls may vary over time.
Management believes that these systems and controls provide reasonable assurance
that assets are safeguarded and transactions are properly recorded and executed,
in accordance with management's authorization. An internal audit function is
maintained to continually evaluate the adequacy and effectiveness of such
internal controls, policies, and procedures.
The Board of Directors pursues its oversight role for the financial statements
through the Audit Committee, which is composed entirely of outside directors.
The Audit Committee meets periodically with management, the internal auditors
and the independent auditors, to discuss internal controls and accounting,
auditing and financial reporting matters. The Audit Committee reviews and
approves the scope of internal and external audits, as well as recommendations
made with respect to internal controls by the independent and internal auditors
and the various regulatory agencies.
/s/ Marty E. Adams
- --------------------------
Marty E. Adams
Chairman, President and Chief Executive Officer
/s/ Kevin T. Thompson
- --------------------------
Kevin T. Thompson
Executive Vice President and Chief Financial Officer
- --------------------------------------------------------------------------------
Report of Independent Auditors
Board of Directors and Shareholders
Sky Financial Group, Inc.
Bowling Green, Ohio
We have audited the accompanying consolidated balance sheets of Sky Financial
Group, Inc. as of December 31, 2000 and 1999, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sky
Financial Group, Inc. as of December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000 in conformity with generally accepted accounting
principles.
/s/ Crowe, Chizek and Company LLP
- ----------------------------------
Crowe, Chizek and Company LLP
Columbus, Ohio
January 29, 2001
34
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------------------------------------------
December 31, 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 266,359 $ 380,980
Interest-earning deposits with financial institutions 17,725 17,086
Federal funds sold -- 3,100
Loans held for sale 13,984 9,006
Securities available for sale 1,846,517 1,868,839
Total loans 5,916,098 5,477,494
Less allowance for credit losses (93,261) (86,750)
- -------------------------------------------------------------------------------------------------------------------
Net loans 5,822,837 5,390,744
Premises and equipment 115,029 115,675
Accrued interest receivable and other assets 304,351 278,326
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 8,386,802 $ 8,063,756
===================================================================================================================
Liabilities
Deposits
Non-interest-bearing deposits $ 757,483 $ 757,537
Interest-bearing deposits 5,134,449 5,001,154
- -------------------------------------------------------------------------------------------------------------------
Total deposits 5,891,932 5,758,691
Securities sold under repurchase agreements and
federal funds purchased 702,985 657,913
Debt and Federal Home Loan Bank advances 933,444 915,957
Obligated mandatorily redeemable capital
securities of subsidiary trusts 108,600 48,600
Accrued interest payable and other liabilities 140,151 116,264
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 7,777,112 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;
84,015,577 and 85,979,371 shares issued in 2000 and 1999 597,723 571,543
Retained earnings 26,599 34,381
Treasury stock; 607,633 and 274,250 shares in 2000 and 1999 (10,491) (6,215)
Unearned ESOP (300) (717)
Accumulated other comprehensive income (loss) (3,841) (32,661)
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 609,690 566,331
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 8,386,802 $ 8,063,756
===================================================================================================================
The accompanying notes are an integral part of the financial statements.
35
Consolidated Statements of Income
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------------------------
For The Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------------
Interest Income
Loans, including fees $ 505,203 $ 449,653 $ 442,725
Securities
Taxable 113,193 112,298 118,749
Nontaxable 6,241 9,613 9,734
Federal funds sold and other 1,378 2,031 4,487
- --------------------------------------------------------------------------------------------------
Total interest income 626,015 573,595 575,695
- --------------------------------------------------------------------------------------------------
Interest Expense
Deposits 222,211 197,863 220,325
Borrowed funds 100,008 72,087 65,587
- --------------------------------------------------------------------------------------------------
Total interest expense 322,219 269,950 285,912
- --------------------------------------------------------------------------------------------------
Net interest income 303,796 303,645 289,783
Provision for credit losses 22,250 20,712 31,992
- --------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 281,546 282,933 257,791
- --------------------------------------------------------------------------------------------------
Other Income
Trust services income 15,147 12,581 11,268
Service charges and fees on deposit accounts 27,003 27,480 25,142
Mortgage banking income 12,204 18,953 26,687
Brokerage and insurance commissions 29,177 15,960 9,430
Collection agency fees 1,912 2,465 4,115
Net securities gains (losses) (3,023) 1,325 1,409
Net gains on sales of commercial financing loans 7,586 17,305 19,378
Other income 31,952 28,273 27,121
- --------------------------------------------------------------------------------------------------
Total other income 121,958 124,342 124,550
- --------------------------------------------------------------------------------------------------
Other Expenses
Salaries and employee benefits 117,957 120,546 128,960
Occupancy and equipment expense 37,004 38,985 38,665
Merger, integration and restructuring expense 3,867 72,545 55,987
Other operating expense 76,579 70,421 82,955
- --------------------------------------------------------------------------------------------------
Total other expenses 235,407 302,497 306,567
- --------------------------------------------------------------------------------------------------
Income before income taxes 168,097 104,778 75,774
Income taxes 53,724 33,596 23,811
- --------------------------------------------------------------------------------------------------
Net Income $ 114,373 $ 71,182 $ 51,963
==================================================================================================
Earnings Per Common Share
Basic $ 1.35 $ 0.83 $ 0.61
Diluted 1.35 0.82 0.60
==================================================================================================
The accompanying notes are an integral part of the financial statements.
36
Consolidated Statements of Changes in Shareholders' Equity
(Dollars and shares in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Common Treasury Common Retained Treasury Unearned Comprehensive
Shares Shares Stock Earnings Stock ESOP Income(Loss) Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 58,781 1,078 $341,727 $298,416 $(19,269) $ (1,408) $ 13,399 $632,865
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income 51,963 51,963
Other comprehensive income 685 685
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 52,648
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock split 9,931
Cash dividends ($.54 per share) (45,184) (45,184)
Treasury shares acquired 961 (34,202) (34,202)
Treasury shares issued
for stock option exercises (129) (3,325) (13) 5,904 2,566
Canceled treasury shares (852) (852) (28,883) 28,883
10% common stock dividend 4,098 124,793 (124,793)
Fractional shares and other items 109 2,460 (34) 594 3,020
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 72,067 1,058 436,772 180,355 (18,684) (814) 14,084 611,713
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income 71,182 71,182
Other comprehensive (loss) (47,110) (47,110)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 24,072
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.70 per share) (56,218) (56,218)
Treasury shares acquired 890 (21,344) (21,344)
Treasury shares issued
for stock option exercises (286) (2,843) 7,350 4,507
Canceled treasury shares (1,001) (1,001) (17,184) 17,184
Shares issued to acquire
Picton Cavanaugh, Inc. 289 313 481 380 1,174
Effect of conforming the year
end of pooled affiliate 1,000 596 3 (15) 1,584
10% common stock dividend 6,751 (387) 152,688 (161,967) 9,279
Fractional shares and other items 57 797 (48) 94 843
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 78,163 274 571,543 34,381 (6,215) (717) (32,661) 566,331
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income 114,373 114,373
Other comprehensive income 28,820 28,820
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 143,193
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.73 per share) (61,377) (61,377)
Treasury shares acquired 3,064 (52,820) (52,820)
Treasury shares issued
for stock option exercises (323) (1,889) 5,774 3,885
Shares issued to acquire
Meyer & Eckenrode
Insurance Agency, Inc. 603 9,610 9,610
10% common stock dividend 5,223 (2,407) 17,904 (60,674) 42,770
Fractional shares and other items 27 555 (104) 417 868
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 84,016 608 $597,723 $ 26,599 $(10,491) $ (300) $ (3,841) $609,690
====================================================================================================================================
The accompanying notes are an integral part of the financial statements.
37
Consolidated Statements of Cash Flows
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
For The Years Ended December 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 114,373 $ 71,182 $ 51,963
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, amortization and valuation adjustments 19,107 47,622 40,922
Net gains on sales of assets (15,084) (37,298) (49,150)
Provision for credit losses 22,250 20,712 31,992
Net change in loans held for sale 7,504 111,421 11,362
Net change in other assets and liabilities (11,526) (10,862) (18,854)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 136,624 202,777 68,235
- ----------------------------------------------------------------------------------------------------------------------------
Investing Activities
Net (increase) decrease in interest-earning deposits with financial institutions (639) (1,840) 2,574
Net decrease (increase) in federal funds sold 3,100 48,636 (1,528)
Securities available for sale:
Proceeds from maturities and payments 383,612 650,186 690,714
Proceeds from sales 276,520 166,479 61,569
Purchases (596,441) (607,043) (1,119,535)
Securities held to maturity:
Proceeds from maturities and payments -- 2,210 124,037
Purchases -- -- (26,506)
Proceeds from sales of loans 51,322 21,830 35,240
Net increase in loans (506,131) (421,994) (279,246)
Purchases of premises and equipment (15,442) (18,959) (21,084)
Purchases of life insurance contracts -- (4,340) (30,350)
Purchases of loans -- -- (187)
Proceeds from sales of premises and equipment 2,580 7,651 2,560
Proceeds from sales of other real estate 4,006 2,314 3,740
Cash acquired through acquisitions 271 1,675 --
- ----------------------------------------------------------------------------------------------------------------------------
Net cash from investing activities (397,242) (153,195) (558,002)
- ----------------------------------------------------------------------------------------------------------------------------
Financing Activities
Cash transferred in connection with sale of branch deposits (9,830) (95,917) (40,884)
Purchases of branch deposits, net -- 47,214 251,221
Net (decrease) increase in deposit accounts 143,748 (171,072) 148,846
Net increase (decrease) in federal funds and repurchase agreements 45,072 68,191 (1,277)
Net increase (decrease) in short-term FHLB advances (105,700) 203,258 (78,148)
Proceeds from trust preferred securities 60,000 -- --
Proceeds from issuance of debt and long-term FHLB advances 548,083 247,765 498,514
Repayment of debt and long-term FHLB advances (424,896) (153,575) (202,431)
Cash dividends and fractional shares paid (61,962) (49,984) (35,734)
Proceeds from issuance of common stock 3,885 4,507 4,220
Treasury stock purchases (52,820) (21,344) (34,160)
Other items 417 1,740 587
- ----------------------------------------------------------------------------------------------------------------------------
Net cash from financing activities 145,997 80,783 510,754
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and due from banks (114,621) 130,365 20,987
Effect on cash of conforming the year end of pooled entity -- 3,331 --
Cash and due from banks at beginning of year 380,980 247,284 226,297
- ----------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 266,359 $ 380,980 $ 247,284
============================================================================================================================
Supplemental Disclosures
Noncash transactions - securitization of loans held for sale $ -- $ 3,915 $ 241
Interest paid 324,659 272,417 283,636
Income taxes paid 48,136 46,732 43,442
============================================================================================================================
The accompanying notes are an integral part of the financial statements.
38
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Note 1 Summary of Significant Accounting Policies
Sky Financial Group, Inc. (Sky Financial) is a financial holding company
headquartered in Bowling Green, Ohio, that owns and operates three banks
primarily engaged in the commercial and consumer banking business. Sky Financial
also operates businesses relating to commercial finance lending, insurance,
trust, and other financial related services.
Basis of Presentation
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 consolidated financial statements give retroactive effect to the 1999
and 1998 merger transactions accounted for by the pooling-of-interests method as
discussed in Note 2. Certain amounts in the prior consolidated financial
statements and pooled affiliates financial statements have been reclassified to
conform to the current presentation.
Consolidation
The consolidated financial statements of Sky Financial include the accounts of
Sky Bank (Sky Bank), Mid Am Bank (Mid Am), The Ohio Bank (Ohio Bank), Sky
Financial Solutions, Inc. (SFS), Sky Trust, N.A. (Sky Trust), Sky Investments,
Inc. (SII), Picton Cavanuagh, Inc. (Picton), Meyer & Eckenrode Insruance
Group, Inc. (Meyer & Eckenrode), and various other insignificant subsidiaries.
All significant intercompany transactions and accounts have been eliminated in
consolidation.
In April 2000, Mahoning National Bank of Youngstown, a bank acquired in 1999,
was merged into Sky Bank. Various other bank affiliates were merged together in
1999 and 1998.
Securities
Sky Financial classifies its securities as held to maturity, trading or
available for sale. Securities classified as available for sale are those that
management intends to sell or that could be sold for liquidity, investment
management or similar reasons, even if there is not a present intention to make
such a sale. Equity securities that have a readily determinable fair value are
also classified as available for sale. Securities classified as available for
sale are carried at estimated fair value with unrealized appreciation or
depreciation recorded, net of tax, in other comprehensive income. Securities
classified as held to maturity are stated at cost, adjusted for amortization of
premiums and accretion of discounts using the interest method. Securities
classified as held to maturity are those that management has the positive intent
and ability to hold to maturity. Trading securities are acquired for sale in the
near term and are carried at fair value, with unrealized holding gains and
losses reflected in earnings. Sky Financial held no trading securities during
any period presented. Amortization of premiums and accretion of discounts are
recorded in interest income using the interest method over the period to
maturity, which is sometimes estimated. Gains and losses on security sales are
calculated using the specific identification method to determine the security's
cost.
Derivative Financial Instruments
Sky Financial's hedging policies permit the use of interest rate swaps, caps and
floors to manage interest rate risk or to hedge specified assets and
liabilities. Interest rate swaps were entered into for the purpose of modifying
the interest rate characteristics for the funding of certain loans within Sky
Financial's loan portfolio. The interest rate swaps involve no exchange of
principal either at inception or upon maturity; rather, it involves the periodic
exchange of interest payments arising from an underlying notional principal
amount. Interest rate swaps are accounted for using settlement accounting and
are reported at its initial cost, and unrealized gains and losses resulting from
changes in its fair value are not recorded in the financial statements. Revenues
or expenses associated with these agreements are accounted for on an accrual
basis and are recognized as an adjustment to interest income on loans
receivable, based on the interest rates currently in effect for such contracts.
Derivative financial instruments are not used for trading purposes.
Loans Held for Sale
Certain residential mortgage loans are originated for sale in the secondary
mortgage loan market. Additionally, certain other loans and leases are
periodically identified to be sold. These loans and leases are classified as
loans held for sale and carried at the lower of cost or estimated fair value
taken together. Fair value is determined on the basis of rates quoted in the
respective secondary market for the type of loan or lease held for sale. Loans
and leases are generally sold at a premium or discount from the carrying amount
of the loans. Such premium or discount is recognized at the date of sale. Fixed
commitments may be used at the time loans are originated or identified for sale
to mitigate interest rate risk.
Mortgage Servicing Rights
The cost of mortgage loans sold or securitized is allocated between the mortgage
servicing rights and the cost of the mortgage based on the relative fair values
of each. The fair value of the mortgage servicing rights is determined by
discounting expected servicing income cash flows, net of certain servicing
costs.
Mortgage servicing rights assets are amortized in proportion to, and over the
period of, estimated net servicing income. Management periodically evaluates
mortgage servicing assets for impairment by discounting the expected future cash
flows, taking into consideration the estimated level of prepayments based upon
current industry expectations.
Interest and Fees on Loans
Interest income on loans is accrued over the term of the loans using the simple-
interest method based on the amount of principal outstanding. The accrual of
interest is discontinued on a loan when management believes that the collection
of interest is doubtful. Payments on these loans are recorded as principal
reductions. Loan origination and commitment fees and certain direct loan
origination costs are deferred and amortized as an adjustment to the related
loan's yield. Sky Financial is amortizing these amounts over the contractual
life of the related loans.
39
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Note 1 Summary of Significant Accounting Policies (continued)
Allowance for Credit Losses
The allowance for credit losses is an amount that management believes will be
adequate to probable losses in existing loans and leases and is established
through a provision for credit losses charged to expense. Loans and leases are
charged against the allowance for credit losses when management believes the
full collectibility of the loan is unlikely. The allowance and provision take
into consideration such factors as past loss experience, changes in the nature
and volume of the portfolio, overall portfolio quality, loan concentrations,
specific problem loans, leases and commitments, and current economic conditions
that affect the borrower's ability to pay. Allowances established to provide for
losses under commitments to extend credit, or recourse provisions under loan and
lease sales agreements or servicing agreements are classified with other
liabilities.
A loan is considered impaired when it is probable that not all principal and
interest amounts will be collected according to the loan contract. Residential
mortgage, installment and other consumer loans are collectively evaluated for
impairment. Individual commercial loans exceeding size thresholds established by
management are evaluated for impairment. Impaired loans are recorded at the
loan's fair value by the establishment of a specific allowance where necessary.
The fair value of collateral-dependent loans is determined by the fair value of
the underlying collateral. The fair value of noncollateral-dependent loans is
determined by discounting expected future interest and principal payments at the
loan's effective interest rate.
Foreclosed Assets
Assets acquired through or instead of loan foreclosure are initially recorded at
fair value when acquired, establishing a new cost basis. If fair value declines,
a valuation allowance is recorded through expense. Costs after acquisition are
expensed.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation, that is
computed primarily using the straight-line method. The adjusted cost of the
specific assets sold or disposed of is used to compute gains or losses on
disposal. These assets are reviewed for impairment when events indicate their
carrying value may not be recoverable.
Intangible Assets
Goodwill is amortized using the straight-line method over periods ranging from
15 to 25 years. Core deposit intangible assets acquired before 1992 are
amortized using the straight-line method over periods ranging from 10 to 15
years. Core deposit intangible assets acquired on or after January 1, 1992 are
amortized using an accelerated method over periods ranging from 10 to 15 years.
Net intangible assets at December 31, 2000 and 1999 aggregated $43,736 and
$35,414, respectively. In 1999, impairment of certain intangible assets was
recognized. (See Note 14)
Merger, Integration and Restructuring Expense
Included in other operating expense is a charge for merger, integration and
restructuring expenses, which primarily represents professional fees, other
personnel related costs, valuation adjustments for certain premises, equipment
and other assets, and integration costs related to mergers, acquisitions, and
corporate restructuring. (See Note 14)
Income Taxes
Sky Financial utilizes an asset and liability approach for financial accounting
and reporting of income taxes. The provision for income taxes is the sum of
taxes currently payable and the change in deferred tax assets and liabilities.
Deferred income taxes are provided using the current tax rate for differences
between the tax basis of assets and liabilities and their carrying amounts for
financial reporting purposes.
Stock Dividends and Treasury Stock
Shares of Sky Financial stock are acquired for reissuance in connection with
stock option plans and for future stock dividend declarations. The treasury
shares acquired are recorded at cost. The fair value of shares issued in stock
dividends is transferred from retained earnings to common stock, to the extent
of available retained earnings. Any excess of fair value over available retained
earnings is considered a return of capital and thus is transfered from paid-in
capital.
Stock-Based Compensation
Employee compensation expense under stock option plans is reported if options
are granted below market price at a grant date. Pro forma disclosures of
compensation cost of stock-based awards have been determined using the fair
value method that considers the time value of the option considering the
volatility of Sky Financial's stock and the risk-free interest rate over the
expected life of the option using a Black-Scholes valuation model.
Statement of Cash Flows
Sky Financial considers cash on hand, deposits maintained with the Federal
Reserve Bank and cash due from other banks, all of which are included in the
caption "cash and due from banks," as cash for purposes of the Statement of Cash
Flows. Sky Financial reports net cash flows for federal funds sold, interest-
bearing deposits with other financial institutions, customer loan transactions,
deposit transactions, repurchase agreements, and short-term borrowings.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes unrealized gains and losses on securities
available for sale that are also recognized as separate components of equity.
New Accounting Pronouncement
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. Adoption of this standard on January 1, 2001 did
not have a material effect on the financial statements of Sky Financial.
Reclassifications
Certain items in the prior year financial statements were reclassified to
conform to the current presentation.
40
- --------------------------------------------------------------------------------
Note 2 Mergers, Acquisitions, Business Formations and Divestitures
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. The purchase premium
of $11,262 is being amortized on a straight-line basis over 15 years. Meyer and
Eckenrode's results of operations are included in Sky Financial's consolidated
statement of income from the date of acquisition. Prior results of operations
were not material.
In 1999 and 1998, Sky Financial was involved in four mergers each year. Seven
of the mergers were with other bank holding companies. The other merger, Picton
Cavanaugh, Inc., is a full service insurance agency. Each merger was accounted
for as a pooling of interests, including the October 1998 merger of equals with
Mid Am, Inc. Accordingly, all financial information has been restated to include
the historical information of the merged entities, other than Picton Cavanaugh.
Since Picton Cavanaugh's financial statements were not material compared to Sky
Financial's, prior financial statements were not restated. The following
summarizes these acquisitions and mergers:
- --------------------------------------------------------------------------------------------------------------------
Entity Location Date Total Assets Shares Issued
- --------------------------------------------------------------------------------------------------------------------
Meyer & Eckenrode Insurance Group, Inc. Carnegie, PA July 13, 2000 $ 6 million .66 million
Mahoning National Bancorp, Inc. Youngstown, OH September 30, 1999 $847 million 12.5 million
First Western Bancorp, Inc. New Castle, PA August 6, 1999 $2.2 billion 16.5 million
Wood Bancorp, Inc. Bowling Green, OH July 16, 1999 $167 million 2.5 million
Picton Cavanaugh, Inc. Toledo, OH May 1, 1999 $4.4 million 0.3 million
The Ohio Bank Findlay, OH December 4, 1998 $600 million 7.0 million
Mid Am, Inc. Bowling Green, OH October 2, 1998 $2.3 billion 24.0 million
Century Financial Corporation Rochester, PA May 12, 1998 $453 million 5.4 million
UniBank Steubenville, OH March 6, 1998 $216 million 2.5 million
====================================================================================================================
UniBank, as well as the banking subsidiaries of Mahoning National Bancorp, Inc.,
First Western Bancorp, Inc. and Century Financial Corporation were merged into
Sky Bank. The banking subsidiary of Wood Bancorp, Inc. was merged into Mid Am
Bank.
Branch Acquisitions and Divestitures
In October 1999, Sky Financial purchased the Kenton, Ohio and Wellsville, Ohio
banking offices of National City Bank, Ohio. In the acquisitions, Sky Financial
assumed $46 million of deposits, acquired certain other assets and received $43
million in cash. The premium of $2.7 million is reflected, net of amortization,
in other assets in the consolidated balance sheet and is being amortized over 15
years.
Prior to its merger with Sky Financial, First Western's branch acquisition
and divestiture activity included the June 19, 1998 purchase from PNC Bank of 16
branches in western Pennsylvania. First Western acquired approximately $384
million in deposits, $74 million in consumer and small business loans, and $11
million in brokerage assets, along with related fixed assets, leases, safe
deposit business and other agreements. First Western paid consideration of
approximately $59 million, which is reflected, net of amortization and
impairment write-downs, in other assets in the consolidated balance sheet and is
being amortized over 12 years. In February 1999, First Western sold four of
these branches. As part of this transaction, First Western acquired from one of
the purchasing banks the deposits and consumer loans of a branch in Moon
Township, Pennsylvania. The branches sold included $135 million of deposits and
$23 million of consumer loans. The Moon Township branch acquired had
approximately $8 million of deposits and $2 million of consumer loans. The $15.8
million premium received from the sale of the four branches was used to offset
the intangible assets created when these branches were purchased and no gain or
loss was recorded. In January 1998, First Western sold three Lake County, Ohio
branches. These branches had approximately $47 million in deposits. First
Western realized a net gain of $1.1 million on this transaction.
Business Formations
Effective January 1, 2000, Sky Financial centralized its entire trust business
into a newly-chartered trust company, Sky Trust, N.A. (Sky Trust). To facilitate
the formation, the trust business of each bank affiliate and Mid Am Private
Trust was transferred to Sky Trust, and Mid Am Private Trust was merged into Sky
Trust. Sky Trust, a wholly-owned subsidiary of Sky Financial, is headquartered
in Pepper Pike, Ohio.
Business Divestitures
In December 2000, Sky Financial Group, Inc. sold substantially all of the assets
of Sky Asset Management Services, Inc., its collection agency located in
Clearwater, Florida. The sale resulted in a before-tax loss of $0.5 million,
which is included in merger, integration and restructuring expense in the
consolidated statement of income. In January 2001, the company announced the
pending sale of Sky Investments, its broker/dealer. The sale of Sky Investments
is pending regulatory approval, with the expected completion of the transaction
in the first quarter of 2001. The company expects to realize a before-tax gain
of $0.6 million in the transaction.
41
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Note 3 Securities Available for Sale
The amortized costs, unrealized gains and losses and estimated fair values of
securities available for sale at year-end are as follows:
- --------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------
2000
U.S. Treasury and U.S. Government
agencies and corporations $ 620,836 $ 3,798 $ (5,085) $ 619,549
Obligations of states and political
subdivisions 48,281 275 (511) 48,045
Corporate and other securities 83,145 172 (5,071) 78,246
Mortgage-backed securities 987,317 7,239 (6,934) 987,622
- ---------------------------------------------------------------------------------------------------
Total debt securities available for sale 1,739,579 11,484 (17,601) 1,733,462
Marketable equity securities 112,846 3,776 (3,567) 113,055
- ---------------------------------------------------------------------------------------------------
Total securities available for sale $1,852,425 $ 15,260 $ (21,168) $1,846,517
===================================================================================================
1999
U.S. Treasury and U.S. Government
agencies and corporations $ 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 69,305 106 (3,590) 65,821
Mortgage-backed securities 865,857 379 (24,629) 841,607
- ---------------------------------------------------------------------------------------------------
Total debt securities available for sale 1,818,318 2,151 (47,761) 1,772,708
Marketable equity securities 100,769 3,428 (8,066) 96,131
- ---------------------------------------------------------------------------------------------------
Total securities available for sale $1,919,087 $ 5,579 $ (55,827) $1,868,839
===================================================================================================
Securities held to maturity of approximately $21,700 were transferred from
held to maturity to available for sale upon completion of the merger of Mahoning
in 1999, and approximately $60,500 were transferred from held to maturity to
available for sale upon completion of the mergers of Unibank and Century
Financial Corporation in 1998.
The amortized cost and estimated fair value of debt securities at December
31, 2000, by contractual maturity, are shown to the right. Expected maturities
will likely differ from contractual maturities because some issuers have the
right to call or prepay obligations with or without call or prepayment
penalties.
- -------------------------------------------------------
Amortized Estimated
Cost Fair Value
Due in one year or less $ 132,830 $ 132,508
Due after one year
through five years 326,089 325,554
Due after five years
through ten years 182,793 182,835
Due after ten years 110,550 104,943
Mortgage-backed securities 987,317 987,622
- -------------------------------------------------------
Total debt securities
available for sale $ 1,739,579 $ 1,733,462
=======================================================
The gross realized gains and losses from the sales of securities are as follows:
- ------------------------------------------------------------------------
2000 1999 1998
Gross realized gains on sales $ 1,378 $ 1,558 $ 2,509
Gross realized losses on sales 4,401 233 1,100
========================================================================
42
- --------------------------------------------------------------------------------
Note 4 Loans and Allowance for Credit Losses
The loan portfolio at year-end was as follows:
- -------------------------------------------------------------
2000 1999
- -------------------------------------------------------------
Real estate loans:
Construction $ 210,135 $ 176,940
Residential mortgage 1,663,111 1,744,162
Non-residential mortgage 1,575,907 1,296,019
Commercial, financial
and agricultural loans 1,568,766 1,322,747
Installment and
credit card loans 884,750 923,261
Other loans 13,429 14,365
- -------------------------------------------------------------
Total loans $ 5,916,098 $ 5,477,494
=============================================================
Most of Sky Financial's business activity is conducted with customers in the
respective local areas of its subsidiary banks. These areas encompass parts of
eastern Ohio, western Ohio, eastern Indiana, southeastern Michigan, western
Pennsylvania and northern West Virginia. Sky Financial's loan portfolio is
diversified, consisting of commercial, residential, agribusiness, consumer and
small business loans. No significant industry concentrations exist, and amounts
related to highly leveraged transactions are not significant. Sky Financial
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained is based on management's evaluation of the customer.
Collateral held relating to commercial, financial, agricultural and commercial
mortgages varies, but may include accounts receivable, inventory, property,
plant and equipment, and income-producing commercial properties. Non-performing
loans totaled $21,460 and $19,490 at December 31, 2000 and 1999, respectively.
In the normal course of business, Sky Financial has made loans to certain
directors, executive officers and their associates under terms consistent with
Sky Financial's general lending policies. Loan activity relating to these
individuals for 2000 is as follows:
- -------------------------------------------------------------
Aggregate balance - December 31, 1999 $ 51,208
New loans 31,539
Repayments (38,215)
Other changes (6,331)
- -------------------------------------------------------------
Aggregate balance - December 31, 2000 $ 38,201
=============================================================
Other changes represent loans applicable to one reporting period that are
excludable from the other reporting period.
Activity in the allowance for credit losses was as follows:
- --------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------
Balance at beginning $ 86,750 $ 80,748 $ 66,553
of year
Provision for credit losses 22,250 20,712 31,992
Recoveries 8,214 5,726 5,545
Loans charged-off (23,953) (20,470) (23,342)
Effect of conforming year
end of pooled entity -- 34 --
- --------------------------------------------------------------
Balance at end of year $ 93,261 $ 86,750 $ 80,748
==============================================================
Information regarding impaired loans is as follows:
- ----------------------------------------------------------------------------------------------------
2000 1999 1998
- ----------------------------------------------------------------------------------------------------
Year-end impaired loans with no allowance for credit losses allocated $ 1,658 $ 3,547 $ 1,331
Year-end impaired loans with allowance for credit losses allocated 7,141 5,676 9,844
Year-end allowance for credit losses allocated to impaired loans 1,173 1,112 3,824
Average investment in impaired loans during the year 9,378 9,589 14,080
Cash-basis interest income recognized during the year 664 500 868
====================================================================================================
- --------------------------------------------------------------------------------
Note 5 Premises and Equipment
Premises and equipment as of year end are summarized as follows:
- --------------------------------------------------------------
2000 1999
- --------------------------------------------------------------
Land, buildings and improvements $ 123,202 $ 119,044
Equipment, furniture and fixtures 111,652 106,298
Construction in process 7,296 10,002
- --------------------------------------------------------------
Total premises and equipment 242,150 235,344
Less accumulated depreciation
and amortization (127,121) (119,669)
- --------------------------------------------------------------
Premises and equipment, net $ 115,029 $ 115,675
==============================================================
Included in the above are buildings, land and land improvements that secure
capitalized leases with a cost of $4,299 and $5,386, less accumulated
amortization and depreciation of $3,109 and $3,999 at December 31, 2000 and
1999. Substantially all of the property recorded under capital leases relates to
transactions with Bancsites, Inc., a former subsidiary of Sky Financial. The
capital lease premises represent nine branch bank facilities owned by Bancsites
and leased to Sky Financial under long-term lease agreements entered into in the
normal course of business and under terms no more favorable than those
prevailing in the marketplace. Lease payments to Bancsites, Inc. under capital
leases amounted to $336 in 2000, $337 in 1999, and $444 in 1998. Rental payments
for land are treated as operating lease expense. Total rent expense amounted to
$3,286 in 2000, $3,412 in 1999, and $3,181 in 1998.
43
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Note 6 Interest-Bearing Deposits
Total interest-bearing deposits as presented on the balance sheet are comprised
of the following classifications at year-end:
- --------------------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------------------
Interest-bearing demand $ 160,132 $ 161,492
Savings 1,830,052 1,871,140
Time
In denominations under $100,000 2,356,605 2,291,044
In denominations of $100,000 or more 787,660 677,478
- --------------------------------------------------------------------------------------------
Total interest-bearing deposits $5,134,449 $5,001,154
============================================================================================
At December 31, 2000, the scheduled maturities of certificates of deposit are as
follows:
- ---------------------------------------------------
2001 $ 2,182,261
2002 742,766
2003 163,598
2004 23,869
2005 22,302
Thereafter 9,469
- ---------------------------------------------------
$ 3,144,265
===================================================
- --------------------------------------------------------------------------------
Note 7 Securities Sold Under Repurchase Agreements and Federal Funds Purchased
Sky Financial has retail repurchase agreements with customers within its local
market areas, as well as federal funds purchased from other banks. These
borrowings are collateralized with securities owned by the banks and held in
their safekeeping accounts at independent correspondent banks.
Sky Financial also has repurchase agreements with brokerage firms which are
in possession of the underlying securities. The same securities are returned to
Sky Financial at the maturity of the agreements.
The following table summarizes certain information relative to these
borrowings:
- --------------------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------------------
Outstanding at year-end $ 702,985 $ 657,913
Weighted average interest rate at year-end 5.62% 4.67%
Maximum amount outstanding as of any month-end $ 741,264 $ 657,913
Average amount outstanding 667,301 612,584
Approximate weighted average interest rate during the year 5.39% 4.77%
============================================================================================
Included in the above are repurchase agreements with a remaining maturity in
excess of one year of $182,500 and $172,500 at December 31, 2000 and 1999,
respectively. At December 31, 2000, the weighted average life of repurchase
agreements with a remaining maturity in excess of one year is 6.9 years based on
the stated maturity of the repurchase agreements. However, many of these
repurchase agreements have call provisions. The weighted average life of Sky
Financial's repurchase agreements with a remaining maturity in excess of one
year based on call dates is 1.3 years at December 31, 2000.
44
- ------------------------------------------------------------------------------------------------------------------------------------
Note 8 Debt and Federal Home Loan Bank Advances
Sky Financial's debt and Federal Home Loan Bank ("FHLB") advances are comprised
of the following at year end:
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Borrowings under bank lines of credit $ 73,678 $ 84,000
Borrowings under FHLB lines of credit at weighted interest rate of 6.29% and 5.65% in 2000 and 1999 805,581 763,170
Capital lease obligations 1,668 1,903
Subordinated note at 7.08%, due January 2008 50,000 50,000
Obligated mandatorily redeemable capital securities of subsidiary trust,
interest at 9.875%, due February 2027 25,000 25,000
Obligated mandatorily redeemable capital securities of subsidiary trust,
interest at 10.20%, due June 2027 23,600 23,600
Obligated mandatorily redeemable capital securities of subsidiary trust,
interest at 9.34%, due May 2030 60,000 --
Other items 2,517 16,884
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,042,044 $ 964,557
====================================================================================================================================
FHLB advances are collateralized by all shares of FHLB stock owned by
subsidiary banks and by 100% of subsidiary banks' qualified mortgage loans.
Based on the carrying amount of FHLB stock owned by subsidiary banks, total FHLB
advances are limited to approximately $874,652, subject to the availability of
qualified residential mortgage loans for pledging.
At December 31, 2000, required annual principal payments on debt and FHLB
advances were as follows:
- --------------------------------------------------------------------------------
2001 $ 330,151
2002 285,986
2003 98,083
2004 56,660
2005 1,187
Thereafter 269,977
- --------------------------------------------------------------------------------
$ 1,042,044
================================================================================
On August 16, 2000, Sky Financial, through one of its affiliates, entered
into a conduit warehousing facility under which an unrelated financial
institution is providing up to $125,000 through a commitment period ending
August 16, 2003. Depending on how the lender funds the facility, interest on a
particular advance is accrued based on a rate equal to either the lender's
commercial paper borrowing rate or the sum of 1.75% and the average of the
London interbank rates, as adjusted. In addition to interest, annual fees
associated with the facility include 0.90% of the outstanding advances plus
0.30% of the unused principal amount of the facility. Sky Financial is required,
unless otherwise agreed to by lender, to enter into one or more hedge
transactions on or prior to the date of each advance, such that the notional
amount of the hedge transaction in effect during any monthly payment period
shall be equal to the scheduled contract balance for the contract delivered into
the warehousing facility. A total of $73,678 is outstanding on this facility at
year end 2000, and carries a weighted average rate of 6.93%. Associated with the
conduit warehousing facility, the company entered into a standby letter of
credit with a financial institution in the amount of $11,250 with an expiration
of August 16, 2001. The agreement contains covenants which require Sky
Financial, among other things, to maintain minimum tangible net worth, as
defined, of $450,000 and a positive net income during each fiscal year.
Sky Financial maintains a credit facility with a group of financial
institutions in the form of a short term line of credit. This line of credit is
subject to renewal on an annual basis. The commitment on the line was $120,000
in 2000 and $100,000 in 1999. Interest on advances taken on the facility is
accrued at either the lead financial institution's prime rate, a formula based
on the London Interbank Offering Rate, or a formula based on the federal funds
rate. Sky Financial may elect the interest rate method to be applied to amounts
outstanding in $100 increments. The agreement provides for a quarterly fee of
.125% on the commitment amount of the credit facility. The agreement contains
convenants which require Sky Financial, among other things to maintain a minimum
tangible net worth of $380,000 as defined by the agreement, minimum specified
capital ratios, and acceptable levels of asset quality. The average amount
outstanding in 2000 was $66,992, with an average cost of 7.30%, compared to
$49,605, with an average cost of 5.93% in 1999.
On March 31, 2000, Sky Financial Capital Trust I, in a private placement,
issued $60,000 of 9.34% capital securities due May 1, 2030. Sky Financial's
obligated mandatorily redeemable capital securities may be redeemed by Sky
Financial, in whole or in part, at Sky Financial's option commencing May 1, 2010
at a redemption price of 104.67% of the outstanding principal amount and,
thereafter, at a premium which declines annually. On or after May 1, 2020, the
securities may be redeemed at face value. Sky Financial Capital Trust I
securities are considered to be Tier I capital.
During 1997, Mid Am Capital Trust I, in a private placement, issued $27,500
of 10.20% capital securities through a wholly-owned special purpose subsidiary.
Sky Financial's obligated mandatorily redeemable capital securities may be
redeemed by Sky Financial prior to their mandatory June 1, 2027 redemption date
commencing June 1, 2007 at a redemption price of 105.10% of the face value of
the capital securities and thereafter at a
45
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Note 8 Debt and Federal Home Loan Bank Advances (continued)
premium which declines annually. On or after June 1, 2017, the capital
securities may be redeemed at face value. In 1998, Sky Financial retired
securities with a face value of $2,900 at a premium of 15.9%, or $460. Sky
Financial's mandatorily redeemable capital securities are considered to be Tier
I capital.
On February 11, 1997, First Western Capital Trust I, in a private
placement, issued $25,000 of 9.875% capital securities due February 1, 2027. Sky
Financial's obligated mandatorily redeemable capital securities may be redeemed
by Sky Financial prior to their mandatory February 1, 2027 redemption date
commencing February 1, 2007 at a redemption price of 104.94% of the face value
of the capital securities and thereafter at a premium which declines annually.
On or after February 1, 2017, the capital securities may be redeemed at face
value. First Western Capital Trust I securities are considered to be Tier I
capital.
On January 16, 1998, Mid Am, Inc. issued $50,000 of 7.08% subordinated debt
in a private placement transaction. The subordinated debt matures in 2008. For
regulatory capital purposes, the subordinated debt is considered Tier II
capital.
Sky Financial maintained letters of credit from two third-party financial
institutions supporting a credit enhancement for loans sold by SFS. These
letters of credit totaled $20,000.
- ------------------------------------------------------------------------------------------------------------------------------------
Note 9 Income Taxes
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Current
Federal $ 51,762 $ 54,298 $ 35,862
State and local (172) 112 267
- -----------------------------------------------------------------------------------------------------------------------------------
51,590 54,410 36,129
Deferred
Federal 2,133 (20,888) (12,214)
State and local 1 74 (104)
- -----------------------------------------------------------------------------------------------------------------------------------
2,134 (20,814) (12,318)
- -----------------------------------------------------------------------------------------------------------------------------------
Total provision for income taxes $ 53,724 $ 33,596 $ 23,811
- -----------------------------------------------------------------------------------------------------------------------------------
The sources of gross deferred tax assets and liabilities were as follows at year
end:
- -----------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Items giving rise to deferred tax assets:
Allowance for loan losses in excess of tax reserve $ 30,903 $ 27,348 $ 23,963
Merger, integration and restructuring expense 1,924 4,564 6,854
Tax basis of intangible assets in excess of book basis 9,182 9,613 3,381
Deferred compensation 7,838 8,428 2,994
Unrealized loss on securities available for sale 2,067 17,587 --
Other 6,876 9,639 2,241
- -----------------------------------------------------------------------------------------------------------------------------------
58,790 77,179 39,433
- -----------------------------------------------------------------------------------------------------------------------------------
Items giving rise to deferred tax liabilities:
Depreciation -- (653) (3,301)
FHLB stock dividends (5,295) (4,458) (3,550)
Mortgage servicing rights (5,113) (4,668) (3,596)
Unrealized gain on securities available for sale -- -- (7,573)
Other (1,921) (3,286) (3,347)
- -----------------------------------------------------------------------------------------------------------------------------------
(12,329) (13,065) (21,367)
- -----------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 46,461 $ 64,114 $ 18,066
- -----------------------------------------------------------------------------------------------------------------------------------
46
- -------------------------------------------------------------------------------
Note 9 Income Taxes (continued)
Sky Financial has sufficient taxes paid in current and prior years to warrant
recording the full deferred tax asset without a valuation allowance.
Total federal income tax expense differs from the expected amounts computed
by applying the statutory federal tax rate of 35% to income before taxes. The
reasons for this difference are as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------
Tax Tax Tax
Amount Rate Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------------------------------------
Income tax expense based upon the federal statutory
rate on income before income taxes $ 58,834 35.0% $ 36,672 35.0% $ 26,521 35.0%
Tax exempt income (3,426) (2.0) (4,507) (4.3) (4,929) (6.5)
Non-deductible merger and restructuring costs -- 0.0 4,109 3.9 2,966 3.9
Other (1,684) (1.0) (2,678) (2.6) (747) (1.0)
- -----------------------------------------------------------------------------------------------------------------------------------
$ 53,724 32.0% $ 33,596 32.0% $ 23,811 31.4%
- -----------------------------------------------------------------------------------------------------------------------------------
Tax expense (benefit) attributable to securities gains and losses totaled
$(1,058), $464, and $493 in 2000, 1999 and 1998.
- ------------------------------------------------------------------------------------------------------------------------------------
Note 10 Other Comprehensive Income
Other comprehensive income consisted of the following:
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
Other comprehensive income
Unrealized gains (losses) arising during period $ 41,317 $ (70,580) $ 2,483
Reclassification adjustment for gains included in income 3,023 (1,325) (1,409)
- --------------------------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on securities available for sale 44,340 (71,905) 1,074
Tax effect (15,520) 24,795 389
- --------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) $ 28,820 $ (47,110) $ 685
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Note 11 Earnings Per Common 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 poolings-of-interests (see Note
2), in addition to 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 dilutive effect of potential common shares issuable under
stock options.
Basic and diluted earnings per share computations were as follows:
- --------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Numerator
Net income (basic and diluted) $ 114,373 $ 71,182 $ 51,963
- --------------------------------------------------------------------------------------------------------------------------------
Denominator
Weighted-average common shares outstanding (basic) 84,604,000 85,938,000 85,759,000
Dilutive effect of stock options 363,000 836,000 1,138,000
- --------------------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding (diluted) 84,967,000 86,774,000 86,897,000
- --------------------------------------------------------------------------------------------------------------------------------
Earnings Per Common Share
Basic $ 1.35 $ 0.83 $ 0.61
Diluted 1.35 0.82 0.60
- --------------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Note 11 Earnings Per Share (continued)
In 2000 and 1999, 3,192,000 and 1,861,000 weighted shares under option were
excluded from the diluted earnings per share calculation as they were anti-
dilutive.
The Board of Directors declared a two-for-one stock split payable June 1,
1998 to shareholders of record May 12, 1998.
In addition, a 10% stock dividend is reflected in each year presented. All
share and per share data have been retroactively adjusted to reflect the mergers
discussed in Note 2, stock dividends and splits.
- --------------------------------------------------------------------------------
Note 12 Fair Values of Financial Instruments
The following table shows carrying values and the related estimated fair values
of financial instruments at year end. Items that are not financial instruments
are not included.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------
Carrying Estimated Carrying Estimated
Amounts Fair Value Amounts Fair Value
- --------------------------------------------------------------------------------------------------------------------------------
Financial Assets:
Cash and due from banks $ 266,359 $ 266,359 $ 380,980 $ 380,980
Interest-bearing deposits with other financial institutions 17,725 17,725 17,086 17,086
Federal funds sold -- -- 3,100 3,100
Securities available for sale 1,846,517 1,846,517 1,868,839 1,868,839
Loans held for sale and loans, net of the allowance for credit losses 5,836,821 5,795,332 5,399,750 5,451,122
Accrued interest receivable 61,118 61,118 54,240 54,240
Financial Liabilities:
Deposits (5,891,932) (5,763,213) (5,758,691) (5,751,309)
Securities sold under repurchase agreements and federal funds purchased (702,985) (703,774) (657,913) (660,474)
Debt, FHLB advances and trust preferred securities (1,040,376) (1,055,287) (962,654) (966,826)
Accrued interest payable (24,203) (24,203) (26,643) (26,643)
Off Balance Sheet:
Interest rate swaps -- (2,266) -- --
================================================================================================================================
For purposes of the above disclosures of estimated fair value, the following
assumptions were used: the carrying values for cash and due from banks, federal
funds sold, interest-bearing deposits in other financial institutions and
accrued interest were considered to approximate fair value; the estimated fair
value for securities was based on quoted market values for the individual
securities or for equivalent securities; carrying value is considered to
approximate fair value for loans that contractually reprice at intervals of less
than six months; the estimated fair value for other loans was based on estimates
of the rate Sky Financial would charge for similar loans at December 31, 2000
and 1999, applied over estimated payment periods; the estimated fair value for
demand and savings deposits was based on their carrying value; the estimated
fair value for certificates of deposit and borrowings was based on estimates of
the rate Sky Financial would pay on such obligations at December 31, 2000 and
1999, applied for the time period until maturity. The fair value of interest
rate swaps represents the estimated amount the company would receive or pay to
terminate the agreements, considering current interest rates, as well as the
current creditworthiness of the counterparties. The capital lease obligations of
$1,668 and $1,903 at December 31, 2000 and 1999 are not included in the fair
value disclosures. The estimated fair value of commitments was not material.
While these estimates of fair values are based on management's judgment of
appropriate factors, there is no assurance that, if Sky Financial had disposed
of such items at December 31, 2000 or 1999, the estimated fair values would
necessarily have been achieved at that date, since market values may differ
depending on various circumstances. The estimated fair values at December 31,
2000 and 1999 should not necessarily be considered to apply at subsequent dates.
In addition, other assets and liabilities of Sky Financial that are not
defined as financial instruments were not included in the above disclosures,
such as property and equipment and life insurance contacts. In addition, non-
financial instruments typically not recognized in financial statements (but
which may have value) were not included in the above disclosures. These include,
among other items, the estimated earning power of core deposit accounts, the
value of a trained work force, customer goodwill, and similar items.
48
- -----------------------------------------------------------------------------
Note 13 Other Income and Other Operating Expense
The following is a summary of other income and other operating expense:
- -----------------------------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------------------
Other Income
International department fees $ 1,248 $ 1,006 $ 965
Gain on sale of deposits and branch offices 560 -- 1,071
Gains on sales of credit card accounts
and other loans 1,681 3,203 1,927
Income from bank-owned life insurance 5,323 4,709 3,178
Other 23,140 19,355 19,980
- -----------------------------------------------------------------------------
Total other income $31,952 $28,273 $27,121
=============================================================================
Other Operating Expense
Brokerage commissions $11,973 $ 7,925 $ 6,209
State franchise taxes 7,097 4,442 5,903
Printing and supplies 5,149 5,741 6,523
Legal and other professional fees 6,747 6,179 9,365
Telephone 5,939 6,421 5,301
Marketing 6,825 6,598 7,554
Amortization of intangible assets 4,831 5,243 6,104
Other 28,018 27,872 35,996
- -----------------------------------------------------------------------------
Total other operating expense $76,579 $70,421 $82,955
=============================================================================
- -----------------------------------------------------------------------------
Note 14 Merger, Integration and Restructuring Expenses
In 2000, Sky Financial recorded merger, integration and restructuring charges
totaling $3,867 ($2,514 after tax or $.03 per diluted share). The majority of
these expenses are associated with Mid Am Bank and The Ohio Bank officially
changing their names to Sky Bank as announced in December of 2000. In addition,
charges were taken as part of the reorganization of Sky Financial's financial
service affiliates in late 2000 and early 2001. Included in the total are
severance and other related employee costs of $721, valuation adjustments of
property, equipment and other assets of $810, transaction costs of $75,
communication expenses of $800, product standardization costs of $305 and other
merger and integration-related costs of $1,156.
Severance and other employee-related charges were incurred primarily as part
of the reorganization into community banking regions associated with the name
change. These changes will be completed by the end of the first quarter of 2001.
Transaction costs were part of the reorganization of the financial service
affiliates that was completed in the fourth quarter of 2000. Other merger,
restructuring and integration expenses are primarily related to the approval and
implementation of the bank name changes, which is expected to be completed in
the first quarter of 2001.
The following is a summary of activity in the merger, integration and
restructuring liability for 2000 and 1999:
- -----------------------------------------------------------------------
2000 1999
- -----------------------------------------------------------------------
Beginning balance $ 16,638 $ 22,520
Accruals 2,424 44,639
Cash payments (11,814) (50,521)
- -----------------------------------------------------------------------
Ending balance $ 7,248 $ 16,638
=======================================================================
In 1999, Sky Financial recorded merger, integration and restructuring charges
totaling $72,545 ($51,051 after tax, or $.59 per diluted share). The majority of
the expenses were associated with the merger and integration of the combined
operations of Sky Financial with First Western, Mahoning Bancorp, and Wood
Bancorp. Included in the total are severance and other employee related costs of
$23,566, valuation adjustments of property, equipment and other assets of
$29,104, transaction costs of $7,813 and other merger and integration-related
costs of $12,062.
Severance and other employee related charges were incurred primarily as part
of the consolidation of First Western Bank, N.A. with Sky Bank and the
consolidation of First Federal Bank, a Wood Bancorp subsidiary, with Mid Am
Bank. In addition, severance and other employee-related charges were accrued for
the consolidation of the Mahoning National Bank with Sky Bank, that was
completed in 2000. A review was conducted of individual positions to determine
those to be eliminated. Positions eliminated affected all job classifications.
49
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Note 14 Merger, Integration and Restructuring Expenses (continued)
During 2000, eighty-one positions were eliminated as part of the integration
of the Mahoning National Bank. Of this total, thirty accepted transfers to other
positions, thirty-four accepted outside employment and seventeen were
involuntarily terminated with severance. Severance payments totaled $161.
The employee-related costs resulted in the elimination of approximately 250
positions during 1999. The employee related expenses for the First Western and
Wood Bancorp mergers are substantially complete.
Asset valuation adjustments were comprised of charges to reflect, at fair
market value, redundant premises and equipment planned for disposal and the
current valuation of intangible assets related to the mergers. The impairment of
these assets results from the significant change in the extent or manner of
their use and their relative value to the merged corporation. Fair values for
significant fixed assets were determined by professional appraisal. The value of
intangible assets was determined using a discounted cash flow method.
Premises and equipment planned for disposal had a carrying value of $6,040 at
year-end 1999 after valuation adjustments of $6,894. These dispositions relate
primarily to the community banking segment of Sky Financial's operations. The
impairment of intangible assets resulted in a charge of $21,787 during 1999,
representing a reduction in the value of intangible assets acquired in the
merger with First Western. The remaining value of these assets at year end 1999
was $20,777. The charges for these valuation allowances are aggregated with
other merger, integration and other restructuring expenses and are reflected in
the parent and other segment for line of business reporting purposes. No
material adjustments were made to the recorded liabilities.
In 1998, Sky Financial recorded charges totaling $55,987 ($39,357 after tax,
or $.45 per diluted share). The majority of the charges are associated with the
merger and integration of the combined operations of Citizens Bancshares, Inc.,
Mid Am, Inc. and The Ohio Bank. Included in the total are severance and other
employee-related costs of $19,750, valuation adjustments of property, equipment
and other assets of $15,933, transaction costs of $8,311 and other merger and
integration- related costs of $11,993. Severance and other employee-related
charges were incurred as part of the consolidation of ten separate banking
organizations into three geographically-based banking entities and the resultant
reduction of duplicate positions and as part of a process redesign applied to
all business segments throughout the organization. The employee- related costs
resulted from the elimination of approximately 260 positions, including 26
senior management and officer positions. Prior to December 31, 1998,
approximately 40% of employee-related expenses were paid. The remaining expenses
were paid and the remaining position reductions were completed during the first
and second quarters of 1999. Also in 1998, First Western eliminated
approximately 70 positions, including 49 full-time positions and five executive
positions.
Asset valuation adjustments were comprised of charges to reflect at fair
value redundant premises and equipment to be disposed of and related intangible
assets; to reflect the impairment of premises for which there has been a
significant change in the extent or manner of use; and to reflect the impairment
of intangible assets. Fair values for significant assets were determined by
professional appraisal. Premises and equipment to be disposed of had a carrying
value of $1,902 at year-end 1998, after valuation adjustments of $1,980. These
dispositions, substantially all of which are in the community banking segment,
were substantially accomplished during 1999. The assets associated with the
remaining valuation adjustments were primarily in the community banking
subsidiaries. The charges for these valuation allowances are aggregated with
other merger, integration and restructuring expenses and are reflected in the
parent and other segment for line of business reporting purposes.
- --------------------------------------------------------------------------------
Note 15 Employee Benefits
Sky Financial maintains two plans, Employee Stock Ownership and Savings Plan and
Employee Stock Ownership Pension Plan, which management intends to be Sky
Financial's primary ongoing retirement plans, as well as a supplemental
retirement plan for certain individuals. Beginning in 2000, all employees of Sky
Financial were eligible to participate.
Employee Stock Ownership and Savings Plan
The plan provides for contributions by Sky Financial as determined annually by
the Board of Directors. These contributions were 4%, 6% and 6% of eligible
employee compensation in 2000, 1999 and 1998, respectively. Under the 401(k)
portion of the Plan, employees may contribute a percentage of their eligible
compensation with a company match of such contributions up to a maximum match of
3%. Employees may contribute to this plan upon employment. Employer matching
contributions commence after the employees have completed twelve months of
service.
Employee Stock Ownership Pension Plan
Sky Financial also sponsors an Employee Stock Ownership Pension Plan which
provides for an annual employer contribution equal to 3% of eligible employees'
annual compensation.
Supplemental Retirement Plan
This plan replaces retirement benefits eliminated under Sky Financial's
qualified retirement plans because of eligible compensation limitations under
current tax law. Sky Financial's contribution under the plan is determined by
multiplying the excess of employees' eligible compensation over the established
limitation by the contribution level established by the Board of Directors for
Sky Financial's qualified plans. The contribution rates were 10% and 12% in 2000
and 1999, respectively.
A summary of the other retirement plans of merged affiliates follows:
Pension Plans
First Western, Mahoning, Citizens and Century maintained defined benefit pension
plans covering certain employees. Retirement benefits are based primarily on
years of service and compensation rates near retirement. Employees became
eligible to participate in the plans after meeting certain service requirements
and became fully vested in the benefits after five years of service. The final
settlement of the First Western, Mahoning and Century plans occurred during
2000. The company recorded a gain of $1.9 million from the reversion of excess
plan assets. A portion of the excess funding was used to make direct
50
- --------------------------------------------------------------------------------
Note 15 Employee Benefits (continued)
contributions to existing plans. The Citizens' plan is expected to settle in the
first half of 2001. The reversion of excess funding is not expected to be
significant. The benefit obligation, pension expenses and accrued pension
liability associated with these plans are not material in any period presented.
Profit Sharing and 401(k) Plans
First Western Bank, Wood Bancorp, Citizens, The Ohio Bank, Picton and Century
maintained defined contribution profit sharing plans in which substantially all
employees participated. During 2000, the First Western Bank, Wood Bancorp, The
Ohio Bank and Picton plans were completely settled.
Postretirement Health Insurance Benefits
The company pays health insurance premiums for certain First Western, Mahoning
and Citizens employees after retirement. The company accrued the cost of
retirees' health and other post-retirement benefits during the working career of
active employees. The expense and liability under this plan are not material in
any period presented.
Employee Stock Ownership Plans
First Western Bank, Wood Bancorp and Citizens maintained an Employee Stock
Ownership Plan (ESOP) for substantially all employees. The First Western and
Wood Bancorp plans were completely settled during 2000. The remaining loan
obligation of $300 and $600 as of December 31, 2000 and 1999, respectively was
merged into the Sky Financial plan. Unallocated shares totaled 25,123 as of
December 31, 2000 and 50,241 shares as of December 31, 1999.
Expenses relating to all Sky Financial's plans, as well as those of the
merged affiliates, totaled $6,185, $9,042 and $7,772 in 2000, 1999 and 1998.
- --------------------------------------------------------------------------------
Note 16 Stock Options
Options to purchase Sky Financial's stock have been granted to directors,
officers and employees under various stock option plans. The Sky Financial
Group, Inc. 1998 Stock Option Plan for Employees and the Sky Financial Group,
Inc. Stock Option Plan for Non-Employee Directors were approved by Sky
Financial's shareholders in 1998. Under these plans, options may be granted to
buy a maximum of 6.5 million common shares, or 7.5% of the number of issued and
outstanding common shares at the time of the adoption of the plans, adjusted for
all subsequent stock-for-stock acquisitions. Options expire 10 years after the
date of grant and are issued at an option price no less than the market price of
Sky Financial's stock on the date of grant. Certain individuals, including
directors, may also elect to receive options, determined under a formula, in
lieu of a portion of their salary or director fees, as applicable. Options
granted to directors are fully vested and immediately exercisable at the time of
grant. Options granted to officers and other key employees are generally
exercisable at 40% after two years and in annual 20% increments thereafter,
except for options received in lieu of salary, which are immediately
exercisable.
A summary of the activity in the plans is as follows:
- --------------------------------------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 4,388,645 $ 16.80 4,450,218 $ 15.65 3,050,907 $ 11.04
Granted 1,489,572 16.64 665,527 18.65 1,715,627 22.94
Exercised (346,548) 8.52 (555,945) 8.21 (262,452) 9.33
Forfeited (274,085) 20.13 (171,155) 21.72 (53,864) 17.65
- --------------------------------------------------------------------------------------------------------------
Outstanding at end of year 5,257,584 $ 17.14 4,388,645 $ 16.80 4,450,218 $ 15.65
==============================================================================================================
Options exercisable at year-end 3,785,482 $ 16.45 3,348,234 $ 15.02 2,893,637 $ 12.71
Weighted average fair value of options
granted during year $ 3.39 $ 3.83 $ 4.93
==============================================================================================================
51
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Note 16 Stock Options (continued)
Options outstanding at year end 2000 were as follows:
- --------------------------------------------------------------------------------
Outstanding Exercisable
---------------------------------------------------
Weighted
Average Weighted
Remaining Average
Contractual Exercise
Range of Exercise Prices Number Life (Years) Number Price
- -------------------------------------------------------------------------------
$3 to $10 620,592 3.51 620,533 $ 8.75
$10 to $15 855,141 5.14 808,822 12.40
$15 to $20 2,086,480 9.09 1,163,467 17.40
$20 to $25 1,594,825 7.75 1,103,724 22.01
$25 to $30 100,546 7.67 88,936 25.65
- -------------------------------------------------------------------------------
Outstanding at year-end 5,257,584 7.36 3,785,482 $ 16.45
===============================================================================
Had compensation cost for stock options been measured using FASB Statement No.
123, net income and earnings per share would have been the pro forma amounts
indicated below. The pro forma effect may increase in the future if more options
are granted.
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Net income as reported $ 114,373 $ 71,182 $51,963
Pro forma net income 111,429 67,462 48,362
Basic earnings per share as reported $ 1.35 $ 0.83 $ 0.61
Pro forma basic earnings per share 1.32 0.78 0.56
Diluted earnings per share as reported 1.35 0.82 0.60
Pro forma diluted earnings per share 1.31 0.78 0.55
================================================================================
The pro forma effects are computed using option-pricing models, using the
following weighted average assumptions as of the grant date:
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Risk-free interest rate 6.13% 5.95% 5.00%
Expected option life (years) 5.37 5.26 7.29
Expected stock price volatility 26% 20% 20%
Dividend yield 4.82% 4.00% 3.01%
================================================================================
Sky Financial maintains a stock appreciation rights (SAR) plan under which SARs
were granted in tandem with stock options until 1998. Expense related to the
SARs was $(63) in 2000, $(100) in 1999, and $213 in 1998. A summary of the
activity in this plan follows:
- ----------------------------------------------------------------------------------------
2000 1999 1998
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
SARs Price SARs Price SARs Price
- ----------------------------------------------------------------------------------------
Outstanding at beginning of year 25,045 $ 14.25 28,342 $ 14.23 53,389 $ 9.68
Granted - - - - 5,776 27.05
Exercised (954) 11.01 (1,736) 10.84 (30,293) 8.67
Forfeited (515) 18.35 (1,561) 17.36 (530) 14.95
- ----------------------------------------------------------------------------------------
Outstanding at end of year 23,576 $ 14.30 25,045 $ 14.25 28,324 $ 14.23
========================================================================================
52
- --------------------------------------------------------------------------------
Note 17 Contingencies
Sky Financial is, from time to time, involved in various lawsuits and claims,
that 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.
- --------------------------------------------------------------------------------
Note 18 Financial Instruments With Off-Balance-Sheet Risk
Sky Financial is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers
located primarily within the local business area. These instruments include
commitments to extend credit, standby letters of credit and international
commercial letters of credit. In addition, SFS retained a portion of the credit
risk on loans and leases it sold in the secondary market.
Sky Financial's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit,
standby letters of credit and letters of credit is represented by the
contractual amount of those instruments. Sky Financial uses the same credit
policies in making commitments and conditional obligations as it does for on-
balance-sheet instruments.
Financial instruments whose contract amounts represent credit risk at
December 31 are presented below:
- --------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------
Commitments to extend credit $1,195,132 $1,192,727
Standby letters of credit 165,147 120,177
Letters of credit 3,802 755
================================================================================
The majority of the unfunded commitments at December 31, 2000 are variable
rate commitments, with approximately 23% or $278,000 having fixed rates.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates ranging from one to five years, variable
interest rates tied to the prime rate and Treasury bill rates and may require
payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
Standby letters of credit are conditional commitments issued by Sky Financial
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including bond financing and similar transactions. The expiration date of
substantially all standby letters of credit extend for a period ranging from
thirty days to seven years.
The credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers. Sky Financial holds
marketable securities, certificates of deposits, real estate, inventory and
equipment as collateral supporting those commitments for which collateral is
deemed necessary.
Letters of credit are instruments used to facilitate trade, most commonly
international trade, by substituting Sky Financial's credit for that of a
commercial importing company. The terms are generally one to three months. The
letters of credit are primarily unsecured.
Derivatives, such as interest rate swaps, are used for asset/liability
management. These instruments involve underlying items, such as interest rates,
and are designed to transfer risk. Notional amounts are amounts on which
calculations and payments are based, but which do not represent credit exposure,
as credit exposure is limited to the amounts required to be received and paid.
The notional amount of interest rate swaps contracts at December 31, 2000 and
1999 was $59,615 and $0, respectively. All contracts mature within the next 9
years.
Most of Sky Financial's business activity is with customers located within
the respective local business areas of its bank subsidiaries. However, SFS's
loan and lease activities are with customers in medical and dental-related
fields located throughout the United States. Substantially all loans and leases
originated by SFS until June 30, 2000 were sold in the secondary market. In
connection with those sales, SFS retains limited servicing and limited recourse
liability. The servicing is limited to responsibility to collect delinquent
accounts based on information provided by the purchaser of the loans and leases.
A liability was established at the time each loan or lease was sold based on the
fair value of the servicing liability. In addition, SFS recorded a liability for
the estimated recourse for credit losses which is limited to an aggregate of 10%
of the purchase price of the loans and leases sold. The fair value of the
servicing liability and the estimated recourse liability reduced the amount of
gain or increased the loss of the loans and leases sold. At December 31, 2000
and 1999, the outstanding balance of loans and leases sold were $476,456 and
$430,220, respectively. A portion of the purchase price is deferred and paid to
SFS on a delayed basis. At December 31, 2000 and 1999, SFS recorded receivables
of $12,266 and $13,081, respectively, for deferred sales proceeds. Changes in
the liability for recourse provisions relating to sold loans and leases is as
follows:
- -------------------------------------------------------------------------------
2000 1999
- -------------------------------------------------------------------------------
Balance at beginning of year $ 10,761 $ 6,233
Provision for recourse liability 4,535 7,260
Recourse claims paid (4,884) (3,444)
Recoveries of claims paid 486 712
- -------------------------------------------------------------------------------
Balance at end of year $ 10,898 $ 10,761
===============================================================================
53
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Note 19 Mortgage Banking Activities
Sky Financial conducts mortgage banking operations through its banking
subsidiaries. The primary activity relates to the origination and sale of fixed
and variable rate residential mortgages in the secondary market. Sky Financial
normally retains the servicing of the loans it sells. Loans are primarily
originated in Sky Financial's community banking market areas of Ohio
Pennsylvania, Michigan, Indiana and West Virginia.
The following table summarizes information relating to Sky Financial's
mortgage banking activity as of December 31:
- ------------------------------------------------------------------------------------------
2000 1999
- ------------------------------------------------------------------------------------------
Amounts held in agency accounts $ 6,854 $ 6,198
Amounts held in escrow accounts 10,829 10,158
Mortgage banking receivables for advanced funds 696 734
Unpaid mortgage loan principal for loans serviced for investors 2,264,496 2,202,034
Mortgage servicing rights, net of accumulated amortization 14,610 13,068
Allowance for impairment of capitalized mortgage servicing rights 2 2
==========================================================================================
In 2000, 1999 and 1998, Sky Financial sold certain servicing rights on mortgages
which had an outstanding principal balance of $29,267, $59,575, and $282,837,
respectively, and realized no gain or loss in 2000 or 1999, and a loss of $53 in
1998. At December 31, 2000, Sky Financial had firm commitments for the sale of
approximately $24,276 of loans held for sale. No provision for loss on the
carrying amount on loans held for sale is considered necessary at December 31,
2000.
- --------------------------------------------------------------------------------
Note 20 Regulatory Matters
Capital Maintenance Requirements
Sky Financial and its bank subsidiaries must observe capital guidelines
established by federal and state regulatory authorities. Failure to meet
specified minimum capital requirements can result in certain mandatory actions
by 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
December 31, 2000, that Sky Financial and its banks meet all capital adequacy
requirements to which they are subject. The combination of Sky Bank and Mahoning
National are reflected in the restated 1999 results.
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
1, 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.
54
- --------------------------------------------------------------------------------
Note 20 Regulatory Matters (continued)
Sky Financial and its significant banks' capital ratios are presented in the
following table:
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Required to be
Minimum Required Well Capitalized
for Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------------------ ------------------ -----------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------
December 31, 2000
- ------------------------------------------------------------------------------------------------------------
Total capital to risk-weighted assets
Sky Financial $825,118 12.1% $546,536 8.0% $683,170 10.0%
Sky Bank 364,895 10.6 274,252 8.0 342,815 10.0
Mid Am Bank 179,026 10.3 138,784 8.0 173,480 10.0
Ohio Bank 116,040 10.6 87,527 8.0 109,409 10.0
Tier 1 capital to risk-weighted assets
Sky Financial $676,934 9.9% $273,268 4.0% $409,902 6.0%
Sky Bank 291,987 8.5 137,126 4.0 205,689 6.0
Mid Am Bank 121,126 7.0 69,392 4.0 104,088 6.0
Ohio Bank 92,325 8.4 43,764 4.0 65,645 6.0
Tier 1 capital to average assets
Sky Financial $676,934 8.2% $328,788 4.0% $410,985 5.0%
Sky Bank 291,987 6.3 186,121 4.0 232,652 5.0
Mid Am Bank 121,126 6.2 78,043 4.0 97,554 5.0
Ohio Bank 92,325 6.7 54,957 4.0 68,696 5.0
============================================================================================================
December 31, 1999
- ------------------------------------------------------------------------------------------------------------
Total capital to risk-weighted assets
Sky Financial $751,976 12.1% $496,493 8.0% $620,616 10.0%
Sky Bank 391,002 12.9 242,863 8.0 303,579 10.0
Mid Am Bank 181,111 11.4 126,986 8.0 158,732 10.0
Ohio Bank 102,649 10.8 76,038 8.0 95,048 10.0
Tier 1 capital to risk-weighted assets
Sky Financial $612,257 9.9% $248,246 4.0% $372,370 6.0%
Sky Bank 322,946 10.6 121,432 4.0 182,148 6.0
Mid Am Bank 145,217 9.1 63,493 4.0 95,239 6.0
Ohio Bank 80,721 8.5 38,019 4.0 57,029 6.0
Tier 1 capital to average assets
Sky Financial $612,257 7.7% $316,379 4.0% $395,474 5.0%
Sky Bank 322,946 7.1 181,471 4.0 226,839 5.0
Mid Am Bank 145,217 7.5 77,184 4.0 96,480 5.0
Ohio Bank 80,721 6.3 51,301 4.0 64,126 5.0
============================================================================================================
Cash and Due from Banks
Sky Financial's subsidiary banks are required to have cash on hand or on deposit
with the Federal Reserve Bank to meet regulatory reserve requirements. The
reserve requirements at December 31, 2000 and 1999 approximated $52,727 and
$68,358, respectively. These balances do not earn interest.
Restrictions on Subsidiary Dividends
Dividends paid by Sky Financial are mainly provided by dividends from its
subsidiaries. However, certain restrictions exist regarding the ability of its
banking subsidiaries to transfer funds to Sky Financial in the form of cash
dividends, loans or advances. Regulatory approval is required in order to pay
dividends in excess of the bank subsidiaries' earnings retained for the current
year plus retained net profits since January 1, 1998. As of December 31, 2000,
$2,701 was available for distribution to Sky Financial as dividends without
prior regulatory approval.
55
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Note 21 Line of Business Reporting
Sky Financial manages and operates three major lines of business: community
banking, financial service affiliates and Sky Financial Solutions. 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 broker/dealer operations, non-conforming
mortgage lending, trust services, collection activities, insurance and other
financial-related services. Sky Financial Solutions is engaged in commercial
finance lending and leasing to health care professionals.
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:
Community Financial Service Sky Financial Parent Consolidated
Banking Affiliates Solutions and Other Total
- -------------------------------------------------------------------------------------------------------------------------
2000
Net interest income $ 311,010 $ 1,350 $ 1,584 $ (10,148) $ 303,796
Provision for credit losses 17,413 381 4,456 -- 22,250
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 293,597 969 (2,872) (10,148) 281,546
Non-interest income 68,231 48,022 9,587 (3,882) 121,958
Non-interest expense 174,683 44,614 16,429 (319) 235,407
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 187,145 4,377 (9,714) (13,711) 168,097
Income tax expense (benefit) 60,532 1,721 (3,466) (5,063) 53,724
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) 126,613 $ 2,656 $ (6,248) $ (8,648) $ 114,373
- -------------------------------------------------------------------------------------------------------------------------
Year-end assets $ 8,090,903 $ 65,369 $ 126,831 $ 103,699 $ 8,386,802
- -------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization $ 13,011 $ 1,271 $ 552 $ 4,329 $ 19,163
=========================================================================================================================
1999
Net interest income $ 308,713 $ 1,503 $ 984 $ (7,555) $ 303,645
Provision for credit losses 17,997 315 -- 2,400 20,712
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 290,716 1,188 984 (9,955) 282,933
Non-interest income 68,518 36,891 19,112 (179) 124,342
Non-interest expense 178,830 37,412 15,198 71,057 302,497
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 180,404 667 4,898 (81,191) 104,778
Income tax expense (benefit) 57,164 223 1,871 (25,662) 33,596
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 123,240 $ 444 $ 3,027 $ (55,529) $ 71,182
- -------------------------------------------------------------------------------------------------------------------------
Year-end assets $ 7,883,394 $ 38,514 $ 24,106 $ 117,742 $ 8,063,756
- -------------------------------------------------------------------------------------------------------------------------
Depreciation amortization $ 15,708 $ 793 $ 504 $ 3,684 $ 20,689
=========================================================================================================================
1998
Net interest income $ 294,877 $ 411 $ 860 $ (6,365) $ 289,783
Provision for credit losses 15,840 153 -- 15,999 31,992
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 279,037 258 860 (22,364) 257,791
Non-interest income 69,192 31,154 19,731 4,473 124,550
Non-interest expense 205,447 32,938 13,508 54,674 306,567
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 142,782 (1,526) 7,083 (72,565) 75,774
Income tax expense (benefit) 44,135 (585) 2,642 (22,381) 23,811
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 98,647 $ (941) $ 4,441 $ (50,184) $ 51,963
- -------------------------------------------------------------------------------------------------------------------------
Year-end assets $ 7,909,485 $ 22,100 $ 16,692 $ 84,989 $ 8,033,266
- -------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization $ 23,444 $ 960 $ 263 $ 2,910 $ 27,577
=========================================================================================================================
56
56
- --------------------------------------------------------------------------------
Note 22 Condensed Parent Company Financial Information
Condensed Parent Company Balance Sheets
- ------------------------------------------------------------------------------------------------------------
December 31, 2000 1999
- ------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 6,563 $ 15,973
Securities available for sale 42,239 31,039
Investment in bank subsidiaries 550,596 518,134
Investment in nonbank subsidiaries 21,238 27,083
Receivable from subsidiaries 122,556 105,631
Premises and equipment 7,789 8,241
Other assets 50,773 65,917
- ------------------------------------------------------------------------------------------------------------
Total assets $801,754 $ 772,018
============================================================================================================
Liabilities
Debt $136,307 $ 158,451
Other liabilities 55,757 47,236
- ------------------------------------------------------------------------------------------------------------
Total liabilities 192,064 205,687
Shareholders' equity 609,690 566,331
- ------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $801,754 $ 772,018
============================================================================================================
Condensed Parent Company Statements of Income
- ------------------------------------------------------------------------------------------------------------
For years ended December 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Income
Dividends from bank subsidiaries $ 139,400 $ 81,408 $ 105,309
Dividends from nonbank subsidiaries 2,767 1,060 3,150
Management fees 13,835 11,749 9,392
Other income 10,461 5,653 2,483
- ------------------------------------------------------------------------------------------------------------
Total income 166,463 99,870 120,334
- ------------------------------------------------------------------------------------------------------------
Expenses
Interest expense 15,505 9,043 6,979
Salaries and employee benefits 6,656 7,822 8,773
Occupancy and equipment expense 1,445 1,285 1,260
Merger, integration and restructuring expense 1,383 21,112 20,063
Other operating expense 6,442 3,045 4,689
- ------------------------------------------------------------------------------------------------------------
Total expenses 31,431 42,307 41,764
- ------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in undistributed net
income of subsidiaries 135,032 57,563 78,570
Income tax benefit 3,048 7,526 8,539
- ------------------------------------------------------------------------------------------------------------
Income before equity in undistributed net income of subsidiaries 138,080 65,089 87,109
Equity in undistributed net income of bank subsidiaries (13,681) 7,072 (32,857)
Equity in undistributed net income of nonbank subsidiaries (10,026) (979) (2,289)
- ------------------------------------------------------------------------------------------------------------
Net Income $ 114,373 $ 71,182 $ 51,963
============================================================================================================
57
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Note 22 Condensed Parent Company Financial Information (continued)
Condensed Parent Company Statements of Cash Flows
- ----------------------------------------------------------------------------------------------------------------------------
For years ended December 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 114,373 $ 71,182 $ 51,963
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of bank subsidiaries 13,681 (7,072) 32,857
Equity in undistributed net income of nonbank subsidiaries 10,026 979 2,289
Depreciation and amortization 679 591 845
Net loss (gain) on sales of assets 175 (9) (99)
Net change in other assets and liabilities 22,937 (15,036) (51,640)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 161,871 50,635 36,215
- ----------------------------------------------------------------------------------------------------------------------------
Investing Activities
Capital contributions to bank subsidiaries (12,235) (4,300) (800)
Capital contributions to nonbank subsidiaries (4,356) (3,850) (4,300)
Return of capital from nonbank subsidiary 3,000 4,000 --
Loan to subsidiary (59,500) (63,836) (11,700)
Net loan payments 42,575 40,752 24,406
Securities available for sale:
Proceeds from maturities and payments 9,469 5,463 --
Proceeds from sales 419 2,016 7,585
Purchases (17,805) (14,167) (26,471)
Securities held to maturity:
Proceeds from maturities and payments -- -- 1,190
Purchases -- -- (1,210)
Purchases of life insurance contracts -- (4,340) (18,350)
Proceeds from sales of premises and equipment -- 10 4
Purchases of premises and equipment (224) (409) (516)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash from investing activities (38,657) (38,661) (30,162)
- ----------------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of debt 142,356 62,000 90,000
Repayment of debt (164,500) (15,400) (21,500)
Proceeds from issuance of common stock 3,885 4,507 4,220
Cash dividends and fractional shares paid (61,962) (49,984) (35,734)
Treasury stock purchases (52,820) (21,344) (34,160)
Other items 417 1,740 587
- ----------------------------------------------------------------------------------------------------------------------------
Net cash from financing activities (132,624) (18,481) 3,413
- ----------------------------------------------------------------------------------------------------------------------------
Net change in cash and due from banks (9,410) (6,507) 9,466
Cash and due from banks at beginning of year 15,973 22,480 13,014
- ----------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 6,563 $ 15,973 $ 22,480
============================================================================================================================
58
- --------------------------------------------------------------------------------
Note 23 Quarterly Financial Information (Unaudited)
- --------------------------------------------------------------------------------
First Second Third Fourth
- --------------------------------------------------------------------------------
2000
Total interest income $148,737 $152,512 $159,567 $165,199
Net interest income 76,300 75,442 75,531 76,523
Provision for credit losses 4,337 4,733 6,094 7,086
Net income 31,106 31,499 25,150 26,618
- --------------------------------------------------------------------------------
Basic net income per share/(1)/ 0.36 0.37 0.30 0.32
Diluted net income per share/(1)/ 0.36 0.37 0.30 0.32
================================================================================
1999
Total interest income $140,907 $140,470 $144,732 $147,486
Net interest income 73,545 75,286 77,280 77,534
Provision for credit losses 4,190 4,552 7,355/(2)/ 4,615
Net income 29,881 30,638 (11,497)/(2)/ 22,160/(2)/
- --------------------------------------------------------------------------------
Basic net income per share/(1)/ 0.35 0.36 (0.13) 0.26
Diluted net income per share/(1)/ 0.34 0.35 (0.13) 0.26
================================================================================
(1) Per share data have been adjusted to reflect the 10% stock dividend paid
November 2000.
(2) The third and fourth quarter of 1999 reflect the impact of additional credit
loss provisions and merger, integration and restructuring charges associated
with First Western and Mahoning transactions. For further discussion see Note
14.
59
Sky Management
- --------------------------------------------------------------------------------
Sky Financial Group
Edward J. Reiter
Senior Chairman
Marty E. Adams
Chairman, President & CEO
Thomas J. O'Shane
Senior EVP
Community Banking CEO
Frank J. Koch
EVP/Senior Credit Officer
President & CEO/Sky Bank
James F. Burwell
EVP/Bank Operations
W. Granger Souder, Jr.
EVP/General Counsel
Kevin T. Thompson
EVP/CFO
Perry C. Atwood
SVP/Director of Sales
Jerry R. Biederman
SVP/Director of Audit
Phillip C. Clinard
SVP/Bank Synergies
Beth A. Haas
SVP/Asset Quality
Donald P. Hileman
SVP/Finance
Ralph J. Foscolo, Jr.
SVP/Planning
Michael R. Moore
SVP/Funds Management
John R. Reisner
SVP/Compliance
Thomas A. Sciorilli
SVP/Human Resources
Bernard A. Sikorski
SVP/Director of Product Development/Marketing
Lewis N. Voisey
SVP/Mortgage Banking
Timothy S. Dirrim
VP/Corporate Communications
Diane K. Critchet
VP/Secondary Market
Tracey L. Reeder
VP/Shareholder Relations
Sky Bank
Frank A. Hierro
Regional President
Mahoning Valley
Rick L. Hull
Regional President
Ohio Valley
Stephen R. Sant
Regional President
Pennsylvania
Dewey VanHoose III
Regional President
Stark County
Jayson M. Zatta
EVP/Corporate Banking
Debra A. Bish
SVP/Marketing Department
Kenneth J. Romig
SVP/Finance
Nancy J. Trombetta
SVP/Human Resources
Donald D. Wehn
SVP/Direct/Indirect Lending
Sky Bank - Mid Am Region
Sharon S. Speyer
Regional President & CEO
Kenneth R. Nagel
Area President
Senior Credit Officer
Michael R. Klein
EVP/Retail Sales
Charles A. Parcher
EVP/Commercial Sales
Michael J. Rose
EVP/ Mortgage &
Consumer Lending
Michael L. Williams
EVP/Operations
John H. Bick
Area President/Bowling Green
Marvin D. Miller
Area President/Bryan
John R. Zajac
CFO
Amy L. Heaton
SVP/Human Resources
Darlene M. Minnick
VP/Marketing
Sky Bank - Ohio Bank Region
Thomas J. Weissling
Regional President & CEO
Mark A. Maiberger
EVP/Credit Administration & Finance
Curtis E. Shepherd
EVP/Retail Banking & Marketing
Michael C. Spragg
EVP/Commercial Sales
Area President
Northern Region
Frank L. Goebel
Area President/Central Region
Susan M. Pellettiere
Area President
Northeast Region
Harold A. Schierloh
Area President
Northwest Region
Michael E. Dominique
VP/Mortgage Lending
Regional Manager
Denise L. Halliday
VP/Regional
Operations Manager
Ronald J. Phillips
VP/Finance
Francine F. Wahrman
VP/Human Resources
Sky Technology Resources
Thomas G. Leek
Chairman & CEO
James C. Burkhart
President & COO
Jack A. Zercher
EVP/Eastern Data Center Operations
Barbara J. Austin
SVP/Item Processing &
Electronic Services
Jerry A. Buckley
SVP/Operations
Caren L. Cantrell
SVP/Customer Services Group
Ronald R. Earl
SVP/Enterprise Network Services
C. Robert Taillard
SVP/Information Technology
Sky Trust
Richard R. Hollington III
President & CEO
Donald P. Southwick
EVP/Chief Investment Officer
Norman E. Benden
SVP/Finance
Thomas C. Hauck
SVP/Personal Trust/Toledo
Alexander Hays IV
SVP/Personal Trust/S.E. Ohio
Chall A. Jenkins
SVP/Operations
Fred J. Liskowski
SVP/Employee Benefits
W. Pennsylvania
Clinton S. Pelfrey
SVP/Investments
Youngstown
J. David Sabine
SVP/Personal Trust/Youngstown
Marcia L. Shaffer
SVP/Personal Trust
S.W. Pennsylvania
Edward J. Tognetti
SVP/Chief Fiduciary Officer
Russel C. Wood
SVP/Personal Trust/Findlay
John M. Zador
SVP/Personal Trust/S.E. Ohio
Sky Financial Solutions
Robert E. Dorr
CEO/President
Paul T. Appel
EVP/COO
John P. Fiore
SVP
Joseph A. DiNicola
SVP
Sky Insurance Group
Picton Cavanaugh
Ronald L. Murray
President
Robert C. Hawker
EVP
Pamela M. Alspach
CFO
Norman D. Fairman
SVP
Mario N. Procaccini
SVP
Leslie S. Talkington
SVP
Meyer & Eckenrode
Insurance Group
Robert W. Meyer
President
60
Affiliate Boards of Directors
- --------------------------------------------------------------------------------
Sky Bank
Marty E. Adams
Dr. David A. Bitonte
William J. Bresnahan
Lee Burdman
Keith D. Burgett
Willard L. Davis
Del E. Goedeker
Richard L. Hardgrove
Fred H. Johnson, Jr.
Frank J. Koch
James C. McBane
Kenneth E. McConnell
Floyd H. McElwain
Parker T. McHenry
Barbara Bateman McNees
Harold F. Reed, Jr.
Thomas K. Reed
Lee A. Smith
Glenn F. Thorne
Sky Bank - Mid Am Region
Marty E. Adams
Joel S. Beren
Paul C. Betz
James F. Bostdorff
David A. Bryan
Wayne E. Carlin
Floyd D. Craft
Ralph W. Gallagher
Richard L. Gordley
Candy Graham
Kathleen S. Hanley
Patrick J. Johnson
Marilyn O. McAlear
G. Ray Medlin, Jr.
Thomas J. O'Shane
William G. Rupp
Sheila Dwyer Schwartz
D. Jane Zeller
Sky Bank - Ohio Bank
Region
Marty E. Adams
P. Richard Axline
Paul V. Ballinger
C. Richard Beckett
Jack W. Donaldson
John C. Fergus II
Frank L. Goebel
John H. Haywood
Beth B. Heck
Thomas A. Heydinger
Richard R. Hollington, Jr.
Patrick W. Rooney
Harold A. Schierloh
Kevin R. Sonnycalb
Jerry L. Staley
Thomas J. Weissling
Anita Y. Williamson
Sky Technology Resources
Marty E. Adams
James C. Burkhart
James F. Burwell
Fred H. "Sam" Johnson III
Frank J. Koch
Thomas G. Leek
Thomas J. O'Shane
Kevin T. Thompson
Sky Trust
Marty E. Adams
C. Richard Beckett
Robert C. Duvall
Frank I. Harding III
Richard R. Hollington III
Randall C. Hunt
Patrick J. Johnson
Dennis L. Nemec
Harold F. Reed, Jr.
Gregory L. Ridler
John W. Sant
Patrick A. Sebastiano
Karl B. Schroedel II
Donald P. Southwick
C. Gregory Spangler
Sky Financial Solutions
Marty E. Adams
Gerald D. Aller
Paul T. Appel
Keith D. Burgett
Robert E. Dorr
D. James Hilliker
H. Lee Kinney
Douglas J. Shierson
Robert E. Spitler
Robert E. Stearns
Sky Insurance Group
Picton Cavanaugh
Meyer & Eckenrode
Marty E. Adams
George N. Chandler II
Charles I. Homan
Jonathan A. Levy
Thomas S. Mansell
Robert W. Meyer
Ronald L. Murray
Thomas J. O'Shane
61
Acknowledgements
- --------------------------------------------------------------------------------
We would like to thank the customers, board members and employees featured in
this year's report. Without their time and support this report would not have
been possible.
Pennsylvania Region - Page 6
Thomas J. O'Shane - Senior EVP
Community Banking CEO
Stephen R. Sant - Sky Bank Regional President
Joseph Giordano, Jr. - President/IPEC
Charles J. Long, Jr. - Secretary/Treasurer/IPEC
Jay A. Martin - Vice President of Operations/IPEC
Ohio Valley Region - Page 8
Rick L. Hull - Sky Bank Regional President
Dorinda Sabol - AVP/Wintersville Office
Gene Cerra - Sky Bank Client
Mid Am Region - Page 10
Sharon S. Speyer - Sky Bank Regional President
Richard G. Moses - President
The Moses-Schlachter Group, Inc.
Thomas L. Schlachter - Secretary/Treasurer
The Moses-Schlachter Group, Inc.
Ohio Bank Region - Page 12
Thomas J. Weissling - Sky Bank Regional President
Russel C. Wood - SVP/Personal Trust
Doug and Laura LaPlant - Sky Bank Clients
Stark County Region - Page 14
Dewey VanHoose III - Sky Bank Regional President
Tim Murphy - President
Concorde Therapy Group
Mahoning Valley Region - Page 16
Frank Hierro - Sky Bank Regional President
Reid Schmutz - President of the Youngstown State
University Foundation
Tanay Hill - Accounting Major
Youngstown State University
Patrice Hight - Accounting Major
Youngstown State University
The following customers and shareholders assisted in the completion of this
year's annual report:
Lesniewicz Associates - Design and Copywriting
Paramount Printing - Printing
Jim Rohman - Photography
M. D. Oothoudt - Copywriting/Editing
Skip Gardner - Gardner Signs, Inc.
A special thanks to the following employees who assisted in producing this
report:
Debbie Bish Mike Moore
Phil Clinard Doug Owens
Vicky Dielman Chuck Parcher
Tim Dirrim Tracey Reeder
Jill Fast John Reisner
Rodney Frey Kelly Semer
Tom Funk W. Granger Souder
Ebbony Hamilton Eric Stachler
Don Hileman Kevin Thompson
Dick Hollington III Pam Vollmar
Jennifer Iliff Dave Walter
Chall Jenkins Miriam Weintraub
Shareholder Information
- --------------------------------------------------------------------------------
Quarterly Common Stock Prices, Dividends and Yields
- -------------------------------------------------------------------
Book Dividend
Value per per Dividend
High Low Share Share Yield
- -------------------------------------------------------------------
2000
Fourth Quarter $17.69 $12.61 $7.31 $0.18 4.75%
Third Quarter 17.39 14.37 6.96 0.18 4.58
Second Quarter 17.05 13.36 6.80 0.18 4.78
First Quarter 18.53 12.50 6.71 0.18 4.69
- -------------------------------------------------------------------
1999
Fourth Quarter $22.85 $17.85 $6.61 $0.18 3.57%
Third Quarter 23.19 16.74 6.83 0.17 3.46
Second Quarter 25.00 21.07 7.19 0.17 3.00
First Quarter 24.90 20.86 7.24 0.17 3.02
===================================================================
- -------------------------------------------------------------------
Stock Information at December 31, 2000
- -------------------------------------------------------------------
Common Stock
Shares authorized 150,000,000
Shares issued 84,015,577
Treasury shares 607,633
Number of shareholders of record 16,941
Closing market price per share $16.75
Book value per share $7.31
Stock exchange NASDAQ
Stock symbol SKYF
===================================================================
- -------------------------------------------------------------------
Dividend Reinvestment Plan
- -------------------------------------------------------------------
Sky Financial offers a Dividend Reinvestment Plan that allows
shareholders to reinvest their Sky Financial Group, Inc.
dividends in additional Company common stock at the prevailing
market price. The plan has 8,081 participants, or 47.7 percent of
our common shareholders of record. Plan information may be
obtained by calling the Shareholder Relations Department at (800)
576-5007, or by writing: Sky Financial Group, Inc. Dividend
Reinvestment Plan, 10 East Main Street, Salineville, Ohio 43945.
- -------------------------------------------------------------------
Corporate Information
- -------------------------------------------------------------------
Annual Meeting
Place: The Forum
Conference Center
Cleveland, Ohio
Date: April 18, 2001
Time: 10:00 a.m.
Headquarters
Write:
Sky Financial Group, Inc.
221 South Church Street
P. O. Box 428
Bowling Green, Ohio 43402
Telephone: (419) 327-6300
Shareholder Relations
and Form 10-K
Write:
Sky Financial Group, Inc.
Shareholder Relations Department
10 East Main Street
Salineville, Ohio 43945
Telephone: (800) 576-5007
Investor Relations
Write:
Sky Financial Group, Inc.
Investor Relations
221 South Church Street
P. O. Box 428
Bowling Green, Ohio 43402
Telephone: (419) 327-6305
Transfer Agent
Write:
The Bank of New York
Receive and Deliver
Dept.-11W
P. O. Box 11002
Church Street Station
New York, New York 10286
Telephone: (888) 683-4901
Online Information
More information
concerning Sky Financial
and its affiliates can be
found on our website at
www.skyfi.com
62
REGIONALLY POSITIONED FOR PERFORMANCE.
Banking
Sky Bank Regions
. Mid Am Region
. Ohio Bank Region
. Stark County Region
. Mahoning Valley Region
. Ohio Valley Region
. Pennsylvania Region
Investment & Trust Services
Sky Trust
30050 Chagrin Blvd.
Suite 150
Pepper Pike, OH 44124
(216) 378-2810
Insurance
Picton Cavanaugh
Fort Industry Square
136 North Summit St.
Suite 311
Toledo, OH 43604
(419) 241-8211
Meyer & Eckenrode
Insurance Group
200 Third St.
Carnegie, PA 15106
(412) 276-7727
Healthcare Financing
Sky Financial Solutions
2740 Airport Dr.
Suite 300
Columbus, OH 43219
(800) 360-0667
Internet Access
Sky Access
24 North Park Ave.
2nd Floor
Lisbon, OH 44432
(330) 424-6683
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